A Portfolio Approach to Supply Chain Design

This is an excerpt of the original article. It was written for the July-August, 2010 edition of Supply Chain Management Review. The full article is available to current subscribers.

July-August, 2010

I’ve always liked that old saying that good fortune favors the prepared mind (though I’ve faltered in my adherence to the principle as often as not). Reading the feature articles in this July/August issue only affirms the validity of that wisdom, this time in a supply chain context. From several instructive perspectives we learn about the value of carefully thinking about what you want to accomplish, how you want to accomplish it, and why you need to be flexible enough to respond if things don’t go exactly to plan. As our cover illustration suggests, it’s really about executing a supply chain game plan.

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Our supply chains operate in a volatile world. Starting in 2007, oil prices climbed from $60 to $145 per barrel within 18 months only to crash back to $40 shortly after the peak. As a result, fuel surcharges for airfreight went on a rollercoaster ride up to as high as 50 percent of the base rate and back down to close to zero within a two year period. In a six- month period starting in late 2008, the Chinese Yuan strengthened in value against the Mexican peso by more than 50 percent, only to fall back close to its original value within a year of the peak. When considering alternatives like manufacturing a product in Mexico vs. air shipping it from China to North America, shifts in macroeconomic factors can mean the difference between winning and losing in the marketplace.

In such a volatile environment, it is unwise to use a one-size-fits-all approach to supply chain design. While offshoring or nearshoring manufacturing, building in as much speed in to your supply chain as possible, and postponement all have their place,  they are not universal best practices. To illustrate, while the Hewlett-Packard case study on postponement continues to be taught in many business schools, HP actually has discontinued the use of postponement for many of its printer platforms. HP has adapted its supply chain to the realities of a maturing product category.

Clearly, supply chains need to be adaptable to cope with changing environments defined by economic factors likes oil prices, exchange rates, labor rates and tax policies; competitive forces; and the maturity of product categories as product characteristics and business strategies evolve. In describing “The Triple-A Supply Chain,” Hau Lee stressed the importance of alignment, agility, and adaptability for world-class supply chain performance. Agile supply chains respond quickly to short-term changes in supply and demand. Adaptable supply chains adjust supply chain design to accommodate market changes. Aligned supply chains establish incentives for supply chain partners to improve performance of the entire chain.

But how often should a business adapt its supply chain design and ramp up an entirely new supply chain?  How do we know which new design will be best?  Does agility mean that the supply chain should serve all customer segments with a highly responsive, short order-to-delivery model?  Is there still some way to capture benefits of lower cost, more efficient supply chain designs?

In this article, we demonstrate how companies can respond to these challenges through the use of portfolios of supply chains.

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