9 July 2009 | Omera Khan, Imran Khan & Ron Jarman
As supply chains get longer and more complex, how can companies mitigate risk and drive competitive advantage? Omera Khan, Imran Khan and Ron Jarman make the case for 'design-centric' businesses
The huge challenges faced by firms today can damage trading and disrupt the supply chain.
The rise in outsourcing and globalisation has forced chains to be longer, leaner and has left them more vulnerable to events that previously may have caused only minor local interruptions.
Success in a volatile market can only be achieved by responsive companies which anticipate and respond to changes and uncertainty. Businesses must be "design-centric", supported by multi-disciplinary design teams in the same place who work closely with suppliers and have "product champions".
As well as enabling a company to run as usual after disruption, a responsive enterprise gains competitive advantage by being quicker than its rivals.
For example, consider the contrasting reactions of Nokia and Ericsson to a fire at a key supplier's factory. Nokia showed responsiveness and resilience, whereas Ericsson was slower and halted production because of supply shortages.
Design also influences the response of the supply chain. How the design process is managed affects time-to-market, which is a measure of the responsiveness of a design-driven supply chain. Businesses must have plans that provide benefits to product life-cycle management, to be able to respond to a market driven by customers and manage complex product design.
The challenge is to find ways to reduce product development times, get faster feedback from the marketplace and speed up replenishment times. But, as supply chains have become global in the search for lower costs, many lead times have lengthened. And as more products are manufactured far from the end customer, the risk of failure is high - and could increase total costs.
role of DESIGN
Product design has a big impact on a firm's risk profile, so it's important that it is seen as more than just creating ideas or simple style changes to products. There should be a more strategic role for design that affects the supply chain, because it is estimated that 70 to 80 per cent of final cost is built in at this point.
For example, the availability of components or materials, and capacity constraints must be considered early. There is also a need for alignment between "product design architecture" - the physical characteristics of the product - and supply chain design.
Architecture will influence logistics costs such as storage, handling and transport. So integrating logistics management with the design process can prove beneficial, because if products take account of transport and storage requirements, then margins could improve.
Considering logistics management early in the design process may also help you identify potential problems, if components or packaging materials with long replenishment lead times are being considered. Controlling logistics management costs also helps in anticipating constraints in product development and managing the supply chain. It also improves customer service levels and logistics performance. The integration between logistics and product design should be acknowledged as crucial to improving supply chain efficiency.
Changes to product design and production processes can be risky for the supply chain and this is made worse now that more low-cost sourcing is available. Supplier selection, vendor involvement and supply chain design are important to ensure supply chain risks arising from the introduction of the new products, the economic environment and new technologies are mitigated.
If a product is launched with a unique bill of materials (BOM) the impact on inventory costs will be significant throughout its life. It may be possible to configure BOMs with the aim to make them coherent with the supply chain to manage this problem. Linked to this is planning and forecasting, which plays a part in the development of a robust and responsive supply chain.
"I have come across this in a firm which wants an agile and effective supply chain delivering standard and new products against its BOMs," says Ian Thompson, procurement director at buyingTeam. "It is held back from achieving this because it hasn't engaged with suppliers. Even worse, it has suppliers who are eager to support them but do not know when they will be given the next order. Even though 60 to 70 per cent of the BOM is based on standard components, the firm has slow delivery because the supply chain hasn't been designed to order the raw materials to make the product until orders are placed.
"A company that has a full order book and an eager supply chain risks paying penalties for not delivering on time. In a tight credit environment, some parts of the supply chain will not be able to secure finance to pay for raw materials until there is an official order."
This suggests that by talking to suppliers - giving them forecasts, and supporting credit discussions with detailed plans including realistic payment - will help the supply chain to become responsive and more robust.
One of the barriers to good product design is that it is often managed in isolation from other functions in the supply chain and neglected in the strategic management of the business.
The development process of new products is typically linear, with a consequent extension of the time-to-market. These 'silo' structures struggle in today's challenging markets because they are not capable of a rapid response to fast-changing requirements. Failure to integrate could create problems at the manufacturing or logistics stages in the supply chain and increase the risk of disruption.
To ensure problems that affect supply chain performance, such as long lead times and poor component availability, are addressed and their impact mitigated, it is important that design activities be integrated into supply chain management.
Changes made at this early point in the supply chain enable manufacturers to avoid the risks of holding inventory and reduce their pipelines because products designed to the required specifications reach their intended markets more quickly.
Unfortunately the evidence shows that product design decisions do not consider the through-life implications for the supply chain. The answer is to develop a more "design-centric business" (see diagram) which requires a cultural and organisational change.
Keys to success
Early supplier involvement can be seen as a powerful tool to obtain supply chain responsiveness. This can be done by involving suppliers in product development and keeping them updated to respond to the emerging needs of the market.
Organisations must work with their suppliers, and listen to their views on small as well as large aspects, because they have a vested interest in making the product sell over an extended period.
Companies must also understand who makes up the supply chain. The principal supplier may be the one you deal with, but what about their suppliers? How are they engaged with them and what safeguards does the principal have? Is there a "plan B" if it has problems?
Lastly, supply chain managers must plan, forecast and revise sooner rather than later, and share this information with the supply chain.
Next, arrange multi-disciplinary teams collaborating on product design. Functions contributing to the design and development of a new product should also be close to each other. This enables the integration of resources and developing a product-design oriented supply chain structure.
* Dr Omera Khan is a lecturer in supply chain management at the University of Manchester. Imran Khan is a procurement adviser at buyingTeam. Ron Jarman is CPO at Universal Music/buyingTeam