Supply Chain Management:

From Vision to Implementation

Chapter 10: Supply Chain Rationalization and

Role Shifting
Chapter 10: Learning Objectives
1. Articulate the challenge of complexity in SC
design. Explain the relevance of Jim Collins’
quote, “’Stop doing’ lists are more important
then ‘to do’ lists.”

2. Identify and discuss the sources of SC

complexity.

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Chapter 10: Learning Objectives
3. Define SC rationalization, identify the key areas of
the supply chain that must be rationalized, and
discuss supply-base optimization as an example of
the rationalization process.

4. Define role shifting, discussing its benefits and

threats. Explain how role shifting improves the
competitiveness of an individual company the
entire supply chain.

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The Challenge of Complexity
 Complexity increases:
 Confusion
 Cost
 The probability of counterproductive decision making and
diminished competitiveness.

 Complexity may be necessary to drive the value

proposition.

 Cost of complexity can not outweigh the value.

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Sources of Complexity
1. Organizational Structure
2. Value-Added Processes
3. The Operating Network
4. SKUs
5. The Supply Base
6. The Customer Base
7. The Logistics System

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Organizational Structure
 Issue: decision-making authority

 Centralized – leverages scale to reduce cost

 Decentralized – leverages local knowledge to

build relationships and promote rapid
response

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Centralized vs. Decentralized Structure
Centralized Structure
Pros Cons
Increases leverage Increased bureaucracy
Reduces duplication Reduced flexibility
Facilitates standardization Can lose touch with reality
Enables specialization
Greater control
Decentralized Structure
Pros Cons
Knowledge of local needs Reduces leverage
Better local relationships Leads to duplication
Greater responsiveness Is relatively inefficient
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Organizational Structure - Solutions
 Team-based structures
 Policies to promote center-led, decentralized
organization
 Measurement systems that promote
cooperation, support local autonomy and
accountability
 Modern communication and database
technologies

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Value-Added Processes
Processes add complexity because they:
 involve a number of people from different
functions;
 consist of a large number of distinct activities;
 employ a variety of capital equipment;
 design, produce, or deliver a wide range of
products.

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Value-Added Processes - Solutions
 Standardization
 Error Proofing
 Synchronization of Material Flows

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Operating Network
 Operating networks add complexity because of the
number of distinct facilities that must be
coordinated.

 Efforts to “optimize the supply chain” using

sophisticated mathematical models often fail over
the long term because:
 operating networks evolve over time;
 acquisitions complicate network design;
 macroeconomics and political stability influence network
design.

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Operating Network - Solutions
Managers should analyze the supply chain in
terms of the following questions:
1. How many facilities do we really need to
achieve desired service levels?
2. Where should they be located?
3. What activities will be performed at each?
4. How will the value-added activities be
coordinated and controlled?
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Company SKUs
 Product proliferation adds to SC complexity.
 Breadth complexity
 Wide range of products
 Low profit margin
 Relies on inventory turns and efficient operations
 Depth complexity
 large number of options for the products carried
 High profit margin
 Relies on customer service and distinctive
products
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Company SKUs - Solutions
Managers wishing to reduce complexity due to
product proliferation should:
 Proactively manage the breadth versus depth
decision
 Using total cost analysis, eliminate
unprofitable SKUs
 Institute policies to reduce proliferation
 Use postponement strategies
 Use database and data mining tools
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 Impact of Options on the Complexity
Product Characteristic Number of Options

Color: Charcoal, Field Khaki, Khaki, Cognac, Brown, Olive, 9

Steel, Navy, and Black
Fabric: blended 60% cotton/40% polyester or 100% cotton 2

Front: pleated or plain 2

Rise: long, regular, short, big/regular, and big/tall 5

Waist Size: 30, 31, 32, 33, 34, 35, 36, 37, 38, 40, 42, 44, 16
46, 48, 50, 52 inches
Length: 27-38 inches 10

Bottom: cuffed or plain 2

Total SKUs 9x2x2x5x16x10x2 = 57,600

Simplified SKUs via Postponement: 9x2x2x5x16x1x1 = 2,880

Simplified SKUs via Data Mining: 1,300

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The Supply Base
 Traditionally, American manufacturers have
sourced parts from multiple suppliers to
hedge against disruptions and create leverage
to drive down costs.

 Multiple redundant suppliers, add complexity

to the supply chain.

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Single or Multiple Suppliers

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The Supply Base - Solutions
To reduce complexity, supply-chain managers
may seek to reduce the number of suppliers
and aggregate purchasing.
 ABC Classification Systems
 Supplier Certifications
 Long-Term Partnership Style Relationships

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Supply Base Optimization Process

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ABC Suppliers Classification

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Supply Base Optimization Process

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Supplier Selection Process

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Supply Base Optimization Process

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Supply Base Optimization Process

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The Customer Base
 Customers generally have greater power in
supply chain relationships.

 Customers use this power to demand

consistently higher levels of service without
additional compensation.

 Customer proliferation may result in

suboptimal profits.
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The Customer Base - Solutions
Managers may seek to address an unwieldy
customer base by:
 ABC Classification Systems
 Customer Relationship Management (CRM)
software to segment customers
 Sophisticated cost analysis to evaluate
customers

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Logistics System
 Logistic systems are complex due to:
 The number of transportation modes available
 The number of different facilities involved
 Geographic dispersion
 Product proliferation
 Variation in demand
 Variation in customer requirements

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Logistics System - Solutions
Managers may seek to address logistics system
complexity by:
 Adopting advanced technology – ERP, DRP,
CRM systems; database management; data
mining.
 Outsourcing – third-party logistics
 Insourcing – on-site third-party logistics
 Innovative practices
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SC Rationalization
 Supply chain rationalization is the process of
systematically evaluating the company’s
operating network, suppliers, customers, and
product offerings to find and eliminate
inefficiencies and redundancies.

 The goal is to efficiently allocate scarce

resources to a company’s most profitable and
strategically important activities and
relationships.
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SC Rationalization
 44 percent of companies have rationalized
their supply base
 38 percent of companies have performed a
customer profitability analysis
 28 percent of companies have streamlined
product offerings

- Cap Gemini (2002)

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Chrysler’s Supply Chain

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 Rationalization at Chrysler
Analysis of the supply chain to eliminate unnecessary or
wasteful activities.
 Step 1 – Identify and eliminate redundant suppliers.
 Result: Fewer SKUs and fewer and higher-
performing suppliers

 Step 2 - Classify remaining suppliers on the basis of

importance.
 Result: Discovery of potential threats and ability to
focus resources on collaborative relationships with
key suppliers.
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Shifting Roles Among Members
 Traditionally, roles for individual members of
the supply chain were well defined.

 Today, roles are far less certain.

 To insure survivability, supply-chain

participants must add unique value.

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Role Shifting
 Role shifting enhances supply chain efficiency
thereby enhancing the value proposition.

 Functional shiftability – allows firms with

unique capabilities to undertake additional
roles.

 Dis-intermediated – a company that is shifted

out of the supply chain, replaced by a more
capable firm.
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Role Shifting – Best Practices
 Second-Tier Sourcing Contracts
 Supplier Certification
 Vendor-Managed Replenishment
 Supplier-Integrated Manufacturing

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Second-Tier Sourcing Contracts
 Coordinated purchasing with first-tier
suppliers.

 Allows for aggregation of purchases.

 Leverages purchasing power to reduce cost.

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Supplier Certification
 Supplier certification is the formal process of
working with selected suppliers to evaluate
and improve supplier quality.

 “Dock to Stock” – incoming shipments no

longer are inspected, they go straight to
inventory or the point of use.

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Supplier Certification Process

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Vendor-Managed Replenishment
 Suppliers actively manage inventory for
customers.

 Suppliers benefit due to improved demand

information and improved ability to allocate
productive resources.

 Customers benefit from lower labor and

inventory costs, improved item availability.
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Supplier-Integrated Manufacturing
 Customer firm invites suppliers to establish
manufacturing facilities at the customer’s
location.

 Suppliers provide their own specialized

equipment, manage their own inventory, and
hire and train their own workers.

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A Return to the Opening Story
Based on what you have now read and discussed:
1. Is all complexity bad? Why or why not? What
are the costs of complexity up and down the
chain?
2. What are the sources of complexity? Why do
so many managers make the decision to “just
live with it”?
3. What best practices might Charlene share with
Doug regarding how to deal with the challenge
of complexity?
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