How do you define a supply chain? This question came up last week as a colleague read a short biography about me. The reader challenged a claim in the bio as an exaggeration. I resisted the attack by agreeing with him that the statement was an exaggeration of an understatement.
“He developed the strategy and design for thousands of supply chains.”
My colleague and friend looked me in the eye before flatly stating, “No way could anybody develop the strategy and design for thousands of supply chains.”
That is where I had him.
“Consider my last corporate position,” I said. “There were over 600 suppliers, five distribution centers, and 600 retail stores. Now, each supplier shipped to at least one distribution center, some to all five. Assume that each of the 600 suppliers shipped to three distribution centers. Three times 600 equals 1,800 different lanes or supply chains, right?”
A look of confusion crossed his face, and then he said, “You can’t argue that each of the strands is a supply chain. It is all one big chain!”
“Not a correct assumption, amigo,” I replied. “There was a whole set of strategic commitments made for each of those supplier product lines. Gross margin, inventory investment, and targeted revenue commitments drove tactical design decisions. The commitments drove which flow strategy to employ, and that commitment drove tactical decisions about order frequency, the order size, and the mode selection. Those commitments drove the decisions about what part of our logistics infrastructure to employ.”
I stopped for a moment to let him catch up with the chains of commitments that became decisions that became more commitments.
“Each strand from supplier to DC involved at least two strategic commitments and four tactical decisions,” I continued. “Sales levels and inventory investment were the strategic decisions; order size, order frequency, mode selection, and network path were the tactical decisions. In the time before I arrived, the default was all vendor-managed — that is, the vendors really made the decisions. By the time I left, the company made the decisions.”
“In seven years the company migrated from one management doctrine — vendor-managed and directed — to a new doctrine of internal control. Six hundred suppliers through a network of five distribution centers to 600 stores. Three thousand inbound supply chains feeding into 600 outbound strands.”
I stopped again for a few moments to let that sink in.
“And that was just my last corporate position. How many different supply chains do you think I have strategically and tactically changed in the five years since I escaped the corporate puzzle palace? How many did I do before my last corporate job? Thousands? Tens of Thousands?”
His resistance was futile.
Q: What is a supply chain?
A: It is the network that connects different companies for production and movement of a specific product. The best way to think of the supply chain is the series of decisions and steps it takes to get a product or service from the supplier to the customer. Supply chain management involves the coordination of both internal and external operations. It involves making Strategic Commitments that concern the value of the flow, the working capital used to obtain the inventory moved, the cost to move and store that inventory, and the profits of the different external and internal entities in the process.
That is a mouthful. Let’s break it down into chunks. A supply chain is:
⦁ A network that connects different companies
⦁ For production and movement
⦁ Of a specific product.
“Of a specific product?” Could that be a SKU? Yes. Well, in my last corporate position, the network moved over 60,000 SKUs. Could that be 60,000 supply chains?
Coordination among the various entities requires more effort. Each company has its own set of revenue, profit, and effort goals to maintain. Those strategic commitments each company makes dictate what tactical options the entities have. It takes effort to decide which of those tactical options to deploy, and to coordinate those tactics.
Logistics is much easier to manage, since it is the distribution process within a company. Supply chain includes multiple companies, and gets much more complex.