4 Supply Chains May Be Better Than 1

If managing one supply chain is difficult, imagine managing four. However, splintering your operation is one strategy experts recommend for developing the supply chain of the future.

Douglas Alexander outlined such a system in a recent blog on EBN. Instead of viewing the supply chain as a linear system made up of links, think of it as a river delta with a series of tributaries. The supply chain doesn’t always flow in one direction, Alexander says:

In actuality, the supply chain has many tributaries that look more like a river delta network; it does not always flow in a unidirectional manner. My mind says, if it were possible to straighten out the turns and kinks, knowing the shortest distance between points is a straight line, then wouldn't the traverse from one end to the other be shorter and faster? I'm still thinking graphically here. If the distances between the links could be made shorter, then the effective time from one link to another would be faster, also shortening the length of the entire chain.

Consultancy McKinsey & Co. reached a similar conclusion in its study, "Building the supply chain of the future."

Many global supply chains have been engineered to manage stable, high-volume production, and to take advantage of low-cost-labor regions such as China. The advantages of China, though, are fading. Wages are increasing, labor practices are under scrutiny, and transportation costs are fluctuating wildly. Other nations are trying to attract manufacturing to their shores, and politically, governments are being pressured to bring manufacturing back home. McKinsey writes:

In such a world, the idea that companies can optimize their supply chains once -- and for all circumstances and customers -- is a fantasy. Recognizing this, a few forward-looking companies are preparing in two ways. First, they are splintering their traditional monolithic supply chains into smaller and more flexible ones. While these new supply chains may rely on the same assets and network resources as the old, they use information very differently -- helping companies to embrace complexity while better serving customers.

It is increasingly difficult for manufacturers to meet customers’ diverse expectations. McKinsey cites the cellphone industry as one example. Mobile phone makers introduced 900 more varieties of handsets in 2009 than they did in 2000. And new models are being churned out ever more quickly: Only a year elapsed between the introduction of the iPhone 4S and the iPhone 5. Some phones are more popular in one region than in others, so a single supply chain solution is not always adequate to meet customer needs.

McKinsey recommends "splintering" the supply chain into smaller, nimbler mini-chains. This reduces complexity, saves money, and better serves the customer base.

In one case study, a US-based consumer durable goods manufacturer had offshored the bulk of its manufacturing to China. A smaller presence was retained in the US. All factories relied on a single, unified production planning process and manufactured the full range of products. However, customer demand patterns were changing while, at the same time, SKUs were proliferating. Customer service was being negatively affected.

In response, the company examined its portfolio of products and components along two dimensions: the volatility of demand for each SKU it sold and the overall volume of SKUs produced per week. According to McKinsey:

Ultimately, the company decided to split its one-size-fits-all supply chain into four distinct splinters. For high-volume products with relatively stable demand (less than 10 percent of SKUs but representing the majority of revenues), the company kept the sourcing and production in China. Meanwhile, the facilities in North America became responsible for producing the rest of the company’s SKUs, including high- and low-volume ones with volatile demand (assigned to the United States) and low-volume, low-demand-volatility SKUs (divided between the United States and Mexico).

Ramping up production in a higher-cost country such as the United States made economic sense even for the low-volume products because the company could get them to market much faster, minimize lost sales, and keep inventories down for many low-volume SKUs. Moreover, the products tended to require more specialized manufacturing processes (in which the highly skilled US workforce excelled) and thus gave the company a chance to differentiate itself in a crowded market.