The 7 Pillars of Global Supply Chain Planning

By John W. Scharlacken -- Supply Chain Management Review, 3/1/1998

Multinational companies with the courage to adopt a global supply chain planning vision have an opportunity to gain worldwide economies of scope, scale, and speed—the keys to market leadership.

Economies of scope allow organizations to share resources across products, markets, and businesses. As this happens, producers can extend the demand planning concept by forming alliances with suppliers, distributors, and retailers. Economies of scale in the supply chain make possible both lower unit costs and greater bargaining power. Economies of speed allow for quicker reactions to changing customer requirements and improved supply chain performance that comes from real-time planning information.

World-class companies recognize the need to expand their supply chain management capabilities to remain competitive in a global market. This article speaks to that imperative, focusing specifically on the planning process. It addresses the case for globalizing your company's supply chain planning process and describes how to tell when it's time to aggressively pursue a planning strategy. It then presents the underpinning of the planning activity—the seven pillars of successful global supply chain planning.

When implemented successfully, the process will lead to the kinds of revenue uplifts and cost reductions summarized in Exhibit 1.

The Case for Globalizing the Planning Process

Real-world events are forcing corporations to consider the merits of implementing a global supply chain planning process. Like many organizations today, your company probably finds it increasingly difficult to achieve revenue objectives through conventional approaches—such as pushing products to wholesalers through marketing drives late in the sales period. Customers are growing wary of marketing promotions that offer incentives to buy in advance of need. Instead, they are lobbying to receive the same price point on future orders that they're offered as an incentive to stock up during a period-end sale.

Furthermore, the reality facing multinational companies today is that their competitors, trade accounts, and suppliers now recognize the benefits of managing operations on a global or pan-regional basis. In the worldwide arena, increased purchasing leverage is achieved through consolidated buys. At the same time, the cost of switching from one supplier to another decreases.

Multinational companies the world over are facing decisions about how to revamp their supply chain to support marketing strategy and improve operational performance. In the continual battle for dominant market share, a select few are always on the alert for those opportunities to gain economies of scope, scale, and speed. For such trailblazing and forward-thinking multinationals, the long-term benefits of implementing a global supply chain planning strategy can ensure continued success in an ever-expanding world market.

Not every company will be a leader in building global supply chain planning capabilities. But as these capabilities mature from strategic differentiator to competitive necessity, every company will be forced to join the race.

Global supply chain planning is an organizationwide information and logistics process that focuses on providing the right products and services for each customer. In this vision, competitive advantage is created by integrating operations and information through an enterprisewide system. Although this integrated global network offers major cost-reduction opportunities, its unique contribution lies in the capability to respond to market trends and service the global customer.

In most U.S.-based consumer-goods companies, certain intractable forces tend to create inefficiency and poor use of assets. These include separate divisions selling to the same account; various geographic units using unique, separate administrative systems; and an overriding emphasis on financial targets to drive operations, especially toward the ends of fiscal quarters and years.

The degree of difficulty in instituting a global supply chain planning process depends upon the size and complexity of your multinational operations. Consider this typical example of a multinational with a functional organizational structure and many separate business units operating in different regions of the world. Each business unit plans and manages its own inventory, logistics, and operations using different philosophies and software applications. Inventories and operating costs are higher than necessary, and service goals are not reached consistently—all of which increases friction between production and sales units. Making matters worse, most operations managers have been taught inappropriate inventory formulas. Passing the cost of inventory along the supply chain is becoming increasingly ineffective and counterproductive.

Why is this scenario so common and what can companies do about it? To simulate how such problems occur and devise solutions, managers can play "The Beer Distribution Game," an operations management instructional simulation developed by the Massachusetts Institute of Technology.¹ The developers designed the simulation to illustrate the dynamics of large, complex systems, such as organizations with many semi-autonomous business units. This game has demonstrated to thousands of business students and corporate executives that organizations do not perform their best when the separate parts of a system are optimized "selfishly"—that is, in isolation from each other. Instead, the net result will improve—that is, the entire organization will benefit—if the system is optimized as a whole, with a systemwide perspective on the relationship between each function.

Today, many multinational corporations are struggling with the issues posed in the Beer Game simulation: separate business units, various corporate functions, or even whole divisions striving to manage risk and opportunity as if each were an autonomous company. Top corporate management fuels the problem by establishing goals for the success of individual functions—sales, marketing, planning, production, distribution, and accounting—instead of establishing shared goals that encourage cooperation and coordination. The result is supply chain inefficiency—higher than necessary inventory carrying costs, administrative costs, and customer fulfillment costs. The alternative of holding high-cost inventory levels is no longer a sustainable option in most businesses. Thus, developing a vision for a global supply chain planning process is becoming the first order of business for many global enterprises.

When orchestrated successfully, a company's global supply chain planning process will:

• Provide a global or pan-regional view of an organization's administrative resources, inventories, purchased materials, and services.
• Support "go-to-market" strategies along a broad continuum ranging from standardization to the mass-customization of products and services, as required.
• Replace the need for inventory stockpiles in every market with shared information networks thus reducing the number of national stocking centers, regional distribution centers, and associated pipeline inventory levels and carrying costs.
• Improve service levels through quicker response to changes in customer demand and reduced order-fulfillment leadtimes.
• Increase revenue and shareholder value.

Having recognized the need, companies must next address the crucial question of how to proceed with the global supply chain planning process. Successful implementation of global supply chain planning rests on seven pillars. This foundation allows a multinational company to more efficiently meet the changing needs and requirements of key customer accounts and targeted market segments.

Pillar I: Integrated Supply Chain Planning Process

Ideally, the different activities composing your company's supply chain planning process—sales and operations planning, production and inventory requirements planning, and deployment planning—are fully integrated into a single information system and the proper metrics for tracking performance are in place. From campus facilities located at company headquarters, planners with oversight responsibility for all product lines establish policies and procedures that synchronize supply chain activities with the pulse of the market.

The global competitive advantages supported by this pillar include a flexible and responsive supply chain planning process that routinely provides excellent service, an ability to adjust inventory to the perfect minimum, and a reduction of operating costs to an all-time low. An integrated system brings up-to-the-minute information, worldwide scope, and the ability to sense and respond to market changes. And this, in turn, enables your company to select the most promising channel relationships, satisfy ever-increasing customer demands, and attract the best suppliers.

An integrated supply chain planning process encompasses these primary activities:

• Sales and operations planning: This activity is an often overlooked but crucial ritual for integrating and synchronizing the different parts of the supply chain. It should be designed to provide the overall framework for which other, more detailed levels of planning are conducted. Sales and operations planning should arrive at consensus-based sales, marketing, production, financial, and R&D plans that are consistent with and aligned to the corporate business plan.
• Production and inventory requirements planning: This activity determines inventory replenishment requirements across stocking warehouses, distribution centers, and in some instances, replenishment orders for key customer stocking locations. These requirements are aggregated to create a time-phased production plan that serves as the basis for production scheduling, capacity planning, material requirements planning, finished-goods inventory deployment planning, load building, and transportation planning activities.
• Deployment planning: This activity determines the distribution of finished-goods stock inventory, the creation of logical and physical truckloads, and the selection of the most cost-effective and time-sensitive shipping lanes for transporting product.

Pillar II: Global Planning Process Hierarchy

Our client work shows that companies can significantly increase revenue and reduce overhead costs—while achieving other strategic and tactical benefits—when they design, manage, and execute a global supply chain planning process as an organizationwide system. Such a system transcends geographical regions, business units, and any divisional boundaries for the purpose of planning inventory requirements on a global, regional, or local level. However, few products are easy to market globally. Almost all require significant adaptation to regional and national tastes. A global supply chain planning vision should certainly not set worldwide product standardization as its primary goal. Instead, it should seek to promote uniformity and consistency in quality, delivery, and marketing of products and services across borders.

As part of a global supply chain strategy, planning activities and responsibilities are distributed and executed—at a global, regional, national, and local level—to achieve an optimal mix of global planning efficiency and local market effectiveness. Each level focuses on a specific set of activities. Each also applies to certain situations and exhibits distinctive strengths and weaknesses, as discussed below.

Global Planning Model

Among the prospective planning activities appropriate to the global planning level are the following:

• Production planning and inventory deployment for basic operations/bulk products.
• Material requirements planning (for selected items).
• Capacity requirements planning (medium and long term).
• Global key account allocation planning for inter-continental accounts.
• New product launch planning.
• Reconciliation of financial forecasts against aggregate unit sales forecasts.

Regional Planning Model

At the regional planning level, a number of additional prospective activities come into play, including:

• Sales forecasting process management.
• Key account forecast aggregation.
• Reconciliation of financial forecasts against unit sales forecasts.
• Account-specific allocation planning.
• Sales and operations reconciliation meetings.
• Multinational promotional and new product launches.
• Scheduling of packaging, filling, and assembly plants.
• Material requirements planning across regional source plants.
• Capacity requirements planning (short and medium term).
• Promotional packing and merchandising planning.
• Transportation scheduling and load planning.
• Finished-goods inventory deployment.
• Key account stock replenishment.

National/Local Planning Model

Some supply chain planning activities are more effectively executed if they remain within the purview of local planning groups. Examples include:

• Sales forecast update contributions.
• Local market promotional planning.
• Shop-floor loading (at factories).
• Scheduling direct material supplies (to factories).
• Load building and transportation planning.
• Warehouse picking/packing/shipping/scheduling.

Pillar III: Uniform Policies and Business Rules

In even some of the best-managed companies, disparate planning approaches, philosophies, work practices, business rules, and conventions often are found across the business units and divisions. When these different components adopt their own way of conducting business along the supply chain, organizations have difficulty servicing multinational trade accounts in a coordinated and uniform manner. As a result, customers become frustrated when they have to deal with multiple production and logistics fiefdoms. Clearly, a company embarking upon a globalized supply chain planning strategy needs to standardize policies across business units to increase adaptability and responsiveness to growing customer-service requirements.

Typically, dozens of policies ("corporate behaviors") will need to be rationalized both across and within the various business units. In most traditional organizations, for example, the sales, marketing, production, purchasing, and distribution plans are developed independently of the respective functions. The singular focus here is in optimizing the individual plans. In the new model, by contrast, organizations adhere to consensus-based plans developed through a formal sales and operations planning process. The emphasis now turns to achieving business results in a coordinated and congruent manner.

Pillar IV: Shared Performance Measurements

In redesigning client supply chain planning processes, we frequently work to bring focus to the performance measurement system to ensure that it aligns with strategic and operational supply chain management objectives. Typically, the performance measurements currently driving most businesses are skewed heavily toward financial indicators. Though these measures are important, they typically overshadow other, but equally important, supply chain measurements—such as service levels, inventory levels, order-fulfillment cycle time, new product time-to-market cycle time, market share, and customer satisfaction.

Thus, we recommend pursuing a balanced scorecard approach for identifying and selecting measures to be shared across departments. That approach, which is contrasted against traditional performance measures, is offered below.

In addition to defining and adopting a new set of measures, companies face an important related task. They must ensure that both the accountability for these performance measurements and the achievement of improvement targets are shared among the departments that manage and use the supply chain planning process. Thus, for each performance measurement, a weighted accountability average should be computed across functions and departments. That computation then needs to be linked to management's variable compensation and annual incentive plans.

Pillar V: Unified Supply Chain Planning Information Systems

Many companies use a variety of incompatible software solutions both across and within business units. When each segment of the company uses its own software instead of integrated tools, less information gets shared, important decision signals are not quickly transmitted through the system, and local decision making prevails by default—often at the expense of overall corporate performance.

For many of Price Waterhouse's client companies, regionalizing or globalizing the supply chain planning process has involved the integration of an advanced supply chain planning tool—such as Manugistics, i2, Red Pepper—with an enterprisewide resource planning (ERP) information system—for example, SAP, Oracle, PeopleSoft, or Baan. This combination is required because planning systems depend on ERP systems for data accessibility and synchronization on a pan-regional or global basis.

The result is a powerful combination of enabling information systems technologies that can enhance a company's ability to respond to changes in customer demand through real-time updating. Sales, marketing, finance, and planning staff enjoy up-to-the-minute information for conducting analyses and making business decisions. With the advent of powerful ERP information systems integrated with advanced demand planning tools, organizations now have global and pan-regional views of:

• Forecast requirements, including local promotional needs.
• Finished-goods inventory balances by SKU and location, including vendor-managed inventory stocks.
• Production plans that feed just-in-time inventory systems.
• Capacity levels by source plant and contract supplier location.
• Consolidated material requirements plans across source plants and contract suppliers.

Pillar VI: Process-Based Organizational Structure

Many organizational structures are static, irrevocable legacies of past management teams. Yet structures should be allowed to change to the degree that the company, the industry in which it competes, and the markets it serves will assuredly change over time. Essentially, you should adopt the appropriate organizational structure that achieves a synergistic match with your size, growth rate, and strategies for approaching the marketplace.

No single organizational structure is effective in all business conditions. In practice, companies traditionally have adopted one of three basic organizational frameworks—functional, product, or market based. Each typically exhibits a significant degree of autonomy from corporate headquarters and sister divisions. In these traditional organizational structures, inefficient information exchanges across departmental boundaries hamper the supply chain planning process by imposing delays and increasing the potential for mistakes.

In a process-based structure, people are organized from a broad cross section of functional disciplines to work together as a team to achieve corporate goals and meet customer needs. When they achieve these objectives, a process-based organization gains important competitive advantages, thereby enhancing a company's adaptability to changes in market demand. These benefits are manifested through improved revenues, increased market share, improved customer-service levels, and advanced order-fulfillment cycle times.

Close alignment of a process-based organizational structure with the global supply chain planning strategy might lead to the creation of an "Integrated Logistics Management" function that combines the traditional customer-service, planning, and distribution functions. This new super function could have responsibility for sales forecast accuracy, finished-goods levels, available-to-promise records, customer-service levels, and delivery performance. The primary advantage of this option is enhanced accountability for finished-goods inventories and customer service.

Many companies struggle with the reporting question. Our experience suggests that the supply chain planning process-based function should report to a vice president or director of global supply chain management. Furthermore, it should have a direct reporting relationship to the CEO/president of the business to ensure freedom from functional bias. There are a number of reporting alternatives, as shown below. Each has advantages and disadvantages.

Pillar VII: Shared Planning Centers of Excellence

Uniform communication and information sharing among departments invariably leads to better planning decisions. Unfortunately, few companies organize their planning functions globally or provide the necessary information systems infrastructure to foster interdepartmental sharing. Typically, the problem is compounded when autonomous business units with decentralized planning departments implement disparate planning models based on different philosophies, policies, procedures, performance measurements, business rules, information systems, interfaces, and organizational structures. When companies hear of the hidden opportunity costs and inherent inefficiencies associated with managing this level of complexity, they quickly embrace the shared services approach to supply chain planning.

Such an approach can be implemented in two basic ways: (1) decentralized planning centers connected through an integrated communications system and (2) a central or regional planning center.

Generally, the ideal approach is to locate the core staff responsible for coordinating supply chain planning in a central or regional planning center. The shared-services planning function's responsibilities will transcend geographic and divisional boundaries (where appropriate) for planning inventory requirements on a regional or global level. With a shared-services planning center of excellence, co-located logistics decision makers will gain a perspective of how supply chain efficiencies support corporate strategic objectives. They'll also be able to identify opportunities to convert supply chain innovations into distinct competitive advantages—such as developing initiatives for targeted pricing and marketing, facilitating local or regional new product introductions, and servicing multinational trade accounts in a coordinated and uniform manner. The enhanced market responsiveness and adaptability made possible through the shared-services planning will enhance the capacity to achieve customer satisfaction and grow current market share.

Applying a "shared-services campus strategy," the staffs of a global or regional supply chain planning facility would be selected based on their outstanding operating skills and team management ability. Their job will be to plan an overview of production and inventory requirements and to negotiate and resolve conflicts in priorities. A shared-services campus approach does not necessarily mean hiring "super planners" responsible for planning a multitude of different product lines for various business units. Instead, divisions might opt to have their existing planners perform systemwide oversight, while retaining planning responsibilities for the subset of products of their individual business unit.

Many veterans of reengineering battles believe that since they have successfully addressed international product sourcing or finished-goods allocation issues, they're now operating under a global supply chain planning strategy. Building a truly effective global supply chain planning solution, however, requires a lot more. Some of the frequently overlooked questions include:

• Has the future "voice of the customer" been sufficiently integrated into the definition of the "go-to-market" strategies and into the creation of the value propositions for selected market segments?
• How should the global supply chain planning process be designed to ensure optimal flexibility, responsiveness, and reliability in support of "go-to-market" strategies and value propositions?
• How should future planning activities and responsibilities be distributed—at the global, regional, and local levels—to achieve an optimal mix of global planning efficiency and local market effectiveness?
• What new organizational structure will effectively support the global planning process?
• How should we organize and manage our supply chain planning staff resources?
• Will existing planning tools and supporting information systems and infrastructure enable management to control global supply?
• What best practices, policies, procedures, and business rules should be standardized across divisions, geographical regions and product lines, and integrated with the global planning process?
• What new performance measurements are required to help manage the supply chain and to establish incentives that encourage desirable behaviors?
• How can the costs and benefits associated with globalizing the supply chain planning process be estimated and properly allocated?

To sum up, developing a global supply chain planning process strategy should become the first order of business for any global enterprise looking to find new ways of reducing costs while improving revenue streams and customer-service levels. The first step is to analyze the issues involved in restructuring and operating their supply chain planning processes with a global or pan-regional perspective. This means involving selected customers and suppliers to assist in analyzing methods and opportunities to increase customer responsiveness. These quick-response capabilities will provide an initial competitive advantage.

After a vision for addressing these issues has been articulated, the next step is to address the business case for change—that is, to find targets of opportunity that provide substantial shareholder value. Achieving world-class customer service and satisfaction levels will help you improve inventory turnover objectives, promotional support, and product allocation and replenishment processes. These enhancements further contribute to increasing shareholder value.

The final step is preparation and execution of an overarching implementation plan. Begin by evaluating the current planning process and create a vision of the benefits you want to realize through a global supply chain planning strategy. To execute that vision, develop a comprehensive plan and solid foundation by incorporating these seven pillars.

Author's note: I am indebted to David A. Harland for his invaluable contributions, which made this article possible. Mr. Harland was director of European materials management for The Gillette Company from 1986 to 1996. In 1997, he was named manager of the Logistics and Order Fulfillment Team within the company's Global Business Process Integration Program. Mr. Harland passed away in June 1997. His knowledge, expertise, warmth, and friendship are missed.