Designing the Hybrid Supply Chain

DESIGNING THE HYBRID SUPPLY CHAIN – A SEGMENTATION APPROACH TO COPE WITH INREASING INDIVIDUALITY OF CUSTOMER DEMANDS Dr. V. Stich 1, T. Brosze 1, N. Hering 1, J. C. Meyer 1 1 Institute for Industrial Management (FIR) at RWTH Aachen University, Aachen, Germany, email: niklas.hering@fir.rwth-aachen.de Abstract: Supply Chain Management (SCM) delivers a considerable amount of ideas and methods to design the value stream. Each of the concepts may lead to significant cost reduction and higher service levels. The same concept does not work for different customers and their diverse needs. Thus, a “one-size-fits-all” supply chain cannot lead to success. The key to overcome this obstacle is the hybrid supply chain. This paper outlines the application of hybrid system theory to supply chains. After a comprehensive overview of existing methods for the design of supply chains is given, a methodology for a customer-to-customer oriented supply chain design is presented. This approach adopts the hybrid system theory to supply chains. Hybrid systems use the advantages of its subsystems to reach a superior result to one system alone. Concluding a case study illustrates the application of the methodology. Keywords: Supply Chain Design, Supply Chain Segmentation, Hybrid Supply Chains Introduction In modern business, satisfying customer needs is a strategic factor of success. Nevertheless, many companies are incapable of fulfilling logistic services as they are required by the market. In consumer goods industry for instance, this deficiency results in out-of-stock-situations and high sales losses [1]. Insufficient availability of goods, at the point-of-sale or in any stage of the supply chain, is caused by inadequate service levels of the suppliers, inaccurate forecasting, lack of information exchange and unpredictable ordering behaviour of suppliers [2]. However, the underlying reason for insufficient availability of goods is best described by an antagonism between the desire to minimize supply chain costs by raising efficiency, and the wish to maximize availability by increasing the agility of the supply chain. This can be derived from the diverging goals of the entities and members of the supply chain: Whereas demand-orientated, customer-focused entities focus on high flexibility, short delivery-time and high availability, supply-side oriented entities value primarily the minimization of production-, transport-, purchasing- and inventory costs [3]. Diverging goals may exist even in a single company (e.g. between sales, procurement and production departments) and are prevalent between different companies that are working together in a supply chain. The antagonism between demand- and supply-side counterparts of a supply chain leads to significant logistical deficits. Supplier Manufacturer Retail Supply Side Demand Side Inventory Revenue costs Produrement Flexibility Agility costs Efficiency Production Never Out-of-Stock costs Readiness Stock value Just-In-Time Production Efficient Consumer Response Kanban Vendor Management Inventory (VMI) Supplier Managed Inventory (SMI) Continous Replenishment (CR) Konsignation Cross Docking (CD) One-Piece-Flow Quick Response (QR) etc. etc. Fig. 1: Diverging goals in the supply chain Although this antagonism is a persistent issue in praxis, to date neither industry nor science has found adequate approaches to resolve this dilemma. Existing approaches try to solve the problem either by implementing a more efficient asset management, or by introducing more effective process design. They failed, for they lack any holistic contemplation of the entire supply chain [4]. Since hitherto existing approaches themselves are focused either on the demand- or supply-side, they are unable to cover the above mentioned antagonism [5]. As an example, Just-in-time strategies [6] address only production- or supply-oriented parts of a supply chain, while both Efficient Consumer Response (ECR) or Category Management (CM) [7] intend to optimize the interface between customer and manufacturer. As a result, supply chains are often managed in a contradicting way – both in terms of sales activities and taking into account production and procurement goals (cp. Fig. 1). Failure of the value stream, out-of-stocks and revenue losses are the outcome. Cost Minimal Supply Chain Cost Customer - „One size fits all “ oriented Supply Chain Number of Supply Chain Supply Chains Risk -hedging Cost Riskhedging Cost Complexity Cost Complexity Cost Degree of Individualization Fig. 2: The optimal number of supply chains To solve this dilemma, an end-to-end orientation towards the customer is required. In terms of the marketing perspective, the extension and diversification of the assortment of goods is understood by striving for a higher customer orientation [8]. Reverse, this is also valid for a specification of the supply chain itself. The first step, a different design of supply chains in different branches, is already implemented in many industrial segments, e.g. Fast Moving Consumer Goods (FMCG) Industry is focusing on optimising their distribution, whereas Automotive Industry continuously increases the integration of their suppliers. But only very few companies have recognized that a diversification of the supply chain within one single branch of business does not only lead to further reduced costs [9], but will solve the described antagonism between demand- and supply-side. Executive managers in modern industry therefore have to take a two-fold decision: Which type of supply chain is suitable for their customer needs, and how many supply chains are necessary, yet affordable under economic reasons (cp. Fig. 2). Established Approaches for Supply Chain Design As a first approach, Fisher [10] contrasts different types of goods and their associated demand predictabilities with their respective supply chains. On the basis of two generic product types – functional products with high demand predictability and long life-cycles (e.g. diapers) and innovative products with low demand predictability and short life-cycles (e.g. cellular phones) respectively – he defines two corresponding supply chain types to meet the distinct requirements. For functional products, the primary goal of supply chain design is cost reduction with respect to predictability and reliability. In contrast, innovative products require supply chains that are designed to minimize the lead time between order and delivery. According to Fisher, these requirements result in two distinct types of supply chains, which he names “Efficient Supply Chain” and “Responsive Supply Chain”. [10] [11] [12] Christopher, Towill and Mason-Jones, based on Fisher’s suggestion, propose the “Lean Supply Chain”, “Agile Supply Chain” and “Leagile Supply Chain” [13] [14] [15]. While the Lean Supply Chain focuses on cost reduction for standardized mass-products, the Agile Supply Chain aims for high availability of goods and short lead times. Both supply chain types are similar to the ones described by Fisher, while the Leagile Supply Chain is an extension of the two former types [13]. It is defined as a combination of Lean and Agile Supply Chains by different authors, introducing a point-of-decoupling [16] to separate Lean (upstream) from Agile (downstream) processes. Extended by Christopher and Towill to what they call “hybrid strategies”, this approach is able to model parallel processes (Lean and Agile) in a single supply chain. All approaches that were introduced to this point are focused on the demand-side of the supply chain. They become extended to the supply-side by Lee [17], who considers a distinction between stable and evolving supply processes.