The Effective Supply Chain Frontier – Fact or Fiction?

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Lora Cecere over at Supply Chain Insights has been writing for some time about Conquering the Supply Chain Effective Frontier. Lora characterizes this as a focus on long term resiliency of the supply chain, not just short term cost efficiency. She is right.


Lora writes that

As shown in the Supply Chain Effective Frontier framework it needs to recognize the impact of corporate trade-offs, business investment strategies, supply chain trade-offs and the degree of complexity in business policies. These together form the system definition of the Supply Chain Effective Frontier. … While students of economics might caution that this is the efficient frontier, we have consciously chosen not to define this as the “Efficient Frontier.” Companies have traditionally defined the most efficient supply chain as the most effective supply chain with the lowest cost per unit. It is our belief that the most effective supply chain is not always the most efficient.

In other words the primary focus of the supply chain function should be the conscious trade-offs between customer service and cost-to-serve. These trade-offs can only be made horizontally, across multiple functions and even trading partners. This becomes more obvious when discussing the trade-offs needed by, for example, a pharmaceutical manufacturer when trying to determine how to respond to a tender. This requires the evaluation of long term profitability of the tender considering the costs associated with non-conformance, both immediate and long term. These need to be balanced against satisfying non-tender business, which is both a lot more uncertain and more profitable over the life span of the tender. How does accepting the offer impact capacity needs? Will the capacity be required beyond the life span of the tender? Will inventory need to be placed closer to the market?  How will planning introductions of the same into new markets be impacted?  These are not decisions that can be made in isolation by Demand Planning, or Marketing, or Sales, or Inventory Management, or Manufacturing, or Purchasing. These are decisions that have to be made horizontally, across these vertical functions, and often in conjunction with Contract Manufacturing Organizations (CMOs) and Third-Part Operators (TPOs). The tender process is only one example of the increasing need to focus on horizontal process enablement in order to make the conscious, risk adjusted trade-offs Lora is writing about.  It is time that the ‘war room’ concept - a co-located cross-function team which is often used to deal with crisis - became standard operating practice. We have to look beyond the ‘divide and conquer’ concepts dating from the 1980s, which broke up planning into multiple function and time horizons, such as in the diagram below. Many of us may feel uncomfortable with this idea because it challenges our pre-conceived notions, how we were taught to view supply chain as a practice. Change can be difficult, even when it is good for you.


Source: Change starts by recognizing that an approach that puts horizontal process effectiveness first is far superior to an approach that only focuses on functional excellence. It starts by recognizing that harnessing and harmonizing human ingenuity and imagination across functions trumps functional optimization every time. It starts with the recognition that the ‘divide and conquer’ approach that guided the development of all legacy APS solutions is no longer enabling, but limiting progress. Yesterday’s approach fails todays dilemma. All the APS suites were developed in this ‘divide-and-conquer’ paradigm with individual applications being developed for Demand Planning, Inventory Planning, Distribution Planning, Capacity Panning, Master Production Planning, …  To be fair, technology in the 80’s and 90’s was not able to support the data scale, speed, and analytics required to connect horizontal business processes in real-time. In fact, the only partially successful attempt to do so was ERP, but with a batch oriented computational engine that took hours, often days, to run. Technology limitations are no longer an excuse with the advent of the internet, social, and in-memory computing. And it isn’t all the fault of the vendors. There is a great article just published in Modern Materials Handling titled “JDA Focus Challenges Attendees to Think Outside the Silos” which comments on the first conference of the joint JDA/Red Prairie operation.  According to Modern Materials Handling Tom Kozenski of JDA states that

“Optimization is a funny word,” he says. “You can optimize a WMS. You can optimize a TMS. But if you optimize a platform that sits above them, it might be one plus one equals three. We love to pitch the platform approach [such as in JDA eight], but the customer buys by silo. They think the platform is interesting, but only as long as it solves the problem in the silo. For many of them, siloed behaviors, thinking and budgets are hard to get away from.”

While I praise JDA for raising this issue of silo buying, solving it from a solution perspective will take much more than simply integrating the functionally focused applications through an integration framework. This approach will do little to address Lora’s Effective Frontier of providing horizontal conscious trade-offs, which is the fundamental reason for connecting these processes in the first place.  Connecting the data without connecting the people still promotes a siloed decision making approach focused at functional expertise. Unfortunately, in many cases the people do not want to be connected, which is the point being made by JDA about siloed behaviors, thinking, and budgets in the user community. Only strong executive leadership will drive an organization to conquer the supply chain Effective Frontier with a strong emphasis on horizontal processes supported by functional excellence. It isn’t just the so-called East-West, or horizontal, integration that has been lacking in processes and technology, it is also the North-South integration between financial and operational plans. Executives have long experienced the side-effects that result from trusting a thin S&OP process disconnected from its deeper operational implications, namely misalignment between objectives and achievements.  Leaders are now expecting full and deep alignment between their highest level plans, and their lowest level operational constraints. Far too many companies believe that they cannot operationalize the S&OP plan, let alone the Annual Operating Plan (AOP), because it can only be developed at a corporate level in aggregate form and in chunky monthly buckets, at best at a Business Unit level. The net effect is an AOP that is, at best, a very loose statement of intent rather than an alignment between intent and feasibility. I’d like to see all of us in supply chain management – executives, practitioners, analysts, commentators, and vendors – lift our heads to focus on the art of the possible. We have the opportunity to rewrite how supply chain management is conceived, enabled, and performed by focusing on the Effective Frontier.


- May 29, 2013 at 1:40pm
Interesting ideas here. There certainly is a lot more meaning behind the term "effective" than simply the short term goals of getting the job done cheaply. Long term effects change the numbers.

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