Certified in Transformation for

Supply Chain (CTSC) Learning

System
ASCM acknowledges the contributions of the following individuals:

Samer Almadhoun, MBA, MCIPS, CSCP, Eva Mata, CPIM, CSCP, CLTD, DDLP
CLTD, CPIM, SCOR-P Dr. Xiaohu ‘Tiger’ Qiao, CSCP, CPIM,
Al Bukey, CPIM-F, CSCP, SCOR-P SCOR
Ann K. Gatewood, CPIM-F, CIRM, CSCP- Brent Ruth, CPIM-F, CSCP-F, CTL, CLTD-
F, CLTD-F F, SCOR‑P, DDPP, LBC, CXO

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In addition to being illegal, distributing CTSC materials in violation of
copyright laws will limit the program’s usefulness. ASCM invests
significant resources to create quality professional development
opportunities for its membership. Please do not violate ASCM’s
intellectual property rights or copyright laws.

No portion of this publication may be reproduced in whole or in part.

ASCM will not be responsible for any statements, beliefs, or opinions

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Version 1.0, © 2023 ASCM

ASCM
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 The APICS CTSC Learning
System
The APICS CTSC Learning System contains four modules: an
overview that also discusses how to set the transformation scope, a
module on preparing for transformation, one on execution, and one
on reflecting on results.

ASCM’s Certified in Transformation for Supply Chain (CTSC)

designation takes transformation professionals through the journey
of creating the rationale and urgency for a supply chain
transformation, preparing for it, executing it, and reflecting on its
results.

You can use this APICS CTSC Learning System to help study for the
CTSC exam. Alternately, you could use this course for self-
improvement or to prepare to participate in a supply chain
transformation as a leader or team member.

Learners with a strong interest in managing the broader supply chain

may want to pursue the ASCM Certified Supply Chain Professional
(CSCP) designation. Those more interested in specializing in
production/service planning and inventory management may want to
pursue the ASCM Certified in Planning and Inventory Management
(CPIM) designation. Those interested in logistics (physical supply
and physical distribution) may want to pursue the ASCM Certified in
Logistics, Transportation and Distribution (CLTD) designation.
Information can be found at www.ascm.org.

Modules
The APICS CTSC Learning System is made up of four modules.

Module 1, “Supply Chain Transformation Overview,” provides a

foundation for helping stakeholders understand what is needed in a
transformation and how to develop a sense of urgency around it. The
module addresses understanding organizational, business unit, and
supply chain strategies. To help set the scope of the transformation,
it covers key transformation roles, value propositions, frameworks,
business context, and transformation drivers.

Module 2, “Preparing for Supply Chain Transformation,” addresses

selecting transformation drivers, assessing the as-is and to-be states
by specifying a balanced and integrated set of metrics, identifying
initiatives to address gaps, initiating transformation projects,
developing and finalizing a business case, creating a transformation
road map, establishing governance, and drafting execution plans.
Module 3, “Executing Supply Chain Transformation,” covers
transformation execution, including the need for rigorous change
management, training, work streams and projects, metric
frameworks, pilots, scaling up, overcoming challenges, and
governance.

Module 4, “Review of Supply Chain Transformation,” addresses the

critical need for transformation campaigns to reflect on results and
standardize and sustain processes. This includes considering
lessons learned and identifying future initiatives.
Module 1: Supply Chain
Transformation Overview
Module 1 focuses on a big-picture road map as well as how to define
the transformation scope by creating a rationale and sense of
urgency for change. It explores different levels of strategy and key
team roles.

Module 1 in the APICS CTSC Learning System, “Supply Chain

Transformation Overview,” provides a review of a transformation
road map and explores the initial phase of a transformation, creating
the rationale and urgency for transformation.

This module has the following sections:

Section A, “Supply Chain Transformations,” addresses

educating stakeholders on supply chains as extended
processes that go beyond functions and the need for end-to-end
solutions that require comprehensive and rapid transformation
to succeed. It explores levels of strategy and tools to develop
and understand strategy. It addresses the key team roles of
evangelist, active executive sponsor, core steering team, and
design team.
 Section B, “Value Proposition, Methodologies, and
Organizational Design,” covers the customer value proposition,
value chains, and a number of research models, frameworks,
benchmarking tools, and cost and service optimization road
maps that the organization may have or need. It concludes with
how to develop a business context summary.

Section C, “Drivers of Supply Chain Transformation,” covers

customer, culture, and capability drivers of transformation,
conducting supply chain operational segmentation,
benchmarking, and finalizing business value propositions.

A case study is introduced in this module that applies the information

covered to an example of an organization. The case study business,
a petroleum and chemical products distributor called Sample, Inc., is
used in the learning system to tie your learning experience together.
Section A: Supply Chain
Transformations
This section addresses the need to educate stakeholders on supply
chains and maturity levels, discusses business cases for
transformation, and presents a transformation road map.

After completing this section, students will be able to

Educate stakeholders to create awareness on what is meant by

supply chains, including types, number, cross-functional nature,
and complexity

Describe a supply chain maturity model and the need to assess

the organization’s current and desired maturity levels in general
and for specific subsets

Relate how different market types and organizational or

business unit strategies require complementary supply chain
strategies

Be familiar with strategic analysis tools and know when to apply

a given tool (e.g., business operating model canvass, SWOT,
order winners, etc.)
 Understand the components of a sound supply chain strategy

Understand the benefits and tradeoffs of different supply chain

strategy types

Explore the business case for supply chain transformation,

including the supply chain transformation/Industry 4.0
movement

Delve into a specific organization’s problems that require

transformation to solve and address when and why
transformation becomes necessary

Help an organization describe its desired future state

Review a transformation process road map to understand the

process as a whole

Understand the need for a positive supply chain transformation

leadership style.

This section introduces the supply chain transformation process and

how to promote the need for supply chain transformation by
educating stakeholders. The focus is on how to convince others to
support the significant change needed to get to the desired supply
chain maturity level. The section addresses the case for
transformation, reviews organizational strategy and interrelated
supply chain strategies, explores examples of businesses that have
chosen to transform, and presents a transformation road map.
Topic 1: Define and Classify the Types
of Supply Chains
Here we provide a narrative that transformation professionals can
leverage to help dispel supply chain misunderstandings and help
stakeholders to support better cross-functional process control and
external partner integration. Supply chains, supply chain types, and
levels of complexity are covered.

What Do We Mean When We Say Supply

Chains?
Educating stakeholders on supply chains as a strategic asset
requires overcoming assumptions. Supply chain functional areas are
a subset of the supply chain. Customer requirements are the starting
point for supply chain strategy.

The goal of educating internal leadership, external partners, and

other stakeholders on supply chains is to get everyone to see the
supply chain as a strategic asset.

A supply chain transformation is a tough sell. While supply chain

professionals generally have a good idea of the need for and
benefits of a cross-functional and integrated supply chain, it is
dangerous to assume that business professionals in other functional
areas or organizations also share this view. Individuals have
preexisting ideas on supply chains and how they impact operational
strategy. These assumptions guide their decision making. They may
champion fixes or improvements that help their area at the expense
of another. They will resist any potential loss of control. Before
attempting to sell people on an overall optimal and customer value–
driven supply chain, it is vital to develop a shared understanding of
what is meant by a supply chain and, in particular, multiple supply
chains. While modern supply chains are complex, transformation
professionals need to learn how to demystify them in terms that a
given audience will relate to. Getting buy-in on this may take time
and persistence.

Exhibit 1-1 presents a graphic of a supply chain and its forward

product/service flows, bidirectional information flows, reverse cash
flows, and reverse strategic requirements flows. The B2B (business-
to-business) returns, customer returns, and refunds are examples of
reverse supply chain flows.
 Exhibit 1-1: Supply Chain as End-to-End Process

The most critical concept to clarify in a supply chain illustration is

how the horizontal end-to-end supply chain relates to the vertical
functional areas in its own organization and in its business partner
organizations. Even the parts of a supply chain that are managed
within a single company cannot be encompassed by a single
functional area. Organizations with relatively mature supply chains
may have many things under the control of a supply chain manager
—strategic sourcing, procurement, production planning, logistics,
customer and supplier relationship management—but integrating all
of supply and demand would include control over product design,
demand management and forecasting, customer service, and more.
While some amount of functional consolidation may be desirable,
specialization remains necessary.

What each stakeholder needs to know is that a supply chain is an

expansive process that exceeds even the functional area(s) they
might call supply chain management, logistics, physical supply, or
distribution. A good way to describe a supply chain is to say it is a
horizontal process that must flow through vertical functions. The
following definitions indicate the breadth of this process.

According to the ASCM Supply Chain Dictionary, 17th edition, a

supply chain is

the network of suppliers that deliver products from raw

materials to end customers through either an engineered
or transactional flow of information, goods, and money.

The Dictionary defines supply chain management as

the design, planning, execution, control, and monitoring of

supply chain activities with the objective of creating net
value, building a competitive infrastructure, leveraging
worldwide logistics, synchronizing supply with demand,
and measuring performance globally.

Another important concept to educate stakeholders on is the need to

have a supply chain strategy that creates the necessary capabilities
for customer satisfaction, retention, and market share growth. Note
how in Exhibit 1-1 there is an arrow at the top titled “Strategic
Requirements.” Strategic requirements for supply chain strategy
come from the customer and flow upstream. The needs of suppliers
or manufacturing are a traditional, but misleading, starting point for
supply chain strategy simply because customers have options.
When customer segments have very different service requirements,
a single supply chain will be unlikely to keep all of them satisfied.
More than one supply chain may be necessary, such as a fast and
responsive but expensive one and a slow but cheap one.

A common trap is for stakeholders to assume that a supply chain

needs to be excellent at every variable. Educating stakeholders on
the concept that there is no single supply chain that can or should do
this will help. If distinct supply chains are needed, emphasize that
each can have its own strategy and transformation process. This will
reduce transformation complexity and keep a strategy from trying to
be everything to everyone.

As customer requirements move upstream, they must flow through

not only various supply chain partners but also through each of an
organization’s functional areas that relate to the supply chain. Get
stakeholders to think about these flows. How smooth is this flow? Do
the areas create barriers or add value? Who is the process owner for
the cross-functional process? In less mature supply chain
organizations, the answer to this last question may be no one.
Supply chain management helps ensure that a specific person is
accountable for defining this process and that the process has the
right capabilities as defined by customers. Getting buy-in for this
concept is the crux of turning a series of individual leaders into a
team. It won’t be easy. One small step in the right direction may
include getting these area leaders to map out a supply chain process
they partly manage, such as the order-to-payment process. Create a
swimlane chart that shows how even this subprocess requires more
than one functional area to work together.

Another argument is that supply chain excellence will add economic

value to the organization (i.e., economic value added, or EVA, also
called economic profit) by generating returns in excess of the capital
required to generate that profit. Barriers reduce or destroy this value.

Supply Chain Types and Specializations

Forward, reverse, circular, digital, agile, and omni-channel supply
chain types are covered. New products, MRO, and services have
specialized chains. Processes of the Supply Chain Operations
Reference Digital Standard (SCOR DS) are introduced.

Supply chains can be differentiated by their type, which refers to how

the supply chain is configured to manage the flow of information,
products, services, funds, and more between supply chain
participants. Here we address forward or linear supply chains and
their interrelated processes using the Supply Chain Operations
Reference Digital Standard (SCOR DS) at a high level, and then we
cover reverse, circular, digital, agile, and omni-channel supply
chains. Supply chains may also need to specialize such as for new
products, MRO (maintenance, repair, and operating supplies), and
services.

Forward (Linear) Supply Chains and Interrelated

Processes (SCOR DS)
Forward supply chains, also called linear supply chains, are often
simplified into a linear depiction that moves from one echelon (e.g.,
all wholesalers) to another, with goods and services moving
downstream and customer requirements, demand, orders, and cash
moving upstream. Exhibit 1-2 shows such an example, and this
version includes the lean concept of a push-pull frontier, or the point
where forecasts of demand are replaced by direct customer orders
or other demand signals. In this example, it is at the level of the first-
tier suppliers. Determining how far up the chain this can occur can
be an important strategic supply chain differentiator. Also note the
suppliers’ suppliers upstream and several tiers of customers
downstream from manufacturers. Advanced supply chains seek to
integrate beyond the first tiers.
Exhibit 1-2: Forward Supply Chain With Push/Pull Frontier Example

Linear depictions are useful for simplification and can help when
determining the right number of echelons to have. Disintermediation
is when an entire echelon is omitted. The ASCM Supply Chain
Dictionary, 17th edition, defines disintermediation as follows:

The process of eliminating an intermediate stage or

echelon in a supply chain. Total supply chain operating
expense is reduced, total supply chain inventory is
reduced, total cycle time is reduced, and profits among the
remaining echelons are increased.

An organization can develop multiple supply chains simply by

determining which echelons to include or omit for a particular
customer segment. For example, in a shared supply chain
partnership between a retailer and a manufacturer, some goods
could be shipped to the retailer’s distribution center (DC) and some
could be shipped directly from the manufacturer to the retail location.
Similarly, goods can be drop-shipped from the manufacturer directly
to the customer with just a floor model at the retailer or through direct
sales using e-commerce. The key is to determine what value each
echelon is adding from the customer’s perspective. Each echelon
needs to add more value than it costs.

Another way to help explain forward supply chains is to go through

the organization’s actual supply chain for one product and map some
part of it all the way upstream to its mining and/or agriculture
beginnings and downstream all the way to the final customer. If
specific entities in specific locations are used, this is called supply
chain mapping. For example, clothing might start with growing cotton
and next move on to manufacturing, where fabrication occurs (thread
is spun and cloth is woven), to transportation to another country by
containership, and then to near its final market, where assembly
occurs (dyeing, cutting, sewing). The item then goes to a DC and
then a retail store. In addition to illustrating the nature of the network,
this process could reveal ways to improve the supply chain, such as
how this chain dyes the fabric at a later stage as a form of
postponement. Similarly, if the transformation is for a service
organization, it is useful to trace the process of planning, sourcing,
and transforming the inputs into outputs. This will help such
organizations see that they too have a supply chain that requires
integration.
While the concept of a linear supply chain is useful, it is limiting.
Even the term “supply chain” implies a linear flow, and many experts
prefer the term “supply network.” Exhibit 1-3 shows how SCOR DS
uses a symbol of two infinity loops to describe the underlying
processes that make up a supply chain: orchestrate, plan, source,
transform, order, fulfill, and return. The loops imply that a supply
chain is actually a never-ending flow of processes that have no
artificial beginnings or endings. Every party in the supply chain will
have their own set of these processes. A buyer’s “source” will be
seen as “order” by the supplier. This model is explored in more detail
elsewhere, but it is important here to express that a model such as
SCOR DS and its integrated metric trees are essential for making
sense out of a complex supply chain.

Exhibit 1-3: SCOR DS Processes

Reverse Supply Chains

The ASCM Supply Chain Dictionary, 17th edition, defines the
reverse supply chain as “the planning and controlling of the
processes of moving goods from the point of consumption back to
the point of origin for repair, reclamation, recycling, or disposal.”

Reverse logistics is a significant cost for organizations, in part

because returns come from many places but in relatively small
amounts compared to the forward supply chain. The assortment is
irregular, so there are relatively high transportation and materials-
handling costs to return the items to inventory, recover useful
components, or recycle them. This, plus markdowns, makes reverse
logistics a significant expense that can harm profits unless
proactively planned and managed as its own supply chain separate
from the forward supply chain, especially for e-commerce.
Organizations need to determine a reverse logistics strategy that
includes warranty and return policies that balance cost against
customer expectations. A best practice is to carefully monitor each
product category separately for return cost and customer sensitivity
to policy changes. Many organizations simply sell all returned goods
to third parties and/or outsource the reverse supply chain to
organizations that have this as a core competency. Exhibit 1-4
shows processes that are often outsourced.
 Exhibit 1-4: Example of Reverse Supply Chain

Products in the reverse chain won’t necessarily move through the

same nodes as products in the forward chain, because fewer, and
different, intermediaries may be required, such as a central collection
DC or a disassembler. Reverse logistics requires a strategy for
reverse information flows (including to product design), related
information systems, reverse cash flows, and reverse product flows.

Circular or Green Supply Chains

A circular supply chain, sometimes called a green supply chain, is a
supply chain designed for the circular economy, which is defined
by the ASCM Supply Chain Dictionary, 17th edition, as follows:

An economic system intended to minimize waste and

maximize the use of resources through a regenerative
process achieved through long-lasting design,
maintenance, repair, reuse, remanufacturing, refurbishing,
recycling, and upcycling. This is the opposite of the linear
economy.
Exhibit 1-5 shows an illustration of how all supply chain processes
need to be intentionally designed and interconnected for
sustainability to become a closed-loop process.

Exhibit 1-5: Circular Supply Chain

An example of sustainability by design is to reduce/eliminate

hazardous material inputs. The waste hierarchy (avoid, reduce,
reuse, recycle, recover, and dispose, from most to least sustainable)
can serve as a design ideal. Such strategies are more economical in
the long run. For example, the organization will get the most benefit
possible from the raw materials it purchases.

Note how return is described as a key enabler. A circular supply

chain depends on collecting products at the end of their lives so they
can be reprocessed. Some organizations use their reverse supply
chain flows to reduce empty backhauls, collect cardboard or packing
material for reuse, or redistribute inventory to stores with faster
turnover. Remanufacturing (refurbish and resell) is an example of a
reverse circular supply chain.

Digital Supply Chains

A digital supply chain is defined in the ASCM Supply Chain
Dictionary, 17th edition, as

the use of digital technology and content to improve supply

chain performance. Part of this refined definition
recognizes that traditional supply chains configured to
distribute physical goods or services can be enhanced via
technology—such as computers and other connected
devices, the internet of things, and related sensors—and
digital content. For example, real-time monitoring of
equipment can allow companies to proactively schedule
maintenance or replace parts.

Instead of integrating with perhaps only one upstream and one

downstream echelon, a digital supply network generates a flexible
matrix that enables parties in the network to all share information
with one another, radically improving visibility, decision making, and
responsiveness to market trends and customer requirement
changes. We will discuss digital supply networks throughout this
course as well as how to get there by thinking big, starting small, and
scaling fast.

Agile Supply Chains

An agile supply chain emphasizes flexibility and responsiveness so it
can adapt rapidly to changing markets or customer requirements and
demands. Such a supply chain should be able to return to normal
operations quickly and/or adapt to the new environment.

Omni-Channel Supply Chains

The ASCM Supply Chain Dictionary, 17th edition, defines related
omni-channel terms as follows.

Omni-channel network: A cross-channel sales approach

in which all sales channels, including online, mobile,
telephonic, mail order, self-service, and physical retail
establishments, are aligned and fulfillment processes are
integrated to provide consumers with a seamless shopping
experience in alignment with the company’s brand
proposition. Examples of this include integrated fulfillment,
dedicated fulfillment, pool distribution, direct store delivery,
store fulfillment, and flow-through fulfillment.
 Omnichannel order fulfillment: The ability to confirm,
aggregate, orchestrate, and fulfill orders through multiple
service points, including warehouses, stores, and
suppliers, through the application of distributed order
management, advanced warehouse management, and
transportation management systems. The objective is to
reduce fulfillment time and costs while enhancing the
customer experience. Some of the network designs include
integrated, dedicated, pool, direct-store-delivery, store, and
flow-through fulfillment.

An omni-channel supply chain uses an omni-channel network and

omni-channel order fulfillment to seamlessly integrate ordering and
fulfillment options to provide a consistent customer experience with
many convenient options.

Supply Chain Specialization: New Products, MRO, and

Services
Some supply chains will need to be specialized. New products may
require supply chains that can emphasize time to market. MRO and
services are also examples of specialized supply chains.

New product introduction (NPI) might require a new supply chain.

For new product development and introduction, vital capabilities
include time to market and time to volume.
 Integrating product design and development into the supply
chain can reduce time to market. Product development
processes must have the necessary production and supplier
resources/collaboration so engineering changes can be rapid.
Integrating with returns can help ensure that defects or feature
confusion are designed out of the new product.

Designing the source, transform, and fulfill processes to be

scalable improves time to volume. Processes such as design for
manufacture or design for supply chain are used. It is important
that both product design (a demand-side process) and design
for manufacture/supply chain (supply-side interventions) are
prioritized, or suboptimization may occur. This concept should
be extended to involve collaborating with suppliers. (This may
require collaboration technology.)

Maintenance, repair, and operating (MRO) supply chains provide

goods and services for MRO in the transform process or for capital
goods such as airplanes. These supply chains have high variability
in the types of parts needed for even one plant. The timing of MRO
work needs to accommodate frequent rescheduling to fit with
production scheduling or use of the assets. The supply chains need
to provide high availability of necessary parts without incurring
excessive inventory holding costs, so they may rely on central
supplies that can be rapidly shipped plus less expensive supplies
always in inventory where the maintenance occurs. There are
several key points in this process: material planned prior to
maintenance, material needed following disassembly and inspection
(transport to repair site), and material needed to address rework
after reassembly and quality assurance. Real-time equipment
monitoring technology can help.

According to the ASCM Supply Chain Dictionary, 17th edition, a

company in the service industry is

1) In its narrowest sense, an organization that provides an

intangible product (e.g., medical or legal advice). 2) In its
broadest sense, all organizations except farming, mining,
and manufacturing. The service industry includes retail
trade; wholesale trade; transportation and utilities; finance,
insurance, and real estate; construction; professional,
personal, and social services; and local, state, and federal
governments.

Here are a few examples:

A supply chain for intangible products would emphasize the

flows of information, money, and orders;
communications/relationships; and service queue flow. Supply
chain analytics capabilities will be important to finding how to
reduce the friction in these flows.
 Retailers are under tremendous pressure to redesign their
service supply chains to compete against online retailers like
Amazon. Amazon has so many DCs that most orders are
shipped within just one shipping zone. Most multichannel
retailers have to ship through more zones. Amazon picks up
most supplier items itself using its own transportation network,
while most multichannel retailers pick up less than half of items
themselves. Amazon’s DCs keep the top-selling items in every
DC and unevenly distribute the rest; this, plus integrated track
and trace, significantly reduces inventory holding costs. Most
multichannel retailers have cross-docking DCs that help retail
efficiency but not online order fulfillment. Retailers need an
effective, market-responsive multichannel or omni-channel
option (e.g., online sales to test new products and move only top
sellers to retail spaces or stores as DCs to fulfill online orders).

Utilities need to arrange for fuel supplies, have an MRO supply

chain, and so on.

Levels of Complexity
Complexity should add competitive advantage. Unnecessary
complexity is hard to remove and blocks performance. Process
complexity involves things like the number of supply chains,
suppliers, customers, echelons, assets, IT systems, etc. Product
complexity involves things like direct materials and SKUs.

Complexity can be necessary or unnecessary. A supply chain should

be as complex as it needs to be and no more. Complexity is
necessary if it provides competitive advantage. A great deal of the
complexity in a given supply chain is unnecessary, and this is the
source of many of a supply chain’s hardest-to-remove performance
blockers.

Complexity can take many forms that can be divided into process
complexity and product complexity:

Process complexity

Number of supply chains

Number of suppliers and/or product categories

Number of customer segments

Number of supply chain echelons (e.g., omni-channel

distribution)

Number, size, and geographic distribution of physical

assets

Number of supply chain IT systems and level of integration

between them
 Number of policies and procedures or other process steps

Number of countries, regulations, languages, cultures, etc.

Need for relationships with external entities who have

varying levels of supply chain maturity, willingness to
trust/change, and degree of direct competition

Product complexity

Number of direct material inputs

Number of stockkeeping units, or SKUs (including services,

packaging options, new product introductions)

Let’s start with necessary complexity. Unless all of your customers

share the same supply chain service requirements all of the time,
you will likely need more than one supply chain. The “one-size-fits-
all” supply chain philosophy has created many years of sunk costs
and has caused entrenched mediocrity in many supply chains. Such
chains fail to accommodate ever-increasing volatility or nuances in
customer needs. Some customers desire collaborative long-term
relationships; others want transactional relationships. Some need
dynamic, rapid responses to demand upswings and downswings,
while others need their partners to engineer innovative solutions and
others need a supply chain that can deliver project materials neither
early nor late.
The number of chains must be dictated by customer needs. Zara, an
Inditex brand, has two supply chains, one that is agile for trendy
fashion and one that is lean for basic staple items. Their customers
are willing to pay a premium for the latest fashion but require an
everyday low price for basics. So one supply chain features rapid
product design by small multidisciplinary teams and product finishing
and even postponed fabric dyeing near the customer at more
expense, resulting in amazing responsiveness to unpredictable
demand. The other supply chain features low-cost country
production and ocean shipping for slow and cheap replenishment of
timeless products that can compete on low cost.

The need for more than one supply chain does not mean that you
need redundant systems everywhere. Differentiation of some
services will add value, while in other cases shared services are the
key to controlling complexity. One way to determine what can be
shared is to create a matrix with functions in the supply chain
(marketing, sales, demand planning, inventory management,
inbound logistics, manufacturing, DCs, outbound logistics) on one
axis and each customer segment on the other axis. Areas of strong
differentiation and areas that can be shared services will become
clear.

Another example of necessary complexity is the transformation

process itself. It requires thinking big and realizing that the only way
to truly transform a supply chain is to transform the entire
organization and beyond.

Unnecessary complexity needs to be aggressively managed both

during a transformation process and during normal operations. One
example is the expansion of SKUs to fill market niches. This is a
common root cause of supply chain complexity due to the need to
market multiple brands, store more inventory, have higher capital
investment in inventory, and have more employees, facilities, and
equipment to handle it.

A key added value of supply chain managers during NPI is to

rationalize the number of SKUs in the network to control SKU
proliferation. Some products should be replacement products to
defend market share, but it is also important to create growth by
offering entirely new solutions. The product strategy should balance
these two objectives while eliminating SKUs that go too far into one
of these strategies at the expense of the other. Also, NPI should use
analytics and total cost of ownership to develop a clear strategy for
how many SKUs the new product should have. It is not a time for
guesswork. An NPI might also trigger an end-of-life assessment for
mature or declining products to ensure that this step occurs
periodically.
The complexity of a supply chain impacts its risk profile. A supply
chain with few suppliers will have a lower risk of disruption due to
having fewer failure points, but the lack of diversity will mean that a
given disruption is likely to be highly disruptive. Conversely, a
disruptive event in a diversified supply chain is much more likely to
happen due to more potential points of failure, but alternate paths
remain open so a given event is less likely to be highly disruptive.
Topic 2: Understand the Supply Chain
Maturity Stages
Here we describe the supply chain maturity stages and consider the
maturity of supply chain components when assessing the current
and desired level of maturity.

Levels of Maturity
A five-stage model of supply chain management maturity includes
multiple dysfunction, semifunctional, integrated, extended, and
orchestrated stages. Creating value requires a relatively mature
supply chain.

The advances made over the past few decades in supply chain
management are generally reflected in each supply chain’s
development. Experts in the field agree that there are typically
between four and five stages in this development. The various
stages can go by many names. We’ll use a five-stage model of
supply chain management evolution:

Stage 1—multiple dysfunction

Stage 2—semifunctional enterprise

Stage 3—integrated enterprise

 Stage 4—extended enterprise

Stage 5—orchestrated supply chain

Many organizations made these leaps over time as computers and

cultures progressed. However, an organization in a particular
industry may have been sheltered from some of these changes and
may be less advanced than another. Also, some small and midsize
organizations may be at a lower level than their larger peers due to a
lack of resources for improvements. Finally, an organization might
believe it is in the highest stage but could actually have slipped down
a notch through complacency. Therefore, these stages can also be
seen as being relative to the capabilities of competing chains. Some
enterprises are likely to exhibit behaviors from two or more phases of
maturity, as this is an evolution, not a specific end state.

The model that used to hold true for many industries, especially
those that were regional and had only regional competitors, was a
stable chain with predictable supply and demand. In a stable supply
chain, costs are low due to predictable demand and minimal need for
changes. Production runs can be long, and few line changes will be
needed. As globalization and technology have connected the world,
fewer and fewer industries have this level of stability.

Stage 1: Multiple Dysfunction

Exhibit 1-6 shows a supply chain that lacks clear, coordinated
information flows or relationships among potential partners, internal
definitions or goals, or external links (except transactions).

Exhibit 1-6: Multiple Dysfunction

This is a reactive supply chain:

It fulfills demand but without much cost concern and is

perceived as a cost center.

It needs few connectivity technologies and capital assets to

respond to demand.

In the dysfunctional organization:

Internal activities tend to be undertaken ad hoc rather than by

plan.

Management provides only the most general sense of mission

(pep talks/threats).
 Forecasting is mostly guesswork, often inflated by marketing
optimism.

Products are designed without advice from other functional

areas.

Distribution centers are near each market, have excess

inventory, and use untrained labor.

Deliveries and shipments have little advance warning.

Payment flow collection may be poorly executed, and

information is, for the most part, orders (given internally), bids
accepted, and invoices sent.

An enterprise resource planning (ERP) system or an alternative

is likely in use, but it may be a highly customized and therefore
hard-to-upgrade older version. Each plant or other node may be
on a different version or a different ERP system.

Purchasing is ad hoc and transactional. There may not be

preferred suppliers or they may not be consistently used.
Purchasing may not consult with logistics at all.

Stage 2: Semifunctional Enterprise

Exhibit 1-7 shows a semifunctional enterprise. Information flow has
been improved and functional areas are defined, but they tend to
perform their functions sequentially without collaborating on effective
ways to create value. There are no supplier or customer
partnerships.

Exhibit 1-7: Semifunctional Enterprise

This is a reactive efficient supply chain:

It supports competitive positioning as an efficient, low-cost, and

integrated unit.

It focuses efficiency and cost management on the total delivered

cost of finished goods.

It uses connectivity technology and equipment to automate,

reduce labor costs, improve capacity, and raise throughput.

In this stage of supply chain evolution, an individual company

undertakes initiatives to improve effectiveness, efficiency, and quality
in specific functional areas. Here are some examples:

Largely manual DC operations may leverage materials-handling

equipment.
 Inventory management may find ways to reduce inventory in the
organization’s own facilities.

Procurement may use purchasing strategies to minimize the

cost of supplies/services.

Transportation may lower costs using strategic carrier/route

selection.

There may be hard skills training and strategies for making jobs
more challenging.

Marketing may develop more reliable research and forecasting

techniques.

ERP systems or alternatives may be somewhat more consistent

in systems or versions and may have cross-functional
integration of planning processes.

While some or all functions engage in initiatives designed to increase

efficiency within silos, there is little or no overlap in decision making
among functional areas. Improvements within separate areas are
suboptimal or are not extended to other areas. For example, market
researchers may uncover market opportunities among current and
potential customers without sharing this information in a structured
collaboration with product designers. And this lack of collaboration
may play out repeatedly among the departments. In this stage, some
functions may be automated, but new software in one department
may be incompatible with software in other areas. Mergers and
acquisitions can also result in incompatible systems.

Stage 3: Integrated Enterprise

In the third stage of supply chain evolution, the individual company
begins to focus on companywide business processes rather than
compartmentalized functions. This is an organization that has
achieved operational excellence—the basics.

Milestones of this phase include better cross-functional integration of

ERP software along with cross-functional communication and
training, centrally located and easily accessible databases and files,
and periodic sales and operations planning meetings as shown in
Exhibit 1-8.

Exhibit 1-8: Integrated Enterprise

This is a proactive efficient supply chain:

 It proposes new raw materials or product designs to lower
complexity and costs.

It instigates changes to product designs for greater efficiencies.

It invests in integrated information systems for sharing of

information across functions.

This stage is markedly different from the previous one because of

the following:

The focus on business processes is facilitated by the availability

of electronic communications, good databases and master data,
and full-fledged ERP systems. Cross-functional cooperation
becomes easier and takes place quickly across functions and
time zones.

A variety of initiatives reduce the time for the order-to-delivery

process:

Closed-loop material requirements planning (MRP) is used,

and it enables cross-functional manufacturing and finance
communication.

ERP extends to each functional area and ties key supply

chain partners together.
 Product design in some companies is now a team effort (e.g.,
design for manufacturability, for logistics, or for the
environment). Products reflect customer desires and are ready
to be manufactured without making costly modifications in
processes, equipment, or staffing.

Marketing-centric customer segmentation and tailored

replenishment policies exist.

Inventory is treated more strategically as just-in-time

procedures, more accurate demand planning, better warehouse
equipment and automation, and improved logistics make
fulfillment more efficient and reliable.

Warehousing and transportation decisions are carried out in

tandem to achieve the optimal balance of cost-effectiveness and
customer service.

At this point, a nucleus company (a influential supply chain party that

can drive changes) may start integrating with external parties
through a third-party logistics provider.

Stage 4: Extended Enterprise

The hallmark of the extended enterprise stage is the decision to
extend at least one business process beyond the corporate
boundary. This could be collaborating on planning, design,
replenishment, logistics, or another business process with one of the
company’s suppliers or customers. The company integrates its
internal network with the internal networks of selected supply chain
partners to improve efficiency, product/service quality, or both. The
starting point is generally one inside/outside partnership that points
the way toward the completely networked enterprise.

Exhibit 1-9 shows how the supply chain has changed.

Exhibit 1-9: Extended Enterprise

This is a strategic driver supply chain:

Management has developed a significant level of sophistication.

The supply chain contributes to the organization’s overall

strategy.

Strategic modeling is used.

Demand generation and fulfillment are fully integrated.

Forecasting, planning, and replenishment are fully integrated

and visible.
 Technology improvements, knowledge, and real-time
information are shared with partners.

What is unique to this stage is the following:

There is an initial exploratory collaboration between, say, a

manufacturer and one component supplier or a retailer and one
supplier of finished goods. It may involve only one component or
product; the famous collaboration between Procter & Gamble
and Walmart began with diapers. If this first collaboration
succeeds, it can lead to a more fully networked relationship
between the first two partners—more products might be
involved, there might be better sharing of information across
integrated networks and more formal team building and planning
across corporate boundaries, and eventually, multicompany
collaborations.

Technology enables the extended enterprise to reach farther, to

add new partners, to move faster in response to market
changes, and to operate with broader scope than in stage 3.
ERP is able to link the entire internal supply chain together on
one platform.

Digitization becomes more common and partners synchronize

their ERP systems across corporate boundaries so they can
share data and efficiently collaborate. For example, Dell
 Computer is able to fill orders without keeping much inventory
because customers’ specifications are sent immediately to
component suppliers to enable assemble-to-order.

Cross-functional approaches are implemented, such as CPFR

(collaborative planning, forecasting, and replenishment). In
place of traditional “silo” production planning, stage 4 companies
institute sales and operations planning (S&OP).

In stage 4, there are advances in e-commerce such as

interactive sites where customers can order products and
services, track their shipment, and communicate with customer
service immediately. Business-to-business e-commerce features
competition among whole supply chains. Cooperation among
companies is integral to competition among supply chains.

Stage 5: Orchestrated Supply Chain

The orchestrated supply chain level is often expressed as the supply
chain digital transformation. In Europe, it is called Industrie 4.0. This
stage is all about realizing the benefits of all of the individual
improvements in the different parts of the supply chain and inventing
new business models. More so than any of the prior stages, this
stage is relative to the capabilities of competing supply chains. A
supply chain is truly in this stage only when it realizes an actual
competitive advantage from becoming better orchestrated than its
competitors. Orchestration requires more than just seamless
technologies; it requires skilled leaders and teams who can leverage
these technologies and adapt quickly to change. Therefore, supply
chain digital transformation requires maturity in a number of areas
for all significant parties in the supply chain.

Maturity in the orchestrated supply chain needs to start with a clear

purpose set by leaders. One way to promote clarity of purpose is by
providing authentic leadership. An influential work in this area is Bill
George’s Discover Your True North, which uses the metaphor of a
compass to orient yourself toward your personal true north, or your
purpose. By extension, authentic leaders help find the organization’s
true purpose. When leaders let their purpose be clouded by money,
celebrity, or power, they can make poor decisions such as a merger
or acquisition to make a big impression on the market rather than to
provide strategically required capabilities. Such leaders focus too
much on the bottom-line results and not enough on how to grow
organically. For example, their mergers may suffer from lack of
attention on integrating the cultures. George argues that authentic
leaders find their true north by using self-discipline, heart, values,
purpose, and relationship building.

A clear purpose can show organizations how to transform to superior

levels of performance. Exhibit 1-10 shows how the core model of the
orchestrated supply chain maturity level is mostly the same as the
prior level but with more emphasis on security, resilience (i.e.,
building in risk management), value realization, and orchestrating
people and processes.

Exhibit 1-10: Orchestrated Supply Chain

This is a consistent and systematic supply chain:

Participating partners align their business objectives and related

processes.

Customer requirements receive an integrated response from

participating partners using real-time planning and decision
making on supply chain responses.

Improvement and change management teams are cross-

functional and are both technically and socially skilled.

Change management and readiness are common skills and

values.
 Data has integrity, is secure, and is actually used in decision
making.

Technology gaps are resolved to realize end-to-end visibility.

Sourcing is right-sized but resilient (quickly adaptable).

Product designs are inclusive, and the number of products is

right-sized.

Transformation processes aim for zero waste for sustainability

and efficiency.

Monthly sales and operations planning may be replaced by

more frequent integrated business planning for consensus
demand planning workflows.

Artificial intelligence may be used, for example, to add external

factors demand sensing.

Processes are shared (e.g., shared services platforms),

standards and policies are enforced, and automation is
common.

It is essential that the teams who will be closing technology or social

gaps be cross-functional among key supply chain partners and have
multiple layers of expertise. Strong leadership and the right
contributors drive the needed changes. A common area for needed
relationship improvement is with IT professionals. These
relationships sometimes have suffered because prior initiatives have
failed to realize the envisioned benefits. Also, IT professionals may
have become too reactive (i.e., putting out fires) and need to be
given the resources to be more strategic. However, IT relationship
building is especially needed because the advances in connectivity
with partners creates more avenues for cyber attacks that IT will
need to address comprehensively. Both technical depth and breadth
are needed to determine technology gaps or how to make use of the
latest technologies such as blockchain.

This people- and process-based transformation requires

organizations and their partners to embrace change management.
Change management is built into the organization’s culture and
perhaps its organizational structures. People embrace change
because they have become accustomed to it and because they
receive the support they need. Organizations embrace change
because they will share in the benefits of the change.

The digital transformation goes way beyond simple digitization of

trade documents or even digitization of control systems such as
remote sensors triggering an automated response. The digital
transformation takes these advances a step further, such as by
ensuring that electronic documentation travels seamlessly among
supply partners, trade intermediaries, and customs authorities.
Demand data from customers may feed directly into not only finished
goods planning but also raw materials and suppliers’ planning
systems. Digitalized control systems are moved from being locally
controlled to being centrally controlled remotely with a control tower.

Data on supply chain inventory and assets is truly real-time, and it

feeds directly into decision-making tools and predictive analytics
(e.g., predictive maintenance scheduling). Things that require little or
no human intervention are fully automated. However, before
automating, the process itself is reviewed to ensure that it is efficient
and is intuitive for end users.

Product development is a key beneficiary of data-driven decisions

and data analytics, resulting in products designed for the supply
chain, for sustainability, and so on, and in supply chains that reflect
actual customer requirements.

Evolved and sophisticated supply chains in the higher stages have

network partners with highly integrated and synchronized
connectivity that focus more on creating net value than on pure cost
minimization.

Understand Current and Desired Supply

Chain Maturity
An organization cannot skip maturity stages. The market should be
scanned and the desired to-be state determined before starting on
prerequisites. The maturity of individual supply chain processes
should be considered.

Typically an organization would have to be at stage 3 or higher to be

capable of initiating an effort to get to what would be considered a
digital supply chain transformation or Industry 4.0 initiative.
Transformation initiatives can still be used to increase supply chain
maturity from any level to a higher level, but this might better be
thought of as developing the prerequisites for the digital supply
chain.

It is not possible to skip maturity stages, because each provides

capabilities needed for progress. However, one could proceed
through stages relatively rapidly given the right purpose, urgency,
and leadership. One prerequisite that will help organizations quickly
advance to at least stage 3 is standardization. Examples include
everything from adopting SCOR DS metrics to using ISO
(International Organization for Standardization) standards. Adopting
a common business language across facilities in different regions
and countries enables faster integration and scale-up to
enterprisewide or extended enterprise solutions.
A maturity assessment can help organizations determine what
initiatives are feasible to achieve and which have prerequisites that
need to be satisfied first. However, it is misguided to jump into such
initiatives without engaging in many of the things also needed prior
to a transformation. One must scan the market and industry
initiatives for what is relevant to customer requirements and
expectations. These expectations are in part based on what
competitors offer. Begin with the end in mind, and then work
backward to the prerequisites that are needed to achieve the desired
capabilities.

While the five-stage maturity model implies that each stage is its own
discrete unit of progress, different aspects of a supply chain could be
at different maturity stages. When assessing the organization’s
current and desired maturity levels, it may be necessary to consider
the relative maturity of technologies or major processes. For
example, consider the maturity of each SCOR DS process
separately. High maturity in a given process may include capabilities
such as the following.

Orchestrate maturity: Participating parties collaborate on

enterprise business plans, supply chain strategy/segmentation,
network design, business rules, and/or circular supply chains.
 Plan maturity: Clear rules and standards are established for
managing supply-demand exceptions from a cross-functional
perspective.

Source maturity: Rich data sets are shared with suppliers,

including engineering changes, forecasts, production schedules,
inventory levels, and performance scorecards. Joint process
improvements and cost sharing are promoted over cost
reduction pressure.

Transform maturity: High maturity may be achieved using pull-

based production scheduling, postponement, integration of
product design, and product life cycle management.

Order maturity: Automation, order status reporting, delivery date

commitments, and simplifications such as lean backflushing are
implemented.

Fulfill maturity: Graded supply chain service levels are set for
different customer segments.

Organizations are typically the most mature in the areas of source

and transform, since this is where many investments have
historically been made. In source, cross-functional sourcing teams,
lowest-total-cost sourcing strategies, and supplier integration into the
sourcing process are widely implemented. For transform, most
organizations have systematic ways to reduce cycle times and WIP
(work-in-process) inventory and have rapid visibility into disruptions,
allowing them to reprioritize and reschedule production efficiently
and keep the customer informed.

Let’s explore the fulfill maturity process more in terms of distribution

channel maturity. Distribution can be single channel, multichannel,
cross-channel, and omni-channel, as explored in Exhibit 1-11.

Exhibit 1-11: Distribution Channel Maturity Levels

Description Customer Expectations and
Experience

Single Organization has a single point of Customers expect a simple, direct

channel contact with the customer (just experience that is hassle-free.
online or just stores).

Multichannel Organization has technical and Customers choose a channel but

functional silos that result in each get conflicting promotions, lead
channel (stores, other retailers, times, or information. Channels are
online, app) operating unaware if customers are using
independently (no information another channel.
sharing).

Cross- While functional silos still exist, Customers choose a desired

channel each channel receives a unified channel and each can still get
view of the customer. (Technical differentiated promotions (e.g.,
silos are gone.) bundled services), but the
customer’s interactions are known
to each channel.

Omni- Functional silos are broken down Whichever channel a customer

channel with joint strategies and chooses, they experience the
coordination based on a unified same brand identity. (The channel
view of the customer. is less visible.)
Note that intensive distribution is a related strategy for mass-market
products such as soft drinks. This distribution strategy offers its
products through as many retail locations, kiosks, and so on as
possible. The goal is complete market coverage.

When performing this or a similar maturity assessment, it is

important to use analytics rather than relying on rules of thumb that
may be outdated. To continue the distribution channel example,
there are rules of thumb for the logistics cost of a bricks-and-mortar
channel versus e-commerce. But these cost profiles are shifting
rapidly as throughput in each channel changes, returns are
increasing, and small order automation becomes more efficient. In
determining how much a given channel is costing or will cost the
organization, analytics should be used to justify the cost against how
much value the channel improvement will deliver.

Another example of a model that breaks maturity down into various

components is the APQC process management maturity model, as
addressed next.

APQC Process Management Maturity Model

The Seven Tenets of Process Management of the American
Productivity and Quality Center (APQC) help organizations create
sustainable progress toward process improvement. This process
management maturity model has process frameworks with
benchmarking across various industries, which can help when
benchmarking a specific process within one’s industry type. Note
that the APQC model does not feature specific levels of maturity for
each of the tenets, although maturity across all of them is necessary
to sustain sought-after improvements and value creation. The seven
tenets, and the associated signs of maturity within them, are shown
in Exhibit 1-12.

Exhibit 1-12: Seven Tenets and Maturity

Tenet Characteristics of Maturity

Process
Information is provided to individuals based on their role.
knowledge
Subject matter experts have been identified and are available.

Process documentation contains information from audits and

reviews and variations, and it also includes:

Communication workflows.

Integration with other resources.

Risk
All relevant risks for a process have been identified and
planned for, including those for:

People.

Process inputs.

Applicable governance.

Tools and
Automated process reporting.
technology
Automated business processes and integrated systems.
 Tenet Characteristics of Maturity

End-to-end
Integration of the process with any relevant parent or child
process
processes.
integration
Clearly identified value of subprocesses to larger, end-to-end
processes.

Process
Clearly defined roles between interdependent processes.
performance
Processes incorporate customer requirements.

Processes consistently meet constraints and goals related to

time, cost, effectiveness, and efficiency.

Roles and
All necessary roles for a process are defined, with specifically
responsibilities
identified and documented needs and responsibilities.

Ongoing monitoring of a role’s capacity, efficiency, and

effectiveness is conducted, with interventions implemented as
necessary.

Measures
Well-balanced measures targeted to understanding value and
process improvement are used.

Measures understanding the impact of the process on the

ability to fulfill customer needs are used.

Supply Chain Maturity as a Foundation for Strategy

The goal for this inward look at maturity is to use it as an input to
supply chain strategy. It reveals gaps that are keeping the supply
chain from fully realizing connectivity and visibility goals.
Remember to also perform an outward look at the market to set
priorities. From a maturity perspective, one can look at one’s key
customers and suppliers and assess their maturity relative to the
organization’s maturity levels. Some customers such as big-box
retailers might be more mature than the organization; some suppliers
might be quite simple. Organizations that wish stay competitive in a
given supply chain will need to upgrade their capabilities relative to
each other or they will eventually be disintermediated. Less mature
organizations may receive strong recommendations from more
mature organizations. Pressure from outside parties in the supply
chain to transform can be used to help develop a sense of urgency
for the transformation.

After addressing gaps or misalignments through transformation, it is

important to continually monitor supply chain maturity, since there is
no end to this process. Reassessments may be needed after
transformations or other major reorganizations, mergers and
acquisitions, or changes in the external environment.
Topic 3: Understand Organizational
and Business Unit Strategies
Here we discuss different levels of strategy development, focusing
primarily on larger strategic goals such as strategies for growth,
diversification, and global expansion. We address market and
internal scanning and SWOT analysis.

Note that a transformation professional will likely not use all of the
strategic analysis tools presented here on any given transformation.
Instead, the goal should be to become familiar with each of the tools
and then select just the few that can best help with a given analysis
or that will best enable stakeholder understanding. The tools are
presented in a particular order to highlight different elements of
organizational and business unit strategies and include tools to help
with

Selecting markets to compete in or avoid

Considering levels of competitive rivalry or industry

attractiveness

Creating new markets and/or expanding globally

Capitalizing on strengths and opportunities and mitigating

weaknesses and threats.
Strategy Overview
A strategy is a plan for using resources to achieve sustainable, long-
term success. Corporate, business, functional area, and operational
strategies form a strategy hierarchy. The strategy diamond or the
McKinsey 7-S framework can be used in developing strategy.

Here we review various levels of strategy setting and strategic plans.

We also address using tools such as the strategy diamond for
developing strategy or the McKinsey 7-S framework for ensuring that
the strategy is part of a holistic transformation. These tools can be
used at any level of strategy development, including for supply chain
strategy.

Defining Strategy and Related Plans

A strategy is a plan for using an organization’s resources to achieve
sustainable, long-term success. It defines success in a competitive
context; the company is successful when it outperforms its
competition or makes the competition irrelevant.

The strategy defines the key success factors—defined in the

ASCM Supply Chain Dictionary, 17th edition, as “the product
attributes, organizational strengths, and accomplishments with the
greatest impact on future success in the marketplace”—that will
create a sustainable competitive advantage.
A business strategy is seen in the actions a company takes or
chooses not to take:

How and where the business will grow

How the business’s resources will be selectively invested

What products or services will be developed or ended and what

they will look like

How product-service packages will be priced and promoted

How and where they will be produced and sold

What competencies the business will develop and enhance

How relationships with customers and suppliers will be

structured

How aggressively the company will compete

The definition of strategy in the Dictionary reflects this broad reach.

For an enterprise, [strategy] identifies how the company

will function in its environment. The strategy specifies how
to satisfy customers, how to grow the business, how to
compete in its environment, how to manage the
organization and develop capabilities within the business,
and how to achieve financial objectives.
According to the Dictionary, the strategic plan examines “how to
marshal and determine actions to support the mission, goals, and
objectives of an organization.” Strategic plans provide resource
investment direction over a longer time frame, more than the usual
annual business planning cycle. (Business planning provides a
bridge from strategic planning to tactical planning described in
operational strategies.)

The process to develop and implement strategy involves defining or

revising the strategic vision, mission and values, followed by market
scanning and internal gap analysis. Then the organization sets
strategic objectives and develops and executes its strategy. This is a
cyclical process, so there needs to be a process to monitor,
evaluate, and correct the strategy. Stages are repeated as
necessary. A review may result in validation or adjustments, but note
that changing strategy in large ways too often can waste prior
investments and reduce investor confidence.

Organizations periodically review their organizational or business

unit strategies, such as once a year and/or after significant market
changes. This is an excellent time to review the supply chain
strategy since the two are so interconnected. If supply chain strategy
is underdeveloped, this is a key moment to lobby for a documented
supply chain strategy.
Planned, proactive measures, sometimes called deliberate or
intended strategy, may need to be adjusted to react to changing
competitive and market conditions. Strategy then becomes emergent
strategy, a continual response to a dynamic environment. Also, while
an organization may have had an intended strategy, the capabilities
and capacities it actually developed over this period are called its
realized strategy. The realized strategy may be very different from
the intended strategy due to poor execution or due to the need for an
emergent strategy.

Levels of Strategy
Strategy is a hierarchy, as shown in Exhibit 1-13. All levels must be
aligned.

Exhibit 1-13: Strategy Hierarchy

Strategy flows in two directions:

It flows downward, as senior leaders define high-level goals for

functional and operations objectives, policies, and processes
that shape value-creating work.

Strategy flows upward, from the organization’s front lines, where

those familiar with resources, competencies, competitors, and
customers set tactics for achieving objectives. They collectively
develop an emergent sense of how well a strategy is actually
working. This feedback loop is important.

Corporate strategy provides overall direction for improving the

performance of the organization as a whole. The corporate strategy
addresses in which industries, markets, and geographical regions
the organization will compete. Headquarters allocates resources to
its business unit portfolio to maximize long-term return to its
shareholders.

An overarching strategic plan is necessary for competitive

advantage. Competitive advantage is defined in the ASCM Supply
Chain Dictionary, 17th edition, as follows:

The advantage a company has over its rivals in attracting

customers and defending against competitors. Sources of
the advantage include characteristics that a competitor
 cannot duplicate without substantial cost and risk, such as
a manufacturing technique, brand name, or human skill
set.

A business unit strategy is a strategy for a major line of business that

tracks its own profits and losses separately, for example, a mining
division. This strategy focuses on creating competitive advantage for
a more cohesive set of products and services.

The functional area strategies elaborate on the roles each area

plays, such as the role of finance or sales in implementing business
strategy. These functions will interact and support each other in
creating value by aligning with the business’s strategic goals.

The operations strategy outlines what operations must do on a day-

to-day basis in order to deliver the required performance in areas
such as production, fulfillment, warehousing, and transportation.

These four levels of strategy are aligned using key performance

indicators (KPIs) at each level that are integrated to allow
aggregation up or drilling down in the levels. This creates a feedback
loop that keeps the organization working in the right direction.

Developing Strategy: Strategy Diamond

A number of tools or frameworks can be used to generate or revise a
strategy. Organizations need to select one that fits their size and
needs. For example, the strategy diamond model, developed by
Hambrick and Fredrickson, is a strategy development template that
is shaped like a four-quadrant diamond (arenas, vehicles, staging,
and differentiators) with a fifth diamond in the center (economic
logic). Here is a summary of each element:

Arenas. This area is about the arenas in which the organization

will compete in terms of market segments, products, services,
distribution channels, geographic areas, or technologies used.

Differentiators. Differentiating oneself from the competition is

the core of a strategy. The differentiation can be based on price,
dependability, brand value, responsiveness, agility, and so on.

Vehicles. This is the means to the end, such as through

mergers, strategic alliances, licensing, capital investment, being
a sought-after employer, and so on.

Staging. Staging is about time-to-market decisions, marketing

strategy, and how to sequence priorities.

Economic logic. This element is at the center of the framework

because it indicates how to generate the desired return on
investment (ROI), for example, by cost competition or value for
the price.
Each of these elements is required to form a sound strategy. The
strategy diamond can be used for brainstorming a strategy on a
white board. It functions as a checklist, because otherwise a strategy
may omit one or more of these essential elements. In addition to
using the model to develop higher levels of strategy, the model can
also be used to develop a supply chain strategy.

Developing Strategy Holistically: McKinsey 7-S

Framework
One example of a holistic strategy development tool that has had
staying power is McKinsey & Company’s 7-S framework. It is a
simple model that acts as a checklist to ensure that executives do
not focus on one or just a few elements of strategy development
such as the issue of the day. The framework features a set of terms
that all start with S (style, skills, systems, structures, staff, strategy)
and that are arranged in a circle. This is done deliberately to convey
the equal importance of each element. Note that strategy is just one
of the elements that need equal attention. At the center is one more
S term: shared values. Lines interconnect the Ss to show how
coordination of the elements is the most important factor rather than
just thinking easy-to-define things like systems and structures alone
will produce a viable strategy.

In this model, strategy, structures (organizational hierarchies and

reporting lines), and systems (the way the organization operates,
including information systems and formal processes) are considered
“hard” elements in that they are easy to identify and leaders can
directly influence them. Without a framework such as 7-S, these tend
to get the bulk of the management attention and planning. The
remaining elements are considered “soft” elements because they are
less tangible and more culture-related:

Style—Style is the need to adopt a leadership style that

promotes the other Ss.

Staff—The general capacity level of staff needs to be

considered.

Skills—Staff competencies and experiences enable the strategy

and the other Ss.

Shared values—Shared values are at the center of the model

because these are the organization’s core values, general work
ethic, and its mission and vision. The shared values are the
organization’s true north.

We will be discussing all of these enablers of strategy throughout

this course. The rest of this topic uses discussions of various
strategy tools to help illustrate how strategy development creates a
plan for how the organization will grow and prosper within a given
market type and set of competitive forces. This leads to
consideration of product-service portfolios and their order winners
and qualifiers.

Growth Strategies
Growth sustains competitive advantage. An organization needs to
define its strategic scope. The Ansoff product-market growth matrix
uses new and existing markets and new and existing products to
create a growth strategy matrix.

For most organizations, growth is essential, but growth must enable

sustainable competitive advantage. Growth strategies set an
organization’s desired scope in terms of what it will do internally
versus externally, the breadth and depth of its offerings, its mix of
business units, its geographic market, and asset footprints. (Growth
is not always feasible; in periods of retrenchment, strategies tend to
focus on cost control.)

Growth within a market can be vertical and/or horizontal. The way an

organization or one of its business units decides to grow will depend
on its resources and marketplace dynamics. The Ansoff product-
market growth matrix classifies these options.

Horizontal and Vertical Integration

The ASCM Supply Chain Dictionary, 17th edition, defines a
horizontally integrated firm as “an organization [that] produces or
sells similar products in various geographical locations.” This is in
contrast to a vertically integrated firm, “an organization with
functions that were previously performed by suppliers but are now
done internally.”

Exhibit 1-14 shows an example. Company A makes cars and can

increase market share by acquiring company B (electric cars).
Company A could also grow vertically in its industry’s value chain by
acquiring Company 1 (advanced batteries).

Exhibit 1-14: Horizontal and Vertical Integration

Horizontal integration can occur through internal growth, mergers

and acquisitions, or outsourcing. Transformation issues related to
mergers and acquisitions can include due diligence failures, culture
mismatches, or technology integration issues. Vertical integration
can be backward (toward suppliers) or forward (toward customers).
While full vertical integration is uncommon, McDonald’s is an
example of a hybrid vertical integration business model. They own all
of the land their franchises use and have long-term profit-sharing
relationships with farmers.

Ansoff Product-Market Growth Matrix (Growth

Strategies)
Four growth strategies described by H. Igor Ansoff are represented
in the matrix for growing revenue shown in Exhibit 1-15. The
quadrants represent the growth strategies.

Exhibit 1-15: Ansoff Product-Market Growth Matrix

To grow within its market, an organization may choose one of these

growth strategies.

Market penetration. Market share is pursued with the existing

markets and the existing products (e.g., new customer segment,
aggressive competition, product differentiation).

Product development. The organization focuses on new

product introductions.
Perhaps the current industry has plateaued or competitive tactics are
unsustainable. A business may choose to grow outside its current
market:

Market development. The organization decides to sell its

existing products in a new market—for example, a new
geographical market.

Diversification. The organization decides to extend its scope to

entirely new activities. While diversification for the sole objective
of growth may be unwise due to exposure to a broader array of
risks, sound reasons to diversify include reducing the volatility of
individual investments, diversifying because original markets are
saturated/declining, or adapting (e.g., technology, habit
changes).

Assessing Diversification Opportunities

The ASCM Supply Chain Dictionary, 17th edition, defines a
diversification strategy as follows:

An expansion of the scope of the product line to exploit

new markets. A key objective of a diversification strategy is
to spread the company’s risk over several product lines in
case there should be a downturn in any one product’s
market.
Organizations may pursue related or unrelated diversification
strategies or a hybrid.

A related diversification strategy focuses on activities anywhere

along the value chain that are similar to the organization’s own,
which is called strategic fit. This has the potential for economies
of scope (sharing expertise or assets for synergistic effects), for
example, products for different seasons produced on the same
lines. Brand identity can be transferred to support consumer
recognition.

Unrelated diversification strategies involve organizations with

different value chain activities and/or different types of
resources, so there is little opportunity for synergy. It is a form of
corporate investment such as in an undervalued business.
Existing assets and supply chain relationships may not be very
helpful.

Diversification can create risks. It may be difficult for leaders to

assess an unfamiliar industry. A third-party analysis of the market
potential or an audit of a potential acquisition/partner can help
address this risk. The desired level of integration, control, and
autonomy among business units should also be assessed.
Differences in cultures must be acknowledged. Also, right-sizing
should be used to remove redundancy and new reporting lines,
collaboration methods, roles, and compensation should be defined.

Organizations should submit a potential diversification strategy to

three tests:

Industry attractiveness. Scan for threats and opportunities and

use the five forces framework to assess the intensity of
competitive forces and market growth.

Cost of entry. Will the potential profit outweigh the investment?

Barriers are generally higher in attractive industries; when low,
there are more entrants.

Better-off test. A “better-off” test assesses whether diversifying

creates synergy.

Five Forces Framework and Industry

Attractiveness
The five forces framework reveals market competitive pressures,
including the level of competitive rivalry, substitutes, suppliers,
buyers, and new entrants. Given such information, one can seek
attractive industry spaces.

Michael Porter’s five forces framework (or five-forces model of

competition) is based on the assumption that an industry is the
composite of competitive forces, as shown in Exhibit 1-16.

Exhibit 1-16: Five Forces Framework

In the ASCM Supply Chain Dictionary, 17th edition, the five-forces

model of competition is defined as

a methodology for analyzing competitive pressures in a

market and assessing the strength and importance of each
of those pressures.

To use the framework, one must

Identify the key figures and the major sources of competitive

pressure per area.

Evaluate the intensity of the pressures.

Determine how the overall picture supports profitability.

Rivalry Among Competitive Sellers

Rivalry is the intensity with which rivals compete in the industry to
gain market share and competitive advantage. As the rivalry
intensifies, the likelihood of making a sustainable profit decreases,
since competitive tactics can be costly (e.g., price cuts, branding,
frequent redesign). In general, rivalry is stronger when demand is
less stable, switching brands has few barriers, there is less
differentiation among industry products, there is excess supply or
unused capacity, competitors have similar size and power, or there
are exit barriers such as contractual obligations. Rivalry tends to be
weaker when the opposite of these is true.

Potential New Entrants to the Market

The entry of a new competitor into a market usually triggers costly
competitive actions in new product development, advertising,
distribution and retail incentives, cost cutting, and efficiency. The
idea is to reduce your barriers or increase others’ barriers. In
general, the threat of entry is greater if the industry is growing,
regulation is lax, disruptive technologies are emerging, and product
differentiation/brand loyalty is low. The threat of entry is weaker if the
opposite of these is true.

Substitute Products from Other Industries

Thinking “outside the box” can reveal that your competitors are not
just direct competitors but anything that meets the same need.
Substitute products are attractive when there are few barriers to
substitution (price, relative benefit). For example, plant-based protein
products gained in popularity as a substitute for meat products when
their taste improved and prices matched those of premium meat
products. Substitutes for growth, capacity change, and profitability
relative to the organization’s product(s) should be reviewed.

Bargaining Power of Suppliers and Customers

Suppliers with bargaining power are in a position to drive up a
producer’s costs (possibly reducing sales if costs are passed on) or
lower their margins. Different supplier categories must be assessed
separately. Suppliers have power when

Demand is greater than supply.

They add value perceived by customers.

The cost of switching suppliers is high.

The customer lacks the capability to make the product.

The customer is not vital to the supplier.

Customers have power when the opposite of these is true.

The important point is to acknowledge when power differences exist.

More powerful organizations, especially those in the role of a
channel master, will expect a larger ROI from transformation
investments. They may invest more in the transformation and will
likely be more committed to driving, executing, and sustaining the
effort. These organizations may abuse their power for short-term
gain or could work to share benefits to encourage the participation of
the smaller party. For example, Walmart had to do the latter to get
more suppliers on board with its RFID (radio frequency identification)
initiative.

Industry Attractiveness
An industry’s attractiveness is assessed by the number and relative
strength of these forces. The strategy can succeed even with high
barriers—given the right strategy. For example, a new product
design may diminish supplier power.

The relationship between profitability and competitive pressure is

illustrated in Exhibit 1-17. A multi-factorial matrix for industry
attractiveness such as this can help with adding, maintaining, or
divesting decisions.
 Exhibit 1-17: Multi-Factorial Matrix for Industry Attractiveness

Strong profitability potential and weak competitive pressure (upper

left) are growth markets that may not last long but offer high profits if
captured quickly. Low profitability and high competitive pressure
(lower right) are open to divestment or repositioning due to the
regular reinvestment needed just to stay profitable. One could also
have a weak profitability and low competitive environment (bottom
left) such as in a declining industry. These are difficult to hold or
divest. One could also have strong profitability potential and high
competition (upper right). The industry is healthy, but this investment
desperately needs transformation to reduce cumulative competitive
pressure.
Global Expansion
Global expansion diversifies organizations beyond one country. It
adds customers and improves competitive position. Organizations
can seek profit sanctuaries while pursuing global, transnational, or
multidomestic strategies.

With globalization strategies, the organization is expanding its

geographical market rather than changing its essential business
focus. A global strategy can do the following:

Provide access to new customers. This is attractive to

organizations that face saturated demand in their home market
(e.g., from imitators).

Lower costs and improve competitive position. Competitive

advantage can come from economies of scale (volume lowers
per-unit cost), economies of scope (synergies such as lower
transportation costs due to an extensive network providing close
proximity to suppliers/customers), lower labor costs, or better
access to capabilities/technology.

Be a response to negative conditions in the home country.

For example, the global strategy may be used to avoid
government regulations or trade barriers, or skilled workers may
be scarce in the home country.
Profit Sanctuaries or Beachheads
Globalization itself creates new competencies, capabilities, and
allies.

One example of a globalization competency is the ability to

determine which foreign markets are most likely to become profit
sanctuaries. This occurs when an organization expands into a
foreign market and enjoys a strong and protected competitive
position. This then supports competitive activities in the
organization’s domestic and foreign markets such as price cuts.
Pharmaceutical organizations have used profit sanctuaries. When
regulations and market size restricted growth in Europe, many
companies entered the U.S. market, where they earned considerably
more profit. These profits were directed into product and market
development.

However, some organizations defy this conventional wisdom. For

example, when Haier sought to expand into new markets, it chose to
target the markets it described as “difficult” first, using unfilled market
niches in these developed markets as a beachhead of sorts. Starting
in the U.S., it won partnerships with big box stores and established
its own industrial park and distribution center there. Once it had a
foothold, it focused on local market design, production, and
marketing of mainstream products. This provided the organization
with a high degree of global competency, which it then leveraged in
new markets.

International Strategies
International strategies can be global, transnational, or
multidomestic. Each is nuanced by the way the global organization
structures the relationships between the headquarters or home
country and the host countries. Exhibit 1-18 maps these orientations
against global integration (degree of standardization and integration)
and local responsiveness (degree of division independence to match
local tastes). Note that a domestic strategy is also shown. It is often
the starting point for globalization.

Exhibit 1-18: International Strategy Orientations

Global/Multinational Strategy
The ASCM Supply Chain Dictionary, 17th edition, defines a global or
multinational strategy as

a strategy to out-compete rivals that focuses on

opportunities to achieve cross-business and cross-country
coordination, thereby enabling economies of scope and an
improved competitive position with regard to reducing
costs, cross-country subsidization, and so on.

A “think global, act global” organization is highly standardized in that

it relies on the same products (with minor customizations) sold under
the same names using the same business strategy. The organization
trades the ability to adapt to local markets for global brand strength.
An organization pursuing a global strategy will benefit from the
transfer and sharing of capabilities across borders for economies of
scale and/or local proximity. A global strategy needs centralized
decision making, leaders with global perspectives, cultural sensitivity,
and expertise in integration.

Transnational Strategy
A transnational or “think global, act local” strategy aims at achieving
some degree of both standardization and local responsiveness. This
may be appropriate for an organization whose products and services
will be more competitive in local markets if they appeal to local
needs with cost-effective customization (e.g., postponement).
Multidomestic/Multicountry Strategy
The Dictionary defines a multidomestic or multicountry strategy as
one in which

each country market is self-contained. Customers have

unique product expectations that are addressed by local
production capabilities.

A “think local, act local” strategy is highly decentralized. All divisions

operate independently, and products vary from one market to the
next. The organization is responsive to local conditions and needs
for its products/services and marketing and can quickly react to
emerging threats and opportunities. It does not, however,

Promote local-to-global innovation, organizational learning, and

competencies

Use the increased customer base for economies of scale or

brand recognition.

Generic Organizational or Business Unit

Strategies and Blue Ocean Strategies
The five generic strategies are low-cost provider, differentiation,
focused low cost, focused differentiation, and best-cost provider. A
blue ocean strategy can focus on both low cost and value creation at
the same time.
In Competitive Strategy, Michael Porter introduced three generic
competitive strategies. He later added a hybrid called best-cost
provider.

Cost leadership or low-cost provider. A low-cost provider

strategy proposes competing with rivals by offering equal value
but at a lower price.

Differentiation. A differentiation strategy aims at competing by

providing more value to customers by offering distinctive
features or capabilities.

Focus. An organization narrows its market and focuses on a

particular segment. It then applies a low-cost or differentiation
focus to competing in that segment.

Best-cost provider. This involves giving customers exactly the

value they want. Value is created by delivering the functionality
at the lowest possible price.

Exhibit 1-19 illustrates these generic competitive strategies. Note

that there are five of them because of the two different ways focus
can be applied.
 Exhibit 1-19: Generic Business Strategies

Separate business units can pursue different strategies, so a holding

company could use any or all of these strategies. Porter stated,
however, that it is very challenging for one business unit to
implement multiple strategies simultaneously due to inherent
tradeoffs. The organization has a culture and skills to support a
certain identity, and different production and marketing goals confuse
employees. The brand identity is also difficult to overcome: Multiple
marketing messages confuse customers.

Business strategy needs performance objectives to support the

strategy. For example:

An organization using a low-cost provider strategy will focus on

cost performance.
 A provider of high-priced but innovative software (differentiation
strategy) may focus on flexibility—ability to translate emerging
market needs into new products.

In addition to Porter’s generic strategies, Chan Kim and Renée

Mauborgne developed a combination low cost and customer value
strategy called a blue ocean strategy. While this strategy is a
seeming contradiction to the rule of thumb to not mix strategies, this
combination strategy has specific requirements to make it viable.
This strategy is addressed after discussing each of Porter’s types
more.

Low-Cost Provider Strategy

Organizations using a low-cost provider strategy offer value based
on lower or lowest price compared to competitors’ prices, targeting
price-sensitive customer segments. Competitive advantage can be
from seeking the most market share or offering a lower price relative
to the market but still having a larger profit margin than the lowest-
price competitors who get more market share. Protecting profit
margin can be difficult due to imitators and price wars.

Price advantage can be created through product or service design

(e.g., low-grade or only preconfigured designs) but still must provide
“enough” value. It also requires a focus on production and supply
chain cost by eliminating unnecessary costs/processes, achieving
top efficiencies, automating procurement, and keeping the supply
chain lean by outsourcing inefficient portions to those with the
needed core competencies and eliminating partners that cost more
than the value they add.

A low-cost provider organization commits to analyzing cost drivers

(quantity of work and activity cost drivers) and how costs interact.
Can increasing costs in one area (e.g., technology) be more than
offset by cost savings in another driver (e.g., labor)? A
transformation can focus on how to cut costs in a way that is difficult
to imitate.

Differentiation Strategy
A differentiation business strategy offers distinctive features and
benefits that competitors do not offer to create a brand identity. The
basis of competition is more sustainable than in a low-cost strategy if
the cost of creating the differential can be included at a price people
are willing to pay. Customers should have diverse needs and the
offering must be possible to be differentiated.

Differentiation strategies work by focusing on value drivers. The

ASCM Supply Chain Dictionary, 17th edition, defines a value-driven
enterprise as one that is “designed and managed to add utility from
the viewpoint of the customer.” The organization must align its
internal value chain competencies and capabilities with the targeted
needs to create a meaningful competitive edge. Supply chains can
have a differentiation strategy (e.g., retailers want shipments at
certain times of day).

A differentiation strategy works best when it is difficult to copy. This

requires research and development, but changes in customer needs
or technology can negate this value (e.g., tax preparation software
instead of tax preparers). A gap between customer value
perceptions and desired price often develops when organizations
trying to sustain differentiation introduce features that add little value
but add cost.

Focus Strategies
Focus strategies apply the generic low-cost provider and
differentiation strategies in niche areas of the market or industry.
Customers have narrowly defined needs. An organization using this
strategy is competing only against rivals in that customer segment.
The market may be smaller this way, but the intent is to capture
more of it.

Focus strategies require a market niche that is large enough to

generate sufficient sales and profit. A niche is especially attractive if
large competitors have decided not to compete in this segment and
there are barriers to entry. This is because imitation is a particularly
dangerous risk. For example, organic food processors had little
competition at first, but organic divisions of large organizations now
exist.

Best-Cost Provider Strategy

The best-cost provider strategy is a value strategy. It aims at
providing desirable features at a cost that customers view as
attractive relative to those of competitors. This tends to result in
products and services that are seen as “mid-range” in the market.
The best-cost provider strategy requires that an organization have
the competencies to create a stronger product or service but more
efficiently (lower price, acceptable level of profit).

A risk is competitive attacks from both low-cost providers and

differentiators. Low-cost providers may add some features to try to
diminish the incremental value best-cost providers offer.
Differentiators may cut prices or add features without increasing
prices, which decreases competitive distance.

Blue Ocean Strategy

One way to provide both strong profitability potential and limit
cumulative competitive pressure is to pursue a blue ocean strategy.
In “Blue Ocean Strategy,” Kim and Mauborgne argue that rather than
competing in an existing market space, which is called a red ocean
strategy (i.e., blood in the water due to competition), one should
create an uncontested market space, or an open blue ocean. This is
basically the concept that it is better to create a job than get a job.
The primary assumption to challenge when seeking uncontested
market space is to not take it as a given that market or industry
boundaries are fixed. Rather than playing by the competitive rules of
the game and seeking incremental improvements, create new rules
by creating entirely new areas of demand or even new industries.

Finding a blue ocean can result in both profitable and rapid growth.
For example, Cirque du Soleil entered a declining industry in which
the traditional competitors were classic circuses that were facing
declining attendance, criticism of animal welfare, and infighting for
the best traditional talent. This was causing their costs to rise without
substantially changing the customer’s experience. Cirque du Soleil
reinvented the circus experience by eliminating problematic animals
and their maintenance expense. Their value proposition was the
desired thrill of the circus but with the artistry of a theater experience.
They eliminated everything except the clowns, the tent, and the
acrobatic acts. The tent captured the magic of the circus. Adding
themes and story lines gave the acts a plot. The result was superior
value at lower cost, resulting in rapid growth and irrelevant
competition.

Organizations that have a red ocean culture (which is most

established organizations) will need to transform this culture to
enable seeking blue oceans. Strategy has roots in military strategy,
and its language and themes are competitive. One seeks to confront
one’s enemies (competitors) and drive them from the battlefield. But
war is expensive. The leadership culture instead needs to shift its
mindset from beating the competition to making the competition
irrelevant. Rather than seeking to achieve the value/cost tradeoff
based on what competitors are achieving, blue ocean cultures seek
to break this tradeoff model fundamentally. Instead of seeking to
differentiate on either value or low cost, the blue ocean strategy is to
pursue both differentiation and low cost at the same time. This will
require aligning all activities to this dual goal rather than the
traditional choice of one over the other.

Organizations developing a blue ocean strategy can use a canvas

that benchmarks the organization’s innovative strategy against the
industry’s current offerings by competing factors (e.g., number of
models, ease of use) to set a strategy for eliminating some things
and reducing others to control costs. It also has areas for deciding
what valuable things for customers will be raised up or created.
Examples can be found at
www.blueoceanstrategy.com/blog/strategy-canvas-examples/.

Creating a new source of competition naturally leads to a desire to

protect this competitive advantage. Blue ocean strategies tend to
result in rapid growth. If the entire organization is aligned around a
value and low cost strategy, it can develop economies of scale
quickly that form an entry barrier. Organizations deeply immersed in
a red ocean culture will also have trouble changing enough to
compete.

Product-Service Portfolio Analysis Tools

Here we discuss the BCG growth share matrix, product life-cycle
analysis, and product profiling.

Part of developing a strategy is rationalizing existing products and

services and determining how to rebalance the product-service
portfolio.

BCG Growth Share Matrix

Boston Consulting Group’s founder, Bruce Henderson, developed
the BCG growth share matrix, a tool to help manage a portfolio of
products or services by their profitability level, as shown in Exhibit 1-
20.

Exhibit 1-20: BCG Growth Share Matrix

High Market Share Low Market Share

High Stars: Invest further in these “stars” Question marks: If likely to become a
Growth due to their high potential. “star,” reinvest; if not, divest.

Low Cash cows: Milk these lucrative Pet: Divest, reposition, or liquidate
Growth products and get cash to reinvest. these “pets.”

Product Life-Cycle Analysis and Product Profiling

The product life cycle is defined in the ASCM Supply Chain
Dictionary, 17th edition, as follows:

1) The stages a new product goes through from beginning

to end (i.e., the stages that a product passes through from
introduction through growth, maturity, and decline). 2) The
time from initial research and development to the time at
which sales and support of the product to customers are
withdrawn. 3) The period of time during which a product
can be produced and marketed profitably.

Product profiling examines the alignment between the needs of a

company’s markets and the characteristics of infrastructure
investments. Product profiling is defined in the Dictionary in part as
follows:

A graphical device used to ascertain the level of fit

between a manufacturing process and the order-winning
criteria of its products. It can be used at the process or
company level to compare the manufacturing capabilities
with the market requirements to determine areas of
mismatch and identify steps needed for realignment.

The phases of the product life cycle are illustrated in Exhibit 1-21.
Note that product life cycle considerations also impact strategy, as
customers will have different things that motivate them in different
phases. Examples of generic performance attributes that tend to
make good order winners or order qualifiers are shown below.

Exhibit 1-21: Product Life Cycle

Introduction Phase
During the introduction phase, businesses accept high risk and
invest significant resources on product positioning (marketing to
place product and change customers’ limited awareness of the
product) and new supply chains. Sales are very low during this
phase, and the organization generally incurs losses. Purchasers are
innovators.

Growth Phase
Successful products gain market share rapidly given early adopters.
This phase puts a lot of stress on scaling upward or downward
quickly if demand differs from what was projected. Quality or delivery
service levels could suffer. In this phase, brand identities and loyalty
are emerging. If economies of scale can be generated, unit costs
drop and high profits result, at least until competitors enter the
market and force prices down.

Maturity Phase
The maturity (saturation) phase marks peak sales. Sales can be
steady for a long period. A product in this phase may be a
functional product, which is defined in the Dictionary as a product
with “a low profit margin and a predictable demand.”

To stay profitable, the organization can expand the customer base by

targeting new needs, enter new markets, or be more
efficient/innovative. Products can be enhanced (e.g., more reliable)
to keep them profitable and allow time for product development.

Decline Phase
Products in the decline phase have falling demand. As revenue
declines, businesses decide whether they will exit the market,
minimally invest, or replace. There may be an ongoing need for
spare parts or service. Products that are still essential to important
customers may be continued if costs can be lowered (e.g., switching
to make-to-order). Products may be sold to other organizations.
An exit strategy is needed. Rollover strategies include a solo and
dual product roll. In a solo product roll, the existing product is sold off
before the new product introduction. A risk is that volume is
insufficient for the launch. A dual product roll has both products
available for a time—sometimes in target markets. This risks
confusing customers.

Order Qualifiers and Order Winners

Customer expectations help form the competitive baseline. Order
qualifiers are what a product must exhibit to compete. Order winners
convey value. These and the push/pull frontier help determine the
manufacturing environment.

Customer expectations are ever-increasing. Minimum expectations

are called order qualifiers, defined in the ASCM Supply Chain
Dictionary, 17th edition, as follows:

Those competitive characteristics that a firm must exhibit to

be a viable competitor in the marketplace. For example, a
firm may seek to compete on characteristics other than
price, but in order to qualify to compete, its costs and the
related price must be within a certain range to be
considered by its customers.
An order qualifier that applies to most products is a certain minimum
level of quality. A manufacturer of heart valves must demonstrate
quality first or its products will not be considered. Delivery
dependability may be a qualifier for a food service supplier.

Strategies should provide minimum requirements in some areas

while exceeding the competition in others. If the customer’s selection
criteria align, it becomes an order winner. Order winners are
defined in the Dictionary as follows:

Those competitive characteristics that cause a firm’s

customers to choose that firm’s goods and services over
those of its competitors. Order winners can be considered
to be competitive advantages for the firm. Order winners
usually focus on one (rarely more than two) of the following
strategic initiatives: price or cost, quality, delivery speed,
delivery reliability, product design, flexibility, aftermarket
service, and image.

Order winners can be a unique capability or a combination of price,

features, quality, and related services perceived as superior value
(purchasing power for a given price). However, as innovations enter
the market, order winners tend to become order qualifiers and new
order winners need to be devised.
Note that order winners and qualifiers plus the location of the
push/pull frontier (the point in the supply chain where forecasting and
planning are taken over by actual customer orders) are two of the
strongest determinants of the type of manufacturing environment (or
service environment) an organization will need to have, such as
make-to-stock and so on.

Scanning the Market and Case Studies

First we address the need for market scanning. Then we look at
some case studies of organizations that needed to transform due to
market influences, and a case study that we will use throughout the
course is introduced.

An important step at this point is to scan the market to acquire

information on what should be driving the transformation. A scan of
the external environment can use tools such as a PESTLE analysis
(an analysis of political, economic, social/ethical, technological,
legislative, and environmental factors). Scanning the market using
such tools is primarily addressed in Module 2.

Here we provide two case studies of real organizations that

determined that they needed to transform based on market
scanning. We finish by introducing a fictional case study organization
that we will use throughout this course.
Coal Chain Coordinator Is Formed due to Politics of
Infrastructure Sharing
Coal-processing organizations in a particular region were competing
intensely, but rather than this being about market share, it was
primarily about access to limited infrastructure capacity in terms of
rail track and loading terminal access. As volumes increased,
queues at the port grew to be unsustainable. Politics was a driver
among the organizations. The parties were unable to determine how
to expand capacity or maintain assets and who would pay for these
things. To avoid the politics entirely, the organizations agreed to form
a coal chain coordination organization, with each coal mine being a
part owner. This nonprofit collaborative supply chain planning
organization had a goal of maximizing coal throughput at minimal
cost. It coordinates the efforts of multiple parties and manages
maintenance so downtime is minimized. It has been a data-driven
organization from its inception, using the information to identify and
remove bottlenecks.

ETO Manufacturer Decomposes Project-Driven Lead

Time
An example of an economic driver of transformation is the need for
globally sourced material to compete on price during economic
downturns despite increasing market expectations for shorter lead
time than is currently feasible. An engineer-to-order (ETO)
manufacturer for the construction industry was faced with customers
demanding shorter lead times and better lead time quoting despite
the need to use globally sourced components.

To better define the problem, they decomposed lead time into its
components and analyzed each component separately. They felt
they could make modest improvements in sales response, start-up,
supplier delivery time to the destination port, and local value-adding
time. However, there was little improvement to be had in inbound
freight or outbound transport without sourcing more locally. A key
area that could benefit from a transformation was its confirmation
process (agreeing to, pricing, and initiating supplier production).
They formalized collaboration methods in this area and increased
automation to reduce the average time from 30 to 10 days. These
improvements allowed them to continue sourcing globally and
survive the economic downturn while reducing the variability per lead
time component, which improved lead time quoting.

Sample, Inc., Petroleum and Chemical Products

Organization Case Study
We will use the following case study organization, Sample, Inc., as a
running illustration of a transformation throughout this course.
Sample, Inc., distributes, repackages, and manages private labels of
high-end petroleum and chemical products as well as generics of the
same. In its 25-year history, it has made quality a core competency
and has expanded the market for premium automotive and marine
products into consumer markets by building lasting relationships with
big box stores and automotive aftermarket car-care chains. Its
business units include chemical products (antifreeze, coolants, and
cleaner product families) and petroleum products (brake fluid, oil and
lubricants, and transmission fluid families). Its private label products
are labeled to meet its customers’ requirements, and these plus their
own lines of generics meet local language and cultural requirements.
They also act as a distributor of the same products in bulk to
automotive and marine manufacturers and dealerships.

Sample, Inc., serves consumers in most countries of the world using

a wide network of strategic partners including distributors and global
retail groups. The organization places priority on good relationships
with these intermediate customers.

Sample, Inc., has long-term committed relationships with its

suppliers, the manufacturers of premium chemical and petroleum
products. It purchases these materials in bulk and repackages them
with private or generic labels. While all of these suppliers are global,
they use local sources whenever possible to avoid transportation
costs, tariffs, and duties.

This case study will focus on one important problem that requires
transformation, improving asset management by significantly
reducing cash-to-cash cycle time.

Analyzing Internal and External Factors

Analysis of internal and external factors can use the competitive
profile matrix, the 4Ps, constraint analysis, the business model
canvas, and evaluation matrices.

Analysis of internal and external factors follows a market scan and is

essential to preparing for a strengths, weaknesses, opportunities,
and threats (SWOT) analysis. Tools covered here include the
competitive profile matrix, the 4Ps, constraint analysis, the business
model canvas, and evaluation matrices.

Competitive Profile Matrix

A competitive profile matrix is a simple tool that lists critical success
factors for the industry. For each factor, an importance weight is
assigned (0 to 1, where 1 is a top priority; all weights must sum to 1)
and there are columns for rating the organization and its rivals. In
each column, a capability rating is determined (1 to 4, where 4 is
superior capability). The weight and rating are multiplied to find a
rated score. The firm with the highest score for the given critical
success factor is the best in that area.

4Ps
The ASCM Supply Chain Dictionary, 17th edition, defines the four
Ps as

a set of marketing tools to direct the business offering to

the customer; include product, price, place, and promotion.

The four Ps are part of what is called demand shaping. The

Dictionary defines demand shaping as

the use of tactics such as price incentives, advertising,

product positioning, product modifications and substitutions
or trade programs to entice customers to purchase.

Customer relationship management (CRM) philosophies have

transformed traditional marketing. A product-service package might
be marketed to a particular niche segment or customized to appeal
to the needs of several segments.

Here are some considerations for each of the four Ps:

Product. The starting point for a product/service package is

customer need. Extensive research is needed to understand
customer segment preferences. Designs may be customizable
by segments, such as via postponement.

Price. Pricing is generally a strategic decision, based on

competition, perceived value, and brand identity. Price and
product are tightly connected. (The product must be attractive to
 customers but still profitable.) Sales data for customer segments
can help automate moving customers into different pricing
groups.

Placement. Placement sets the combination of places to locate

products, in what quantities, and how customers get product
information and support. Strategic channel priorities (e.g.,
reliability plus control, consistency, profitability) need to be
determined. The most cost-effective customer-preferred channel
should be used.

Promotion. Promotion includes consumer research, market

analysis, customer segment strategy, advertising, packaging,
and creation of brand image. It also involves determining and
communicating the timing of marketing and promotional
activities and collecting feedback (e.g., CRM technology).

Business Constraint Analysis

A business constraint is a bottleneck in a process or system that
reduces process throughput and efficiency. It is a concept from the
theory of constraints (TOC). Identifying strategic-level constraints
helps target improvement priorities and helps in selection of
technologies. The process of analyzing constraints helps functional
areas learn to collaborate on a problem. Organizations with fewer
constraints will be more agile, be better able to implement
sustainability (less waste), and have lower risk.

Business Model Operating Canvas

Alex Osterwalder’s business model operating canvas is a
collaborative, human-centered strategy mapping tool that helps
organizations set a clear strategy. It features nine areas divided into
three categories: desirability (from the customer perspective),
viability (is it worth it?), and feasibility. Desirability is divided into the
customer value proposition (including the product-service bundles
that create value), customer segments being targeted, ordering and
distribution channels, and customer relations (desired relationship
levels). Viability is divided into revenue streams and cost structure
(both per customer segment). Feasibility is divided into key
resources (vital assets required to make the business model able to
fulfill the value proposition), key activities (those required for
success), and key partnerships (ones that make the business model
work). Some versions include a sustainability area. Exhibit 1-22
shows an example of an as-is canvas for our case study.
Exhibit 1-22: Sample, Inc., Business Model Operating Canvas, As-Is

Internal and External Factors Evaluation Matrices

An internal factors evaluation matrix evaluates and ranks strengths
(S) and weaknesses (W); an external factors evaluation matrix
evaluates opportunities (O) and threats (T). These tools are used as
a starting point for a SWOT analysis, with only the most important
items from these matrices making it on to the SWOT list. That is,
more elements are listed but are then prioritized. For each strength,
weakness, opportunity, or threat that is considered, the organization
assigns an importance weight (0 to 1, where 1 is a top priority; all
weights must sum to 1) and a capability rating (1 to 4, where 4 is
superior capability), which are multiplied to find a rated score for
ranking. The result is the sum of the weighted scores, which can
range from 1 to 4 when both S and W or O and T are combined. A
low external factors score means the organization’s strategy is
poorly designed to capture opportunities or counter threats. A low
internal factors score means competitors are at an advantage.
Exhibit 1-23 shows an external factors matrix for our petroleum and
chemical products case study.

Exhibit 1-23: External Factors Evaluation Matrix for Case Study

Critical Success Factor Weight Rating Score Result

Opportunities Expand private label network 0.1 4 0.4 1.14

Emergency direct supplier 0.2 1 0.2
shipments 0.18 3 0.54
Ability to ship from any DC

Threats High competition in generics 0.2 3 0.6 1.24

Customer expectations (e.g., 0.15 2 0.3
higher delivery frequency). 0.17 2 0.34
Oil price volatility

SWOT Analysis
A SWOT analysis evaluates the strengths, weaknesses,
opportunities, and threats of and to an organization. A variant is a
TOWS analysis, which starts with external analysis.

The SWOT analysis assesses an organization’s ability to implement

a strategy and defend itself against competition. The acronym
SWOT is explained by the term’s definition in the ASCM Supply
Chain Dictionary, 17th edition:

An analysis of the strengths, weaknesses, opportunities,

and threats of and to an organization. SWOT analysis is
useful in developing strategy.

Strengths and weaknesses reflect internal conditions that favor or

damage competitiveness, while opportunities and threats reflect
external conditions that impact the organization. The internal and
external aspects of the analysis are related. It is important to
understand that all four of these assessment areas are relative to
what is considered best in class.

A SWOT analysis for our Sample, Inc., petroleum and chemical

products case study is shown in Exhibit 1-24.

Exhibit 1-24: Sample, Inc., SWOT Analysis Report

SWOT Analysis

Strengths Weaknesses
 SWOT Analysis

Dominant market share in private Very poor cash-to-cash cycle time

labels
High raw material holding cost
Skilled and knowledgeable global
Lack of collaboration with partners
staff
Lack of sales and operations
Committed suppliers for bulk
coordination
purchasing

Well-developed supplier network

Owned fleet for local deliveries

Opportunities Threats

Expand private label network High competition in generics

Emergency direct shipments to Customers want high delivery

suppliers frequency

Ability to ship from any DC Oil price volatility

Milk runs to increase delivery Electric cars need fewer of our

frequency products

Note that a variation on a SWOT analysis is called a TOWS analysis.

It is simply a rearrangement of the same acronym. The point a
TOWS analysis is emphasizing is where the analysis should start. In
this method, one should start with external analysis before doing
internal analysis. (Start with threats and opportunities.) The intent is
to take full advantage of what is identified externally by using the
results to determine what strengths and weaknesses will help
minimize the threats or take advantage of the opportunities. The tool
is helpful for developing a strategic plan; SWOT or TOWS is not just
for understanding current strategy.

Strengths
Strengths are organizational resources and capabilities that allow an
organization to act on opportunities quickly. Strengths can be
identified using a resource and capability analysis, which includes a
VRIN (valuable, rare, inimitable, and nonsubstitutable) test. Note that

A valuable resource or capability is one that is directly related to

the strategy being considered.

A rare resource or capability is something an organization

possesses but competitors lack.

An inimitable resource or capability is one that is difficult for a

competitor to copy.

A nonsubstitutable resource or capability is one that cannot be

countered by entirely different types of resources and
capabilities.

Even strengths that do not have VRIN characteristics may help

strategy in the short term while more long-lived advantages are
being developed.
Strengths include an organization’s core process and core
competencies, which are defined in the ASCM Supply Chain
Dictionary, 17th edition, as follows:

Core process: That unique capability that is central to a

company’s competitive strategy.

Core competencies: Bundles of skills or knowledge sets

that enable a firm to provide the greatest level of value to
its customers in a way that is difficult for competitors to
emulate and that provides for future growth. Core
competencies are embodied in the skills of the workers and
in the organization. They are developed through collective
learning, communication, and commitment to work across
levels and functions in the organization and with the
customers and suppliers.

Core competencies directly contribute to an organization’s strategy.

Weaknesses
Weaknesses are competitive liabilities. Weaknesses may be
tangible, such as insufficient production capacity, or intangible, such
as an unethical culture. Weaknesses may also be missing or
deficient capabilities. Uncorrected weaknesses increase an
organization’s vulnerability to threats (e.g., lawsuits, fines, labor
organizing).
Opportunities
Opportunities are conditions in the external environment that could
convey a competitive advantage if the organization has the right
resources and capabilities and can act quickly. Opportunities could
be newly discovered customer needs, new technologies, or the exit
of a powerful market competitor. There could be an opportunity to
rebalance holdings to strategically aligned ventures. Acting on
opportunities generally requires building strengths and correcting
weaknesses. It may also create new threats.

Threats
Threats may be risks that can limit the success of a strategic action
or environmental factors likely to damage profits or competitiveness.
The organization becomes more vulnerable to external threats when
it does not build its competencies, correct its weaknesses, and
commit to regular scanning of its internal and external environments.

Effect of a SWOT Analysis on Strategy and Strategic

Intent
SWOT analysis findings can improve the development and execution
of a strategy:

The organization must assess the likelihood and impact of

threats and consider actions to protect itself. For example, a
threat to the introduction of a new medicine is that regulatory
 authorities will refuse to grant a marketing license. A company
can protect itself against this threat by meeting regularly with
regulatory representatives, gaining insight and improving
chances for agency acceptance.

Potential strategies and opportunities must align with the

organization’s strengths. Does the organization have the
resources, capabilities, and competencies required to execute
the strategy/opportunity? For example, before purchasing a
rival, one must have access to sufficient capital or investors and
strength in conducting mergers and implementing change.

The organization must address those weaknesses that will

decrease the chances for strategic success. It may invest in
capabilities and technology that will reduce the weakness or
acquire a business with the needed skills or market access.

Relying on a SWOT or TOWS analysis can have drawbacks. An

organization could focus only on known pain points and miss
scanning for other opportunities. Or the analysis could limit how big
the organization can dream. While traditional strategy development
embraces the “strategic fit” concept championed by Porter, a new
way to approach strategy is called strategic intent. Strategic intent
goes beyond just developing a strategy that fits one’s current SWOT
elements. Instead, it starts with a more ambitious long-term vision
and then looks at how to develop the capabilities that are needed to
get there. The organization creates a sense of urgency around this
vision. They add structure to this process by developing a
meaningful mission that focuses everyone on winning rather than
playing constant catch-up. The organization sets goals and strategic
objectives and determines an action plan to operationalize the
strategy. The strategic intent process is clearly a good fit for a
transformation initiative.
Topic 4: Understand Supply Chain
Strategies
Here we discuss supply chain strategy development, integrated
measurement models, KPIs, and supply chain strategy types.

Supply Chain Strategy Development and

Components
A documented long-term supply chain strategy is needed for proper
supply chain design. The strategy development process, strategy
development maturity, and strategic components of a supply chain
strategy are covered.

A documented long-term supply chain strategy is the foundation for

supply chain design, including its processes, people capabilities, and
ability to execute on its customers’ value propositions. A supply
chain strategy needs to address supply chain competency areas
comprehensively:

Strategic network design

Demand management strategy

Customer and supplier relationship management strategies

 Strategic sourcing and procurement strategy

Global trade strategy

Product and service portfolio management strategy

Transformation (manufacturing or service provision) strategy

Inventory management strategy

Demand fulfillment strategy (transportation, warehousing, and fill

rate/product availability strategies)

Reverse supply chain strategy

Sustainability or circular supply chain strategy

Supply chain information systems and decision support systems

strategy

Supply chain performance management and improvement

strategy

While organizations may have a supply chain strategy, not enough of

them ensure that this strategy is documented and extends far
enough into the future to be a strategic rather than a tactical or
operational plan. Others lack a strategy and spend their time putting
out fires, pursuing disconnected initiatives with little follow-through,
or working at cross purposes. Reasons commonly given for no
strategy or only tactical plans are a lack of resources, the daunting
nature of strategic planning when multiple supply chains are used,
and a lack of people capabilities in the areas of setting a strategic
vision, defining a plan and metrics, and leading improvements. Lack
of cross-functional buy-in is also quite prevalent, which reveals the
clear need for change management.

Lack of resources can be particularly challenging for many supply

chain transformations. Often the current supply chain workforce is
over-committed just to get their operational responsibilities done and
has no time to allocate to transformation even though leadership is
asking for it. Transformation in these cases will require contracting
with consultants and logistics providers as well as additional hiring
and/or finding ways to free up existing staff for long-term
improvements. Getting any of this will be difficult. It will require both
a strong business case with a positive ROI plus significant
relationship development and one-on-one conversations.

Supply Chain Strategy Development Process

A good supply chain strategy needs to indicate how to synthesize a
network out of its independent parts, create synergy by leveraging
leadership and interorganizational relationship management, and
enable synchronization of supply and demand between each supply
chain echelon.
Supply chain strategy development can use the tools discussed for
general strategy development such as the strategy diamond or the
McKinsey 7-S framework to ensure that the strategy considers how
the desired capabilities will be implemented, including by addressing
its human and cultural factors.

Supply chain strategy needs to start with a consideration of the

customer’s current and future requirements, and this often requires
getting outside of a supply chain manager’s comfort zone, which
often is more focused on suppliers and operations.

The process of developing a supply chain strategy follows. (There is

overlap with the transformation process road map; strategy
development is an integral part of any supply chain transformation.)

1. Understand the as-is state and do a market scan of the supply

chain environment and its supply chain customers and suppliers
(e.g., PESTLE, SWOT).

2. Describe the to-be state for partners, competitive position,

SWOT elements, etc.

3. Concisely describe the supply chain’s purpose (reason for

existence, true north).

4. Set supply chain goals to achieve over the strategy’s duration as

well as specific customer service objectives (reliability,
 responsiveness, agility, cost, profit, assets, etc.).

5. Specify the supply chain’s strategic priorities as well as areas of

parity. These priorities should be able to satisfy the goals and
objectives previously set.

6. Once a strategy is in draft form, validate it for strategic

alignment. Validation may take the form of a business case that
requires approval.

7. Develop a strategy implementation plan (e.g., the transformation

process), including plans for sufficient internal and external
resources.

8. Develop supply chain strategy risk management and

contingency plans.

9. Revisit the strategy periodically and revise it as needed.

Supply Chain Strategy Maturity

An organization may want to get an idea of its supply chain strategy
maturity level. A self-test is a good exploration session that
leadership can employ. J. Paul Dittmann presents a 12-question self-
assessment in Supply Chain Transformation that uses a scale of “1
not done to 10 world class” but recommends scoring a maximum of
5 if what “world class is” is not understood. A score of 100+ is
considered excellent, while below 85 is insufficient. Here is a general
characterization of self-assessments:

You discover your customer’s future needs and supply chain

requirements.

You assess the external environment (e.g., PESTLE).

You do a SWOT assessment using best-in-class for comparison.

You analyze competitor supply chains.

You evaluate the future supply chain technology environment.

You use risk management and have planned responses for

high-priority risks.

You assess global and country-specific supply chain

requirements and issues.

You revisit supply chain metrics and ensure that they are used
to measure progress.

Your supply chain strategy is based on the organizational

strategic plan, it covers at least three years, and it has a
portfolio of planned strategic initiatives.

You prioritize initiatives and manage projects to be on time and

on budget.
 You do a full strategy refresh at least every three years.

You are meeting your best-in-class goals for costs, working

capital, and product availability.

Supply Chain Strategy Components

A supply chain strategy needs to develop the following elements as
part of an integrated whole rather than developing each in isolation:

Supply chain customer service goals and competitive

attributes. Set responsiveness, dependability, and agility goals
based on the value proposition(s) of targeted customer
segment(s) and other value propositions. If more than one
supply chain will be needed, the value propositions and goals of
each should be specified separately. Things that are the same
for all channels are called out.

Sales channels. Specify the ordering and distribution channels,

including the optimal channel mix and how to prioritize demand
in supply shortages. If changes to sales channels are needed,
specify the details, such as whether the manufacturer or an
established distributor will distribute to retailers, the level of
information system integration that will be needed, who will pay
for these investments, and if dedicated inventory will be held for
the distributor so costs and assets can be properly planned.
Value chain. Indicate which parties will be performing which
supply chain functions and why (e.g., better economies of
scale). Specify what will be done internally. Two major
categories are decision-making activities and execution
activities. Many organizations retain the former and outsource
the latter. Others outsource some production stages but retain
others. Be sure to specify who is responsible for which parts of
the strategy. For example, if a consumer-packaged goods
(CPG) company outsources its last stage of production to
contractors, the CPG will be responsible for raw material cost
and quality while the contractors will be responsible for lead time
and finished goods quality.

Operating model. Specify how orchestrate, plan, source,

transform, order, fulfill, and return processes will be organized to
meet customer service goals, cost objectives, and working
capital needs. Simple supply chains will specify whether
operations will be make-to-stock, assemble-to-order, make-to-
order, or engineer-to-order. Complex supply chains with many
product types will use multiple models, so the strategy may stay
at a level higher than this. It will still need to ensure that
individual models are appropriate and integrate well with
planning, procurement, order management, and logistics at an
optimum cost.
Asset footprint. Indicate where supply chain assets will be
located and the scope of each. This includes physical assets,
human resources, information systems, and access to capital.
Assets that will need to change should be called out. Asset
distribution can follow one of these models:

Global model. All production for a given product occurs in

one place, such as for highly capital-intensive products with
specialized production requirements that need carefully
controlled production costs.

Regional model. Production occurs in the same region as

where sales occur, such as to meet regional requirements,
or each region produces a different type of product to
create economies of scale. If a global model cannot
produce the needed lead time, a regional model might.
Transportation costs may also play in to total cost
measurements to promote this over the global model.

Country model. Production occurs in the same country as

where sales will be. This is used for products that are cost-
prohibitive to transport far (very heavy or things like
newsprint) or is due to regulations favoring in-country
production.
A supply chain strategy and its components need to be stress-
tested. Check that supply chain power positions (supplier or
customer relative bargaining power) are accounted for in supply
chain objectives. Verify that the supply chain is as complex as it
needs to be but not more. It needs a process for managing risk. The
level of resilience in the chain needs to be acceptable relative to the
strategy and risk tolerance levels at an acceptable cost. This
involves deciding whether to use redundant systems to achieve
resilience at a high cost versus using visibility to get similar results at
less cost. It requires the capability of moving resources quickly to
where they are needed. Verify that any social responsibility
commitments are in the strategy, such as a commitment to
transparency. Finally, the supply chain strategy needs to be able to
adapt to changing markets and conditions.

Supply chain strategy for a transformation may need to go beyond

just specifying how business processes and functions need to align.
It should also consider necessary changes to organizational
structures, jobs, skills, values, and beliefs. At this point, these can be
high-level goals. During supply chain design, these areas will gain
specificity.

A supply chain strategy also needs to specify the key performance

indicators (KPIs) it will use so that the right metrics promote using
the right processes and work toward the right goals with the right
accountability. New metrics help prevent reverting to old practices. It
is best if defining a new set of metrics is one of the last steps in
supply chain strategy development. Before setting metrics, the
organization needs to decide what it wants to do in the future and
what new capabilities will be needed.

It is also vital that metrics be paired with an action plan. Any given
metric will have one or more targets (e.g., a minimum and a stretch
goal), and these targets require an action plan that specifies projects
or deliverables that will enable achieving the desired results. One
cannot just hope for people or business partners to work harder.
They need a plan to get there. Action plans are created for a specific
individual or team and are developed only for the upcoming project
phase. They require deadlines. Plans for later phases are listed in
the transformation road map. Action plans can help get people and
teams started rather than leaving them feeling overwhelmed.

Strategy and the Integrated Measurement

Model
Strategy drives actions for competitive advantage. The integrated
measurement model links strategy to tactics and shows if a strategy
is effective. Setting strategic objectives moves planning down to the
business plan level.
The process of setting strategic objectives is the step that moves the
planning process down from the level of the strategic plan and into
the level of the business plan. In other words, now we get to the
specifics of financial, market share, and growth goals.

The ASCM Supply Chain Dictionary, 17th edition, defines

performance objectives as follows:

Measurements that enable the firm to monitor whether or

not the firm’s strategy is being accomplished. Thus, the
measurement should be aligned to strategy. Performance
objectives may differ based on the hierarchical level of the
firm…and should be aligned with the corresponding
strategy for that level.

Objectives translate the business’s vision and mission into

actionable goals that further focus strategic planning. These
objectives serve three primary purposes:

They help align actions across the business and down its layers.
They support decision making consistency and to-be state
commitment.

They provide a basis for measuring the effectiveness of a

strategy.
 They motivate all members of the organization to achieve and
surpass these goals.

Integrated Measurement Model

An integrated measurement model is a tool that can help ensure that
strategic goals are carried down into the strategies and tactics of the
organization. Exhibit 1-25 shows an example of an integrated
measurement model. Note how it starts with the goals of
organizational strategy. Strategy directs all of the remaining priorities
for each part of the organization. These priorities are used to
determine what is important to measure and what targets are
important to achieve if the overall strategy is to succeed.
 Exhibit 1-25: Integrated Measurement Model

The model illustrates the way in which the organization’s

performance at all levels—from strategic to operational (the work
environment)—is aligned through performance objectives. Each part
of the organization needs to link back to the organization’s strategy,
or that strategy will fail to be realized.

An integrated measurement model is an example of a KPI tree, or a

series of key performance indicators (KPIs) that are linked and
become more specific at lower levels but can be aggregated to
provide summary information at higher levels. These logical
frameworks allow drilling down to root causes. Using a KPI tree is
absolutely essential to supply chain transformation because it helps
show how each metric contributes to shareholder value.

Let’s walk through how the performance objectives cascade down

the levels.

Organizational performance objectives might be, for example, a

revenue target (in the aggregate and for individual product/service
families), a percentage share of the market, or successful entry into
a new line of business or a geographical region.

The overall strategy is specialized at the divisional or business unit

level. Objectives at this level need to balance various priorities, so
four perspectives akin to those of Kaplan and Norton’s balanced
scorecard are shown here. Kaplan and Norton strategy maps can be
used here; they are discussed shortly.

These strategic and divisional objectives drive the creation of

functional objectives. By aligning their performance objectives with
the overall objectives, the organization’s functions can perform as a
team rather than working at cross purposes.

The functional area and operations strategies are set by prioritizing

high-level performance objectives. Speed, dependability, flexibility,
quality, and cost are basic ways to categorize priorities. Each is
discussed more in this topic.
Operations will settle on a mix of priorities that promote the overall
strategy, and these will in turn guide selection of detailed goals and
performance measures at lower and lower levels. One way to ensure
that metrics link back to higher-level goals is to select just a few
critical metrics that can be proven to directly link back to strategy.
These will become the organization’s KPIs. These are discussed
more shortly.

At the individual level, each person will need their own set of metrics
to which they will be held accountable and that align with the higher
levels of the model. These should be SMART: specific in terms of
desired outcomes, measurable, attainable, relevant, and time-bound.
Specific and measurable goals are objective. (Vague or
unmeasurable goals fail to define success.) Attainable avoid
demoralizing people. Goals must be relevant; irrelevant goals
distract users from strategic priorities (thus the need for a limited set
of KPIs). Time-bound goals are not open-ended but need to be
achieved during the time horizon, such as during the three-year
strategic plan.

Kaplan and Norton’s Strategy Maps

Kaplan and Norton’s strategy maps are an extension of the balanced
scorecard. The process results in a single-page strategy that helps
show how a strategy will actually create value. Because the map is
simple, it can be used to sell the strategy to stakeholders. Another
key benefit is that the map helps align people, organizational
structures, and technologies to the strategy.

The mapping process starts by defining organizational direction:

mission, vision, and values. Then each perspective is defined,
starting with learning and growth at the bottom, then internal
business (separated into specific process areas such as operations
management processes, innovation processes, etc.), then customer,
and then financial at the top. The next step is to set strategic
priorities and business goals along with their rationales. (Providing
the rationales is important to getting buy-in). For each goal, a set of
key metrics that include a leading and a lagging indicator is defined.
Arrows show how the processes are interconnected, with everything
leading to the financial metrics and eventually to the top metric, long-
term shareholder value. Key initiatives and action plans are added.
The overall strategy map is then used to create local versions of
strategy maps at lower levels that can cascade up to this level.

Key Performance Indicators (KPIs)

The ASCM Supply Chain Dictionary, 17th edition, defines key
performance indicator (KPI) as follows.

1) A financial or nonfinancial measure that is used to define

and assess progress toward specific organizational goals
 and that typically is tied to an organization’s strategy and
business stakeholders. A KPI should not be contradictory
to other departmental or strategic business unit
performance measures. 2) A metric used to measure the
overall performance or state of affairs. SCOR level 1
metrics are considered KPIs.

Here are some important design criteria for KPIs:

They should use a KPI tree logical framework.

They should use a logical reporting framework that puts them in

context, explains their relevance, and allows for easy and timely
accessibility by decision makers.

Key personnel should be able to see which metrics they can

influence, in part because metrics have easily identifiable cause-
and-effect drivers.

Metrics should be easy to understand and hard to manipulate.

Metrics should have a source of stable and accurate data with

few outliers.

A small number of KPIs is a design goal; each should drive part

of the strategy.
 The best KPIs help provide a view of end-to-end supply chain
performance, why supply chains have these results, and where
supply chains are making tradeoffs.

There are a number of sources organizations can draw upon to

gather a set of KPIs:

SCOR DS metrics are part of an integrated measurement

model, with many metrics created and updated by practitioners
from a wide cross-section of industries.

The triple bottom line helps balance financial, social, and

environmental metrics.

The balanced scorecard can be used to set strategic KPIs.

The Dictionary defines the Global Reporting Initiative (GRI) as

“a network-based organization that pioneered the world’s most
widely used sustainability reporting framework.” The framework
helps measure and voluntarily disclose information on human
rights, labor, environment, and anticorruption.

Environmental, social, and governance (ESG) indices are

sustainable investment indices for various asset classes,
countries, industries, or sustainability strategies.
 The material circularity indicator is a supply chain metric can
range from 0 to 1 (1 being best). It measures recycled and
reused components, duration and intensity of product use,
destination after use, and recycling efficiency.

Organizations can develop their own KPIs or use models

developed by consulting organizations or other groups.

This list makes it clear that it is important for the organization to

include some secondary metrics to complement its primary metrics.
Primary metrics measure the direct output of a process; secondary
metrics are not directly tied to the result but provide more information
on the possible unintended consequences of a process. They reduce
suboptimal results and help functional areas integrate. For example,
if production output is a key metric, useful secondary metrics might
be labor costs, defect rates, or renewable materials used to ensure
that the process is meeting cost, quality, and sustainability
objectives.

Supply Chain Strategy Types

Five generic performance objectives—speed, dependability,
flexibility, quality, and cost—help set competitive priorities. SCOR DS
attributes can also be used. A few other ways to set strategy are
discussed.
Here we address ways to develop a strategy for a specific supply
chain. The idea is to describe a strategy in terms of what supply
chain services will be order qualifiers and order winners. Due to
inherent tradeoffs, organizations generally cannot be order winners
for more than one or possibly two of the generic performance
objectives or SCOR DS attributes discussed next. A supply chain
strategy needs to specialize in the areas that the strategy dictates
will produce a competitive advantage. The other areas then are
provided to the degree possible to remain order qualifiers.

Building a Supply Chain Strategy From Generic

Performance Objectives
Operations Strategy describes generic performance objectives that
can be prioritized to create strategic advantage if they match the
requirements of key customer segments. An organization will select
and prioritize these objectives based on factors including
stakeholders’ perceptions, sustainability strategy, product life cycles,
and so on. Meeting goals may require tradeoffs in performance
objectives.

Speed
Speed includes time to market (e.g., fast research and
development), short lead times, high throughput, and/or fast delivery.
A business strategy based on speed of delivery is referred to as
time-based competition (TBC), defined in the ASCM Supply Chain
Dictionary, 17th edition, as follows:

A broad-based corporate strategy that emphasizes time as

the vehicle for achieving and maintaining a sustainable
competitive edge. Its characteristics are as follows: (1) It
deals only with those lead times that are important to
customers, (2) the lead-time reductions must involve
decreases in both the mean and the variance [from the
mean], and (3) the lead-time reductions must be achieved
through system or process analysis (the processes must
be changed to reduce lead times). [This] involves design,
manufacturing, and logistical processes.

Achieving speed requires analyzing all the steps in the transaction

and identifying opportunities for shortening each step and the gaps
between steps.

Dependability
Dependability includes promise fulfillment, on-time delivery (neither
early nor late), and/or products that can take a certain level of wear
and tear. Dependability refers to keeping promises to customers,
which could mean promised delivery time or promised volume.

Flexibility
Flexibility is the ability to ramp up or down in volume quickly or
change what is being produced without significant financial penalty.
Flexibility has two dimensions: volume/mix and agility. Volume/mix
flexibility refers to an operation’s ability to provide different

Types of products or services, including new/redesigned

products/services

Varieties of products or services within a given time

Levels of output

Delivery dates—e.g., advancing a promised delivery date.

Second, flexibility refers to agility, or how quickly and efficiently an

organization can respond to demand changes—production mix,
delivery date, or throughput changes to match demand. The
Dictionary describes this as product-mix flexibility: “the ability to
change over quickly to other products produced in a facility, as
required by demand shifts in mix.”

Quality
Quality is fitness for use. Quality can be described by specifications
(attributes of the product or service) or by the compliance of the
product or service with specifications.
 Products and services should have a specified grade that
relates to how customized the design is to match customer
needs as well as the grade of the input materials and resources.
Both high- and low-grade products and services will have quality
if the customer gets the value they expect for the price.

Each unit is supposed to comply with specifications: type and

amount of material used, requirements, quality inspections, and
so on. If the product does not comply with those specifications, it
has poor quality that impacts satisfaction.

Cost
Cost is the ability to provide goods at the lowest price versus the
competition. The cost objective can refer to various goals: lowering
unit cost and increasing profit margin by selling enough more units or
increasing price competition by lowering price and profit margin. It
can also refer to the return on a capital investment and to the
operation’s ability to maintain working capital to fund operations. This
can be accomplished through an ability to collect from customers, to
maintain low levels of inventory, and to achieve high inventory turns
(turning inventory into revenue quickly).

Using SCOR DS Attributes to Define Supply Chain

Strategy
SCOR DS includes a performance section that features a set of
performance attributes in addition to metrics, people, and practice
maturity. SCOR DS performance attributes are “strategic
characteristics of supply chain performance used to prioritize and
align the supply chain’s performance with the business strategy.”
Performance attributes are grouped into three categories—
resilience, economic, and sustainability—as shown in Exhibit 1-26.
Note that performance attributes are not metrics themselves but that
one or more top-level metrics are tied to each attribute. (These
metrics and the rest of the model are addressed elsewhere.)
Definitions are quoted from SCOR DS.

Exhibit 1-26: SCOR DS Performance Attributes for Building a

Supply Chain Strategy
Category Performance Definition
Attribute

Resilience Reliability (RL) “The ability to perform tasks as expected. Reliability

focuses on the predictability of the outcome of a
process. Typical metrics for the Reliability attribute
include delivering a product on time, in the right
quantity, and at the right quality level.”

Responsiveness “The speed at which tasks are performed and the

(RS) speed at which a supply chain provides products to the
customer. Examples include cycle-time metrics.”

Agility (AG) “The ability to respond to external influences and

marketplace changes to gain or maintain a competitive
advantage.”
 Category Performance Definition
Attribute

Economic Costs (CO) “The cost of operating the supply chain processes.
This includes labor costs, material costs, and
management and transportation costs.”

Profit (PR) “The Profit attribute describes the financial benefit

realized when the revenue generated from the
business activity exceeds the expenses, costs, and
taxes involved in sustaining the activity.”

Assets (AM) “The ability to efficiently utilize assets. Assets’

strategies in a supply chain include inventory reduction
and insourcing rather than outsourcing.”

Sustainability Environmental “The Environmental attribute describes the ability to

(EV) operate the supply chain with minimal environmental
impact, including materials, water, and energy.”

Social (SC) “The Social attribute describes the ability to operate

the supply chain aligned with the organization’s social
values, including diversity and inclusion, and training
metrics.”

Source: SCOR DS. Used with permission.

Other Ways to Set Supply Chain Strategy

In Strategic Supply Chain Management, Cohen and Roussel argue
that a supply chain can have an innovation, customer experience,
quality, or cost strategy:

Innovation. The organization makes innovative

products/services in high demand. The supply chain prioritizes
time-to-market and time-to-volume. Zara’s fashion supply chain
is an example.
 Customer experience. Products and services are customized
to customer needs. The supply chain strategy supports
customer preferences while carefully balancing cost-to-serve
and profitability (i.e., knowing when not to offer too many
choices).The price of offerings to B2B (business-to-business)
customers can be based on how well the product helps the
customer stay productive (e.g., MRO always available to keep a
drilling operation going nonstop, charged by equipment
production rates).

Quality. Products and services have reliability as an order

winner, so procurement and operations need to emphasize
quality control and process conformity. Traceability is a priority
for origin tracing and combating counterfeiting.

Cost. Products and services compete on cost, so supply chains

need to be highly efficient and omit any processes not valued by
the customer.

Here are other examples of potential supply chain strategies:

Supply chain integration strategy. Products and services

require integration and close collaboration with upstream and
downstream partners using customer and supplier relationship
management (CRM and SRM), visibility, information sharing,
and shared incentives.
Resilient supply chain strategy. An organization’s products
and services must be available to the customer. In addition to
emphasizing agility so that production can quickly match
demand upswings or downswings, this supply chain can engage
in proactive risk management to minimize risk of disruption,
selective redundancy, safety stocks, and/or information in place
of inventory.

Project-driven supply chain strategy. An organization is

project management–driven and needs deliveries neither early
nor late, even of engineered-to-order materials. Lead-time
planning and logistics excellence are essential.
Topic 5: Explore Business Cases for
Transformation and a Transformation
Road Map
Here we present the business case for transformation at a high level,
explore some real-world transformation business cases, and finish
with a road map for a transformation process.

The Case for Transformation

Begin with the end in mind and reverse-engineer. Ensure that the
right problem is being worked on, challenge assumptions, and define
goals, what to change, and impact. Transformation can shift the
curve. Protect the core and enable innovation.

Many established as well as start-up organizations have been

leveraging digital, data-driven technologies to transform, scale up in
record time, and establish new business models. The COVID-19
pandemic’s supply-demand imbalances and lockdowns shocked
many supply chains that were lagging in this effort or advancing too
slowly. The pandemic accelerated the need for multi-tier supply
chain visibility and real-time data integration to enable better
decision making, agility, and, especially, the severely under-
prioritized quality of supply chain resilience. Failures or loss of
market share by many formerly prominent organizations help show
that this is an existential crisis for organizations who fail to improve
or fail to improve fast enough.

Organizations are learning that they must transform themselves to

survive and thrive and that they must do so continuously because
the rate of change is only accelerating. Whoever stays the most agile
and responsive to customers and markets will have the advantage.

Transformation requires two key enablers:

Begin with the end in mind (or find your true north).

Reverse-engineer capabilities.

Working backward from a clear purpose is a major shift in mindset

from supply chain managers who think about current capabilities,
supply base, and assets first. The paradigm shift is to start with the
ultimate goal; first learn what is needed from customers and
markets. If you can change the culture and leadership to begin with
the end in mind and have clarity of purpose, then it is feasible to
reverse-engineer the needed capabilities. That is, you work
backward from the goal to define the gaps that need to be filled to
provide those capabilities reliably and consistently. Throughout this
course, we explore ways to work backward from the end goals. For
example, we will show how customer supply chain operational
requirements form the basis for supply chain segmentation.

Designing key performance indicators (KPIs) to measure what

matters to specific customer segments is another example of reverse
engineering. These metrics are used to determine gaps to be filled
by new capabilities. Relatively mature supply chains can leverage
advanced digital capabilities models when reverse-engineering the
capabilities needed to satisfy customers. An example is the Digital
Capabilities Model (DCM) for Supply Networks. Such capability
models are discussed elsewhere.

To sell the idea of new capabilities to stakeholders, transformation

champions need to get people thinking about three important
questions:

What is the problem that needs to be solved?

How can a transformation solve this problem better than a

conventional initiative?

Where are we trying to get to?

These questions and some possible answers are addressed more

next.

Supply Chain Transformation: What Is the Problem

We’re Trying to Solve?
Carefully defining the problem to solve is a critical step in any
transformation. This step ensures that the right problem is being
worked on. Avoid making assumptions at this point and take the time
to define the problem from multiple stakeholder perspectives.
Involving stakeholders in defining the problem gets them invested in
the problem and therefore in its solution. Carefully defining the
problem requires being specific in terms of who it impacts and what
the impact is, when and where it occurs, and why and how it occurs
and how much it will cost (i.e., five Ws and two Hs). Avoid jumping to
solutions too soon or settling for symptoms when the root causes are
sought.

A problem statement should be brief and concise. When defining a

problem to solve, it is important not to group multiple problems
together. More than one problem statement can be created as
needed.

Consider a problem with a single supply chain that really should

become multiple supply chains. Framing a problem as how to get
customers to be more satisfied with the supply chain fails to get to
the root cause of the problem and creates an implied solution that
one supply chain will still suffice. Different customers may have
different areas of dissatisfaction, so the original problem may be best
expressed as a different problem from each customer segment’s
perspective. Delving into the root causes of these customer pain
points may reveal that the single supply chain is a root cause. From
there, each problem can be more carefully defined and a separate
strategy can be devised for each supply chain segment.

Assumptions can be invisible until deliberately surfaced and

challenged. Here are two case studies of organizations who devoted
sufficient time to this step.

Hospital Clinic Network Streamlines Outpatient Process

Flow
A specialist clinic network had a lot of bureaucracy, such as
outpatients needing to wait in a queue for an x-ray prior to an
appointment, then another queue to see the doctor, and another at
the pharmacy. Payment was required at each step. Leadership set
goals: Radically simplify processes, eliminate routine queuing, and
improve the overall outpatient experience. To better define the
problem, they

Surfaced assumptions. Assumptions act like invisible business

rules even long after they are no longer valid, blocking
transformation. To reveal them, the clinic network used the what,
who, where, when, why, and how categories. For example, for
“when,” an assumption was that a patient had to pay for the
service before leaving the clinic.
 Challenged assumptions. For example, paying after leaving or
in installments.

Generated ideas. For example, electronic funds transfer;

enabling taking credit card payments remotely; combining billing
for all tests, consultations, and medications; and a single point
of contact for payments/appointment booking.

This process resulted in a list of potential projects. The clinic network

created a matrix of the potential projects in rows and in columns they
had categories of customer benefits, organizational benefits, and
difficulties such as implementation cost. Both overall high-scoring
projects and ones that satisfied most criteria simultaneously to an
acceptable level were prioritized. The projects were tested to see if
they could easily integrate and didn’t undermine each other. The
clinic network developed an ideal patient flow diagram that
incorporated the selected projects to show the desired end result.

The new system allowed online pre-registration or in-person

registration via kiosks or a registration counter. Access to the facility
was regulated by turnstiles using QR codes or tokens. At the end of
the visit, the outpatient could pay all bills together and make another
appointment. Upon leaving, the outpatients’ access privileges were
automatically revoked.

Medical Equipment Supplier Improves Reverse Logistics

A medical equipment supplier had a lot of complaints about its very
slow reverse logistics process for its repair services, but the cost to
the organization was already quite high. In defining the problem, they
determined that it rested on a number of assumptions, so their place
to start was to challenge these assumptions. Here are some of the
assumptions they challenged along with some potential solutions:

Assumption: Defective units are cheaper to repair than

replace. This was not true for older models, so an idea was to
offer incentives to replace the old equipment with new
equipment.

Assumption: Doing all repairs at a central location is the

lowest-cost option, in part because they have specialized
equipment. This was not true for regional service due to
transportation cost. A solution was to have a small repair service
at each retail location for easy repairs, forwarding only complex
repairs to central repair.

Assumption: Customers are willing to pay for return delivery

and will wait longer as distance increases. Neither is true. The
supplier needed to treat each customer the same regardless of
their location such as by outsourcing shipping (saving their
vehicles for the first shipping zone) and offering convenient
pickup locations using participating convenience stores.
In the new model, the vast majority of the repairs were done at the
local shop, reducing the overall lead time for all repairs since the
unburdened central repair facility now had better repair capacity.
This caused a significant drop in the annual transportation cost for
returned products and increased customer satisfaction and
responsiveness.

Determine Goals, What Needs to Change, and Impact

Given a well-defined problem, the next steps are to define goals,
determine what needs to change, and get a sense of the potential
impact of the change. During the exploratory stages, this can be a
high-level discussion to give people a general scope of the change.

The goals are what a given solution to the problem should provide,
such as better understanding of a customer segment’s value
proposition, understanding what new products/services they desire,
and increasing loyalty or market share.

The broad areas that need to be changed are the gaps between
current and desired capabilities. These could include the need for a
new value proposition or changes to products and services, sales
channels, distribution channels, definitions of customer segments,
revenue streams, or the value chain.

Impact starts with whether it aligns with the organization’s overall

strategy and includes improvements to key metrics and financial
success measures such as faster time to market, lower cost to
serve, better turnover, lower risk, better agility, fast payback, and so
on. Should these be specific commitments at this point? They may
need to be to get certain stakeholders on board. While the benefits
depend on the specific solutions that have yet to be devised, it may
be possible to provide an estimate of improvement that is large
enough to get key executives interested while still being conservative
enough to allow for variation.

As a way of moving from the problem to the solution, for each area
that needs to be changed, it is important to explore feasibility and
difficulty levels with stakeholders so they grasp the scope of the
change. Changes to culture and capabilities will require strong
leadership, a disciplined process, and organizationwide commitment.
The financial investment and availability of needed technologies can
also be discussed at a high level from a feasibility perspective. The
idea here is to convey that the change methods of the past will not
suffice because change needs to happen faster and be more
comprehensive, both of which can be addressed by embracing
transformation.

Why Do We Solve Problems Through Transformation?

Transformation is breakthrough improvement that can be realized
only by abandoning old mentalities and learning new capabilities. It
is contrasted with incremental or continuous improvement.
Transformations require cross-functional buy-in and often cross-
organizational buy-in. They must also be performed in a way that
enables ongoing operations to proceed. The only way to succeed at
transformation is to follow a structured approach that starts by
developing a clear, written supply chain strategic plan (or plans for
multiple chains) that links back to strategy. The plan guides creation
of prioritized road maps and project portfolios to break down the
work into manageable portions. Another quality of a transformation is
that it needs to be more rapid than initiatives in the past. A
disciplined process can help the team move quickly through steps
rather than allowing lingering on each.

When selling stakeholders on a transformation, clearly distinguish it

from incremental changes. In addition to these initiatives possibly
having poor reputations for not providing the envisioned benefits, the
degree of improvement will have been incremental. Rather than
continuous improvement, a transformation is a breakthrough
improvement. Show what a genuine transformation process should
look like and explain how to know whether this is just a superficial
label applied to business as usual or to slower incremental change.
One example of how to do this is by showing how cost curves can be
entirely shifted rather than just improving the shape of the curve.
Exhibit 1-27 shows an example of the cost tradeoff between supply
chain cost and resulting customer service (i.e., perfect orders).

Exhibit 1-27: Supply Chain Transformation Can Shift Cost-to-

Customer Service Curve

Note how in the less mature supply chain, achieving a targeted level
of customer service starts out easily enough but getting to a
relatively high level starts to require significantly more supply chain
investment. Less mature organizations can get to a desired service
level using expensive tools such as high safety stock levels. Most
organizations have used a number of initiatives to target their “low-
hanging fruit,” such as transportation and warehouse cost
reductions. Such continuous improvements likely have resulted in an
improvement to the curve, as shown. However, continuous
improvements now become more difficult and provide less marginal
benefit, despite the same level of pressure to improve more.
It is important that stakeholders comprehend that transformation is
not about more of the same cost cutting, downsizing, automation, or
restructuring. While all of these may be included, the goal is now to
shift the curve entirely. In this example, the same service level can
be offered at a lower price and/or better service can be feasible to
offer.

Another reason why organizations are moving to solve business

problems through transformation is because it has been proven
successful by many market leaders. Find some examples of best-in-
class companies or competitors who have transformed, and present
their story by exploring their problem definition, transformation
process, quantitative results, and lessons learned. Help stakeholders
see that the capabilities they seek are feasible to achieve, but be
realistic about the level of effort and cross-functional buy-in that will
be required. For example, you could show how the companies listed
on the most current Gartner’s “Top 25...” supply chains have higher
return on assets than less mature supply chains.

What Is the Desired Future State?

The desired future state needs to focus on making the current
business model fit for the future while also enabling new markets
and business models. The former might be called incremental
transformation in that it is working to maximize the value of current
markets and products as well as finding adjacent areas to grow
these existing business models. Some of this incremental
transformation will still require significant change. For example, it
could require building integrated, logical, and optimized networks
with clear links to customers and suppliers, clear and simple process
flows, and greater visibility and insight into demand (i.e., more timely
and accurate forecasts). However, a transformation should also
devote some part of the desired future state and some of the
business investment to entirely new capabilities that enable entirely
new business models, new markets, and new products/services.
This dual focus allows the organization to protect and nurture the
core business while becoming agile and capable of experimenting
with radical options that can be tested and scaled up quickly if
successful.

Transformation Business Case Examples

Various business cases are explored to show what transformation
can achieve and how the organizations defined their problems,
challenged assumptions, and transformed to benefit themselves and
their customers.

Here we present a series of business cases to show the value of

transformation. These examples are all real companies presented
anonymously. Many of these initiatives resulted in both new
competitive advantages and significant cost savings.

Consumer Packaged Goods Company Adopts Hybrid

Organizational Structure and Shared Services
A large, diversified consumer packaged goods (CPG) organization
with hundreds of product brands in four major categories was still
managing its supply chain activities only at the local level. The
problem was to remain locally agile while leveraging global
economies of scale. The solution involved creating a hybrid
organizational structure with shared services. Regional leadership
remained responsible for front-line functions such as supply and
demand balancing, customer order management, production, and
logistics, while shared services managed the vast majority of
procurement. Identifying major supply categories enabled hedging
against price volatility and provided clout in negotiations on things
like sustainability. Supply chain management, customer service, and
quality were considered cross-cutting processes that still needed
local management, so a chief supply chain officer was placed in
charge of the regional vice presidents to coordinate their efforts.
Regional vice presidents were able to shift focus to brand building
and innovation.

Healthcare Company Matures Supply Chains and Adds

S&OP
A major healthcare distributor based in Saudi Arabia had several
subsidiaries, including a healthcare network, pharmaceutical
manufacturing, and a consumer packaged goods subsidiary. They
developed a sense of urgency to transform their supply chain for the
entire group because there were various levels of supply chain
maturity among the subsidiaries. This included different levels of
supply and demand synchronization, which resulted in variability in
forecasting, inventory control, and communications with internal
stakeholders.

These were signs that this organization had some prerequisites to

achieve to enable higher levels of transformation. They established a
supply chain academy development and training program for the
group to map supply chain skills and competencies. The academy
provided ASCM’s CSCP, CLTD, and CPIM certifications and SCOR
DS training. They also provided training on sales and operations
planning (S&OP), forecasting management, and simulation-based
learning. This helped create a culture of improvement and modern
supply chain thinking. These changes helped the organization
achieve breakthrough advances in their supply chain maturity.

As a result of the companywide transformation for the supply chain,

they
 Reviewed logistics network design and reassessed asset and
resource utilization.

Reengineered their cold chain, digitizing and improving

temperature controls.

Added a fleet utilization and last-mile delivery system with

customer collaboration that monitored drivers’ journeys and
collaborated with customers on routings.

Implemented purely stockless cross-docking at a key facility for

annual savings of about $532k.

The transformation program also resulted in a 50 percent reduction

in delivery times to key customers and a 50 percent reduction in
delivery refusal rate. The organization is now in a position to conduct
a digital capabilities assessment and also plans to add ASCM’s
Enterprise Certification for Sustainability.

Pharmaceutical Retailer Adds State-of-the-Art

Distribution Center
A Saudi Arabian pharmaceutical retail market leader went into a
transformation journey to enhance its guest experience. After
implementing a SCOR improvement program, the next evolution in
the strategy was the need for a new distribution center (DC) to
enable this strategy. The state-of-the-art facility fused automated
storage, management, and transportation solutions with manual
operations, integrating a variety of smart logistics technologies to
ensure a robust supply chain, enable process improvements, reduce
human error, and increase product security.

The establishment of the DC was a significant milestone in the

company’s ongoing journey toward expanding its healthcare
offerings and reflected an unyielding commitment toward optimizing
and delivering improved healthcare services accessible to everyone.
The new DC became home to some of the world’s best automated
solutions and pioneering technology to improve efficiency, ensure
process improvements, reduce human error, and increase product
security. Technologies deployed included voice picking, pick-to-light,
and an automated storage and retrieval system (AS/RS). This
transformation program was a breakthrough improvement that
resulted in bringing down supply chain responsiveness from three
days to four hours and improved shelf availability by four percent
while still delivering over 200 million units annually.

Midsize Retailer Increases Availability, Lowers Inventory

A midsize office supplies retailer had too much inventory but its
stores needed high fill rates. They started by enhancing supply and
demand synchronization. They revised their S&OP process to align
replenishment plans with actual sales, revamped forecasting for
better store-level accuracy, and created a promotions database for
better communications. The retailer’s inventory initiatives included
reducing fulfillment lead time and lowering availability targets on its
slowest-moving inventory categories. It also fine-tuned the number of
deliveries per week based on the need per store while allowing the
stores to manage SKU assortments, adopted calculated safety stock
levels, adjusted case counts to reflect actual periodic demand, and
postponed differentiation by moving kitting to import origin. They also
worked to better collaborate with suppliers.

Retailer Works to Fully Implement Digital Supply Chain

and Blockchain
A very large retailer with an already mature supply chain wanted to
accelerate its innovative culture and digital transformation to save
customers both money and time while staying ahead of the
competition. Its omni-channel efforts have resulted in higher demand
both in stores and online: It is still opening more stores domestically
than closing poor performers. Also, customers who use multiple
channels are spending nearly twice as much as the average
customer. One remaining issue is determining how to manage
inventory when the same consumer may use different channels each
time.

To grow into China while avoiding the need for separate distribution
inventories, they partnered with an e-commerce platform in China
that picks inventory from the retailer’s shelves and delivers in about
an hour.

They also have a goal of reinventing how food is tracked for food
safety, but rather than go it alone with a blockchain initiative, they are
partnering with a number of suppliers who are competitors to spread
the cost among more investors while enabling standardized
solutions.

NVOCC Adds Blockchain and IoT for LTL Optimization

A non-vessel operating common carrier (NVOCC) has both full
containerload (CL) and less-than-containerload (LCL) business
customers. While CL involves basically commodities, LCL has more
nuance. Local LCL forwarders prefer lower ocean freight and higher
destination fees, while global LCL forwarders prefer balanced fee
structures because they have to answer to the receiving customer.
This process was causing delays for the handoffs between agents,
shippers, and customers, especially given the need to confirm
bookings and so on. Rather than just digitizing the current process,
the new process needed to transform to organize the work around
the desired outcome while ensuring that the terms could be arranged
per the customer’s desire.

A blockchain system with an internet of things (IOT) component was

envisioned as a solution. The distributed, secure nature of
blockchain allows each party to perform its own process rather than
needing to forward the request. The blockchain is used to create a
smart contract that locks in contract details from the start and allows
multiple parties to initiate their transactions simultaneously rather
than sequentially. The IOT component allows the status of the
shipment at each leg of the journey to be reliably known to all parties
so they can approve payments and stay informed.

Durable Goods Manufacturer Leverages Big Data

A large durable goods manufacturer and remanufacturer needed to
better predict the maintenance and refurbishment requirements for
their expensive capital goods. Each unit had hundreds of sensors for
equipment that often ran nonstop. To leverage this big data, they
needed predictive data analytics capability and condition-based
rather than time-based maintenance. They acquired an organization
with strong predictive analytics capabilities. They used this to tap into
the wealth of data their units were already generating, even
analyzing the data in real time. Visibility was extended to supply
chain parts and supplies to reveal the life cycle of these parts from
orders to delivery, including costs by facility and business unit.

Transformation Process Road Map

Four major steps and a number of substeps are shown as a guide to
running a transformation process. A detailed road map with a Gantt
chart view can be downloaded.

Here is a short version of a transformation process road map:

1. Create the rationale and urgency for supply chain

transformation.

Recognize the need for transformation, develop or acquire

transformational leadership, build support, and educate
stakeholders and teams.

Understand organizational and supply chain strategy.

Carefully define the problem to be solved.

Develop key team roles: evangelist, active executive

sponsor, core steering team, and design team.

Use value propositions, frameworks, maturity models,

supply chain capability models, and tools that enable a
detailed analysis of value streams and the desired
conceptual process for each supply chain in the to-be
strategy.

2. Prepare for supply chain transformation.

Develop a project portfolio charter and hold a kickoff.

 Scan the market for transformation drivers, including market
changes, technological advancements, and societal
environment (social imperatives such as sustainability)
versus task environment (all external stakeholders).

Assess the supply chain current state, analyze gaps, and

do maturity assessments.

Develop a new set of metrics for both as-is and to-be

measurement, map as-is processes, and model/analyze
alternatives.

Identify transformation initiatives, collect data, and set

priorities.

Create portfolio plans (e.g., resources, governance), a

project portfolio road map, and a detailed business case
that aligns with corporate strategy and presents estimated
project budgets.

Draft execution plans and prioritize projects in the portfolio.

3. Execute the supply chain transformation.

Tailor and roll out change management, communications,

and training.
 Engage stakeholders throughout the transformation
process.

Decompose supply chain value streams and create detailed

to-be process maps.

Conduct pilot projects.

Implement individual projects: charter, design, pilot, test,

and deploy.

Scale up to enterprisewide solutions.

4. Review the supply chain transformation.

Reassess transformation maturity, evaluate results, and

provide feedback and lessons learned.

Sustain improvements, implement corrective actions, and

identify future initiatives.

Note that in addition to this road map, you can download a

spreadsheet from our Resource Center that contains a more detailed
version of this transformation process road map. The spreadsheet
includes a mockup of a Gantt chart for a rapid transformation
portfolio. Note that this sample schedule is just an example to give a
general idea of how long each step might take, which steps might be
performed concurrently, and which may need to be sequential.
Individual transformations will have differences in their schedules,
but developing and adhering to a compressed schedule is a key
transformation goal.
Topic 6: Supply Chain Transformation
Leadership and Culture
Here we address ideal transformation leadership skills and the
transformational leadership style, plus the need to understand
organizational culture.

Supply Chain Transformation Leadership

Skills
Transformation leadership skills include communication; integrity;
political awareness; consulting; collaboration; critical thinking;
business sense and analytical skills; change, conflict, and project
management; negotiation; “fail fast, learn fast”; and tenacity.

Transformation leadership skills include communication; integrity;

political awareness; consulting; collaboration; critical thinking;
business sense and analytical skills; change, conflict, and project
management; negotiation; “fail fast, learn fast”; and tenacity.

Many of these skills involve exercising power. Positive ways to

exercise power include collaborating, coordinating, negotiating,
inspiring, appreciating, or rewarding. These are contrasted with
negative power tactics such as complaining, demanding, bullying,
manipulating, or contesting. One’s leadership style needs to
leverage positive power dynamics and avoid negative tactics.
Negative tactics undermine relationships. Relationship building is
necessary for inspiring something as difficult as change. While
individuals may privately see the need to change, an innovator
needs to realize that few people will openly welcome change.
Everyone will feel anxiety. Many will have prospered in the old ways;
some will fear losing power or position. Those who may prosper will
give only lukewarm support unless they are recruited.

Communication
Communication starts with selling the vision of the bright future of the
organization with its transformed supply chain. Inspiration is
effectively selling hope to others in non-coercive ways. It also
involves setting inspiring standards and inspiring the discipline to
follow those standards. Be passionate about desired results, show
constancy of purpose, and be available and emotionally present.
Ensure that communication is open, regular, and inclusive. Be an
empathic listener (waiting to talk is not listening) and learn how to
“read” people.

Integrity and Political Awareness

Leaders act with integrity by modeling the ethics and transparency
they desire in the culture. They provide the true pros and cons of a
transformation. They do what they say they are going to do. They
show integrity in their organization’s internal politics.

Transformation leaders need to have an awareness of positive and

negative organizational politics. This includes recognizing one’s own
politics and working to foster positive politics (e.g., customers do
matter, respect is required). Being willing to negotiate across
functions or organizations to ensure mutual gain is an important
positive political trait. Understand others’ motivations when they
engage in negative politics. For example, a person who is very
deferential to superiors and condescending to subordinates usually
desires a clear pecking order and considers compassion or
forgiveness to be weaknesses. A genuine leader respects others
and commands respect, dealing with all disrespect in a
comprehensive way.

Consulting
Supply chain professionals in transformation roles need to act as
internal consultants for their organization. For example, they provide
mentoring or coaching as needed to leaders, stakeholders, or teams.
They develop expertise in transformation methodologies such as
SCOR DS or lean and can advise on the benefits and risks of
alternative practices or technologies. They prepare convincing
business cases and strong recommendations. They listen to
feedback and work to find solutions. They accept leadership
decisions with grace—even ones they disagree with—so that they
retain political capital for future needs.

Collaboration
Collaboration skills need to be practiced. Teach team members how
to collaborate by giving them the chance to practice problem-solving
skills. They will build individual and team collaboration skills at the
same time. People need to experience the power of finding solutions
to actual supply chain issues themselves.

Critical Thinking
Transformation leaders need to be thought leaders, meaning that
they are driven to advance the state of the art of supply chain
management. Taking time to engage one’s curiosity and ponder
options requires carving out time from daily activities and fire
fighting. Things like executive retreats may help ensure that this
occurs, but one must also innovate and be creative as a key part of
one’s daily routine. (This is called leader standard work and is
addressed elsewhere.) The idea is to find ways to be more cross-
functional, multidisciplinary, and end-to-end not only in thinking of
solutions to specific problems but also in one’s philosophical views.
Rather than assuming that something is a best practice, try to think
of an even better way. Challenge assumptions. Consider policies,
processes, or heuristics that define better ways to make supply chain
decisions or remove unnecessary complexity from supply chains.

Business Sense and Analytical Skills

Business sense for a supply chain must include the realization that
one cannot double the size of the business and expect to be able to
also double the size and cost of the supply chain. This is an
unsustainable growth model. True breakthroughs are needed for
growth. Analytical skills are related to business sense. While one can
hire great analysts, it is important to have enough understanding of
analytics to judge an analysis on its merits and not have one’s eyes
glaze over. This requires some training as well as hands-on practice.
Business sense also needs to be deep and empathetic. Great
leaders own their operating environment and work hard to
understand the situation and empathize with people’s concerns.

Project Management
Transformation professionals understand the need for project
management at all levels: portfolio management and/or program
management plus project management. They know about different
methodologies and when each should apply. They have skill at
managing projects at their appropriate level (e.g., portfolio
management for transformation leaders, project management for
transformation professionals).
Change Management, Conflict Management, and
Negotiation
Truly listening and understanding people’s perspectives is the key to
change management, conflict management, and negotiation
success, especially when working across functional and
organizational boundaries. Seek to understand before seeking to be
understood. In conflict management or negotiation, use this
understanding to develop solutions that are win-win, meaning that
they satisfy everyone’s needs to the degree possible and can be
lasting solutions that endure. Effective leaders use proven change
management, conflict management, and negotiation methods
consistently. They walk the walk. For example, they show that they
are prepared for change, including by embracing new technologies
and culture shifts.

The mantra to promote change should always be faster, better,

cheaper. Otherwise, changes lose momentum and fail to keep pace
with the rate of external changes.

“Fail Fast, Learn Fast” and Tenacity

A “fail fast, learn fast” philosophy requires personal resilience to can
stay calm in a crisis. Leaders embrace the risk of failure as a price of
innovation. They decide to face facts, learn from a failure, determine
how to improve, make an action plan, and have the courage to try
something else. This is called failing well. Compressing this cycle
requires knowing when to abandon a failure, such as by using
modeling or simulation to determine what courses not to take in the
first place.

While adhering to the fail fast, learn fast mindset, transformation

leaders still need tenacity, meaning that they do not give up on the
transformation when it faces setbacks such as political or change
resistance. They reinforce that the status quo is not working and
inspire discovery of what is working or might work. They create unity
of purpose, urgency, momentum, and results.

Transformational Leadership Style

A transformational leadership style is visionary, and it builds
relationships, positive interactions, and balanced power.
Transformational leaders use charisma and authenticity and value
different forms of intelligence.

There are a number of leadership styles, such as the coaching style

(consensus building and more of a thinking manager) or the
traditional manager (consensus and doing more than thinking). Note
that no one style is the best and great leaders adopt the best style
for the situation. A transformation situation calls for a visionary style
(high in individual decision making and thinking). A visionary inspires
followers with a big idea and uses information to get others on board.

Closely related to the visionary style is a relationship leadership style

called transformational leadership. A transformational leader is one
who values relationship building, positive interactions, and balancing
power between leaders and followers. Such leaders are influential
but not coercive or manipulative. They treat each individual as
important. They foster a positive working environment and model
high moral and ethical standards. Transformational leaders must
exhibit charisma to be able to positively influence stakeholders, to
get them enthusiastic and determined to see a change through, and
to be engaging so followers start thinking creatively.

While leaders should work to improve upon their strengths and

mitigate their weaknesses, they should also work to be authentic,
meaning that they listen to their inner conscience when making
decisions, especially in taking a stand on controversial issues. They
stand for something. Authenticity requires honesty and integrity.

Transformational leaders need to understand that there are different

forms of intelligence that they can apply or appreciate in others:

Intellectual intelligence is the ability to reason, solve problems,

learn from experience, and recall information.
 Emotional intelligence is the ability to recognize the influence of
one’s own or others’ emotions, empathize with others, and self-
manage emotions.

Social intelligence is understanding social cues, power

dynamics, and how to maintain relationships.

Adaptive intelligence is seeing things as shades of gray,

balancing individual and group interests, persevering despite
uncertainty or poorly defined problems, and working in situations
with no best answer or solution while still endeavoring to find
good enough results that are sustainable in the short and long
term.

One’s position of authority is insufficient to get others to follow you.

To maximize the impact of one’s inspiration, a transformational
leader needs to earn followers by being trustworthy, modest, able to
admit mistakes, and so on. In addition, one must have the ability to
organize others to actually get things done.

It is important to be a leader and not a laggard. From a

transformation perspective, this means always preferring to get more
savings faster rather than less savings later. This seems intuitive, but
many leaders take actions that slow down schedules and reduce
savings because they do not see the value in integrated supply
chains and use negative power behaviors such as seeming to
already have all of the answers. Some laggard behavior is codified in
organizational bureaucracy (approvals, investigations, and
consultations prior to any decisions or action), and some of this may
need to change (while retaining critical checks and balances). Key
team roles need to avoid laggards; when they are needed as
stakeholders, educating them and inspiring them on the value of
supply chain transformation is the way to get their support.

Understand Organizational Culture to Enable

Transformation
Great leaders embody a culture that can be a competitive
advantage. Innovation culture needs to be fostered in at least part of
the organization. A quick culture assessment tool and Hofstede’s
cultural dimensions are covered.

A great culture can be a significant competitive advantage. A great

leader projects the culture they want to see; rather than directing a
culture, be the culture. Model your ethics and govern others’ ethics,
including by holding supply chain partners accountable for things like
labor practices. Determine the purpose of your culture and set
values to drive that purpose. If empowerment is a value, for
example, transfer some leadership to teams so they feel a sense of
responsibility for the results. Inspire persons to have the courage to
be more cross-functional and cross-organizational.
A transformation requires an innovation culture similar to that of a
start-up company so that people are encouraged to experiment and
take risks and then fail fast, learn fast. However, not everyone needs
to share this culture. Elsewhere we discuss the idea of having an
organizational subculture that is entrepreneurial while other parts of
the culture remain more traditional and keep the current business
operating.

However, even limited culture change is slow and may not succeed
at all without significant change management. Therefore, it is
important to understand the current organizational culture even as
you work to improve it. In Transforming Supply Chains, Gattorna and
Ellis present a culture assessment tool that can be used to give a
high-level idea of culture. In this tool, the idea is to indicate what
percentage of the culture falls into each of four quadrants created by
internal versus external focus and indirect versus direct control.
Exhibit 1-28 shows an approximation of this tool.

Exhibit 1-28: Quick Culture Assessment Tool

Internally Focused Externally Focused

Indirect Team-focused culture that is good Entrepreneurial culture that

Control at cooperating in harmony, being innovates well, copes well with
internally cohesive, and creating change, is flexible, and promotes
synergy. growth.
Percentage: _______ Percentage: _______
 Internally Focused Externally Focused

Direct Control Hierarchical culture that promotes Results-oriented culture that

stability and control by promoting operates rationally by setting
standardized systems and objectives and channeling energy
measures. into action.
Percentage: _______ Percentage: ______

Another aspect of culture that needs to be understood is national

culture. Geert Hofstede’s dimensions of culture show the contrasting
values within each aspect of national culture:

Power distance. A high power distance culture has more

separation of the average person from power and equality; a low
power distance culture has more equality.

Individualism/collectivism. In an individualistic culture, ties are

loose and self-reliance is valued. A collectivistic culture has
strong, cohesive groups in which protection is exchanged for
loyalty to the group.

Uncertainty avoidance. A high uncertainty avoidance culture

cannot tolerate deviant people or ideas; rules are set. Low
uncertainty avoidance has tolerance, self-control, and fewer
rules.

Masculine/feminine. A masculine culture is ambitious,

polarizing, and achievement-oriented; a feminine culture favors
nurturing and consensus building.
 Long-term/short-term orientation. A long-term orientation
emphasizes thrift and perseverance; relationships are ordered
by status and values. A short-term orientation values social
traditions and social obligations and being respected;
reciprocation of greetings, favors, and gifts is expected.

Key Team Roles

Key transformation team roles include evangelist, active executive
sponsor, core steering team, and program director and design team.

A transformation process will not move forward without developing a

critical mass of organizational support. The following roles are critical
to gaining this support on transformation projects: evangelist, active
executive sponsor, core steering team, and program director and
design team. Note that the names of these roles may differ.

Evangelist
The first role that needs to be filled in a transformation is an
executive role that champions the transformation and builds support
and a sense of urgency for the change—the evangelist. This person
needs to be a credible expert and be able to communicate well in
both formal presentations and one-on-one. The evangelist should
have the leadership skills and transformational leadership style
already discussed. This is a self-appointed role or it could be
appointed by the chief executive officer, but a volunteer is preferred.
The best candidate should have:

Financial understanding and accountability, meaning that the

person is knowledgeable about financial statements (the impact
of changes in costs, revenues, and assets) and is able to tell the
story behind the numbers, defend business cases
(recommendations and justification), and motivate people to
achieve financial targets.

An integrated measurement model mindset so that they can

help goals cascade up to strategy and down to daily goals
where the work actually gets done.

An organizational learning mindset that values communication

and team learning.

Job experience in different positions related to orchestrate, plan,

source, transform, order, fulfill, or return, including expertise with
key organizational practices (e.g., sales and operations
planning, lean, six sigma, cross-docking).

Project management, process mapping, metrics models (e.g.,

SCOR DS), and business case development training and
experience.
 Teaching and coaching talent, such as adjusting teaching to the
audience and their current level of understanding, using real-
world anecdotes to set context, and using humor when needed
to provide comic relief or dispel tension.

One-on-one conversations help people to buy in individually, which

will lay the groundwork needed to make the case to the larger
audience. A good place to start is to get the chief financial officer
(CFO) on board. This is because this role is typically already aligned
with the concept of supply chain excellence driving costs and has a
good understanding of how supply chain metrics affect the
organization’s overall performance.

Active Executive Sponsor

The active executive sponsor has the authority to approve or reject a
transformation business case and portfolio charter. This person is
accountable for success or failure and so will review plans and
recommended changes. In addition, the active executive sponsor
acts as a facilitator, removing blockers, backing up the evangelist in
selling the transformation, and preparing the organization for
change. The chief executive officer (CEO) could fill this role; it should
be someone with authority over the directors of the functions that
make up the supply chain so that business resources can be
integrated and internal politics can be mitigated. It is vital that this
role have or be educated and sold on the concept of the supply
chain as a process that needs to be larger than any one functional
area, that supply chains need sufficient complexity but not more, and
that strategy, design, people, organizational structure, process, and
technology are interconnected perspectives.

During the transformation, the active executive sponsor needs to

encourage the evangelist to get more done faster, for example, by
creating and enforcing aggressive deadlines. During review of
benchmarking, process maps, and metrics, the sponsor needs to be
actively engaged, learning the logic used to make decisions so that
they can accept or reject the results of the analysis on its merits as a
defined opportunity. During supply chain design, they regularly meet
with the design team leader to learn about progress, assumptions,
and the scope and priority of initiatives.

Core Steering Team

The core steering team is composed of executives who are at similar
levels of authority and are responsible for areas of the supply chain
that need to transform. While this team may need to include
members who are resistant to the change, the core of the team can
be hand-selected to improve the chances of success. Ideal members
are those who are willing to assign resources from their own teams,
who have built cross-functional or cross-organizational relationships
successfully, are champions of organizational and supply chain
alignment, have organizational knowledge depth related to
processes and prior change initiatives (without being too
pessimistic), are open to ideas from outside the organization (instead
of falling prey to the “not invented here” syndrome), and can cope
well with uncertainty.

Coping well with uncertainty is a key aspect of moving away from a

silo mentality to a systems view. This is because if one can see the
interactions of processes, one can look at inputs and outputs and
make sense of a complex system rather than trying to have certainty
by considering only what one can control oneself.

Once the team is formed, it should set ground rules such as to use
clarifying dialogue and critique prior to rendering an opinion and
saving opinions for true decision points. There should be a process
for how agreements will be reached.

Portfolio/Program Director and Design Team

The portfolio or program director may be the evangelist or another
individual. This person should have extensive portfolio/program and
project management experience.

The design team is responsible for analyzing supply chain gaps and
making change recommendations. Individuals need expertise in the
design process and supply chain elements. The best members will
have problem-solving experience, task discipline, compatible
personalities, and access to data.

Problem-solving experience could take the form of six sigma

black belts (and some green belts) and experience in tools (e.g.,
value stream mapping) or data analytics.

Task discipline is vital because failure to complete or participate

in earlier design steps makes it very hard to catch up and
understand the next step.

Compatible personalities represent a balance between various

perspectives. One perspective is the facts versus feelings
continuum (data and reasoning versus feelings and human
factors). Others include details versus vision (bottom up or top
down), introvert versus extrovert (internal thoughts versus
thinking out loud), and low versus high organization (loose
versus organized). A good balance can prevent problems such
as all extroverted leaders who can sell but can’t present the
details needed to get things approved or paralysis by analysis,
in which a team can plan forever but can’t sell
recommendations.

Team members will need to know how to extract data from their
systems such as how to execute queries. They also need the
right access management privileges, meaning they have the
role-based authority to conduct at least read-only queries in
specific areas. The team as a whole should have most of the
areas covered.
Section B: Value Proposition,
Methodologies, and
Organizational Design
This section covers tools and frameworks to leverage in a
transformation, the customer value proposition, the business context,
and organizational design.

After completing this section, students will be able to

Develop supply chain transformation value propositions from

various perspectives, including customers, suppliers, service
providers, intermediaries, and the supply chain network

Explore and recommend research models, frameworks, and

benchmarking tools such as the balanced scorecard, Supply
Chain Operations Reference Digital Standard (SCOR DS),
SCOR Racetrack, SCORmark benchmarking, GRI metrics, ISO
standards, APQC supply chain planning benchmarks, and
others

Explore and recommend cost and service optimization road

maps or selected tools from them, including from lean, six
 sigma, the theory of constraints, total quality management,
agile, and various forms of project management

Develop a business context summary

Understand organizational design, including types, sizes,

structure, hierarchy, talent alignment, collaboration methods,
and performance management models.

The section presents early steps in the transformation:

understanding supply chain transformation drivers from various
stakeholder perspectives; understanding organizational design;
determining which models, frameworks, benchmarking tools, and
cost/service optimization road maps to leverage in the
transformation; and developing a business context summary.
Topic 1: Understand Value
Propositions and Value Chains
Here we discuss customer value propositions, value to other supply
chain parties, the value of tools such as SCOR DS, value chain
analysis, and understanding one’s supply chain network, nodes, and
interconnectivity.

Customer Value Propositions and Other

Value
A value proposition describes the competitive value the business
and the supply chain are providing to each major customer or
segment. Operational customer segments have different value
propositions.

A customer value proposition is a description of the competitive

value the business and the supply chain are providing to each major
customer or customer segment. A value proposition is like a mission
statement for how the organization will fulfill customer segment
expectations. The customer value proposition needs to solve the
customer’s supply problems so the total package of resources,
process, practices, and price is effective, simple, and affordable.
Any new practice for the supply chain must pass the value
proposition test. The customer value proposition helps decide what
not to do because it would not be valued (e.g., over-engineered
products and supply chains). The process of discovering customer
value propositions can lead to the discovery of game-changing
customer requirements that may require significant new capabilities,
such as the use of mobile device apps to control devices, the need
for environmentally friendly packaging, or a need for direct home or
same-day delivery.

Given customer needs, one can then work backward to determine

outbound flow, then internal operations, then inbound flow, and then
necessary supplier capabilities. This is opposed to developing
strategy from suppliers to internal operations to customers, which
makes the customer an afterthought.

Each customer segment needs its own value proposition. Note that
these are not marketing customer segments (e.g., demographics-
based), nor should they be overly generalized. A segment such as
all retailers could hide retailers with very different needs. These are
operationalized customer segments, meaning that the segment is
defined by its supply chain requirements. Here are examples with
value propositions:
 Low-cost strategy customers. A lean supply chain that results
in lowest price while delivering reliably, on time, in full, with
consistent quality and no surprises.

Customer with high demand variability. An agile supply chain

that is capable of timely response to volume or product changes
by featuring flexible capacity.

Project-driven customers (e.g., construction industry).

Delivery to site neither early nor late, in full, and with full
compliance with specifications; engineer-to-order in short
enough lead time to meet project deadlines.

Customer-supplier long-term collaboration segment. Mutual

gain by providing consistent quality, pricing, delivery timing, and
supply (dedicated capacity enabled by information sharing);
shared insights; cooperative strategy, tactics (e.g., shared cost
savings), and operations (e.g., collaborative planning,
forecasting, and replenishment).

Customers needing innovative or emergency capacity. New

types of capacity developed rapidly; innovative solutions to
problems proposed and designed.

The customer’s customer should also be considered. Here are some

generic areas for value propositions:
 Attractive product (quality, features, technology, durability) and
service surround (lead time, flexibility, reliability) at a price the
customer segment finds valuable

Customer segment’s ease of doing business in areas of

ordering, order inquiries/tracking, payments, delivery quoting
accuracy, order confirmation, after-sales service, returns, or
freight claims

Transparency of omni-channel

Warranties and guarantees

Packaging

Sustainability, end-of-life returns, supplier ethics, societal value

When crafting value propositions, it is important that they should be

measurable so you can determine if you are meeting goals. Note
that there a difference between customer expectations and customer
perceptions. Expectations can be found by interviewing or surveying
customers. The ability to meet these expectations can be measured.
Customer perceptions are more subjective and hard to quantify.
Tools such as quality function deployment (QFD) can be used to help
make customer wants and needs into requirements by producing a
house of quality. A key output of QFD is the voice of the customer
(VOC). These tools are discussed elsewhere.
The concept of a value proposition can be extended to other parties
and to tools.

Value Propositions for Suppliers

Suppliers are often the focus of cost-cutting initiatives. Taking time to
understand supplier expectations and their operating models can
help make any savings be less fleeting. Start by segmenting
suppliers based on their capabilities in engagement, assistance
(e.g., available capacity), collaboration, or performance. The value
proposition can be to commit to judging each supplier on the core
competencies you selected them for rather than, say, evaluating an
innovative supplier based on low cost.

For example, an e-commerce organization’s value proposition to the

vendors on its site could be to provide an ever-growing number of
customers to its own site, which increases the likelihood of a vendor
making a sale. If its economies of scale and supply chain excellence
lead to lower costs that are passed on to consumers, this will
increase customer satisfaction and lead to sales growth. As more
vendors join, this results in greater selection for the e-commerce site,
reinforcing customer satisfaction.

As your supplier’s customer, you may also provide value to them in

terms of information sharing and ease of doing business. For
example, the organization could offer electronic data interchange
(EDI) and advanced shipping notices (ASNs) to suppliers with bar-
coded labels and RFID (radio frequency identification) tags. The
value is that their goods will be received without delay or errors and
they receive their payment on time.

Value Propositions for Service Providers or Other

Intermediaries
Service providers and other intermediaries will have a value
proposition for working with you, and, much like suppliers, it is
important to judge them and provide performance incentives to them
based on what you value in them. A third- or fourth-party logistics
provider (3PL or 4PL), for example, will only innovate on your behalf
or provide insights into your business if you reward this behavior. A
commitment can also be made to internal intermediaries, for
example, being committed to collaborating on working capital
improvements with finance.

Value Propositions for Enabling Methodologies and

Tools
The enabling methodologies and tools used in the transformation
should have their own value propositions that answer the question:
Why should we use these methods or tools? The lean value
proposition includes eliminating waste in all its forms, including
making only what is actually being demanded. The value proposition
of SCOR DS is that it can help transform a supply chain from a linear
supply chain into an orchestrated supply chain. This includes raising
the maturity level to the orchestrated supply chain level. SCOR DS
also helps create end-to-end visibility and helps people see that the
supply chain is more of a network of never-ending processes. (See
Exhibit 1-29.) Its social and environmental performance metrics can
also help transform linear supply chains into circular supply chains in
terms of sustainability, waste avoidance, and good employee and
community relations.

Exhibit 1-29: SCOR DS Helps Transform Linear Supply Chains into

Orchestrated Supply Chains

Value Chain Analysis and High-Level Current

State Mapping
The value chain is a way of understanding how one activity in the
chain can affect the costs of another. Prior to engaging in network
optimization, it is vital to understand the current state of your supply
chain network.
A supply chain network can offer strategic value in the following
areas:

Reducing operating costs through efficiency, favorable terms

from suppliers, etc.

Increasing revenues by increasing customer loyalty or providing

differentiated or value-added supply chain services

Increasing innovation or time to market with strong collaborative

relationships, fast production ramp-up, and on-schedule
production

Improving long-term equity

The value chain is a way of understanding how one activity in the

chain can affect the costs of another. By analyzing connections, an
organization can find ways to improve costs and competitive power
without damaging quality and long-term profitability.

A value chain is defined in the ASCM Supply Chain Dictionary, 17th

edition, as “the functions within a company that add value to the
goods or services that the organization sells to customers and for
which it receives payment.” The term was coined by Michael Porter
in The Competitive Advantage.
The internal value chain (see Exhibit 1-30) consists of primary and
support activities, which are influenced by strategic drivers. Support
activities need to help the primary activities become more efficient
and more effective at creating competitive advantage. In addition to
the support activities listed, technological development, research and
development, organizational infrastructure, financing, and
procurement are also support activities.

Exhibit 1-30: Internal Value Chain

One way to extend the internal value chain is to extend the scope of
supply chain transformation, such as to product and service design
and new product introduction. For example, SCOR DS has a design-
centric extension called the Design Chain Operations Reference
(DCOR) model that includes processes and metrics for this support
activity. SCOR DS also has a Customer Chain Operations Reference
(CCOR) extension that addresses sales and marketing support
activities and a Product Lifecycle Chain Operations Reference
(PLCOR) model to support the product life cycle. Another option is to
use methodologies such as design for supply chain or design for
everything.

Another practical way to transform the value chain is to use the

balanced scorecard to define goals that are broader than the supply
chain and then create a transformation portfolio that includes
projects to increase things like innovation or learning and growth in
both primary and support activities.

The organization’s internal value chain is usually only one part of a

larger value chain system that includes the value chains of the
organization’s trading partners—in other words—its supply chain.
This is expressed in the Dictionary’s definition of value chain
analysis:

An examination of all links a company uses to produce and

deliver its products and services, starting from the
origination point and continuing through delivery to the final
customer.

The process of value chain analysis is as follows:

1. Create a process map for value chain activities for a single
product category or product family. Start with primary activities
(which may already be done as part of transformation mapping)
and then add secondary activities. Repeat this process
separately for each major product category or product family.
Tools such as DCOR and CCOR can be used to standardize
processes.

2. Calculate the value of each primary and secondary activity and

its cost. Challenge assumptions about value by asking whether
the material quality, feature, direct transformation process, or
support service satisfies a specific customer need. Another
question to ask is whether the element helps increase business
volume or turnover or provides tangible network synergies.
Finally, ask whether this same benefit might be provided in a
different way (more efficiently/less cost)?

3. Seek opportunities for competitive advantage based on one’s

strategy and selected KPIs for the strategy. It is important to
analyze opportunities relative to one’s strategy. If differentiation
is vital to the strategy, what areas of the value chain provide the
most differentiation? We will show in this course how to set KPIs
for a supply chain based on customer operational requirements,
such as for responsiveness or agility. Value chain analysis can
use this same process.
The trading partners and the organization need to work together to
provide value to customers. Each added cost should add value.
Partner activities that add cost but less value need to be improved by
making strong root cause recommendations.

Understanding Your Supply Chain Network and Nodes

Prior to engaging in network optimization, it is vital to understand the
current state of your supply chain network and nodes. The nodes are
the suppliers, warehouses, production facilities, and various
customer echelons. The network is how the nodes are
interconnected: transportation modes and information connections. A
network will also have decoupling points where supply is decoupled
from demand (e.g., inventory storage is a buffer against supply-
demand mismatches). Map these out in terms of where they are and
how much inventory is stored at each node. This can help in
rationalizing where these points should be located. Also, each buffer
location should be considered as a potential junction point for
switching between distinct supply chains.

Value stream mapping is an important lean tool for value chain

analysis. It can be used to identify the value-added and non-value-
added portions of a process so that the latter can be reduced or
eliminated. This tool is discussed elsewhere.
For example, our case study organization, Sample, Inc., has mapped
out its supply chain network and nodes, focusing on its suppliers and
its warehouses, as shown in Exhibit 1-31. Warehouses also perform
repackaging operations. The main warehouses also co-locate a local
sales office to improve coordination of sales and supply chain
operations teams.

Exhibit 1-31: Sample, Inc., Petroleum and Chemical Product Case

Study—Warehouses and Suppliers

In this early stage, a high-level understanding of the cost of this

network should be gained for later benchmarking purposes. This
includes the cost of the nodes as well as transportation costs
between nodes in the aggregate. Cost trends should be determined,
and obvious problems such as transportation costs growing faster
than other expenses should be noted. Areas of high efficiency can
also be noted as models to study and replicate.

There may be challenges with gathering and cleansing the vast

amount of data on networks and nodes needed for the analysis. If
so, prioritize cleansing and formatting so that later data analysis will
be faster and better able to find an optimal solution to the number of
nodes and links to have in the network, where they should be, and
their size. Network study can be a foundational project on its own.

Interconnectivity
Interconnectivity is created by supply chain partners’ supply chain
information systems technologies, including enterprise resource
planning (ERP), advanced planning and scheduling systems (APS),
warehouse and transportation management systems (WMS and
TMS), point-of-sale (POS) systems, and so on. Understanding
interconnectivity requires mapping out these systems at a high level,
including how they interface with other systems. Note any partner
integration rules that are in place and levels of compliance. Note any
bottlenecks (format disconnects or manual steps). It is important at
this point not to start thinking of new technology solutions to add.
One must first determine desired capabilities and then reverse-
engineer technology enablers.
A key benefit of better interconnectivity between supply chain parties
and nodes is that it can replace inventory with information.
Information on actual demand is shared up the supply chain and
forecasts are replaced by pull signals further upstream, greatly
reducing the bullwhip effect (a situation in which variability at the
customer source is magnified at each step backward through the
chain when each party forecasts based only on their immediate
customers’ ordering patterns, promotions are not communicated,
etc.). Better interconnectivity also provides these benefits:

Each party in the chain will discover which types of data are
providing real benefit and which are just extra noise that is
confusing analysis.

Interconnectivity can automate the product design feedback

loop, for better quality.

Resources can be better used and unwanted redundancy can

be eliminated.
Topic 2: Research Models,
Frameworks, and Benchmarking
Tools
Here we discuss research models, frameworks, and benchmarking
tools, including the balanced scorecard, SCOR DS, SCOR
Racetrack, ISO standards, SCORmark, and the APQC supply
planning benchmarks.

Drive Performance with Models,

Frameworks, and Benchmarking
Deciding on what to measure is hard in complex supply chains.
Standards make it easier to gain agreement and reduce the chance
for cherry picking of data. Some models require membership or
consulting engagements.

The concept that only what can be measured can be managed is a

common business principle. However, supply chain complexity
makes it hard to agree on what should be measured and what
metrics to use. Another challenge is to ensure that you not only
measure but also manage performance. The former provides only
visibility; the latter provides control. Research models, frameworks,
and benchmarking tools can provide standards to help people agree
on what to measure, how to measure it, how to put it in context (what
benchmarks), how to set targets, and how to control results.

Standards make the metrics and their definitions or the benchmarks

consistent across participating organizations. Integrated metrics
frameworks (KPI trees) help get to root causes. Metrics definitions
help you and your partners get to the detail level, such as what costs
or elements to include for a given metric. This is a critical area
needing partner agreement. For example, a tire distributor committed
to one-day on-time delivery and defined it as the percentage of tires
received in one day of the customer order. Their metrics showed that
they were doing very well, but customers were not happy. Delving
into the discrepancy revealed that their order fulfillment staff did not
count an order as having been placed until they verified that the tire
was in stock or in transit to their DC. Also, they just assumed that an
order out for delivery was also received on time. Conversely,
customers started their metric as soon as they placed their order and
didn’t stop it until the item was actually received. In other words, staff
were cherry picking what data to include in the metric by excluding
backorders or late deliveries. Carefully defining the metric makes
such data manipulation much harder.

Important models or frameworks that are discussed elsewhere in this

course include the:
 Digital Capabilities Model (DCM) for Supply Networks

Capabilities Maturity Model Integration (CMMI)

ASCM Enterprise Certification for Sustainability.

Some frameworks require membership or a consulting engagement:

The Digital Supply Chain Institute (DSCI) has developed a

digital supply chain transformation guide for a framework they
call the Frontside Flip, meaning a focus on customers and
revenue. It contains a set of KPIs in an integrated framework
that is available only to DSCI members.

Gattorna Alignment, a consulting firm, has developed the

Dynamic AlignmentTM framework that is available to clients.
Gattorna and Ellis wrote about it in Transforming Supply Chains,
and this is one of the core references for this course.

Below we address some common frameworks.

Balanced Scorecard
The balanced scorecard balances financial metrics with customer
value, business process, and innovation and learning perspectives.
Each category has metrics and targets. Lower-level scorecards
cascade down the KPI tree.
Global metrics at the organizational or business unit strategy level
should be comprehensive enough to address the whole strategy
while staying at a high level so they are useful for decision making
and strategy monitoring, control, and alignment. The selection of
strategic KPIs can be supported by a balanced scorecard, defined
in the ASCM Supply Chain Dictionary, 17th edition, as follows:

A list of financial and operational measurements used to

evaluate organizational or supply chain performance. The
dimensions of the balanced scorecard might include
customer perspective, business process perspective,
financial perspective, and innovation and learning
perspectives. It formally connects overall objectives,
strategies, and measurements. Each dimension has goals
and measurements.

The authors of The Balanced Scorecard and The Strategy-Focused

Organization, Kaplan and Norton, believe that a sole focus on
financial results leads to short-term management at the expense of
long-term goals, so they added three other perspectives. (They also
developed strategy maps, as discussed elsewhere.) While
organizations can customize the categories, here are the traditional
categories:
 Customer value. How does the customer define satisfactory
and exceptional service? What actions in operations affect the
customer’s satisfaction?

Business process. What do we need to do to be efficient and

continually improve?

Financial performance. What do investors expect, and how

can operations affect those expectations? What are the financial
implications for longer-term initiatives such as those in the other
three perspectives?

Innovation and learning (organizational capacity). What

competencies do we need to be innovative or sustainable or to
improve our culture so that we can maintain our competitive
advantage? Can we improve employee satisfaction?

The scorecard is a simple tool listing KPIs from an integrated

measurement model to enable cascading scorecards down to lower
levels (including to things like supplier performance). Each KPI has a
goal, a metric, one or more targets (good, better, best), and an actual
result for a given time period or set of periods.

Exhibit 1-32 provides an abridged example of a balanced scorecard

developed to measure the performance of our Sample, Inc., case
study. (The metrics are from SCOR DS.)
 Exhibit 1-32: Balanced Scorecard Example for Sample, Inc.,
Petroleum and Chemical Products
Goal Measure Target Actual

Customer Perspective

Meet customer delivery Percentage of orders 99% 98%

promises. delivered in full to customer

Meet customer quality Customer order perfect 99% 97%

expectations. condition

Business Process Perspective

Improve responsiveness to Order fulfillment cycle time 2 days 6 days

distributors.

Assuring quality failure Perfect return order 95% 75%

condition of returned items. fulfillment

Financial Perspective

Streamline cash availability. Cash-to-cash cycle time 0 days 52 days

Maximize supply chain Total supply chain <8.0% of 9.1% of

efficiency. management cost revenue revenue

Innovation and Learning Perspective

Quickly react to demand Supply chain agility 30 days 60 days

increases/decreases.

Keep staff highly trained. Training 80 hours 50 hours

These perspectives look inside and outside—at customers or

shareholders as well as employees. They consider the organization’s
present and future needs (capabilities).

SCOR DS
The Supply Chain Operations Reference Digital Standard (SCOR
DS) features seven major processes with levels 0 through4 (the
fourth level is custom) and a KPI tree with levels 1 through 3. The
model includes performance, processes, practices, and people.

The Supply Chain Operations Reference Model (SCOR) has been in

use by a wide range of organizations since its introduction in 1996.
The Supply Chain Council created it, and in 2014 this council
merged with ASCM (formerly APICS). In 2022, SCOR received a
major consensus-driven update to represent a wider range of
organizations. If you are familiar with the model, note that there are
now many differences, including new metrics and codes for metrics.
It is now called the SCOR Digital Standard (SCOR DS). Anyone who
has registered on www.ascm.org can access this model for free.

The ultimate purpose of SCOR DS is to design supply chains that

focus on satisfying customer demand.

Exhibit 1-33 shows that SCOR DS has seven major management

processes arranged in two infinity loops to show that these
processes are never-ending.
Exhibit 1-33: SCOR DS Major Management Processes Form Never-
Ending Cycle

This process framework can be used for business process

improvement (to capture the as-is and to-be states), performance
benchmarking, best practice analysis (practices and technologies
that result in significantly better performance and help organizations
start out at least even with competitors), and organizational design
(assessing skills and staffing needs and aligning this information to
internal targets).

Exhibit 1-34 shows how SCOR DS has levels 0 through 4 in its

process model. Level 0 is orchestrate. The other six major processes
are at level 1 of the hierarchy. Levels 2 and 3 are defined in the
model, but level 4 is not. Organizations define this level, and possibly
even lower levels, using industry-, organization-, and location-
specific processes.
Exhibit 1-34: SCOR DS Hierarchical Process Model with Levels 0–4

SCOR DS has a scope of all customer interactions from order entry

to paid invoice, from the suppliers’ supplier to the customer’s
customer. Sales, marketing, product development, and research and
development are out of scope.

SCOR DS has four major sections that are all interrelated to help
define the overall processes in a way that aligns with key business
functions and goals. These are:

Performance. Start here to understand the model. Performance

attributes are characteristics used to describe a strategy. Each
attribute has one or more defined metrics at levels 1 through 3
in a KPI tree that measure the ability of processes to achieve
the strategic objectives of the performance attribute. Each
lower-level metric serves as a diagnostic for the higher-level
metric. Performance metrics help translate business strategy
into supply chain strategy, benchmark against similar supply
chains or internal targets, and identify and monitor processes
that are the likely cause of performance gaps.

Processes. Processes are standard descriptions of

management processes and relationships. These help capture
the consensus view of the as-is (what we do and how we do it),
the what-if (scenarios), and the to-be (what will we do, where
and how will we do it) states of processes.

Practices. Practices are a unique way to configure a process or

set of processes based on special skills, automation, software,
process sequence, or process integration. Practices that the
organization believes will result in significantly better process
performance can be added to transformation wish lists or be
considered when conducting analysis of alternatives. Other
practices might be blacklisted. All practices are now called best
practices (single category); organizations decide whether or not
a practice is valuable. First, the practice must apply to the
industry and the business. After narrowing them down to viable
alternatives, the organization may plot practices on a risk/return
prioritization matrix (see Exhibit 1-35) and select some low
effort/high return practices because they are quick wins but also
some high effort/high return elements as sponsor issues. They
may avoid practices that have low returns unless they are
deemed necessary. Organizations can also benchmark which
supply chains are using which practices in an effort to expand
some practices to the entire organization. Practices are
categorized by these pillars:

Analytics and technology (e.g., BP.049 Lean Planning)

Process (e.g., BP.009 Kanban)

Organization (e.g., BP.160 Lean)

Exhibit 1-35: Prioritization Matrix for Selecting Practices to

Consider in Transformation
People. This area helps align staff and staffing needs to internal
targets by providing standard skill definitions and standardized
skill maturity levels to assess skills and performance needs.
Organizations define the needed skill level of a role as they see
fit. Competency levels are defined as follows:

Novice—New to the field or activity; a novice is task-

oriented and needs standard/written procedures.

Beginner—Has not mastered work skills, is task-oriented,

and has limited “situational perception.”

Competent—Goal-oriented and has enough skill do tasks

and set priorities but is still task-oriented; needs an
analytical system for decision making.

Proficient—Sees holistic situation and uses it to set

priorities and act from personal knowledge and conviction;
decision making is now intuitive but problem recognition still
requires measuring rather than intuition.

Expert—Intuitive understanding of the situation and what is

possible, able to highlight key points or extend related
experience to master new situations; both decision making
and problem recognition are intuitive.
While the major processes themselves are not metrics, each has
one or more level 1 metrics. The full set and their codes are listed in
Exhibit 1-36. Note how each metric starts with a two-letter code
followed by a level and unique identifier. For example, RL 2.4 is a
level 2 reliability metric.

Exhibit 1-36: SCOR Level 1 Metrics in Three Categories of

Performance Attributes
Performance Attributes Definition

Resilience Reliability (RL) Perfect Customer Order Fulfillment (RL.1.1)

Perfect Supplier Order Fulfillment (RL.1.2)
Perfect Return Order Fulfillment (RL.1.3)

Responsiveness (RS) Customer Order Fulfillment Cycle Time

(RS.1.1)

Agility (AG) Supply Chain Agility (AG.1.1)

Economic Costs (CO) Total Supply Chain Management Cost

(CO.1.1)
Cost of Goods Sold (COGS) (CO.1.2)

Profit (PR) Earnings Before Interest and Taxes (EBIT)

as a Percent of Revenue (PR.1.1)
Effective Tax Rate (PR.1.2)

Assets (AM) Cash-to-Cash Cycle Time (AM.1.1)

Return on Fixed Assets (AM.1.2)
Return on Working Capital (AM.1.3)

Sustainability Environmental (EV) Materials Used (EV.1.1)

Energy Consumed (EV.1.2)
Water Consumed (EV.1.3)
GHG Emissions (EV1.4)
Waste Generated (EV.1.5)
 Performance Attributes Definition

Social (SC) Diversity and Inclusion (SC.1.1)

Wage Level (SC.1.2)
Training (SC.1.3)

Learning How to Use SCOR DS for Transformations

To learn more about SCOR DS, start with the SCOR DS website
(www.scor.ascm.org). Take the “Free SCOR Course” online tutorial
and read the “Introduction to SCOR” document. Then become even
more familiar by navigating through the site, starting with the
Performance area.

Performance
On the Performance tab, click an area such as the Resilience drop-
down, and from there click one of the level 1 resilience metrics, such
as RL.1.1 Perfect Customer Order Fulfillment. Read the definition,
calculation, data collection, and discussion areas. For the RL.1.1
calculation, note how it says “an order is perfect if the individual line
items making up that order are all perfect.” Review the
subcomponent bullets that refer to RL.2.1 to 2.4. Each of these
subcomponents needs to be perfect for the overall order to be
perfect. The logic is described: “Each component receives a score of
1 if it is judged to be perfect. Otherwise it receives a score of zero. If
the sum of the scores equals the number of components (in this
case, four), the order line is perfectly filled.” Note how this logic
allows for other forms of perfection to be defined and included as
custom components.

Also listed in a hierarchy area for a given metric are its level 2
metrics. Each metric has processes and practices that use it. Click
one of the level 2 metrics, for example, RL.2.4 Customer Order
Perfect Condition. Read this metric’s information. In the hierarchy
area, click one of the level 3 metrics, such as RL.3.11 Customer
Orders Delivered Damage Free Conformance. Note how at level 3
you are taken to a running list of reliability level 3 metrics. See how
RL.3.11 has three potential fulfill processes that could be used to
provide the data for this metric.

After browsing through as many metrics and their subsets as

desired, it is time to move on to the Processes area.

Processes
On the Processes tab, click one of the processes in the double
infinity symbol graphic, such as Plan. Read the description. Note
how level 2 processes for Plan are now listed below the graphic.
Click one of these processes, such as P1 Plan Supply Chain.
Review the information provided for this process, and then click one
of its level 3 processes, such as P1.1 Capture External Market
Signals. Read the definition and review the metrics and practices
associated with this process. Scroll down to see the workflow
(flowchart) for this process. The workflow for P1.1 is shown in Exhibit
1-37. Note how the process in question is shown with one or more
input processes (OE1.3 here) and one or more output processes
(P1.2 here). Also shown are the workflow elements such as market
data or market insights.

Exhibit 1-37: SCOR DS Workflow for P1.1 Capture External Market

Signals

Workflows such as these can help when designing as-is, what-if, and
to-be process maps by showing common ways these processes
interact. Viewing this workflow for each upstream and downstream
process can provide a solid starting point for mapping a larger
process. Let’s try it. Click P1.2 in the navigation sidebar and scroll
down to view these workflows. Note how this workflow has many
more potential inputs, including inputs related to make-to-stock,
make-to-order, and engineer-to-order as well as one input that is
listed as Other (Outside Framework). During supply chain process
design, the design team can select the process options that apply to
this process or develop their own processes.
Now lets look at the input to P1.1. Navigate to OE1.3. (Click
Orchestrate in the processes graphic, scroll down, and click OE1
Supply Chain Strategy to find this process in the sidebar on the right,
or use the search feature.) See how this process also has inputs, but
one input is simply called External Data, meaning that the process
relies on external inputs such as market data from market scanning.

Review more processes and their workflows as desired. Let’s see

how to work with Practices next.

Practices
On the Practices tab, read the introduction. Then click best practices
by category and review the categories. Click one of the drop-down
arrows to see practices in a given category. For example, click
Inventory Management in the left sidebar, and then click BP.009
Kanban. Read the definition. Note how this is a brief discussion of
the practice. Actually implementing this practice will require use of
outside resources such as textbooks, instructor-led training courses
to provide the necessary people skills (or hiring), plus perhaps new
software or software configurations.

Review the related processes where the practice might be applied.

Scroll down to the metrics area and review the metrics that can be
used to measure the relative success of the process. Further down,
note the people section. Here are related people skills for the kanban
practice.

Now click best practices by pillar and note that this is an additional
way to find practices one might consider. Also, click the search tab.
Note how search results are divided among processes, performance,
people, and practices. Click practices, and then enter a practice you
are searching for, such as kanban. This is another way to find a
practice. If you searched for kanban, note how it also shows up on
the people subset. Click the people subset to see what is listed:
HE.0139 Kanban System. This is a related experience a person
might need. Let’s explore the People tab next.

People
On the People tab, read the introduction. Note how it has subsets of
skills (the “capacity to deliver pre-determined results with minimal
input of time and energy”), experiences (“knowledge or ability
acquired by observing or participating in various real-life situations”),
and training (which “develops a skill or type of behavior through
instruction”). Also review the five competency levels, and then click
the subtabs for skills, experiences, and training and scroll through
what is there. Click one skill and review its definition and related
processes, experiences, training, and practices. These areas plus
the search engine are useful for finding a specific skill and so on.
Another good way to use the People and Practices areas is to go
back to the processes. Determine the process that needs to be
understood or designed, and then see what practices and people
elements may be needed for that process. For example, click the
Processes tab, click Plan in the graphic, and then click P1 Plan
Supply Chain. Click P1.1 Capture External Market Signals. Note that
one practice is BP.156 Collaborative Planning, Forecasting, and
Replenishment (CPFR) and that one people skill is HS.0048
Forecasting. These may be practices and skills to consider for this
process. Click HS.0048. Read the definition and review the
processes to which it might apply. Also scroll down and review the
experiences and training that may be needed for forecasting
capability development.

SCOR Racetrack
SCOR Racetrack is a model for defining the major phases of a
transformation using SCOR DS. Looking at Exhibit 1-38, it is easy to
see how its major steps are compatible with the process road map
presented in this course.
 Exhibit 1-38: SCOR Racetrack

A racetrack metaphor implies that change is now a marathon: Once

one lap is done, it is time to start the next. The model also contains a
more detailed road map with outcomes, milestones, tools,
techniques, templates, and a time frame. The time frame suggests
six days for step 1 (engage), three days for step 2 (define), 12 days
for step 3 (analyze), and six days for step 4 (plan), with step 5 being
a separate proposal. Note that these materials discuss SCOR
Racetrack steps 1 and 2 in Module 1, steps 3 and 4 primarily in
Module 2, and step 5 primarily in Module 3. This course’s Module 4
addresses reflecting on the transformation, which is implied by the
circular nature of this model.

ISO Standards
ISO provides internationally recognized voluntary standards
developed using consensus.

ISO (the International Organization for Standardization) provides an

internationally recognized and broad set of standards. ISO
certification is voluntary, but, if it is obtained, it must be renewed
every three years to remain valid. Whether an organization achieves
ISO registration (becomes certified) or merely implements and
maintains ISO compliance, the results will be of benefit in supply
chain management.

ISO has thousands of standards, many of which are detailed and

industry-specific, such as technology interoperability standards.
These could have a place on specific projects. In addition, there are
a number of broad, universally applicable standards that can be
leveraged to improve the maturity of the organization in a
transformation:

ISO 9000 series: Quality management

ISO 14000 series: Environmental management

ISO 22301: Security and resilience—business continuity

management systems

ISO 22316: Security and resilience—organizational resilience

ISO 26000 series: Guidance on social responsibility

 ISO 27001: Information security, cybersecurity, and privacy
protection

ISO 28000 series: Security and resilience—security

management systems

ISO 31000 series: Risk management

Benchmarking Tools
SCORmark and the APQC supply chain planning benchmarks are
examples of benchmarking services offered by organizations.

Here we address SCORmark and the APQC’s supply chain planning

benchmarks.

SCORmark
SCORmark is a PriceWaterhouseCoopers (PwC) benchmarking tool
offered through ASCM Corporate Development that uses SCOR DS
metrics based on PwC’s data set of over 1,000 organizations and
2,000 supply chains. It allows comparison against relevant industry
vertical organizations for calculating the opportunity value of
improvement. Exhibit 1-39 shows a mockup of a level 1 report for the
Sample, Inc., petroleum and chemical products case study. Level 2
reports are also provided with executive summaries and graphics
such as bar charts and a value proposition for improvement. Note
how the organization decides whether it will work to be superior (pick
one), advantage (pick two or three), or parity (the rest) relative to
competitors. This tool is revisited elsewhere in the course to show
how it is used in a transformation.

Exhibit 1-39: Example of Level 1 SCORmark Report for Sample,

Inc., Case Study

APQC Supply Chain Planning Benchmarks

The American Productivity and Quality Center (APQC) is a
benchmarking organization that provides supply chain planning
benchmarking for members. The APQC’s supply chain planning
benchmarks include a rapid assessment and open standards
benchmarking. There may be a fee for some assessments for
nonmembers and certain membership levels. Metrics areas include
forecast accuracy, inventory, cash-to-cash cycle time, stockouts,
backorders, shipping forecast error, order cycle time in days,
customer retention rate, inventory carrying cost, and others.
Organizations fill out an Excel-based data collection tool and a
survey. The report is an Excel file that has columns comparable to
what was shown for SCORmark, but it also has categories for
industry peers, revenue range peers, and regional peers.
Topic 3: Explore Cost and Service
Optimization Road Maps
Here we discuss cost and service optimization road maps, including
lean, six sigma, the theory of constraints (TOC), total quality
management (TQM), agile operations, and various forms of project
management.

Cost and Service Optimization Road Maps

Cost and service optimization road maps can help organizations
thrive, but many organizations have failed due to the significance of
these changes. It is important to satisfy prerequisites and
foundational must-do’s.

The cost and service optimization road maps discussed in this topic
have helped organizations thrive. However, many other
organizations have tried and failed at these initiatives due to the
same risks that affect transformations: resistance to change,
incomplete funding or commitment, and so on. These tools require
culture change, a sense of urgency, and extensive training.

There may be prerequisites and foundational must-do’s to implement

these systems, or they may represent building blocks for a
transformation. For example, implementing lean may require
replacing batch or intermittent manufacturing with flow
manufacturing. Likewise, agile operations require lean capability.
Moving to a resilient supply chain requires lean and agile
capabilities. Similarly, six sigma or total quality management may be
prerequisites to enable transformation.

Lean
Lean minimizes resource use. The house of lean has a foundation
(standardization and operational stability), two pillars (just in time
and jidoka), a center (respect for people and continuous
improvement), and a roof (lean goals).

Taiichi Onho developed lean at Toyota. The house of lean (Exhibit 1-

40) is a metaphor of a house with a space within (a culture). In other
words, to get the benefits of lean, see the big picture and fully
integrate its components. When a lean system is running on takt
time (releasing supply based on the rate of demand), just-in-time
delivery of supplies is critical to keep inventory very low.
 Exhibit 1-40: House of Lean

Next we discuss the roof, the center, and the foundational levels of
this house concept.

House of Lean Roof: Eliminate Waste

The roof of the house of lean lists lean goals: Focus on the customer
to produce only what is wanted in the best quality, at the lowest cost,
and in the shortest lead time possible by eliminating waste in all of its
forms.

If work is defined as motion that creates value, then motion that

creates no value is not work, it is waste. Waste is any activity that is
not value-added, and its root cause is often unevenness, variability,
or overburdened processes or persons.

Value is defined by internal and external customers. Determine who

the customers are and then what they value. One test is to ask if
they would be willing to pay more to ensure that it is included. No
one would pay more for long wait times. Separate the result from the
process. For example, customers value quality but do not care how it
is achieved. Thus, inspection is waste in lean because the final work
should be perfect.

Workers and managers need to work to eliminate the eight wastes:

processing, movement (transportation), methods (motion), product
defects, waiting time, overproduction, excess inventory, and unused
people skills. Lean identifies waste in regular continuous
improvement sessions (kaizen) and with vital lean techniques
defined in the ASCM Supply Chain Dictionary, 17th edition:

Gemba: The place where humans create value or the real

workplace. Gemba also is a philosophy: “Go to the actual
place; see the actual work.”

Genchi genbutsu: A Japanese phrase meaning to visit the

shop floor to observe what is occurring.
Listen to workers and then redesign or eliminate processes, steps,
policies, or plans so that everything left is value-added, improving
cost, lead times, and quality.

House of Lean Center: Culture of Involvement and

Continuous Improvement
A house of lean is a culture of continuous improvement with a high
degree of respect for people, in terms of both designing processes
so they are safe and maintaining and improving morale. Workers are
valued assets. Give workers real responsibility for quality, set high
expectations but be fair, invest in training, and empower workers.

House of Lean Foundation: Standardization and

Operational Stability
The foundation of lean includes standardization and operational
stability. Leveling product mix, standardized work, reducing
variability, not overburdening processes or employees, and kaizen
will keep work from being in a constant state of emergency.

Standardized work includes standardizing processes (less to learn)

or using parts that are common to more than one product. Two lean
tools help with stability:

Total productive maintenance (TPM) is operator-oriented

preventive maintenance. Preventive is the key word here to
prevent costly line shutdowns.
 The five Ss are sort, simplify, scrub, standardize, and sustain.

Poka-Yoke (Mistake-Proofing)
Poka-yoke can design quality into the product or related production
process. The Dictionary defines poka-yoke (mistake-proof) as
follows (abridged).

Mistake-proofing techniques...designed in a way to prevent

an error from resulting in a product defect. For example, in
an assembly operation, if each correct part is not used, a
sensing device detects that a part was unused and shuts
down the operation.

The goal of a poka-yoke solution is to prevent defects by eliminating

the source of errors once they are discovered. Poka-yoke prevents
the same error from repeating.

Value Stream Mapping and Waste Walks

Value stream mapping can be applied to many types of continuous
or breakthrough improvements and is defined in the Dictionary as
follows:

A lean production tool to visually understand the flow of

materials from supplier to customer that includes the
current process and flow as well as the value-added and
non-value-added time of all the process steps. It is used to
 help reduce waste, decrease flow time, and make the
process flow more efficient and effective.

Value stream mapping visualizes the flow of the value stream. The
top of the map contains information flow, the middle the material
flow, and the bottom the process data plus a time line that
differentiates between value-added lead time (processing time) and
non-value-added lead time (wait and move times). The goal is to
reduce non-value-added lead times by producing an as-is (Exhibit 1-
41) and a to-be map (Exhibit 1-42). This is an example of improving
milk runs and is restricted in scope to the eight-hour shift of a driver
(shown by the dotted vertical lines).

Exhibit 1-41: Value Stream Mapping As-Is State

 Exhibit 1-42: Value Stream Mapping To-Be State

The following explains some of the symbols used in these exhibits.

Value stream mapping can improve inventories, cycle times, and

throughput.

Waste Walks
A waste walk is a backward review of a value stream map while
timing each step to find more waste. Moving backward makes
people think about each step more. It can involve observations or
interviews. Categorize forms of waste and brainstorm.

Pull Systems
In a pull system, demand is matched to supply to produce only what
customers use. An asynchronous pull system has no timing
associated with product routing; it replenishes the part just supplied.
A synchronous pull system controls the velocity of the process flow
using takt time for systemwide lead-time reduction. This requires
standardizing operation times, fine-tuning batch sizes, and using
visual signals.

Visual Management
Visual management has been widely adopted. Here are some
examples:

Visual workplace. Everything needed is visible to the worker

and supervisor. Visual feedback is timely, concise, and focused
on tasks the worker can control.

Visual management triangle. See as a group (e.g., status),

know as a group (e.g., commitments), and act as a group
(consensus on rules, involvement).
 Clean workplace. A place for everything and everything in its
place.

Visual system. Visual indicators or signals to locate tools,

prompt an action, or limit behavior to the correct responses only.

Visual communication. For example, A3 problem solving lists

a problem and builds consensus for a solution on one page.

Visual workplace reporting. Obvious, frequent reports enable

self-correction.

Six Sigma
Six sigma works to improve quality and customer satisfaction by
reducing process variation. It must start from the highest levels of the
organization but involves employees at all levels. DMAIC is a six
sigma improvement process.

The ASCM Supply Chain Dictionary, 17th edition, defines six sigma
as follows:

A methodology that furnishes tools for the improvement of

business processes. The intent is to decrease process
variation and improve product quality.

Many organizations implement six sigma and lean together to focus

on both problem solving and process improvement. The Dictionary
defines lean six sigma as follows:

A methodology that combines the improvement concepts

of lean and six sigma. It uses the seven wastes of lean and
the define, measure, analyze, improve, control (DMAIC)
process from six sigma and awards recognition of
competence through judo-style belts.

Six Sigma Objectives and Methodology

The objectives of six sigma are to provide high customer satisfaction
and low product return rates by systematically reducing variation to
very low levels, as expressed in the Dictionary definition of six
sigma quality:

The six sigma approach is a set of concepts and practices

that focuses on reducing variability in processes and
reducing deficiencies in the product. Important elements
are (1) producing only 3.4 defects for every 1 million
opportunities or operations and (2) process improvement
initiatives striving for six sigma-level performance. Six
sigma is a business process that permits organizations to
improve bottom-line performance by creating and
monitoring business activities to reduce waste and
resource requirements while increasing customer
satisfaction.
An opportunity for error could be a failure of any specification. The
level of precision that is feasible may vary by industry. The point is to
ruthlessly eliminate root causes.

Like lean, six sigma is initiated at the top and involves and
empowers employees at all levels. Middle managers translate
executive goals and guidelines into process goals and performance
measures. Six sigma includes the following major concepts:

Begin with the customer’s needs in mind.

Variation is the cause of defects.

The output of any process is a function of its inputs.

Six Sigma Process and Tools

The six sigma continuous improvement process has five phases,
known by the initials of the phases as DMAIC: Define, Measure,
Analyze, Improve, Control. The phases are described in the
Dictionary as follows.

Phase 1 (Define): Determine the nature of the problem.

Phase 2 (Measure): Measure existing performance, and

commence recording data and facts that offer information about
the underlying causes of the problem.
 Phase 3 (Analyze): Study the information to determine the root
causes of the problem.

Phase 4 (Improve): Improve the process by effecting solutions

to the problem.

Phase 5 (Control): Monitor the process until the solutions

become ingrained.

This process is the key way to translate the six sigma philosophy into
results. It can be used as a stand-alone tool. Teams use this
methodology to examine their supply chains for issues and then look
for the root causes to seek lasting improvements. Because of its
statistical basis, six sigma analysis depends heavily upon thorough,
reliable, measurable data.

Theory of Constraints (TOC)

In the theory of constraints, a constraint is identified, it is exploited,
things are subordinated to it, it is elevated, and then the next
constraint is identified. A drum/buffer/rope metaphor pulls production
per the beat of demand.

The theory of constraints (TOC), by Eliyahu M. Goldratt, has a

premise that any system, such as a supply chain, has at least one
element that limits its maximum output. The constraint determines
maximum output; improving it enables the system as a whole to
have higher throughput. The ASCM Supply Chain Dictionary, 17th
edition, defines a constraint as “any element or factor that prevents
a system from achieving a higher level of performance with respect
to its goal.” An element can be any part of a system, including
people, equipment, a process, a facility, or even a way of thinking.

Five-Step TOC Process

Applying TOC as a method of continuous improvement requires five
repeatable steps:

1. Identify the constraint. A typical indicator of a constraint is

excessive work in queue from poorly trained employees, a poor
process, or unreliable equipment.

2. Exploit the constraint. Before investing heavily in process

improvement, “exploit” the constraint. Achieve the maximum
output possible without major changes.

3. Subordinate other processes to the constraint. Once the

constraining element is operating at maximum efficiency, adjust
subordinate processes to operate at the new speed. Focus on
before the constraint. Keep buffers ahead of the constraint.

4. Elevate the constraint. If exploiting the constraint and adjusting

subordinate processes is satisfactory, go to Step 5. If output still
 can’t meet customer demand, then invest in more significant
process or resource improvements.

5. Repeat the cycle. Start over. There is always at least one

constraint in a system.

Drum/Buffer/Rope
Explanations of TOC sometimes refer to the pace set for the
constraint as a drum, because it determines the system’s speed like
a drummer’s beat. It is based on the maximum rate of that constraint
(but not to exceed takt time [the rate of customer demand]).

The Dictionary defines a buffer in part as follows: “In theory of

constraints, buffers can be time or material, and they support
throughput and/or due date performance.”

The “rope” is the scheduler that pulls orders through the system to
meet customer demand by scheduling the parts of the process that
occur before the constraint.

Total Quality Management

Quality is defined by customer requirements and perceptions. Total
quality management seeks long-term success using champions,
measurement, involvement, empowerment, and customer focus
(including internal customers).
The ASCM Supply Chain Dictionary, 17th edition, defines total
quality management (TQM) as follows (abridged):

TQM is a management approach to long-term success

through customer satisfaction. TQM is based on the
participation of all members of an organization in improving
processes, goods, services, and the culture in which they
work.

The Dictionary defines quality as follows:

Conformance to requirements or fitness for use. Quality

can be defined through five principal approaches: (1)
Transcendent quality is an ideal and a condition of
excellence. (2) Product-based quality is based on a
product attribute. (3) User-based quality is fitness for use.
(4) Manufacturing-based quality is conformance to
requirements. (5) Value-based quality is the degree of
excellence at an acceptable price. Also, quality has two
major components: (1) quality of conformance, which is
quality defined by the absence of defects, and (2) quality of
design, which is quality measured by the degree of
customer satisfaction with a product’s characteristics and
features.
Quality is defined by customer requirements and perceptions.
Customer requirements are shaped primarily by quality of design
and fitness for use (solving a customer’s actual needs).
Conformance to requirements is in the sphere of control of
manufacturing. Customer perceptions are not entirely controllable
(e.g., competitor actions) but are partly based on quality of
conformance (past service failures).

Core Concepts of TQM

The primary objective of total quality management is to ensure the
organization’s long-term success through customer satisfaction,
including meeting all required product and service specifications.
Another objective of TQM is to ensure that variation is minimized (tall
and narrow bell curves).

The following are core concepts of TQM:

Management needs an absolute commitment to TQM,

championing it and including it in strategy, mission, vision,
culture, and daily routine. Management needs patience to see
results.

TQM is evidence-based and relies heavily on performance

measurement.
 TQM is everyone’s responsibility. Do your job well but also
improve your job. Cross-train employees in quality and root
cause analysis.

Quality initiatives are executed by self-motivated cross-

functional employee teams. They think of finance, etc., as
internal customers (value chain).

Quality is a source of competitive advantage. It is not an added

value; it is essential. Employees are the most important
resource for improving quality.

Quality is foundational. In the sand cone theory, proposed by Meyer

and Ferdows and referenced in Operations Strategy, quality is the
foundation for operational priorities, and then dependability, speed,
flexibility, and finally cost are added. Imagine a stable pile of sand in
a cone, with each new layer expanding the base, as shown in Exhibit
1-43. Each layer represents cumulative rather than sequential
resources and management effort. Sustainable cost reduction must
leverage prior areas.
 Exhibit 1-43: Sand Cone Theory

Root Cause Analysis

According to the Dictionary, root cause analysis is “analytical
methods to determine the core problem(s) of an organization,
process, product, market, and so forth.”

The steps to conduct a root cause analysis are as follows:

1. Describe the problem (including internal and external data

analysis).

2. Establish cause categories.

3. Identify specific potential causes.

4. Prioritize the causes.

Root cause analysis can take many forms, but in general it requires
developing critical thinking skills and asking lots of questions rather
than assuming. It may involve brainstorming. Another example is to
go through a simple set of questions to cover all the possibilities, for
example, the five Ws and two Hs or DMAIC. Also, the five whys are
frequently associated with root cause analysis. This involves asking
why five consecutive times after each answer is determined. Only
after answering the fifth why is the root cause considered to be
found.

Agile Supply Chains

Agile supply chains are able to respond quickly to unpredictable
changes in customer needs.

Supply chain agility is a level 1 SCOR DS metric that can be

measured at the strategic or operational level. Basically, it means,
despite last-minute notice, producing just what is needed without
inventory or cost penalties, all while minimizing risk.

The ASCM Supply Chain Dictionary, 17th edition, defines agile

supply chain (also sometimes referred to as agile manufacturing)
as “the ability to respond quickly to unpredictable changes in
customer needs by reconfiguring operations.”

Agile supply chains flex the output of supply to match demand

responsively, responding to new customer requirements quickly
without loss of profitability. When lead times are short, agile makes
just the required inventory with little risk of oversupply. While agility is
needed in many industries, it is a top strategic priority if
 Demand and product requirements are unstable and
unpredictable.

Product life cycles are very short.

Inventory becomes obsolete quickly.

Customers expect the latest product, especially when buying

direct.

Agile systems require strong supply chain collaboration:

Data sharing between echelons to move the push-pull frontier

back

Pull systems triggered by automated sharing of point-of-sale

data

Multi-echelon inventory visibility

Agile systems have the following logistics characteristics:

Minimal finished goods inventory

Minimal lead times by design whenever feasible

Direct factory delivery to customer when possible

Agile systems have the following manufacturing characteristics:

Collaborative production planning across echelons

 High levels of work-in-process (WIP) inventory held for
finalization (manufacturing postponement)

Light manufacturing or geographic postponement within

distribution

The Dictionary defines postponement as

a product design or supply chain strategy that deliberately

delays final differentiation of a product (assembly,
production, packaging, tagging, etc.) until the latest
possible time in the process. This shifts product
differentiation closer to the consumer to reduce the
anticipatory risk of producing the wrong product. The
practice eliminates excess finished goods in the supply
chain. This strategy is sometimes referred to as delayed
differentiation.

Portfolio, Program, and Project Management

Transformation requires portfolio or program management. Individual
projects are implemented using project management. The selection
of traditional versus agile project management is important.

Projects can be organized into portfolios and programs. A portfolio is

a collection of programs, projects, and operations that are managed
together to meet strategic goals. A program is a collection of projects
or other activities that are managed together to provide synergy. An
organization may use one or both of these levels. Like projects,
portfolios and programs need a charter. Unlike projects, portfolio or
program management is typically managed at a higher level due to
its strategic nature.

Projects guided by standards such as those defined in A Guide to

the Project Management Body of Knowledge, or PMBOK® Guide
(Project Management Institute [PMI]) are more likely to succeed.
PMI’s portfolio management standards can also be leveraged.

It is important to select the right type of project management for the

project and the team’s maturity: traditional or agile, plus a specific
methodology. Regardless of the type, projects need clear
assignment of responsibilities:

All projects need to have a formal charter signed by authorized

executives that appoints a project manager or equivalent;
formally approves the use of funds and resources up to a limit;
sets forth high-level time lines, risks, tradeoffs, and
assumptions; and has SMART criteria for determining success.
This document should be brief, such as one page. It is vital to
educate stakeholders on the importance of a charter. It forces
stakeholders to come to a consensus on the scope of the
 project (sometimes painful but necessary) and to commit to
resourcing it.

One or more executives should champion or sponsor the

project.

Teams must be lean and effective. Verify availability. Full-time

participation is best. Verify part-time participation hours with the
person’s functional manager.

Other stakeholders also need clear roles using a RACI matrix,

discussed elsewhere.

Exhibit 1-44 emphasizes the importance of stakeholder

communications. The dotted line shows how part-time team
members must keep supervisors informed. A kickoff meeting
formalizes roles, generates enthusiasm, and ensures ongoing
communication.

Exhibit 1-44: Project Manager and Communication

The team as a unit needs to become high-functioning. Psychologist
Bruce Tuckman proposed that teams evolve in stages, per Exhibit 1-
45.

Exhibit 1-45: Tuckman Ladder of Team Development

Traditional Project Management

Projects with complex requirements that can be frozen early may
select traditional (predictive) project management to control project
costs and deadlines. The phases—from initiating, to planning, to
execution, to closing—are mostly sequential but use what the
PMBOK Guide calls progressive elaboration (a feedback loop that
adds detail and precision). Planning is critical to success, as Exhibit
1-46 shows.
 Exhibit 1-46: Project Costs by Phase

Included in the project plan are the critical project baselines:

Scope baseline. Objectives and deliverables must align with

the customer’s statement of work. The scope baseline includes
a work breakdown structure (WBS). If work is not on the WBS, it
is out of scope.

Project schedule. A schedule should have phases and go/no-

go decision points. Gantt charts should show what can be done
sequentially versus in parallel.

Project budget. The budget includes direct and indirect costs,

project reserve funds the project manger can use, and
management-approved reserve funds.

The project manager will monitor and control against these

baselines. Regular and reliable reports are vital. Projects get off
schedule/budget one day or one dollar at a time. The project
manager ends assignments and contracts to control project costs.
Work requested after formal customer acceptance will require a new
contract. The project manager avoids scope creep or gold plating
(unplanned growth in project scope) and insists on additional funds
or schedule from the change control board if the scope is expanded.

Agile Project Management

Projects that involve technologies such as software or that require
prototypes may have a high degree of variability and may require
customer-driven changes at all stages, even late in the project. This
way the project can be responsive to competitor actions, to prototype
feedback, and so on. For such projects, an agile project
methodology is best. Agile methods use intense customer
participation, regular iteration with planning just for that iteration, and
regular reprioritization. Because agile methods can turn innovation
into results quickly (e.g., releasing a minimum viable product [MVP]
before adding features), they are ideal for transformation. Agile might
be used at the transformation portfolio/program level regardless of
how individual projects are run.

Scrum, one agile method, is a rugby term that implies that the team
needs to move forward as a unit by letting various members take the
lead. Scrum kanban boards show work-in-process cards in status
columns and a backlog for prioritization.

The team meets on a regular basis. They meet to plan the next
sprint or iteration, they meet on a daily basis to discuss progress and
blockers (a daily standup), and they meet to periodically reflect and
improve (a retrospective). A product owner who represents the
needs of the customer should be in all these meetings. The scrum
master (project manager) removes blockers and keeps teams
focused on current work before starting too many new things.

Risk Management and Supply Chain Security

Methodologies
Orchestrated supply chain maturity levels need proper risk
management.

Exhibit 1-47 shows how a stage 5 orchestrated supply chain maturity

level adds resilience and supply chain security. To get to this level,
the organization may need to leverage standards in these areas.
Transformations may also introduce new risks related to greater
connectedness, and security becomes a key enabler of partner trust.
 Exhibit 1-47: Stage 5 Orchestrated Supply Chain Is Resilient and
Secure

Risk Management
Due to the financial and business consequences of supply chain
disruptions, transformation programs may need to ensure that risk
management maturity is high enough to meet resilience goals and
the organization’s risk appetite. Review the existing risk
management framework for continued appropriateness. ISO 31000
is a good standard to recommend if needed, due to its wide
international acceptance. Risk management can be supplemented
with risk analysis tools such as failure mode and effect analysis
(FMEA), event tree analysis (ETA), process mapping, process
decomposition, or brainstorming. Also ensure that risk treatment
options are appropriate to the organization’s risk tolerance and
provide more benefit than they cost. Business continuity plans
increase risk management maturity, and tools in this area include
business impact analysis (BIA). Related metrics include recovery
time objective, recovery point objective, and maximum tolerable
downtime.

Resilient Supply Chains

A resilient supply chain is one that is agile and reliable. A global lean
supply chain can be highly efficient, but it assumes that disruptions
are rare. However, volatility, uncertainty, complexity, and ambiguity
(VUCA) are all increasing rapidly, and robust solutions are needed.
While an organization cannot prepare for unknown risks (e.g., “black
swans”) or even every known risk, they can invest in capabilities that
allow for rapid responses to leading indicators of risks or risk events.
Investing in redundancy or padding safety stocks can reduce risk but
at great cost; investing in fluid and flexible organizations and
networks allows resilience to be affordable and risk-agnostic. For
example, Lenovo foresaw that COVID-19 was a risk and built up
additional raw materials in late 2019 and also leveraged its
diversified manufacturing base to move much of production out of
China in 2020, avoiding serious disruption.

Transforming to a resilient supply chain must start with supply chain

design for resilience. This involves developing small teams that are
versed in response preconditions, have a predetermined response
process, have a clear focus on desired goals, and execute
responses only after related plans have been refined and approved.
Supply Chain Security
Supply chain security requirements can also rely on standards, such
as ISO 27001 for information security management or NIST 800-53
or Cybersecurity Maturity Model Certification (CMMC) for
cybersecurity. Physical security and anti-counterfeit protection can
rely on technologies such as telemetry, radio frequency identification
(RFID), smart cards, or blockchain for chain-of-custody assurance.
Topic 4: Understand Business
Context
Here we discuss the organizational background and internal profiles
needed in a business context summary. We look at organizational
design not only from a business context viewpoint but also from a to-
be state design perspective.

Business Context Summary

A business context summary provides context on strategy and
financial performance along with external and internal profiles. A
business description for the case study is provided here as an
example.

An early project deliverable to be used as a reference during

program development is a business context summary. The ASCM
Supply Chain Dictionary, 17th edition, defines this as follows.

Used in the S: Set the Scope phase of the SCOR

Racetrack to identify and document the business and
establish a high-level view of the competitive landscape.
The summary is composed of a business description,
challenges and opportunities, a value proposition, critical
 issues, risks, financial performance, an internal structure
profile, and an external profile.

The portfolio manager or design team should be able to assemble

readily available information into a business context summary. This
summary will compile data on

The strategic background, addressing organization, business

unit, and supply chain strategy and supply chain segments at a
high level.

The business value proposition. (This is addressed elsewhere.)

Financial performance from annual or quarterly earnings reports

and analyst reports (e.g., from D&B Hoovers, Reuters, or
Forbes).

An internal profile that includes a business description, the

mission, the people, and organizational capabilities.

An external profile that includes market conditions, market

trends, competition, taxes, regulations, technology maturity, and
customer needs.

A best practice is to develop a checklist of the necessary business

context elements specific to your organization that need to be
reviewed and summarized. The process of assembling this summary
can be an opportunity to engage early with stakeholders, ask for
their point of view, and help them feel included from the start.

Next we’ll take a closer look at the information included in the

business context summary.

Strategic Background
The strategic background portion of a business context summary
includes a business description, SWOT analysis results, value
propositions, critical success factors, and critical business issues. An
example is shown.

The strategic background portion of a business context summary

includes a business description, the results of a SWOT analysis, an
organizational value proposition, critical success factors, and critical
business issues.

For the business description, briefly describe the organization, its

business units, and its size in monetary terms and provide a broad
view of the organization’s competitive landscape. There should be
no shortage of sources for this information (quarterly reports,
brochures, white papers, etc.). Here is an example for our case
study organization, Sample, Inc.

Sample, Inc., is a billion-dollar global distributor,

repackager, and manager of private label and generic
products in the petroleum and chemical products industry.
It leverages its global distribution network to serve most
countries in the world. Its product lines include antifreeze
and coolants, brake fluid, cleaners, oils and lubricants, and
transmission fluids. It has three business units: automotive
oil, lubricants (brake fluid, transmission fluid, and other
lubricants), and chemical products (antifreeze, coolants,
and cleaners). Automotive oil represents half of the
business, and the other two lines represent one quarter
each. Each unit has two shared success factors: the
organization’s stringent product quality control testing and
its lasting relationships with suppliers, including DuPont,
BP, Castrol, Chevron, Mobil, Oilco, PetroBras, Sinopec,
and Total. Each business unit has two sales channels:
distribution and bulk. Sample, Inc., maintains inventory on
site with some of its customers, which has reduced the
impact of delivery problems. However, it is contributing to
significant underperformance in its cash-to-cash cycle time
metric.

Its distribution channel represents three-quarters of the

organization’s fulfillment in terms of revenue. This channel
repackages, labels, and distributes high-quality private
label and generic products to a well-developed and long-
 term network of distributors and retailers, including
Walmart, Carrefour, Metro, and S-Mart as well as
aftermarket car care chains such as Auto Bros, AutoZone,
Carfix, Euromaster, Meineke, Midas, NAPA, and Pep Boys.
It leverages its owned fleets of bulk material transportation
vehicles for inbound supply and outbound fleets of delivery
vehicles.

Its bulk distribution channel represents one-quarter of the

organization’s fulfillment in terms of revenue. It distributes
all product lines in bulk to automotive and marine
manufacturers, dealerships, and service shops, leveraging
just its bulk-material vehicles.

The SWOT analysis was addressed earlier as were value

propositions. Note, however, that the business context summary can
include value propositions for each business unit separately or an
overall value proposition for the organization as a whole.

The critical success factors area should focus on a limited number of

the generic performance objectives (speed, dependability, flexibility,
quality, cost) or SCOR DS performance attributes (reliability,
responsibility, agility, costs, profit, assets, environmental, social) that
are strategic priorities. Use specifics. For example, if after-tax profit
needs to be 8 percent or more, state this.
Critical business issues rate how well the organization is doing in
these areas relative to competitors using labels of disadvantage,
parity, advantage, or superior.

Financial Profile and External Profile

For a business context summary, the financial profile lists key data
from the income statement and the balance sheet. It breaks down
gross margin, operating margin, and economic profit. The external
profile lists major customers and suppliers.

Here we discuss financial and external profiles for a business

context summary.

Financial Profile
A business context summary shows the as-is state of the income
statement items of income, cash position, and profitability plus the
balance sheet items of assets (including inventory) and liabilities.
Publicly traded firms can summarize information from financial
analysis sites (e.g., share prices analysis, profit reports, ratios, cash
flows). Profit should be listed in terms of gross margin (revenue less
cost of goods sold as a percentage of total revenue), operating
margin (gross margin less cost of sales and administration), and
economic profit (earnings before interest and taxes, or EBIT). Each
of these profitability views will be helpful in transformation planning.
External Profile
The external profile describes major categories of customers and
suppliers. Since this is a top-level financial summary, for customers,
the revenue reporting groups used by the organization can be used,
since financial data are readily available. Focus on those customers
and suppliers who are likely to have a significant impact on supply
chain design. For suppliers, focus on major supplier categories and
consider listing individual suppliers that represent the bulk of your
spend in the area (e.g., use the Pareto 80/20 rule: the 20 percent of
suppliers who get 80 percent of your spend).

Internal Profile and Internal Transformations

Here we cover internal profiles and internal transformation related to
organizational structure, hierarchy, physical assets, talent
assessment and alignment, collaboration methods, and performance
management.

The internal profile summarizes the organization’s structure,

hierarchy, physical assets, talent assessment and alignment,
collaboration methods, and performance management models. Many
of these areas may require internal transformation.

Organizational Structure and Hierarchy

Functional organizational structures can be centralized (for
consolidating global supply and demand, economies of scale, and
consistent policies), decentralized (for cultural accommodation,
regional supply chain optimization, and autonomy), or a hybrid
(shared services and suppliers, some corporate standards, and
some business unit flexibility). A matrix structure allows dual lines of
control. A network structure (loose, self-organizing teams) can also
be used to create an innovative subculture with an entrepreneurial
spirit. The best model will be the one that best aligns with
organizational strategy and desired culture. While no one way is
best, many organizations have outgrown their current structure and
need a reorganization that saves more money than it costs.
(Complexity increases costs.) Note that this is change with a high
degree of difficulty, and one must realize that any organizational
structure change will involve changes to far more areas than is
usually initially imagined.

When building an internal profile for a business context summary,

the organizational structure can be found on the organization’s
website or in internal documents. This can be a top-level
organizational chart showing how the organization’s major business
units or regional operations interact. For example, Exhibit 1-48
shows our case study organization, which uses a matrix structure. It
shows how the Sample, Inc., regional functions (the Americas,
EMEA [Europe, Middle East, and Africa], and APAC [Asia-Pacific])
report to global functional management as well as to regional
management to ensure that both global and local interests are met.
Each of these areas operates independently, with its own suppliers
and customers, and each has the same business units (oil, lubricant,
and cleaner families) and sales channels (retail distribution and bulk
distribution). They moved to a matrix structure to enable faster
decentralized decisions and better access to shared corporate
processes and technologies. The operations area consists of
production, fulfillment, warehousing, and transportation groups.

Exhibit 1-48: Sample, Inc., Petroleum and Chemical Products Case

Study Organizational Chart

An organization’s hierarchy is how accountability is assigned. The

hierarchy guides the process the organization uses to orchestrate,
plan, manage, and execute to meet its key performance indicators.
Things to note in the hierarchy for an internal profile portion of the
business context summary include noting which transformation
stakeholders are peers. For example, is the chief operating officer at
the same organizational level as the regional general managers? An
executive-level organizational chart that lists executives by name
and title can show this information.

Organizational structure and hierarchy changes may be necessary

for transformation success. Here are a few considerations:

In general, transformations thrive when organizational structures

are flatter, with fewer management levels and a greater span of
control. Multidisciplinary teams, digitized information systems,
expert systems, and decision support systems can allow
decisions to be made at lower levels where the work is
performed.

Demand creation (sales and marketing) should be separate

from demand fulfillment (planning and operations) due to their
differing goals and capabilities. Planning and operations are
best managed together so that things like cost, inventory,
customer service, and availability can be optimized by the same
business team. Forecasting is needed by both groups and is
often an area of contention.
 If a supply chain functional area is desired, list all potential
functions that could optimize supply chain orchestration,
planning, and execution and develop pros and cons for grouping
each area. For example, merchandising might control inventory
and forecasting but may not understand these from a supply
chain perspective. A clear business case showing how the
change will reduce merchandising costs is a start, but expect
resistance to any change in control, so involve these
stakeholders early.

Supply chain leadership should be a strategic function that gets

a seat at the table for strategic clout. To whom should the role
report? If it reports to sales and marketing, there could be a bias
toward service. If it reports to operations, there could be a bias
toward cost and inventory. If it reports to the chief operating
officer (COO) or an equivalent, this can provide balance, but
assess the COO’s supply chain savvy and involvement.

Physical Assets
In the internal profile of a business context summary, list areas of all
operations, including headquarters, production facilities,
warehouses, return locations, service centers, and call centers. Also
list locations for outsourced services. Get information-gathering help
from accounting, purchasing, human resources, or information
technology functional areas.

Talent Assessment and Alignment

In the internal profile of a business context summary, provide a
general characterization of the organization’s talent assessment and
alignment processes for areas critical to the transformation. Indicate
if staff capabilities are a current strength or if there are gaps in hiring
or training processes or in specific roles. Identify gaps early to give
time to include them in planning (e.g., outsource, hire, or train).

During later detailed transformation planning steps, it is important to

show how the program will close any talent gaps that exist. Define
the logical drivers (e.g., business growth, new analytics capabilities)
and key assumptions made for determining headcount requirements
and skill mix. This step occurs after your operationalized supply
chain segments are designed so you can incorporate specific supply
chain competency requirements into recruiting, staffing, and training
plans. For example, if you need the data analytics role of data
scientist, you can create a metric for the number of data scientist
roles in the supply chain and measure/manage to it.

A skill mix will list technical and business skill requirements by role.
For supply chain management roles, also consider the need for
inspirational leadership, a global orientation, systems thinking, and
financial savvy.

When considering new roles for supply chain leaders, consider

adopting leader standard work (LSW), which is a lean concept that
extends standardized work to leadership roles by adding recurring
management practices to daily and weekly routines. These are
differentiated by management level but include time devoted to
gemba (getting out to see the actual work), visual management, one-
on-one meetings, improvement meetings, coaching, and ensuring
that subordinates are also using LSW. Executives have time devoted
to considering strategy.

Collaboration Mechanisms
The internal profile of the business context summary should also
describe the collaboration mechanisms the transformation will use.
Global organizations or multiple organizations working together need
formal methods for connecting, collaborating, and handing off
deliverables and information. This may include a process map or
flowchart of the collaboration process. Roles and how decisions are
made should be clarified using tools such as RACI and RAPID®.

Clarifying roles can be done with a RACI (responsible, accountable,

consult, inform) matrix as shown in Exhibit 1-49. Note that only one
person can be accountable for a given part of a project (i.e.,
accountable for success or failure) but multiple people can be
responsible for executing. Some people, like subject matter experts,
will need to be consulted. Other people, such as executives, just
need to be kept informed.

Exhibit 1-49: RACI Matrix

RAPID® is a tool developed by Bain & Company to clarify how

decisions are made. While the process is more methodical than fast,
it can be faster than never arriving at a decision due to politics or
contention on complex cross-functional or cross-organizational
teams. RAPID is not exactly an acronym because its elements are in
this order: input, recommend, agree, decide, and perform. Like
RACI, team members are assigned to each role. Many persons may
be responsible for inputs, for example, for a benefit-cost analysis.
Person(s) assigned to recommend may be a team lead or a
committee accountable for the related business proposal. The agree
role is a person whose opinion must be considered, such as
someone who is able to assess technical feasibility. The decide role
makes the final decision. The perform role is decided in advance so
responsible persons can promptly implement the work.

Collaboration also needs to be designed into transformation program

communications by aligning talent to roles and getting these roles to
commit to collaborative goals in their target agreements with their
project manager. (Target agreements are mutually set goals for
processes, performance, or outcomes between a person and their
supervisor for use in performance evaluations.) Work to link each
person’s individual objectives to business objectives; this acts as a
motivator. Leaders work to ensure that people also see the big
picture. Reward teamwork rather than rivalry, and celebrate team
wins. A collaborative planning methodology can also help.

Performance Management Models

The internal profile of the business context summary indicates how
performance is managed and success is measured at the
organization. For example, executives could be assessed using KPIs
such as spend under management (SUM) or percent non-value-
added (PNVA) that is eliminated or streamlined. They might also be
assessed on how well they conduct supplier performance
management to ensure timeliness, completeness, quality, innovation,
and so on.
Section C: Drivers of Supply
Chain Transformation
This section explores the need to operationalize customer
segmentation, the need for a culture that can enable rapid change,
plus analytics capabilities, technology enablers, benchmarking, and
business value propositions.

After completing this section, students will be able to

Recognize the customer, culture, and capability drivers of supply

chain segmentation

Understand that transformation requires operationalizing

customer segmentation, meaning that customer segments are
defined by their supply chain requirements

Understand capabilities, and limitations of culture to scope the

transformation, especially by enabling quick wins, rapid
transformation, and innovation

Explore the possibility of building or leveraging an organization’s

rapid transformation network or developing useful organizational
subcultures
 Discover an organization’s current and needed levels of
analytics capabilities

Benchmark performance attributes, customer satisfaction,

efficiency, effectiveness, costs, growth, and transformation
maturity to develop a business value proposition.

In this section, the concept of operationalizing customer

segmentation is explored as a way of segmenting supply chains so
that improvements can focus on what customers actually value in
terms of supply chain capabilities. Rather than relying on marketing
or sales customer segments, determine the supply chain capabilities
customers prioritize and ensure that each supply chain has an order-
winning strategy.

Another key driver is organizational culture. Culture can enable or

derail any transformation effort unless it is deliberately part of
change management. John Kotter argues in Accelerate for building a
rapid transformation network, and John Gattorna and Deborah Ellis
argue in Transforming Supply Chains that a set of organizational
subcultures are needed to create the entrepreneurial spirit required
for big changes. The bureaucracy alone can have trouble with a
transformation, especially a rapid one.

The rest of this section explores analytics capabilities,

benchmarking, and business value propositions.
Topic 1: Customer, Culture, and
Capability Drivers of Supply Chain
Segmentation
Here we cover operationalizing market and customer segmentation,
the impact of culture, and the need to assess organizational
capabilities, including analytics capabilities. The process of supply
chain segmentation is discussed after that.

Operationalizing Market and Customer

Segmentation
Operationalizing market and customer segmentation involves
segmenting customers by their delivery needs and areas where they
are willing to make tradeoffs.

When most business professionals think of market and customer

segmentation, they think of the segments developed by sales and
marketing, such as industry sector, customer type, customer size,
geographic location, or profitability. Such segments are too broad for
transformation. A midsize-retailer category is fine for marketing and
accounting purposes, but one retailer might value lowest-cost
delivery while another values flexibility. Neither will be happy with a
moderate cost and moderate flexibility supply chain. The solution is
to educate stakeholders and the design team on the need for
operationally defined market and customer segments.

Operationalizing market and customer segmentation involves

segmenting customers by their delivery needs and areas where they
are willing to make tradeoffs. In SCOR DS terms, determine
categories of customers who align on the same priorities related to
resilience (reliability, responsiveness, and agility), efficiency (cost,
profit, and assets), and sustainability (environmental and social).
While various combinations of these priorities could result in many
segments, data analytics can help determine your organization’s
biggest categories. Here are some common operational segments
with some potential areas for superior, advantage, and parity levels
of strategic priority relative to the competition, using SCOR DS
performance attributes as an example:

Low-cost-strategy customers. Superior in cost, advantage in

assets and reliability, and parity for other areas.

Customer with high demand variability. Superior in agility,

advantage in responsiveness and reliability, and parity for
efficiency areas.

Project-driven customers (e.g., construction industry).

Superior in reliability, advantage in agility and responsiveness,
and parity in efficiency areas.
 Customer-supplier long-term collaboration segment.
Superior in profit, advantage in reliability and (for example)
sustainability, and parity in other areas.

Customers needing innovative or emergency capacity.

Superior in agility, advantage in responsiveness and assets, and
parity in other areas.

Culture and Capabilities

Culture includes invisible assumptions that create transformation
risk. Capabilities need to be understood and developed. The book
Accelerate argues for a dual operating system.

The ASCM Supply Chain Dictionary, 17th edition, defines corporate

culture (or organizational culture) as follows:

The set of important assumptions that members of the

company share. It is a system of shared values about what
is important and shared beliefs about how the company
works. These common assumptions influence the ways the
company operates.

Culture is a driver of strategic capability when the values and beliefs

match the goals of the organization. The most dangerous aspect of
culture in terms of change difficulty and transformation success risk
are the underlying assumptions per the definition. These are like the
much larger portion of an iceberg that is below the waves and sinks
ships. For example, people may assume that silos are inevitable and
will discount arguments for value stream processes. Another
example is the not-invented-here syndrome, such as ruling out good
ideas just because they come from a consultant. Even a simple idea
like a great name for the transformation program can start building a
productive set of cultural assumptions.

Areas for positive culture development include principles, values,

and behaviors; collaborative behavior; and ability to openly share
ideas and explore them. An important behavior change for
transformations is a bias for quick wins and overall implementation
speed. This can be done by helping people develop guidelines or
heuristics to improve rapid decision making and by providing training
on decision-making processes. People need to learn to break a
problem down into manageable portions while still seeing how it
contributes to the big picture. Rigorous change management is
needed to empower staff in these ways. While it will be difficult
enough to turn a good culture into a great one, turning any type of
negative culture into a positive one is a far more serious problem.

An organization’s capabilities need to be understood so gaps can be

assessed and plans can be made to address them. A given supply
chain that is being designed will require a specific set of capabilities.
These include
 Staff capabilities, such as familiarity with a given customer
segment (knowledge of their operations and how to handle the
relationship) or data analytics

Process capabilities, such as the ability to prioritize more-

valuable customers, to perform a process quickly, or to balance
variable workloads profitably

Information and technology capabilities, such as replenishment

plan sharing

Innovation capabilities, such as for incremental change

(continuous improvement), radical change (entirely new
business models), or rapid change. The organization also needs
to be able to cope with the accelerating rate of change.

It is important that customer segment profitability be taken into

account when considering capabilities. Highly profitable customers
get high service levels. Mid-tiers can be offered some discounts and
some special handling or better cycle times. Low-profit or
unprofitable customers need to be given standard, efficient options
or be made profitable by requiring premiums for additional services.

Building a Rapid Transformation Network

In Accelerate, John P. Kotter spells out a process for timely and agile
strategic change. He argues that traditional organizational structures
are necessary and efficient for running the organization, but they
can’t innovate like an entrepreneurial start-up. Start-ups often use a
network structure, so Kotter argues for a “dual operating system,”
sort of a left-brain logical side and right-brain creative side system.

Top management needs to champion, support, and sustain this

network to give it legitimacy, which is vital because the network is not
part of the hierarchy. Network relationships form spontaneously.
Exhibit 1-50 shows the division of responsibilities.

Exhibit 1-50: Hierarchical Organizational Structure Roles versus

Network Roles
Hierarchical Structure Roles Network Roles

Running day-to-day affairs Innovating, brainstorming, and

championing
Executing extensions of current
strategy Strategic changes that require speed
and agility
Enabling continuous improvement
Creating breakthrough improvement
Focusing on management, metrics,
procedure Focusing more on leadership and
creativity

Kotter sets principles: Recruit from all organizational levels, enlist

volunteers and don’t “volunteer” people, sell people on being part of
a bigger cause, emphasize leadership over management, and share
staff (no payroll increase).
Kotter’s eight accelerators are principles to speed implementation of
a change driver he calls “the big opportunity.” The accelerators are
paraphrased here:

Big opportunity and urgency. Find a big opportunity and

create a sense of urgency around it, getting buy-in and
enthusiasm from many people. People who feel this urgency will
be thinking continually about how to advance the goal.

Guiding coalition as change agents. The first big opportunity

helps form the core of the network. A guiding coalition forms but
will need guidance to understand how a network needs to differ
from a hierarchy (less bureaucracy).

Vision and inspiration. The network forms a vision for the big
opportunity and develops related strategic initiatives, starting
with what inspires the coalition.

Legion of volunteers. The network creates an army of

volunteers vetted for commitment and capability. Kotter
indicates that a network of five to ten percent of the workforce is
sufficient.

Obstacle and duplication avoidance. Members remove

obstacles to ensure rapid progress. They avoid duplications of
effort on the hierarchical side.
 Credibility through wins. The network proves its worth by
creating quick wins as well as bigger wins that have strategic
relevance. The network gains credibility.

Self-sustaining network. The network sustains itself by

recognizing and supporting numerous sub-initiatives, which
provide quick wins.

Institutionalize. Successful initiatives are incorporated into the

organization’s hierarchical structure. The culture supports
change as necessary.

Building Organizational Subcultures

In Transforming Supply Chains, Gattorna and Ellis argue for
developing a set of organizational subcultures. These can include
hierarchical (direct control and internal focus), rational (direct control
and external focus, becoming results-oriented), group (indirect
control and internal focus, working for consensus), and
entrepreneurial (indirect control and external focus) subcultures.
Gattorna and Ellis also argue that the traditional hierarchy should
remain in place to manage functions.

Also, they recommend that a set of subcultures be created to better

serve each identified supply chain customer segment. For example,
for a customer-supplier long-term collaboration segment, the
organization creates a subculture that is biased toward relationship
management capabilities. These subcultures would be part of
dedicated co-located or virtual agile teams, but people might switch
teams for cross-training.

The key benefit of this concept is that not every person in an

organization needs a culture change to get the performance
improvement benefits of a culture change. The main culture does
need to change, but only in ways that enable these small teams to
succeed, meaning that they remove blockers so those teams can get
things done fast.

Analytics Capabilities
Analytics capabilities are important to transformation and mature
supply chains. Data scientist is a higher organizational position than
data analyst. The former uses prescriptive and predictive analytics;
the latter uses descriptive analytics.

Analytics capabilities are hugely in demand by organizations who are

transforming to high levels of supply chain maturity. For large
enough organizations, having a data analytics group is a necessary
aspect of the core business. Analytics capabilities are a prerequisite
for getting any value from newer technologies such as blockchain.
Analytics reveals the true facts and patterns about a situation
regardless of what people are telling themselves. Analytics are
useful for analyzing supply and demand patterns, which in turn help
guide network analysis and capacity planning.

Data analytics is part of a larger discipline called data science. Data

science is a broad field that also includes statistics, probability, data
mining, machine learning, big data, and related information systems.
A data scientist role is for highly qualified persons who can use
higher forms of analytics to evaluate data quality (even for big data),
form hypotheses (clearly define the problem), build a way to test
them, and develop non-intuitive insights. These higher forms of
analytics include

Prescriptive analytics (the highest form of analytics that makes

recommendations): network modeling, decision analysis,
mathematical programming, and transportation and inventory
management models

Predictive analytics (the second highest form that predicts what

could happen): Markov analysis, forecasting, queuing theory,
modeling, and simulations.

Data analytics is oriented toward functional reporting, data

visualization, queries, and ad hoc analysis. A data analyst role is a
lower organizational position than data scientist. Typically data
analytics uses descriptive analytics, the lowest but still very useful
level of analytics. Descriptive analytics involves making sense of
historical data and includes statistics, distributions, control charts,
segmentation, association, regression analysis, PESTLE, SWOT,
and analysis of customers, suppliers, competitors, or economics.

Both data scientists and data analysts need a good understanding of

the organization’s business, processes, and products/services.

There are two important considerations for when planning to improve

analytics capabilities. The first is to begin with the end in mind or
one’s true north and then reverse-engineer needed analytics
capabilities. Determine the areas that will drive the desired strategic
improvements and then determine the capabilities, tools, and
methodologies needed to get there. The second is that decision
makers need more analytics maturity too, enough to understand the
logic being used and to allow it to influence decision making.

Conduct Supply Chain Segmentation

In addition to customer segments, supply chain segmentations can
use a supply chain definition matrix, custom matrices such as to
compare responsiveness to sales volume, and total cost of
ownership.

An organization can use a supply chain definition matrix to

understand the number of supply chains it might need and which
one(s) to focus design on first. Use one matrix per separately
managed geographical region. Start with the region where
headquarters are located or the one with the most sales, or use a
matrix to analyze multiple factors. (Selected factors can differ, such
as a nonprofit looking at cash consumption.) Factors may include
size (revenue, volume, and margin), strategic importance, supply
chain complexity, customer segment service requirements, critical
business issues, inventory (units and dollars), risk, or volume
variability. Exhibit 1-51 is an example of how the Sample, Inc., case
study organization determines that the Americas are a higher priority
than EMEA and APAC by assigning values of 1 (low) to 3 (high) per
column (with no duplicate values) and then summing each row’s
values.

Exhibit 1-51: Supply Chain Prioritization Matrix by Geographical

Region and Size/Complexity
Revenue Gross Number of Unit Strategic Ranking
Margin % SKUs Volume Value (SUM)

Americas 3 2 2 2 3 12
EMEA 1 1 3 3 2 10
APAC 2 3 1 1 1 8

The supply chain definition matrix for each region is then developed.
Typically, the columns of the supply chain definition matrix list sales
channels and the rows list business units. Rather than just creating
one supply chain per business unit or one supply chain for each
sales channel, the matrix is used to indicate which business units
require which sales channels.

Sample, Inc., has three business units (automotive oil, chemical

products, and lubricants, each with a private label and a branded
subset) and two distribution channels (distributor and bulk sales).
Using a matrix (which is not shown here), it decides to focus on its
distributor channel because these constitute the majority of revenue
and its complexity and strategic importance are clear drivers.

Sample, Inc., assembles a narrative map of the Americas, shown in

Exhibit 1-52. It lists suppliers, customers (including what they buy),
and channel partners for the matrix.

Exhibit 1-52: The Americas Business, Supplier, Customer, and

Channel Partner Map
Suppliers Sample, Inc., The West Coast Customers
Americas,
Oilco (oil S-Mart (large global retailer; branded
Distributor Channel
products and private labels but no private-label
and Headquarters lubricants)
lubricants) (H1) on East
Auto Bros (aftermarket retail chain;
Coast
Chemco private labels)
(coolants East Coast
Costking (membership warehouse
and Operations
club; branded and private label but no
cleaners) (Central
branded chemicals)
DC/repackaging;
Packit
Southern DC) Carfix (aftermarket retail chain;
(plastic
West Coast branded only)
containers
and labels) Operations
East Coast Customers
(Central
 DC/repackaging,
Corrugated Vehicle Proof (car service club;
Northern DC)
(cardboard branded oil and private lubricants
boxes, only)
Channel Partners
fillers, and
Night Drive (aftermarket retail chain;
displays) None identified
branded oil and chemicals only)

The Mall (large global retailer;

branded oil and private and branded
lubricants only)

Automotive Ecommerce (e-

commerce reseller; branded and
private oil, private chemicals,
branded lubricants)

Exhibit 1-53 shows how the distributor sales channel is divided into
West and East Coast sales markets for the Americas (further divided
by major customers). Note how this matrix helps the design team
determine which products or services are offered in which regions.
This supply chain definition matrix shows how even this distributor
channel could have many supply chains.
 Exhibit 1-53: Supply Chain Definition Matrix: Channels in Columns,
Business Units in Rows

The above example lists 27 total matches, for up to 27 supply

chains, but each needs rationalizing. Design supply chains that are
representative of multiple categories. Goals include finding the right
number of supply chains to have and the right first supply chain to
design.

Sample, Inc., has decided that the oil, lubricant, and chemical lines
for the distributor channel can be served by one supply chain for the
East Coast and one supply chain for the West Coast, because all
products are all stored in the same warehouses and share the same
distribution vehicles and distributors for each of these markets.
Chemical and petroleum bulk products need two separate supply
chains per market since different inbound vehicles are used. This is
six supply chains for the Americas.
Another example of a custom matrix that can be developed is to
compare desired responsiveness to the sales volume per location,
as shown in Exhibit 1-54.

Exhibit 1-54: Comparing Responsiveness to Sales Volume per

Location
High Less-than-truckload (LTL) Compete on responsiveness.
responsiveness quantities are likely, so charge Leverage truckloads (TLs),
more for desired responsiveness. backhaul opportunities, and
consolidation to contain costs.

Low Seek opportunities for milk runs Compete on low-cost efficient

responsiveness with optimized routing. supply chain.

Low volume per location High volume per location

Another differentiator is the total cost of ownership. The ASCM

Supply Chain Dictionary, 17th edition, defines the total cost of
ownership (TCO) as follows:

In supply chain management...the sum of all the costs

associated with every activity of the supply stream. The
main insight that TCO offers...is the understanding that the
acquisition cost is often a very small portion of the total
cost of ownership.

The intent of TCO is to get decision makers in the supply chain to

see supply chain activities as an investment in capabilities rather
than just an expense to be minimized. TCO measures the cost of
each echelon that is used in a given supply chain, transportation
costs, import/export costs, and so on. A reverse supply chain will
determine the cost of returns under the given returns policy. TCO
can also help characterize the value of flexibility in the supply chain
(late ordering and fast delivery versus ordering well in advance and
slow delivery, but more expensive mismatches). Also, for a
transformation, estimate process change costs (e.g., shared
technology).

Once you have a preliminary list of supply chains to develop or

improve, test each against the organization’s strategy to ensure a
good fit and make necessary changes.
Topic 2: Discuss Benchmarking and
Business Value
Here we discuss the benchmarking process, areas for
benchmarking, and developing business value propositions.

Benchmark Against Competitors and Best-

in-Class Organizations
Benchmarking helps set “stretch” goals. Best-in-class company
benchmarking reduces complacency risk. A benchmarking process
is provided.

Benchmarking is used to set “stretch” goals for benchmark

measures. These terms are defined in the ASCM Supply Chain
Dictionary, 17th edition, in part as follows:

Benchmarking: Comparing products, processes, and

services to those of another organization thought to have
superior performance. The benchmark target may or may
not be a competitor or even in the same industry.

Benchmark measures: A set of measurements or metrics

that is used to establish goals for improvements in
processes, functions, products, and so on. Benchmark
 measures are often derived from other firms that display
best-in-class achievement.

Benchmarking can be used for strategy, business processes and

tactics, or operations. At the transformation program level,
benchmarking is strategic but should focus on evaluation of one or
more specific supply chain segments. This may require focusing on
just the data for a single business unit’s supply chain since financial
data is accounted for at the business unit level. Individual projects
benchmark at lower levels.

Benchmarking can be performed internally (e.g., different business

unit), externally (e.g., organizations that have won quality or
business management awards), or versus a standard (e.g.,
conformance to ISO 9001). When benchmarking looks to external
examples of excellence, competitors are of obvious interest.
However, their most comparable business units should be used, if
possible, since many organizations are highly diversified. In a
comparable business unit, look out for process differences. Best-in-
class companies (BICC; sometimes defined as firms with 50 percent
greater sales growth and 20 percent greater profitability than
average firms in their industry), regardless of industry, can inspire
more than just to catch up but instead to surpass the competition.
BICC comparisons reduce the risk of complacency. Seek market
disruptors and organizations who manage complexity well, because
these can be significant areas of supply chain competitive
advantage. BICC indices exist and can be leveraged.

Juran’s Quality Handbook lists key tasks in the benchmarking

process.

1. Determine critical performance to benchmark. As with setting

performance objectives, it is important to focus on performance
that creates competitive advantage. The benchmarked
performance should align with strategic plan KPIs.

2. Define the metrics to be used and a benchmarking

framework (e.g., SCOR DS). Metrics tie directly back to the
performance attributes the organization has chosen.
Frameworks standardize for like-to-like comparison, but note
that inputs used for a given metric may still not be an exact
match.

3. Identify leading or benchmark targets. This step starts with

selecting benchmark organizations, functional areas, a
standard, or an index to use as the benchmark. Benchmark data
can be sourced in different ways. External organizational data
may be purchased from a third party. If consultants are used,
ask how they get their information. (Some hire graduate
students to poll organizations; ask who is funding a study if you
are called.) Sometimes industry associations or consortia of
 business groups have gathered information from members.
There may also be a variety of publicly available data from
annual and quarterly earnings reports, white papers, or
periodical databases. Site visits and original research, such as
interviewing individuals (e.g., staff who recently worked for a
competitor), questionnaires, or customer or supplier focus
groups may be needed. (For example, ask “What can we be
doing better?”). In some cases, two organizations can
benchmark each other.

4. Gather the organization’s own performance data. This can

be gathered from historical records, surveys, interviews,
observation, and analysis.

5. Identify and analyze performance gaps. This comparison has

two parts. First, the processes are compared and analyzed
using flowcharts and other quality tools. This will provide
information on how a process might be done differently. Second,
performance measurements are calculated and compared. For
example, which company has better inventory turnover?
Determining why this is the case can provide information on
processes to improve and goals to meet or surpass.

6. Plan a path forward. Within the constraint of limited resources,

prioritize necessary improvements and build business value
 propositions. Choose carefully when working to be superior to a
specific competitor. It may not be feasible to surpass a far larger
competitor, but one could target a niche area for growth.

7. Allocate resources, implement plans, and measure results.

Strategic benchmarking is expensive and needs action plans to
implement changes so the investment has a chance to create
value.

The art of competitive analysis is in determining why a competitor is

doing certain things so you get a picture that goes beyond the
numbers. In other words, their strategy starts to emerge, and you
can then determine what areas align with your strategy. Decide what
capabilities to improve and what capabilities are unnecessary.

For example, one organization benchmarked its inventory turnover

and found it was close to a key competitor. However, delving into the
data revealed that the competitor had much faster retail store
inventory turnover (a subset of the metric) due to a sophisticated
replenishment process that allowed postponing deliveries and
avoiding stocking items that were not selling. The result was that the
competitor could support the same sales but with 40 percent less
inventory. The processes and technologies told the story of why the
competitive advantage was in their favor. However, avoid
assumptions: Just because a competitor is working on a technology
or methodology does not necessarily mean it is being properly
implemented.

When it comes to participating in benchmarking, consider the benefit

of explaining one’s processes to outsiders. It can reveal gaps in logic
and lead to improvement even if the other organization is not
superior. Participating in benchmarking surveys from independent
third parties can help ensure that data are accurate and
unambiguous.

Benchmarking Areas
Benchmarking can be done for customer satisfaction, retention,
efficiency, effectiveness, agility, resilience, supply chain costs, and
growth. Transformation benchmarking maturity is also addressed.

Here we discuss benchmarking customer satisfaction, retention,

efficiency, effectiveness, agility, resilience, supply chain costs, and
growth. Transformation maturity can also be benchmarked.

Customer Satisfaction and Retention

When benchmarking customer satisfaction and retention, note that it
is not possible to quantify satisfaction. A proxy metric can be used,
such as the net promoter score, but this type of score is subjective
and does not help define what needs to improve. While such scores
can be tracked internally for trends, they are not the best
benchmarks. Rather, seek specifics about what customers want
versus what they get. A simple customer survey asking customers to
rank you and a competitor on specific SCOR DS performance
attributes or service areas can provide quality information on
customer service levels and gaps. Exhibit 1-55 shows a service
areas survey that our case study organization sent to a key retailer
who also gets similar products from a competing distributor. (The
scale is 1 to 10, with 1 being poor and 10 being world class.) This
information can be compared to the strategy to determine gaps.

Exhibit 1-55: Sample, Inc., Petroleum and Chemical Products

Company Customer Survey
Top 5 Customer Priorities in Order Sample, Inc. Competing
Distributor

1. Replenishment frequency 5 (currently at parity) 5

2. Order completeness 3 (currently 7

underperforming)

3. Reliable delivery windows 8 (currently superior) 2

4. Reverse logistics 4 (currently at parity) 4

5. Lead-time quoting accuracy 6 (currently at 4

advantage)

Efficiency, Resilience, and Effectiveness

Customer-focused resilience (reliability, responsiveness, and agility),
internally focused efficiency (costs, profit, and assets), and
holistically focused sustainability (environmental and social) can all
be benchmarked using SCOR DS or a similar KPI tree. This is
discussed elsewhere. To benchmark effectiveness, one could
benchmark profit, for example, or consider the overall effectiveness
of the supply chain strategy by looking at tradeoffs between priorities
to ensure that the overall strategy can be profitable.

A tradeoff area is that higher levels of resilience tend to lower

efficiency. Investing in consistency, speed, or the ability to flex
capacity is hard to achieve while also having a least-cost supply
chain. This is one reason why organizations need to select a
competitive basis for a supply chain. One also cannot ignore either
factor entirely, which is why organizations seek parity for lower
priorities. An organization that competes on low cost will maximize
efficiency but will still need some amount of reliability and
responsiveness as order qualifiers and some level of agility to
mitigate demand risk. An organization that is agile to demand
fluctuations or supply chain disruptions will still need some efficiency
or it will go out of business.

Supply Chain Costs

Supply chain costs and operational efficiency can be benchmarked
using the SCOR DS metrics. Costs can use CO.1.1, total supply
chain management costs. Operational efficiency can use the profit
metric PR.1.1., earnings before interest and taxes (EBIT) as a
percent of revenue, which measures the organization’s earning
power from ongoing operations. Since EBIT = Revenue – Cost of
Goods Sold (COGS) – Operating Expenses, one could also
benchmark COGS and operating expenses for more nuance.

There are, of course, many other ways to benchmark supply chain

costs and operational efficiency. For example, an organization with
human resources as its primary cost driver could benchmark
revenue per employee.

Growth
Benchmarking results from many organizations have shown that
superior supply chain performance leads to superior organizational
performance. Projecting a superior growth rate is one way to sell a
supply chain transformation. Organizations can benchmark revenue
growth against overall industry growth rates. To get more value from
a growth rate analysis, the organization will seek data indicating
which are the true growth drivers (e.g., reliable availability, agility,
responsiveness, innovation, continuous improvement).

Organizations can also internally benchmark growth, such as for a

business unit’s product families. Exhibit 1-56 shows an example for
Sample, Inc., who created this growth rate analysis as part of a
product-to-market map. It compares each product family’s growth for
existing and new customers. For each product family, the analysis is
nuanced between new product introductions (NPIs) and existing
products. For each customer category, it looks at revenue growth,
gross margin growth, and unit sales growth. The analysis determines
which areas have positive growth (+), neutral growth (0), and
negative growth (–). Growth issues can be identified.

Exhibit 1-56: Sample, Inc., Growth Rate Analysis for the Americas
and Its Petroleum Products Unit
New New New Existing Existing Existing
Customer Customer Customer Customer Customer Customer
Revenue Gross Unit Sales Revenue Gross Unit Sales
Margin Margin

Family A + + + + + +
NPI

Family A + + + – – –
existing

Family B 0 0 0 + – +
NPI

Family B – – – – – –
existing

Transformation Maturity Benchmarking

Organizations engaging in digital transformation will want to see how
their digital maturity levels relate to what competitors are planning or
doing. This type of benchmarking is useful when working to develop
a sense of urgency for changes, such as knowing a competitor is
already well under way with their transformation. Benchmarking
organizations exist that use surveys to benchmark in the areas of
 IT maturity (the maturity of the digital backbone)

Operations maturity (which specific digital processes are being

implemented)

Analytics maturity (from data basics, to reporting, to descriptive

analytics, to predictive and prescriptive analytics, to automation
of whole processes and AI)

Digital business model maturity (no strategy, want one, have

one, have road map, have steering committee, etc.).

Organizations can also benchmark their enterprise resources

planning (ERP) systems. For example, ERP vendor SAP has
standard application benchmarks that help determine the best
hardware and database performance of SAP applications in terms of
scalability and other factors.

Develop Business Value Proposition(s)

A business value proposition is a commitment on the part of the
party accountable for the transformation program’s success or failure
to deliver specific results within a specific time period. It should be
feasible but inspiring.

The final step of this phase of developing a sense of urgency is for

the evangelist or portfolio director who will be accountable for
transformation success or failure to make a commitment of specific
improvements to the primary decision maker (e.g., CEO) in the form
of one or more business value propositions. This is the essence of
transformation requirements. The evangelist very likely was hired to
oversee some aspect of supply chain operations, meaning that his or
her primary role is to run the business as defined and to continually
improve performance. Now this executive needs to step outside this
comfort zone and commit to breakthrough improvement.

The evangelist or other accountable party will likely need to make

specific commitments to win program charter approval. These are
estimates at this point, based on benchmark organization results and
historical improvement results. They should be conservative enough
to be feasible while still creating that sense of urgency. The Sample,
Inc., petroleum and chemical products case study business value
proposition follows.

Over the course of the three-year strategic transformation

plan, the transformation will improve operating income by 4
percent of total sales per year. Return on investment will be
at least 3.0, with a payback period of 1 year due to plans
for many quick win projects. Existing information systems
will be better leveraged, including currently untapped
analytics functionality. Profit will grow by 0.5 percent per
year.
Note that the challenge of making such commitments is in finding the
time to oversee something outside of normal operations and to find
staff who can devote some or all of their time to this long-term
transformation. Philosophically, the person accountable for the
transformation needs to develop an orientation that anything as
major as a transformation will require sufficient resources that will be
hard to come by. This can include executive-level supply chain
officers or new teams such as a supply chain engineering functional
area whose sole purpose is supply chain network design and
transformation.

The business value proposition concludes with a go/no-go decision

point.
Index
A
Action plans [1]
Active executive sponsor [1]
Agile project management [1]
Agile supply chains [1] , [2]
Analytical skills [1]
Ansoff product-market growth matrix [1]
APQC process management maturity model [1]
APQC supply chain planning benchmarks [1]
Asset footprint [1]

B
Balanced scorecard (BSC) [1]
Bargaining power [1]
BCG growth-share matrix [1]
Benchmarking
Best-in-class benchmarking [1]
Benchmark measures [1]
Best-cost provider strategies [1]
Best-in-class benchmarking [1]
Blue ocean strategy [1]
BSC (Balanced scorecard) [1]
Buffers [1]
Business cases [1]
Business context summary [1]
Business model operating canvas [1]
Business sense [1]
Business strategies
Best-cost provider strategies [1]
Differentiation strategies [1]
Focus strategies [1]
Low-cost provider strategies [1]

C
Change management [1] , [2]
Circular economies [1]
Circular supply chains [1]
Collaboration [1] , [2]
Communication [1] , [2]
Competitive advantage [1]
Competitive attributes [1]
Competitive profile matrix [1]
Complexity [1]
Consistent and systematic supply chains [1]
Constraint analysis [1]
Constraints [1]
Consulting [1]
Continuous improvement
Lean continuous improvement [1]
Core capabilities [1]
Core competencies [1]
Core processes [1]
Core steering team [1]
Corporate culture [1] , [2]
Corporate strategies [1]
Cost leadership strategies [1]
Cost optimization [1]
Costs
Supply chain costs [1]
Critical thinking [1]
Culture
Organizational culture [1] , [2]
Customer expectations [1]
Customer experience [1]
Customers [1]
Customer satisfaction [1] , [2]
Customer segmentation [1]
Customer service goals [1]

D
Data analytics [1]
DBR (Drum-buffer-rope) [1]
Decentralized inventory control [1]
Decline phase of product life cycle [1]
Define, Measure, Analyze, Improve, Control [1]
Deliberate strategy [1]
Demand shaping [1]
Dependability [1]
Design team [1]
Differentiation strategies [1]
Digital supply chains [1]
Disintermediation [1]
Distribution channels [1]
Diversification
Related diversification [1]
Unrelated diversification [1]
Diversification strategies [1]
DMAIC [1]
Drum-buffer-rope (DBR) [1]
Dual operating system [1]
E
Economic value added (EVA) [1]
Effectiveness [1]
Efficiency [1]
Emergent strategy [1]
Emerging technologies
Data analytics [1]
Enabling methodologies [1]
Environmental scanning
Five forces framework [1]
Product life cycle analysis [1]
SWOT analysis [1]
Value chain analysis [1]
EVA (Economic value added) [1]
Evaluation matrices [1]
Evangelist [1]
Extended enterprise stage [1]
External factor analysis [1]
External profiles [1]

F
Fail fast, learn fast [1]
Financial profiles [1]
Five forces framework
Bargaining power [1]
New entrants [1]
Rivalry among competitive sellers [1]
Substitute products [1]
Flexibility [1]
Focus strategies [1]
Forward supply chains [1]
Four Ps
Place (as one of the four Ps) [1]
Price (as one of the four Ps) [1]
Product (as one of the four Ps) [1]
Promotion (as one of the four Ps) [1]
Frameworks [1]
Functional area strategies [1]
Functional products [1]

G
Gemba [1]
Genchi genbutsu [1]
Globalization [1]
Global Reporting Initiative (GRI) [1]
Global strategy [1]
Green supply chains [1]
GRI (Global Reporting Initiative) [1]
Growth [1]
Growth phase of product life cycle [1]
Growth strategies [1]

H
Hofstede’s cultural dimensions [1]
Horizontal integration [1]
House of lean [1]
House of Toyota [1]

I
Industry attractiveness [1]
Innovation [1]
Integrated enterprise stage [1]
Integrated measurement model [1]
Integration
Horizontal integration [1]
Vertical integration [1]
Integrity [1]
Intelligence [1]
Intended strategy [1]
Interconnectivity [1]
Intermediaries [1]
Internal factor analysis [1]
Internal profiles [1]
International strategies
Global strategy [1]
Multicountry strategy [1]
Multinational strategy [1]
Transnational strategy [1]
Introduction phase of product life cycle [1]
Inventory
Maintenance/repair/operating (MRO) supplies [1]
ISO standards [1]

K
Key performance indicators (KPIs) [1]
Key success factors [1]
KPIs (Key performance indicators) [1]

L
Lateral integration [1]
Leadership [1]
Leader standard work (LSW) [1]
Lead time [1]
Lean [1]
Lean continuous improvement [1]
Lean manufacturing [1]
Lean production [1]
Lean six sigma [1]
Level 1 SCOR [1]
Linear supply chains [1]
Low-cost provider strategies [1]
LSW (Leader standard work) [1]

M
Maintenance/repair/operating (MRO) supplies [1]
Mapping [1]
Market scanning [1]
Market segmentation [1]
Maturity phase of product life cycle [1]
McKinsey 7-S framework [1]
Measures
Benchmark measures [1]
Mistake-proof [1]
Models [1]
MRO supplies [1]
Multicountry strategy [1]
Multi-factorial matrices [1]
Multinational strategy [1]
Multiple dysfunction stage [1]

N
National culture [1]
Negotiation [1]
Networks
Supply chain networks [1]
New entrants [1]
New product introduction (NPI) [1]
NPI (New product introduction) [1]

O
Omni-channel network [1]
Omnichannel order fulfillment [1]
Omni-channel supply chains [1]
Operating models [1]
Operations strategies [1]
Opportunities [1]
Orchestrated supply chain [1]
Order qualifiers [1]
Order winners [1]
Organizational culture [1] , [2]
Organizational hierarchy [1]
Organizational maturity [1]
Organizational structures [1] , [2]

P
Performance management
Supplier performance management [1]
Performance objectives
Costs [1]
Dependability [1]
Flexibility [1]
Quality [1] , [3]
Speed [1]
Physical assets [1]
Place (as one of the four Ps) [1]
Placement [1]
Poka-yoke [1]
Political awareness [1]
Portfolio director [1]
Portfolio management [1]
Postponement [1]
Price (as one of the four Ps) [1]
Proactive efficient supply chains [1]
Problem definition [1]
Process improvement tools
Benchmarking [1] , [2] , [3] , [4]
Scrum [1]
Product (as one of the four Ps) [1]
Product life cycle
Decline phase of product life cycle [1]
Growth phase of product life cycle [1]
Introduction phase of product life cycle [1]
Maturity phase of product life cycle [1]
Product life cycle analysis [1]
Product-market growth matrix [1]
Product-mix flexibility [1]
Product positioning [1]
Product profiling [1]
Products
Functional products [1]
Profit sanctuaries [1]
Program director [1]
Program management [1]
Project charter [1]
Project management
 Agile project management [1]
Projects [1]
Promotion (as one of the four Ps) [1]
Pull systems [1]

Q
Quality
Six sigma quality [1]

R
RACI charts [1]
RACI matrices [1]
RAPID tool [1]
Reactive efficient supply chains [1]
Reactive supply chains [1]
Realized strategy [1]
Related diversification [1]
Resiliency [1]
Responsibility charts [1]
Responsibility matrices [1]
Reverse engineering [1]
Reverse logistics [1] , [2]
Reverse supply chains [1]
Risk management [1]
Rivalry among competitive sellers [1]
Root cause analysis [1]

S
Sales channels [1]
Sand cone model [1]
Scheduling
Drum-buffer-rope (DBR) [1]
SCM (Supply chain management) [1]
SCOR DS [1] , [2] , [3] , [4] , [5] , [6]
SCORmark [1]
SCOR Racetrack [1]
Scrum [1]
Segmentation
Customer segmentation [1]
Market segmentation [1]
Self-assessment [1]
Semifunctional enterprise stage [1]
Service industries [1]
Service industry supply chains [1]
Service optimization [1]
Service providers [1]
Six sigma [1]
Six sigma quality [1]
SKUs (Stockkeeping units) [1]
SMART criteria [1]
Specialized supply chains
Service industry supply chains [1]
Specific, measurable, attainable, relevant, and timely criteria [1]
Speed [1]
Standardization [1]
Standardized work [1]
Stockkeeping units (SKUs) [1]
Strategic background [1]
Strategic driver supply chains [1]
Strategic intent [1]
Strategic plans [1]
Strategy
Blue ocean strategy [1]
Emergent strategy [1]
Intended strategy [1]
Realized strategy [1]
Strategy Diamond [1]
Strategy maps [1]
Strengths [1]
Strengths, weaknesses, opportunities, and threats analysis [1]
Subcultures [1]
Substitute products [1]
Supplier performance management [1]
Suppliers [1] , [2]
Supply chain capabilities
Core competencies [1]
Supply chain costs [1]
Supply chain development
Extended enterprise stage [1]
Integrated enterprise stage [1]
Multiple dysfunction stage [1]
Orchestrated supply chain [1]
Semifunctional enterprise stage [1]
Supply chain integration [1]
Supply chain management (SCM) [1]
Supply chain maturity [1] , [2] , [5]
Supply chain networks [1]
Supply Chain Operations Reference (SCOR) metrics
Level 1 SCOR [1]
Supply Chain Operations Reference Digital Standard (SCOR DS) [1]
, [2] , [3] , [4] , [5] , [6]
Supply chain resilience [1] , [3]
Supply chains
Agile supply chains [1] , [2]
 Circular supply chains [1]
Consistent and systematic supply chains [1]
Digital supply chains [1]
Forward supply chains [1]
Omni-channel supply chains [1]
Proactive efficient supply chains [1]
Reactive efficient supply chains [1]
Reactive supply chains [1]
Reverse supply chains [1]
Strategic driver supply chains [1]
Supply chain security [1]
Supply chain strategies [1] , [4]
SWOT analysis
Opportunities [1]
Strengths [1]
Threats [1]
Weaknesses [1]

T
Talent assessment/alignment [1]
TBC (Time-based competition) [1]
TCO (Total cost of ownership) [1]
Teams
 Core steering team [1]
Design team [1]
Transformation teams [1]
Tenacity [1]
Theory of constraints (TOC) [1]
Threats [1]
Time-based competition (TBC) [1]
TOC (Theory of constraints) [1]
Total cost of ownership (TCO) [1]
Total quality management (TQM) [1]
TOWS analysis [1]
TQM (Total quality management) [1]
Transformation [1] , [6] , [7] , [8]
Transformational leadership [1]
Transformation process [1]
Transformation teams [1]
Transnational strategy [1]
Transportation stakeholders
Customers [1]

U
Unrelated diversification [1]

V
Value [1]
Value chain analysis [1]
Value chains [1] , [2]
Value-driven enterprises [1]
Value propositions [1] , [5]
Value stream mapping [1]
Vertical integration [1]
Visual management [1]
VRIN tests [1]

W
Waste [1]
Waste walks [1]
Weaknesses [1]