Optimization and Competitive Advantage

January 24th, 2013 9:53 am Category: Optimization, by: Alan Kosansky

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The most mature Supply Chain organization are engaging in a strategic process whereby they identify two categories of supply chain processes within their company: Category B are those processes where performing at the industry standard is sufficient. Typical processes in this category include accounts payable, accounts receivable, raw material sourcing, and freight contracting. Category A are those processes where they believe they have ideas and/or practices that give them competitive advantage. These processes might include S&OP, production scheduling, territory planning, or network design.

For supply chain processes for which performing at the industry standard is sufficient, standard technology solutions are sufficient as well. However for processes here there is an opportunity for competitive advantage, out of the box standard solutions will not do. Often mathematical optimization is a critical enabling technology for those supply chain processes that are a source of competitive advantage. Furthermore there is typically some level of customization required in order to uniquely capture the ideas and processes that embody the competitive advantage.

For example, consider the order fulfillment process in consumer electronics. Products in this industry become obsolete very quickly. For this reason, electronics suppliers to “big box” retailers like Best Buy and Walmart often operate in a back-order situation to reduce the probability of getting stuck with returns and obsolete stock. While standard solutions most commonly use a traditional first-in, first-out (FIFO) method to allocate inventory to orders, more advanced consumer electronics companies use more sophisticated approaches to determine how best to assign limited inventory to their customers. These approaches take into account customer priority, in-transit inventory and inventory already in the channel to determine algorithmically in what sequence and quantity to assign inventory to orders. Since they cannot simply fill all the orders of their biggest customers at the expense of the rest of their customer portfolio, they apply sophisticated business rules to balance the needs of all their customers while making sure their most important customer’s feel the pinch of inventory shortfalls the least. In this case, a custom solution for deploying in-transit inventory helps to “score” orders based on customer priority as well as on the inventory in the channel. This approach, which uses logic and algorithms well beyond the capabilities of standard ERP solutions, reduces the seller’s total supply chain costs and improves its performance scorecard relative to its most important customers.

Mature supply chain organizations typically identify about 80% of their process as “standard” and are able to use out of the box standard ERP and supply chain solutions here. In addition, they are identifying about 20% of their processes as being a source of competitive advantage and are developing and implementing solutions that capture that advantage.

If your organization is engaged in these strategic management practices, we commend you for your leadership in supply chain maturity. If not, let’s work and grow together.

For a more detailed discussion of this topic, read the Supply Chain Quarterly magazine article by Dr. Alan Kosansky and Ted Schaefer entitled Is standardized software eroding your competitive edge?

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