Strategy-Driven - Sustainable - Circular - Resilient - Segmented -Supply Chain Design

In my previous post "Strategy-Driven - Sustainable - Supply Chain Design", I included a social foundation and an ecological ceiling into the strategy-driven supply chain design. The idea is two-fold. If we design a supply chain, we shouldn't just look at financial metrics but as well at the ecological and social impact. If we can improve on all dimensions simultaneously, life is easy. When we need to make trade-offs, the strategy will be leading. Do we want to play at par, differentiate or dominate on sustainability metrics. To better reflect that strategic choice, I have added "Sustainability" as one of the possible value drivers when we analyze our market. In our markets, what does it mean to be at par, to differentiate or to dominate on the Sustainability dimension. After understanding the market, we need to define our strategic value proposition. Do we want to play at par, differentiate or dominate (on sustainability and other possible value drivers)?

Compared to the previous version, in the version below, we have added scenario analysis at the bottom right. Sometimes we're not sure where the market is going. Then we can think in scenarios. Strategic Planning for Dynamic Supply Chains from Shardul Phadnis, Yossi Sheffi and Chris Caplice provides an excellent framework for scenario management. We won't elborate it in detail here.

And where do we factor in resilience? A hot topic given the massive shortages we have had over the last 2 years. On previous posts one of the questions was "should resilience also be an extra dimension? And how does resilience link with sustainability and cost?" I have added resilience to the "Supply Chain Response" at the bottom left. One aspect of resilience is business continuity. At all times I need to ensure I know my risks and manage them from a business continuity perspective. Once that is covered I believe resilience becomes a matter of strategic choice. Once more, if I can improve my resilience while improving the triple bottom line, life is easy. When it comes to trade-offs, the strategy will be leading. A company like 3M has design principles such as "every technology in at least 3 plants, each plant at least 3 technologies"; 80-90% of the sourcing is regional for regional. That is not necessarily the lowest cost or lowest fixed asset solution, but it provides a lot of "flexibility" and "resilience". That is a matter of choice. As a company driven by innovation, they are aware that now and then the demand in a niche "explodes". Think about mouth masks in the beginning of COVID. When that happens a more resilient supply chain will more quickly react and deliver longer. The premium margins realized in those periods are covering the higher cost base during normal times. If your primary focus is lowest price, you will not be able to afford the same level of resilience. In this latest version, I have added resilience as a parameter of the 'supply chain response'. To make the link to the strategic value proposition, I have more explicitely mentioned the 'supply chain response' under the 'service' dimension in the value drivers. We can deliver services like 'field service' or 'aftermarket service'. Likewise our 'supply chain response' is a service we deliver to the customer. You could say it is one service aspect on which we zoom in in the next steps, as it has a primary impact on the costs, the capital employed, the ecological and the social footprint.

Next. How do we link in the 'circular' thinking and the 'circular' supply chain? In an earlier post on the triple bottom line, I extended the traditional source-make-deliver with a "use" and "end-of-life" stage after the work of Chee Yew Wong in his book “Sustainable Logistics and Supply Chain Management”. The "use" and "end-of-life" stages are needed to include the 9R's of the circular supply chain: Refuse, Reduce, Resell/Reuse, Repair, Refurbish, Remanufacture, Repurpose, Recycle, Recover energy, Re-mine. I refer to "Mastering the Circular Economy" of ed weenk and Rozanne henzen for an excellent description of the R-ladder, the value hill, the butterfly and related circular concepts. Another important consideration from Chee Yew Wong is how important the product design is in managing the 'embedded CO2' or the 'scope 3 emissions'. It made me realize the obvious: that designing the supply chain and designing the product go hand in hand. Yes, when we decide what to source and what to manufacture (in the product design), we impact our scope 1 and scope 3 emissions. When we decide where to source and where to manufacture (in the supply chain design), we also impact our scope 1 and scope 3 emissions (scope 3, for instance when we decide on the INCO terms). The same intertwined relationship exists on the financial dimension, on the costs and the capital employed. If we design products for postponement, it will help a lot to offer a broader product range, within a reasonable lead time, at a reasonable cost and with a reasonable amount of inventory. For these reasons, in the updated model, I have shown Supply Chain Network Design and Product Design as two intertwined processes. Together they define the optimal cost, capital employed, CO2 and social impact, across the extended supply chain, from our Suppliers (or our Suppliers' Suppliers) to our Customers (or our Customers' Customers), including the 9R circular flows.

Less hot today, but equally important from a strategy perspective, is "segmented supply chains". In the beginning, I wasn't necessarily a fan. I remain convinced that "If strategy is about making choices, then companies are bad at strategy, as companies are led by humans, and humans hate to make choices, we think choosing is losing". So in general I used to push back, as combining branded and private label under 1 roof doesn't make sense. From a strategy-perspective, you can't combine Ryanair and Etihad or Aldi and Harrods in the same organization. Strategy teaches us that making choices is about creating focus, and more focused companies are simply more succesful. As executive teams and boards, let's keep that in mind! Over the last 2-3 years, I have worked with a number of global diversified B2B companies. They may have a dominant DNA, driven by engineering and innovation, as a product leader, or defining customer specific solutions, as a customer intimacy player, at the same time, their different product groups meet different playing fields and competition in different regional markets, requiring a different response and as such segmented supply chains. I accept it is part of reality, so we need to bake it in the process. In the updated figure, I have put the segmented supply chains in between the strategic value proposition and the supply chain design. As we start mapping the strategic value proposition to the supply chain, it is a good moment to verify whether there is 'one-size-fits-all' supply chain or whether we need a 'segmented supply chain' approach.

A last one to add in this updated overview is the "customer-product segmentation". Within a certain supply chain segment (which could be more or less focused on cost, or more or less focused on service or innovation, ...) we need to think through how we design our service response. On average our service response has been ill-conceived and poorly designed. We are held hostage by sales that threatens us that "the customer won't accept anything else". The tyranny of sales quite often leads to one of two extremes: we either have the same service for all customers and all products (which can never be the truth), or we promise different lead times to different customers on complex portfolios of thousands of SKU's (which can never be managed). In any case we are chasing unrealistic, poorly designed service promises that lead to a lackluster financial performance where the customer that shouts the loudest gets the best service. That's why we need to segment customers and products and differentiate our service. I have added it in this latest scheme in between the complexity and the supply chain response. I refer to the Solventure website for a vision paper on customer-product segmentation in B2B environments.

I assume that some people will say, wow, this is complex. Well, I believe it is. In an earlier article I tried to describe how supply chain has turned from something simple "just deliver the customer", into something complex and multi-dimensional (from a 1D to a 5D supply chain). I don't claim the truth in this latest update of the 'strategy-driven - sustainable - supply chain design', it is mere an attempt to link some of the dimensions and some of the fragments that today's supply chain managers are exposed to. As always, I'm most curious for your thoughts and comments!