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Title: How To Do Strategic Supply-Chain Planning. Authors: Sodhi, ManMohan S. Source: MIT Sloan Management Review; Fall2003, Vol. 45 Issue 1, p69, 7p Document Type: Article Subject Terms: *BUSINESS planning *MANAGEMENT science *STRATEGIC planning *SUPPLY chains Abstract: Any company that has a global supply chain should consider introducing its strategic left hand to its operational right hand. Senior managers formulate strategy to maximize shareholder value; supply-chain planners run optimization models to minimize costs. Consider a strategic supply-chain planning exercise at a polyvinyl chloride (PVC) manufacturer that we will call Acme Vinyl Co. Acme's North American revenues came from PVC for building (55%), packaging (15%), consumer goods (10%), the electronic industry (10%), the automotive industry (4%) and from non-PVC products (6%). Although business-strategy formulation also uses tools and flame-works, it requires much more creativity than tactical planning. For tactical supply-chain planning, the decision options and the factors affecting them (production capacity, distribution capacity, variable costs, demand forecast) are clearly defined. Optimization models for tactical supply-chain planning and models for strategic supply-chain planning differ only slightly in their design, but markedly in their use. In scenario planning, senior managers build internally consistent, alternative views of possible future outcomes. Full Text Word Count: 4476 ISSN: 1532-9194 Accession Number: 11162982 Database: Business Source Premier
Senior managers formulate strategy to maximize shareholder value; supply-chain planners run optimization models to minimize costs. Combining scenario planning with supply-chain planning achieves the best of both worlds, which leads to long-term competitive advantage. Any company that has a global supply chain should consider introducing its strategic left hand to its operational right hand. Strategic supply-chain planning that combines aspects of business-strategy formulation with aspects of tactical supply-chain planning can make each far more valuable to the planning effort than either would be alone. Strategic supply-chain planning is the Pegasus of strategy: It can soar, but it also needs to keep its feet on the ground. Although companies routinely weigh long-term supply-chain-related decisions in light of alternative sources of supply, new geographic markets or new products, various levels of management use different approaches, often in isolation. Senior managers make such decisions as part of formulating business strategy; supply-chain planners, as an extension of their tactical supply-chain planning. How should companies ensure that relevant supply-chain details inform the business-strategy formulation and that strategic direction and the supply chain are in alignment? They can do so through early communication between senior managers and supply-chain planners, which shortens strategy-implementation time while letting each group pursue its forte: senior managers formulating strategy to maximize shareholder value; supply-chain planners running optimization models to minimize total supply-chain costs.
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unique to optimization models using linear programming, a method using advanced mathematics to capture all the constraints, such as capacity, and to find the best possible recommendations that would minimize the total operating cost or some other stated objective. Such models guarantee the lowest possible supply-chain cost. Spreadsheet calculations or simulation models cannot provide that sort of benchmarking capability.(n3)
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Erik Larsen, professor of management and systems at London's Cass Business School, has identified three phases of scenario planning. Scenario building involves identifying issues, driving forces and factors that produce uncertainty, then devising rough scenarios that are further fleshed out. In scenario planning, managers evaluate possible decisions, policies and strategies to determine their effects in each scenario, modifying and reevaluating them as necessary. Scanning the business environment involves checking early indicators of change in the environment to see which scenario or combination of scenarios is actually unfolding, thus enabling managers to revise and refine the decisions made earlier in Phase Two. Consider Acme Vinyl's scenario planning in light of Larsen's approach. Acme managers deemed three decisions as likely candidates: first, the rationalization of existing production capacity and the closing of plants or parts of plants, while possibly expanding other plants; second, the concentration of production at one or two new megaplants; and third, the rationalization of the company's distribution network, the closing of some distribution centers and the opening of others. They identified four main drivers affecting the company's prospects: macroeconomic forces that determine growth in the gross national product (GNP) of the United States and Canada and the growth of demand in most sectors; the efforts of western European governments and the European Union to phase out PVC, partly in response to Greenpeace activism; fluctuating oil prices and their impact on the cost of raw material (and the company's margins); and the cycle of prices for PVC goods. The managers also predicted business trends: continued U.S. construction growth; slower industrial growth in the United States, Japan and western Europe; rapid growth from 2000 through 2005 in Asia (excluding Japan); a gradual shift from PVC to packaging polymers by major Japanese and western European producers of household goods, chemicals and construction materials; and a reduced use of PVC compounds in the auto industry in western Europe. After their analysis, the managers developed two business scenarios: a so-called "Official Future" and one referred to as "Sunrise-Sunset." The Official Future reflected senior managers' belief that, for at least four or five years, the company's business would grow at the same rate as the GNP growth of the United States and Canada (about 2% per year). Some sectors, such as electronics and consumer goods, would continue to grow faster than others. Asian demand (excluding Japan) -- a small proportion of Acme's total North American production -- would grow as the GNP of Asian countries grew and as Acme achieved greater market penetration. Those trends would continue for 20 years, and U.S. government policies would remain favorable to the PVC industry regardless of which political party was in power. The electronics and consumer-goods businesses and growth in Asian demand would eventually slow down. The Sunrise-Sunset scenario anticipated that events in western Europe and Japan would lead to a downturn in the U.S. and Canadian PVC industry. Concerned about dioxin emissions from the burning of PVC, state governments would begin to file law-suits against PVC manufacturers and garbage-incineration companies. Non-PVC polymer production would gain in importance. Meanwhile, a new day would dawn for PVC exports to Asia, where an overwhelming need for buildings, water and sewer lines would increase demand for 20 years despite environmental issues. The total market would expand and Acme would see its market penetration increase, especially in India, China, Thailand and Indonesia, where Acme might even need to build or acquire plants.
Middle Ground
The ideal process adds a step between business-scenario creation and final decisions: using supply-chain planners' optimization models. (See "Strategic Supply-Chain Planning Using Scenario Planning.") For each of the business scenarios, supply-chain planners can create multiple detailed model scenarios to run with their supply-chain optimization models. The result: a supply-chain configuration that minimizes the total fixed and variable, long-term supply-chain costs for the particular business scenario. How do these model scenarios of supply-chain planning differ from the more familiar business scenarios of scenario planning? Model scenarios feature an array of demand forecasts and tactical production configurations (extra shifts, planned maintenance and the like). The underlying factors are built into optimization models for use with advanced planning-and-scheduling software. Creating model scenarios is straightforward and involves little creativity or discussion. It is similar to a company taking a macro business scenario and creating micro scenarios for business units or regions? Only convenience and the time it takes to solve a model scenario constrains how many a company can have for each business scenario. Linking each business scenario to multiple model scenarios and uniting the creative work of strategy formulation with the analytical, optimization-model approach results in a powerful synergy with "right brain" strategizing joined to "left brain" planning.(n17)
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Phase One: Scenario Building In Phase One, the strategy team identifies the candidate decisions and their attendant uncertainties, then outlines business scenarios. The supply-chain team develops or modifies its supply-chain model on the basis of input from the strategy team regarding possible decisions. The two teams then validate the model. The strategy team garners useful information about the supply chain and updates its notions about how long-term supply-chain configurations affect total supply-chain cost. Next, the strategy team fleshes out the business scenarios using this information and data-on-demand forecasts, plant locations, distribution centers and so on. Finally, the supply-chain team develops multiple model scenarios for each business scenario to run through its software. After developing the Official Future and Sunrise-Sunset scenarios, Acme's strategy team met with the supply-chain team. The teams agreed that the supply-chain group should make recommendations for both scenarios to reconfigure the supply chain to minimize the cost of manufacturing, distribution, the dosing of old plants and the establishment of new ones. They identified possible locations for megaplants and determined which of the existing plants could be altered or closed; they also identified 14 product families that, in aggregate, totaled several hundred products. Then the supply-chain team, focusing on demand for North American production, developed model scenarios. Phase Two: Scenario Planning In Phase Two, the supply-chain team runs the model scenarios and makes scenario-specific recommendations. Then the strategy team modifies its pool of possible decisions, finally choosing one that it then shares with other managers. Acme's supply-chain team used software from an APS vendor and ran model scenarios requested by the strategy team. The latter group weighed the resulting recommendations with factors relating to the long-term profitability of the business. As a result, Acme decided to spin off part of the vinyl business as a joint venture with a supplier; it also chose to merge with a non-PVC polymer company. Phase Three: Scanning the Business Environment In Phase Three, the strategy team identifies leading indicators (in the case of a company like Acme, it might be housing starts) that enable early detection of which scenario or combination of scenarios is actually unfolding. When the strategy team has determined which scenario is occurring, it informs the supply-chain team. With the new information, that group revises the scenarios and runs the model again to fine-tune its recommendations. The strategy team then revises its decisions and shares them widely so they can be acted on.
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scenario-planning techniques. Legend for Chart: A - Technique 1(i) B - Technique 2(ii) C - Technique 3(iii) A B C Phase One: Scenario Building Identify issues, key driving forces and important factors for uncertainty Sketch out basic scenarios Flesh out scenarios Identify focal issue or decision List key factors influencing success or failure of the decision List driving forces in the macro-environment that influence those factors Identify two or three factors or trends that are most important and most uncertain Sketch each scenario using the logical relationships among factors, and view each scenario in a graph that has the previously identified drivers as axes Flesh out scenarios Define scope of strategy formulation Identify major stakeholders (those affected and those able to influence) Identify current trends Identify key uncertainties Construct extreme scenarios Assess scenarios' internal consistency and plausibility Create representative scenarios -- internally consistent scenarios covering a wide range of outcomes adjusted to reflect stakeholder behavior Identify research needs for each scenario
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Phase Two: Scenario Planning Evaluate policies and strategies within each scenario to see how they hold up Modify the strategies Iterate and reevaluate as many times as necessary In each scenario, determine the implication of decisions being considered Develop and apply quantitative models (for forecasting and optimizing decisions when the future is uncertain; these activities will likely lead to scenario refinement) Describe decisions for different scenarios, combining managerial judgment with results from previous step Phase Three: Scanning the Business Environment Identify leading indicators and assign people to monitor changes in the environment in order to detect in advance which scenario or combination of scenarios is unfolding Select leading indicators and signposts to detect which scenario (or combination of scenarios) is unfolding (i.) Proponent: Erik Larsen, professor of management and systems, Cass Business School, London. (ii.) Proponent: Peter Schwartz, chairman, Global Business Network, Emeryville, California. (iii.) Proponent: Paul J. H. Schoemaker, CEO, Decision Strategies International Inc., West Conshohocken, Pennsylvania, and research director, Mack Center for Technological Innovation, The Wharton School.
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Identify issues, key driving forces and important factors for uncertainty Sketch out business scenarios Flesh out business scenarios Develop or modify optimization model for the supply chain (including any target acquisitions and locations for new plants or distribution centers) Validate model with strategy team Phase Two scenario planning Phase Two: Scenario Planning Evaluate possible decisions (policies and strategies) against each scenario to see how they hold up in each case, using the scenario-specific recommendations of the supply-chain team as a benchmark Modify possible decisions Iterate and reevaluate as many times as necessary For each business scenario, create model scenarios and run optimization model with each model scenario Determine best decision for the business scenario, taking into account recommendations of the optimization model for each model scenario Present this business-specific choice to senior management along with the team's rationale for recommending it If the strategy team has provided its list of possible decisions, compare each of them against the scenario-specific recommendations as well Phase Three: Scanning the Business Environment Identify leading indicators and charge people with monitoring changes in the business environment for early detection of which scenario or combination of scenarios is unfolding Refine model scenarios to reflect the reality of the unfolding scenario and determine the best decision recommended by the optimization model Present recommendations to the strategy team
REFERENCES
(n1.) Suppliers of APS technologies include SAP, i2 Technologies, Manugistics and Logility. (n2.) R.L. Breitman and J.M. Lucas, "PLANETS: A Modeling System for Business Planning," Interfaces 17 (January-February 1987): 94-106. (n3.) Optimization models can be built into spreadsheets by using the Solver feature within Excel, for instance, or by using add-on software, but these models are not comprehensive enough to take into account the scope and detail needed for a global supply-chain model. For such optimization, the cost of APS software, including implementation, may exceed $1 million. (n4.) A.M. Geoffrion and R.F. Powers, "Twenty Years of Strategic Distribution System Design: An Evolutionary Perspective," Interfaces 25 (September-October 1995): 105-127. (n5.) M.A.. Cohen and H.L. Lee, "Strategic Analysis of Integrated Production-Distribution Systems: Models and Methods,"
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Operations Research 36, no. 2 (1988): 216-228; and M. Cohen and H. Lee, "Resource Deployment Analysis of Global Manufacturing and Distribution Networks," Journal of Manufacturing and Operations Management 2, no. 2 (1989): 81-104. (n6.) R. Breitman and J. Lucas, "PLANETS: A Modeling System for Business Planning," Interfaces 17 (January-February 1987): 94-106. (n7.) B. Arntzen, G. Brown, T. P. Harrison and L. Trafton, "Global Supply-Chain Management at Digital Equipment Corporation," Interfaces 25 (January 1995): 69-93. (n8.) A. Macdonald and D. Beavis, "Seize the Moment -- Radical Supply Chain Integration as a Means of Increasing Shareholder Value and Enabling Acquisitions To Deliver on Their Promises," Manufacturing Engineer 80, no. 4 (2001): 175-178; C. Farrell and R. Melcher, "The Lofty Price of Getting Hitched," Business Week, Dec. 7, 1997; and D. Henry, "Mergers: Why Most Big Deals Don't Pay Off," Business Week, Oct. 14, 2002, 72-78. (n9.) B. Arntzen, G. Brown, T.P. Harrison and L. Trafton, "Global Supply-Chain Management at Digital Equipment Corporation," Interfaces 25 (January 1995): 69-93; J. Muller, "Compaq Will Buy Digital in a Record $9.6b Deal," Boston Globe, Jan. 27, 1998, p. A1; and "Compaq To Acquire Digital for $9.6 Billion," Compaq press release, Jan. 26, 1998, New York, http://h18020.www1.hp.com/newsroom/pr/1998/pr260198c.html. (n10.) D.J. Frayer and R.M. Monczka, "Enhanced Strategic Competitiveness Through Global Supply Chain Management," Annual Conference Proceedings of the Council of Logistics Management (Oak Brook, Illinois: Council of Logistics Management, October 1997): 433-441. (n11.) J. Greenbaum, "SCM Is Dead, Long Live SCM," July 16, 2002, http://itmanagement.earthweb.com/columns/entad/article.php/ 1407831. (n12.) A.P. de Geus, "The Living Company" (Harvard Business School Press: Boston, 1997), 69. (n13.) H. Mintzberg, "The Rise and Fall of Strategic Planning" (New York: Free Press, 1994). (n14.) See M. Porter, "Competitive Advantage: Creating and Sustaining Superior Performance" (Free Press: New York, 1985); B. Melzer, "The Uncertainty Principle," CIO Insight, June 1, 2001, www.cioinsight.com; and H. Kahn, "Thinking About the Unthinkable" (New York: Horizon Press, 1962). (n15.) E. Larsen, "What Is Scenario Planning?" teaching note, Cass Business School, London, 2000; P. Schwarz, "The Art of the Long View: Paths to Strategic Insight for Yourself and Your Company" (New York: Doubleday, 1991); P.J.H. Schoemaker, "Multiple Scenario Development: Its Conceptual and Behavioral Foundation," Strategic Management Journal 14 (March 1993): 193-213; and P.J.H. Schoemaker, "Scenario Planning: A Tool for Strategic Thinking," Sloan Management Review 36 (winter 1995): 25-40. (n16.) T.F. Mandel and I. Wilson, "How Companies Use Scenarios: Practices and Prescriptions," SRI International, Menlo Park, California, report no. 822, spring 1993. (n17.) H. Mintzberg, "Planning on the Left Side and Managing on the Right," Harvard Business Review 54 (July-August 1976): 49-59. Also published as H. Mintzberg, "Planning on the Left Side, Managing on the Right," in "Mintzberg on Management: Inside Our Strange World of Organizations" (New York, Free Press, 1989), pp. 43-55. ~~~~~~~~
By ManMohan S. Sodhi ManMohan S. Sodhi is an associate professor of supply-chain management at Cass Business School in London. Contact him at m.sodhi@city.ac.uk.
Copyright of MIT Sloan Management Review is the property of Sloan Management Review. Copyright of PUBLICATION is the property of PUBLISHER. The copyright in an individual article may be maintained by the author in certain cases. Content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. Source: MIT Sloan Management Review, Fall2003, Vol. 45 Issue 1, p69, 7p Item: 11162982
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