Getting ahead through

Six PracticesPractice 1

Strategic Alignment

The Six Practices that bring competitive advantage

According to McKinsey & Co and Georgia Tech College of Management, there are six ‘leading practices’ that drive supply chain performance1. In this, the first in a series of six articles in which each of these practices is examined, Derek Thomason, Martin Green and Martin Haynes of Unipart Expert Practices describe how companies can practically apply these practices for competitive advantage. it has long been established that supply chains can be used for competitive advantage. What is helpful is that the implementation of just six leading practices, as identified by McKinsey & co with Georgia tech college of Management, can be correlated with improved business performance – companies who excel in these six areas are dominant in terms of service, cost and inventory.

it is also interesting to note that two of the traditional levers used to supposedly drive benefits, it and re-organisation, do not consistently provide the desired results. Unipart expert Practices (UeP) help companies develop and use these six practices to deliver competitive advantage.

Setting out the six leading practicesMcKinsey summarise these leading practices as:

1 Supply Chain Strategic Alignment:Leading companies align their supply chain and corporate strategies, and then drive alignment throughout the supply chain on objectives and aspirations. in the very best companies, supply chain colleagues from the shop floor to the most senior managers clearly understand the supply chain strategy, tactics and actions required.

2. Segmentation:Leading companies actively manage product and service complexity. they design multiple supply chains within a network to capitalise on the complexity that delivers competitive advantage. they take steps to ruthlessly eliminate complexity where it does not.

3. A balanced and forward-looking design:Leading companies create a top-down and forward-looking vision of their overall supply network. they ensure that the network balances productivity, flexibility, and risk to deliver great service without excessive cost or assets.

4. A lean, end-to-end value chain:Leading companies task their supply chain managers with optimising end-to-end value chains, and drive true collaboration across functions. they typically deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma), which they have made their own.

Supp

ly c

hain

Co

nsul

tanc

y

1 of 6

5. World-class integrated planning:Leading companies use disciplined integrated planning processes to ensure the organisation executes in synchronisation, without the need for ‘heroes.’ they focus their planning efforts where it matters – using sophisticated and robust techniques where they are valuable and using unaided computer predictions elsewhere.

6. The right talent, accountable for performance:Leading companies make supply chain talent development and acquisition an organisational priority. Supply chain positions form part of the top management career track. Once the right people are on board, companies hold talent fully accountable for their contribution to supply chain performance.

according to McKinsey, ‘companies that have built strength in the practices that matter most are:

1.4 times more likely to have strong service performance; 1.7 times more likely to have strong distribution and logistics cost performance; 2.7 times more likely to have strong inventory performance.

Strength in these supply chain metrics is key to driving sales, margin, and return on capital. it also helps sustain competitive advantage. Furthermore, the gap between top and bottom performers is wide and likely to widen as competitors move on to the next horizon of practices such as sustainability and full integration of supply chains across suppliers and customers.in this series of Papers we will look at each of these leading practices, and also at a group of ‘new horizon’ practices that McKinsey and Georgia tech have identified. We start with Supply chain Strategic alignment.

Supply Chain Strategic AlignmentStrategy is the direction and scope of an organisation over the long-term. it is the means by which advantage is achieved through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations.it is self evident that a business needs a robust and appropriate strategy, but it is not always evident that businesses have the capability to implement these strategies. For example:

Kaplan and Norton, the originators of the Balance Scorecard, published that 90% of organizations fail to execute their strategies successfully2

in a study of 200 organizations in the times 1000, 80% of directors said they had the right strategies but only 14% thought they were implementing them well3

Harvard Business School teaches that at least 70% of all change initiatives fail4

the economist intelligence Unit reported that organizations realise only around 60% of their strategy’s potential value because of failures in planning and execution5.

the problem is that strategy ‘announcements’ from the highest levels don’t always translate into action or changes in behaviours at lower levels. this can make implementing new strategies slow, expensive and ineffective. in a successful company, strategies are implemented quickly thus enabling rapid response to changing circumstances.

Supply chain Strategy cannot be developed in isolation. it must be considered when broader business possibilities are being analysed, when choices are being made and most importantly as part of Business Strategy implementation.

a Business Strategy should set the long term direction and provide a vision. it should define the businesses’ markets and offers, and describe how the business should leverage competitive advantages. the Strategy specifies what resources are required in order to be able to compete, and includes the external factors that might affect the businesses’ ability to compete. in all this it is communicating the values and expectations of those who have power in and around the business.

2 of 6

So as part of this Business Strategy, the Supply chain Strategy needs to cover:

the customer value proposition; Sourcing and supply (including production if appropriate); infrastructure and network strategy; Processes and competences; technology; continuous improvement; Organisation design, i.e. the values and cultural norms which promote a collaborative /

collegiate culture, enabling cross functional (as opposed to silo) working; Performance measurement and incentives; Skills / competences and personnel development.

Finally, the strategy needs to be communicated in a way that is consistent throughout the organisation and meaningful at the level where work is performed. implementing strategies is not about grand statements, but changing the actions of individuals and managers throughout the business, day by day and minute by minute. With this in mind, the way in which the strategy is communicated and prioritised becomes critical, otherwise there is the risk that strategy in individual areas such as Supply chain will become misaligned, or even in conflict with, the overall Business Strategy.

3 of 6

Tools for developing and ensuring Strategy AlignmentWe identify seven broad areas which could be considered as the ‘toolbox’ for creating and maintaining Strategic alignment. the first of these is in the setting of priorities.

Setting PrioritiesMost strategies fail because they are not underpinned by specific actions which together contribute to the whole. Unipart makes extensive use of ‘Hoshin Kanri’ (PDM – Policy Deployment Matrix) in order to: ensure that aims are consistent at each level in the business separate out the vital few initiatives from the trivial many; convert strategy into objectives which are meaningful at the business unit, departmental, team

and individual level; and to provide measurable milestones and deliverables against which the strategy can be

measured.

there are other tools which can be used – examples are Kodak’s ‘Strategic Framework’; or Kaplan and Norton’s ‘Balanced Score card’.

Understanding Customer Value PropositionsSupply chain Strategy should start with a clear understanding of market sector requirements. However, what is important when developing Supply chain Strategy is not always (or often) the same as the way the market is viewed when developing the Business Strategy. For example, during the business planning cycle the market tends to be viewed in terms of revenue or type (for example, large accounts) but from a supply chain perspective the market should be viewed in terms of value add and activity / cost drivers, for example:

segments that take full pallets, vs cases, vs singles; speed of delivery (e.g. same day vs 24 hr vs 3 to 5 days); order placement method, fax, eDi, e-mail; stable vs. volatile demand; product characteristics (e.g. chilled vs ambient, small and high value vs bulky and low value).

UeP refers to this as the customer Focused Supply chain Method (cFScM) and has developed a structured approach for the identification of how supply chains add value from a customer perspective and therefore ‘the worth’.

a core element of cFScM is Quality Function Deployment (QFD) which prioritises what is important to customers and how they measure performance. it then links these to internal KPi’s, helps establish where there are conflicting aims/goals and finally indicates the gaps that need to be closed. this ensures that businesses design their supply chain to meet the real needs of the customer – not what we think they need. For example, we may be looking to reduce lead-time, when what the customer really wants is reliability.

this approach is particularly valuable when the strategy has determined that a business needs to enter new markets with which it may be unfamiliar. a fresh view enables us to develop new models of the supply chain with new value propositions. Unipart itself is a good example of this, having transformed itself from its traditional roots in the motor industry to be a major supplier of business services in a wide range of industry sectors.

4 of 6

Sourcing and SupplyDeciding which products and services to source from where can be complex. For example, a company may decide to source low-value items with high demand variability from a low-cost economy, but is this really the best option? Factors such as service levels to customers, inventory holding costs, quality and obsolescence need to be included. Similarly, outsourcing decisions and the type of outsourcing arrangements are also key. these decisions can be complex and , sometimes, difficult to change. this can leave companies exposed when they are operating in volatile environments and at the mercy of rapid exchange rate changes. Best practice companies have developed processes to review these decisions regularly and, where appropriate, change their sourcing arrangements at short notice.

tools such as cost-to-Serve which can be used to establish the total cost of ownership are valuable in understanding the true cost associated with various supply options (or customers or products) by including not just the price of the goods for a given exchange rate, but also hidden costs such as inventory, transport, administration and planning.

Infrastructure and Network StrategyOnce customer needs have been established by sector then the supply chain needs to be configured to deliver the required level of service. Practice 2 (segmentation) describes how infrastructure and network strategy can be developed but the point here is that these must be aligned with the overall strategy of the company. For example, if growth is planned in the ‘direct-to-consumer’ market channel it would be folly to design a network which only serves the traditional retail sector.

Processes and CompetencesSome processes have more impact on the business strategy than others. UeP uses a methodology called Business Process Prioritisation to identify what factors are critical in implementing the business strategy by generating a business process master list, then prioritising processes based on their impact on the critical success factors, and finally assessing their quality rating in terms of fitness for use.

the business process master list shows all the processes that are used in the supply chain (and those that interface with it). the purposes of the master list are to ensure that nothing is missed; to look for opportunities to leverage previous work; to standardise as far as possible and to highlight variations where they are essential; and to drive out waste and duplication.

in the adjacent diagram processes with a low quality rating and inpact on a high number of critical success factors are regarded as critical (highlighted in red) and require serious attention.

Technologythere are a lot of technologies that can be deployed in the supply chain, not all of which necessarily contribute to the success of the Supply chain Strategy, or work in alignment with the overall Business Strategy. tools are needed to help select the right technology (hard and software); to assure flawless execution through proper preparation and excellent implementation; and to allow both for disaster recovery and for benefits realisation.

in selecting the right technology UeP use a tool called ‘Spec n Select’ which involves process blueprinting to give a functional specification, comparison across available technology, short listing and selection.

Flawless execution is built on world class process design, process trials, ‘real life’ simulations and excellence in execution and project-management.

Disaster recovery/benefits realisation requires a back to basics approach which focuses on using technology capability to get tangible business results

5 of 6

Num

ber

of c

ritic

al s

ucce

ss fa

ctor

s im

pact

ed 8

7

6

5

4

3

2

1

E D CCurrent process quality rating

ContinuousImprovement

NetworkDesign

Order flow usingmrp and drp

Execution of theconsignment stock contract

Strategic qualification/vision and mission (long term planning)

S&OP

Selection of stockproducts

Setting stockparameters

Customer needsanalysing

Forecasting

Generating the MPSB A

Communicationsas already discussed, strategy is worthless unless it has meaning and influence across the organisation. Policy Deployment is an important tool in communicating priorities and aligning aims and results. in addition, stakeholder analysis can be used as a prerequisite to effective communications planning and execution.

communication of the strategy should include, as a minimum, the following three elements.

1 Stakeholder analysis identifies all interested parties, the connections to the ‘core’ team, the recipients’ attitudes to the strategy and their degree of influence on the outcome.

2 A communications plan lays down what messages are going to be communicated, how they will be delivered and with what frequency. Not all people need the same types of communication.

3 Communication plan execution determines who will be responsible for the communication and what the inputs to the process will be. it is all too common to start with good intentions but then not follow-through.

ConclusionsFew would argue that for a supply chain to be effective, it must be strategically aligned with the business and its objectives. in the same way that the business environment is constantly changing, so the business itself must evolve and its supply chains must respond in a controlled and coherent fashion. However, this is often not the case for a variety of reasons. Organisational structures may make change difficult, key skills may be absent or the business may be locked into inflexible assets (for example buildings or systems). there are other barriers.

the senior management team is responsible for addressing these issues and deploying a variety of tools and techniques to develop the supply chain and ensure it remains aligned to the needs of the business. this article has outlined a variety of such tools and techniques that have proved highly effective, not only in transforming our business, but also in transforming many others. More importantly, these are all tools that can be deployed on a regular basis. this ensures that the task of maintaining strategic alignment is a constant and regular process – not a major exercise conducted every few years. the supply chain therefore evolves with the business and changes are relatively small and incremental. this in turn helps ensure that the changes are successful and that we are not one of the 90% of initiatives that fail.

in the next edition of Living Logistics, we will look at the second of the Six Practices, segmentation.

Unipart Expert Practicesas the consultancy arm of Unipart Logistics, Unipart expert Practices (UeP) provides supply chain consulting services. UeP has particular areas of expertise in process re-design, sustainable employee engagement, supply chain strategy, design and operation. UeP’s clients include Shell, Home Delivery, eSaB, Network rail & Sky.

References1. McKinsey & company. the race for supply chain advantage; Six Practices that drive supply chain performance operation practice 2008.

2. Kaplan & Norton. 1996 Balanced Scorecard: translating stategy into action Harvard Business review.

3. Strategic Performance Measurements and Management 1997.

4. course Notes.

5. economist intelegence Unit 2004 Stratagy execution: achieving operational excellence.

the next articles in this series, together with any other publications from our quarterly publication Living Logistics are available from the thought Leadership section of our web site.

www.unipartlogistics.com/consulting

6 of 6

For more information contact:Unipart expert Practices

Unipart House, Garsington roadcowley, Oxford

OX4 2PG

tel: +44 (0) 1865 384690 uep.enquiries@unipart.co.uk

or visit our website:www.unipartlogistics.com/consulting