2. Designing Supply Chains
2.2 Design Consideration in a Firm’s Supply Chain Organizational Structure
2.3 Approaches to Supply Chain Design
2.3.1 A Conceptual Procedure for Supply Chain Design
2.3.2 Life Cycle Approach to Supply Chain Design
2.3.3 Supply Chain Operations Reference Model
2.4 Other Topics in Supply Chain Design
2.4.1 Change Management as a Design Flexibility Strategy
2.4.2 Information System Design
Terms
Collaborative planning, forecasting, and replenishment (CPFR)
Enterprise resource planning (ERP)
Horizontal process network (HPN)
Materials requirement planning (MRP)
Matrix organizational structure design
Near field communications (NFC)
Radio frequency identification (RFID)
Supply chain operations reference (SCOR)
Vendor-managed inventory (VMI)
2.1. Prerequisite Material
As stated in the preceding chapter and in the remaining chapters in Part I of this book, this section is chiefly to acquaint less-experienced students of supply chain management with basic and elemental content and terminology. Experienced supply chain executives and managers might be tempted to skip this section in chapters where it is included, but they might instead want to use it as a review of basic concepts and terminology.
There are many different ways to design the organizational structure of a business. In a generic sense, all business organizations have to design the structure of functional areas or groupings (for example, marketing, operations). This leads to the designing of supply chain departments or divisions (for example, logistics, procurement), which in turn can lead to designing of the processes, which each performs (for example, production processes, delivery processes).
Organizational structures can be organized in many different ways. Typically, organizational structures center around functional areas, products, or regions (see Figure 2.1). The arrows in the figure define the direction of authority. The functional and geographical region designs are classically hierarchical, but can create the silo problems (that is, discourages communication between functional areas or regions). However, they provide better management control and make authority systems more delineated over a product design, where each product would have its own functional area (for example, finance) that may also have to report to a centralized department.
Figure 2.1. Organizational design structures
Similar to product design, organizations can also structure the design of business systems on the basis of individual projects. Figure 2.2 shows two typical project design structures. Project design structures can also be used within departments of an organization that might have a completely different organizational structure. In Figure 2.2(a), project managers have no activities or personnel reporting directly to them. Project managers, along with other department heads, act in a staff capacity to the general manager. In Figure 2.2(b), project managers have staff and functional line personnel reporting directly to them. Under this design, the project manager has full authority over the entire project, which permits faster response times for decision making. Unfortunately, this latter structure can lead to the silo effect, since separate functional areas are created under each project.
Figure 2.2. Project-based organizational design structures
A matrix organizational structure design is a combination of a functional and project structure (see Figure 2.3). Although sometimes considered a project structure, it combines some of the best features of both. In Figure 2.3, the solid lines show lines of authority, which extend from the functional departments to each project group function. Once assigned to a group for a specific project, those functional staffers also report and work for the project managers (denoted as dashed lines in the figure). Matrix designs directly violate principles of unity of command (that is, reporting to only one supervisor) and can generate conflict in supervisory relationships, but research has shown for decades that a matrix design has higher levels of performance in dealing with complex and creative work environments (Ford and Randolph, 1992). They are able to achieve these positive outcomes because they encourage a greater degree of interaction and collaboration between functional areas than other organizational designs. From those interactions come new ideas, innovations, and improved efficiencies in operations.
Figure 2.3. Matrix organizational design structures
Design considerations should also be viewed in the context of their application to the planning stages of the organization. At a strategic level, the hierarchy of the entire organization can be planned. Executives decide issues such as whether a product or geographic region design best serves the organization. At the tactical level, functional areas like operations can be planned. Here, the decision may be how departments (for example, logistics, production) should be structured to achieve better integration. Within the departments at the operational level of planning, design considerations might include project planning (for example, installing a software system for order taking) or undertaking supply chain initiative programs (for example, designing processes for manufacturing or distribution activities).
While designing a supply chain is generally considered to be a strategic planning process because it creates the environment under which all other forms of planning a supply chain are subordinated (Ganeshan et al., 1998, p. 849), it can be employed at any level of planning throughout the organization. The diversity of application necessitates managers to become aware of a variety of differing approaches to supply chain design to better fit the design needs with the design capabilities of the organization.
2.2. Design Consideration in a Firm’s Supply Chain Organizational Structure
Every decision, plan, and person who works within a supply chain is constrained, limited, and influenced by the design of the firm’s supply chain organizational structure. The design of the organizational and the supply chain organizational structures become pivotal components for creating and moving the strategic organization and supply chain objectives toward reality.
Different organizational designs can be used, but research and experience has shown successful supply chain organizations ideally seek and adopt structures that help them better serve customers. Therefore, supply chains are naturally inclined to seek out designs that aid interaction with customers and collaboration between partners to enhance operations, resulting in better customer service and profits for all stakeholders.
For organizations just beginning or facing the introduction stage of the product life cycle, upper management or chief operating officers (COOs) might suggest a matrix organizational structure. Matrix organizational designs are cross-functional (that is, allowing members of differing functional areas to work together as group or team on a project or program) and help end silo problems, thus encouraging interaction between functional areas. Figure 2.4 shows a matrix design that includes an organization’s various product supply chains (perhaps broken down into separate supply chains by the customer). The authority (represented by the solid lines in the figure) is still retained by the functional areas and the general manager or supply chain executive. The dashed lines in Figure 2.4 represent an additional line of authority to individual supply chain managers, who are responsible for those customer’s supply chains.
Figure 2.4. Matrix organizational design by supply chain customer type
Although matrix organizational designs have been used at the organizational level to restructure the entire business organization, they are also useful at other organizational levels, including supply chain departments. A supply chain executive (for example, vice president of operations) cannot always impact or alter organizational design structures, but may be able to structure the departmental supply chain organization to better accomplish its objectives. In Figure 2.5, a matrix design for a supply chain department is presented. Not all supply chains can be divided into customer groups or clusters. Rather than customer divisions depicted in the horizontal rows in Figure 2.5, other criteria can be used. Products can be used or geographic divisions (for example, North American markets, Asian markets) can be used to divide supply chain tasks into groups requiring differing internal supply chain resources (for example, logistics support). Matrix organizational designs were some of the first to encourage cross-functional behavior.
Figure 2.5. Matrix supply chain department organizational design
New supply-chain-related organization designs are being developed to better serve the cross-functional needs required in current supply chains. One example of an innovative organizational structure is referred to as a network design. A supply chain network design focuses on facility decisions related to establishing a supply chain network. Such decisions include the role of the facility (that is, what role and processes the facility will play in the supply chain network), where the manufacturing or service facility should be located, what capacity is needed to produce or store inventory, what markets the facility should serve, and the supply sources for each facility. Basically, a supply chain network design seeks to set up the network used within the supply chain system. The types of facilities to include in the network design and the roles they play in the supply chain network are often tied to strategic objectives (see Table 2.1).
Table 2.1. Types of Facilities Found in Supply Chain Network Designs
Source: Adapted from Table 1.2 in Schniederjans (1998), p. 6.; from Table 1.2 in Schniederjans et al. (2005), p. 8.
Network designs can be used for many different organizational structure applications. For example, Procter & Gamble (P&G) designed an organizational planning structure, horizontal process network (HPN), that spans across the entire organization (Farasyn et al., 2011). The HPNs help define, manage, and execute work processes across all of P&G’s business operating units. Each of the 11 planning processes in Figure 2.6 are spread over the 3 P&G business units, business services, and market organizations. To implement this design, P&G uses a team approach. HPN planning teams involve members of the business units, information technology managers, and other business and technical experts, including supply chain staff. The teams work across business units dealing with issues such as the supply network planning. For example, sharing information about constraints, a team member working in another business unit might be able to identify surplus financial resources that would allow a new network facility to be acquired. In addition, sharing information helps educate members cross-functionally, engendering a holistic view of the entire organization. This design maximizes collaboration within the organization.
Figure 2.6. Procter & Gamble supply chain horizontal process network organizational design
Source: Adapted from Figure 1 in Farasyn et al., (2011), p. 68.
2.3. Approaches to Supply Chain Design
2.3.1. A Conceptual Procedure for Supply Chain Design
A step-wise conceptual procedure for designing supply chains is presented in Table 2.2. The idea behind this design procedure is to bring together critical elements of any supply chain (that is, customer, product, network, and processes) into collaborative efforts to create a supply that meets customer needs and organizational objectives. Clearly, the value proposition (discussed in Chapter 1, “Developing Supply Chain Strategies”) is the critical success factor that drives designing efforts in this procedure.
Table 2.2. A Procedure for Designing a Supply Chain
2.3.2. Life Cycle Approach to Supply Chain Design
Chapter 1 mentioned product life cycles as a means of identifying areas for strategic planning. Identifying a position on a life cycle helps managers detail design consideration strategies, tactics, and operational plans at every level of planning that they face. Figure 2.7 illustrates design-related strategies that can be considered using a life cycle approach.
Figure 2.7. Design considerations and strategies during life cycle stages
2.3.3. Supply Chain Operations Reference Model
The Supply Chain Operations Reference (SCOR) is process focused and more ideally used for existing supply chains, although steps in this model can be adapted to create a new supply chain (http://supply-chain.org/companies/scor-helps-companies). It was developed by the Supply Chain Council (SCC) (http://supply-chain.org/scor), a global organization that seeks to apply advanced systems and practices in industry. SCOR is recognized chiefly as a diagnostic tool to find opportunities for improvement in existing supply chains, but in doing so, becomes an approach useful in designing and redesigning supply chains. The scope of the SCOR model includes customer interactions (that is, order entry to paid invoice) and all product transactions (that is, supplier’s supplier to customer’s customer). It uses processes, metrics, best practices, and technology to identify supply chain problems and enhance supply performance. It also helps in design issues related to customer service, cost control, planning and risk management, supplier and partner relationship management, and talent development. Table 2.3 relates design features and objectives to the types of diagnostic information that this model can provide.
Table 2.3. Examples of SCOR Model Diagnostics Information for Redesigning (or Designing) Supply Chains
The SCOR model has evolved over the years, supporting design improvements related the SCC’s view of a supply chain as a plan-make-source-deliver-return process. Table 2.4 provides summarizes one way to implement the model.
Table 2.4. Using the SCOR Model to Redesign (or Design) Supply Chains
2.3.4. Network Design
Chopra and Meindl (2001, pp. 314–316) suggested a supply chain network design for creating global supply chains. Today, most supply chains are global, and the framework presented by Chopra and Meindl (2001) considers many of the issues faced in any network design plan (see Figure 2.8).
Figure 2.8. Chopra and Meindl network design framework
Source: Adapted from Figure 11.7 in Chopra and Meindl (2001), p. 314.
In Phase 1, the strategic positioning of the organization and the supply chain are considered. The organization’s competitive strategy related to the supply chain (that is, where the firm wants to go in the future determined from the external organization analysis from Chapter 1) is added to the constraint realities (determined from the internal organization analysis from Chapter 1). Any global competitive risk factors are included to define the overall strategy for the network design.
In Phase 2, a preliminary regional facility forecast is estimated for customer demand in each country where the markets are important to the network design. Next, there is a need to determine, given network opportunities in the regional area, whether the impact of tariffs and taxes, political risks, potential exchange rate risks, and customer demand, needs, and risks is worthwhile. This is combined with a production technologies analysis that considers costs, scope of operation needs, and necessary support to keep the network functioning to meet strategic or tactical goals.
In Phase 3, the design effort focuses on selecting desirable facility sites within each region where facilities are to be located. Considerations for the existing regional infrastructure have to be considered in light of network needs. To build a viable supply chain network, infrastructure, including suppliers, warehousing facilities, transportation services, communication systems, and utilities, has to be in place. Also, for some networks the infrastructure requirements might include availability of a skilled workforce and the willingness of communities to work with supply chain managers.
Finally, in Phase 4, the specific locations for placement of network facilities are determined. This phase also involves consideration of the capacity allocations for each facility and network integration flexibility.
Although it is beyond the scope of this book to discuss the quantitative procedures used in network design, many useful methodologies can be employed to enhance the design location tasks (Chopra and Meindl, 2001, pp. 316–327). Some techniques, such as gravity location models, can be used to minimize distance between facilities and network optimization models (for example, methods such as minimum distance spanning tree, shortest route method) can be used to establish routing (Schniederjans, 1998, pp. 31–32). General modeling methods, such as mathematical programming models (for example, linear programming, the transportation method), can be used to allocate production capacity to each facility, locate demand requirements per facility, and set up manufacturing and warehouse facilities simultaneously (Schniederjans, 1999, pp. 103–117). Still, other methodologies, such as scaling, scoring, and ranking methods (for example, analytic hierarchy process) can consider qualitative information such as critical success factors (CSFs) and subjective facility location factors (for example, skill level of labor, quality of transportation system) (Schniederjans, 1999, pp. 45–101). For an extensive treatment of quantitative models useful in supply chain management design planning (and other supply chain planning applications), see Ganeshan et al. (1998).
2.4. Other Topics in Supply Chain Design
Before deciding on a supply chain design, many factors should be considered. Some will impact the structural design selection or creation, and others can be a constraint or a competitive advantage to be exploited as a benefit of the supply chain design (see Figure 2.9). These factors and many more are discussed throughout the rest of this book and allude to the diverse nature of supply chain design planning.
Figure 2.9. Select supply chain design factors
2.4.1. Change Management as a Design Flexibility Strategy
Supply chain departments are based on continuous change and adaptation to customer demand requirements. There is a need to establish a mindset that encourages change in organizations to keep them in a state of readiness for innovation. Many firms use program or project management as a means to introduce and manage organizational or operations change. (See Chapter 9, “Building an Agile and Flexible Supply Chain,” for more about program and project management.) For example, Van Arnum (2011) reported the use of project management principles in a pharmaceutical firm to achieve a cross-functional supplier integration of its outsource supplier network. Van Arnum also makes the point that project management should be viewed as an ongoing task for supply chain organizations. Firms not only need to use change management methods to undertake change through projects or program initiatives but should also use them frequently enough so that it becomes a philosophy of doing business and eventually becomes part of the organization culture. Changing the design of a supply chain should not be viewed as a threat, but as an opportunity to excel. The more project or program management is used in an organization to implement change, the more likely the firm’s staff will find new and efficient ways to become flexible in making design changes. How much change is needed depends on the volatility in the supply chain and in partner industries.
2.4.2. Information System Design
The information systems technology hardware purchased for a particular organization design is largely determined by the software that runs the system at various levels within the organization. At the organizational level of design, information systems that run multiple functional areas (for example, enterprise resource planning [ERP]) involve the alignment of the organization’s functional needs to the technology capabilities. Within a functional area like operations, other software (for example, materials requirements planning [MRP], focused on production materials planning) is integrated and aligned with the ERP system to serve objectives. Further down in the organization, departments (such as the supply chain department) have their own software applications (for example, vendor-managed inventory [VMI]) that monitor how suppliers are able to supply customer needs.
Integrating and aligning software is an important design requirement. Also, supply chain executives can use implementation as a design strategy to move their organizations toward becoming more collaborative. Using linkages between personnel in different functional areas, as well as different departments within those functions, to implement a software application, can help break down the organization silos and improve communication relationships.
Collaborative software applications can also help bring about collaborative efforts with external supply chain partners. CPFR is a software that requires the integrative work of suppliers with a manufacturing firm. This software helps trading partners work together to reduce forecasting errors and increase product availability by improving synchronization within a supply chain for inventory replenishment. In addition to building trust with supplier partners, this software is credited with reducing inventory and improving in-stock product availability (Fawcett et al., 2007, pp. 482–483).
2.4.3. New Technology: RFID
The use of new technologies can have a profound impact on supply chain design planning. For example, radio frequency identification (RFID) is being used in increasingly more applications, including in most supply chains (Beth et al., 2011, pp. 190–192). RFID is an umbrella term that refers to a family of various but related technologies, including near field communications (NFC) (that is, short-range technology permitting simple transactions, data exchange, and connections with smartphones and e-tablets) and electronic product code (EPC) used by retailers to retrieve product identification information that can be stored on the RFID tag. Unlike the revolutionary universal product code (UPC) number, RFID tags are unique in that they carry substantial reference information about pricing, manufacture dates, shipping destination, and so on. For supply chain management, this detailed information helps enhance traceability for product recall, inventory control, and product anticounterfeiting. Unlike the UPC number, which requires access to a mainframe to obtain additional information about a product, RFID tags contain information at the location where it is needed. By taking advantage of the RFID in the design of supply chain processes, planners allow greater decision making autonomy at the levels where the decisions are to be made, while impacting design considerations for information systems.
Patton (2011) suggests that tagging products well upstream in the supply chain will leverage advantages for all supply chain partners. Handheld scanners used in combination with the RFID tags can allow for a quick check on large inventories without an extensive auditing process. The enhanced visibility provided by RFID can bring about substantial operations impact in terms of a reduction in suppliers running out of stock, elimination of shrinkage problems, and a reduction in shipping errors. At the same time, RFID can improve replenishment, improve order picking and packing accuracy, and allow for quick data entry into an organization’s information system (thus improving response time in sharing this information internally and externally).
2.4.4. Design Innovation
Creating a flexible environment for change can invite and stimulate supply chain innovation. An important design consideration to enhance innovation with supply chain partners is to encourage the building of trust. As trust with supply partners increases, each is more willing to take risks in sharing innovative ideas without fear that information will be used against them by supply competitors or manufacturers. Although methods exist to assess the level of trust in an organization (Fawcett et al., 2007, pp. 359–361), what is important are the design elements that will lead to a culture encouraging trust to grow. Trust design elements that should be encouraged include a willingness to share information that could lead to innovation developments, building personal relationships with suppliers and making them friends rather than transactional business associates, and an assurance program that makes performance of partners transparent to all participants in the supply chain network. This last element helps to communicate the consequences of success and failure. In doing so, this becomes a motivational tool to encourage desired results and discourage poor performance.
How to initiate innovative idea development among supply chain partners can depend on how partners are recognized for their contributions to innovation. Yuva (2011) reported on a possible recognition system. Basically, suppliers can be segmented into groups based on their contributions of innovative ideas. Several segments (for example, gold, silver, bronze) could be established based on the number or quality of innovative ideas suppliers make available to the supply chain network. These segments and their value to the supply chain could be based on cost, availability, incoming quality, price, and delivery. Rewards to suppliers could include more and larger contracts.
2.5. What’s Next?
According to the Aberdeen Group (“Globalization and...,” 2011), there is a considerable trend toward redesigning sourcing geographies across multitier supply chain locations for discrete manufacturers. Future design efforts for all types of manufacturers and their supply chains are focused on the following:
• Improving internal cross-departmental systems, processes, collaboration, and integration
• Increased business-to-business collaboration
• Increased visibility into supplier processes and systems to maximize resource utilization
• Consolidating and redesigning and improving flow of sourcing geographically and through multitier network points
Fueling the value of design innovation, the survey revealed that investments in design and redesign ranked second in terms of providing a return on investment (ROI). Based on the survey results, the Aberdeen Group recommends supply chain design changes that streamline and optimize process steps with internal and external customers, embraces new collaborative visibility solutions and technologies, and enhances training and equipment to ensure personnel know how to use the new technologies and equipment.