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Posted: November 4, 2013
Dave Phillips
Dave Phillips

Dave Phillips is a principal with Strategy& based in London. He specializes in operations strategy and supply chain optimization within the consumer goods industry.

 

Phil Coghlan
Phil Coghlan
Phil Coghlan was formerly a senior associate with Booz & Company.
 

 
 

Why You Should Create Multiple Supply Chains

Consumers have grown accustomed to getting things their way. With customer demands growing more sophisticated and customization becoming more popular in several categories, the number of products on the market in almost every industry has skyrocketed. Complexity is here to stay, and manufacturers must adapt.

To date, many manufacturing companies have reacted to this reality by reducing their number of products in order to invest more in those that generate the most profit. But although this approach has its uses, it will eventually run up against an inescapable truth—the increasingly diverse tastes of savvy and global consumers are now a fact of commercial life.

But don’t panic, manufacturers. Accommodating the myriad and complex tastes of your customers isn’t as hard as it seems. The solution: a differentiated supply chain. Instead of companies having one supply chain that struggles to meet all their needs, they can design multiple supply chains that work together to serve different segments based on different markets, consumers, products, or seasons.

Don’t panic, manufacturers. The solution to pleasing your customers is a differentiated supply chain.

One alcoholic beverage company we worked with had a highly complex product portfolio and sales of the different products varied. However, a small proportion of its products represented a surprisingly large and stable volume of sales. So we designed an efficient supply chain purely to handle this stable segment and a second, more responsive one to deal with less predictable demand. These two supply chains worked in tandem, but didn’t get in each other’s way.

The primary intent of the efficient chain was to reduce cost, but it had the additional benefit of reducing CO2 emissions. By better shaping and synchronizing orders with manufacturing and delivery, the new system allows more products to be shipped direct from plant to customer.

Multiple supply chains can also customize service levels. The efficient supply chain seeks to maintain the expected service level at the lowest possible cost, whereas the goal of the responsive supply chain is the reverse: to improve service to the customer at a somewhat higher, but still acceptable, cost. Sensitive to peaks and troughs in unpredictable demand, it avoids tying up valuable capacity in the supply chain and gets the product on the shelves before it loses its appeal to the consumer.

We also worked with a large apparel company that found it needed three supply chains—one for basic goods always in demand, one for seasonal styles updated four times a year, and one for the latest fashions. Each supply chain had a different lead time, inventory size, and mode of business planning. Basic items perpetually in demand—T-shirts and socks—were sent cheaply on slow freighters, whereas the latest fashions were whisked to the stores while demand was at its peak and they commanded the highest price.

The much shorter interval between production and sales for seasonal and fashion items reduced storage and redistribution costs. The results were exceptional: The company was able to reduce its working capital by about 30 percent, while the gross profit margin increased by almost 6 percent.

Creating a portfolio of supply chains can also strengthen product development—if a company doesn’t have to wait for free capacity in its one supply chain, it can react quickly to emerging trends.

Differentiated supply chains mark a real departure for manufacturers in a number of ways. Not only do they take a market-back view of things in which the needs of product development, customers, and markets are taken into account all at once, they can also improve a company’s internal relationships.

Supply chain departments tend to concentrate on improving efficiency and reducing complexity in the existing system. But limiting the number of products can lead to problems in sales and marketing when customers want more variety. Differentiated supply chains can transform this sometimes antagonistic relationship into a more productive one.

The piecemeal approach of the past sought to optimize each step of the chain in isolation. A differentiated supply chain strategy adopts a holistic view, which can unlock new opportunities for companies to find ways to be as efficient as possible while catering to as many consumers as possible.

Some intermediate steps need to be taken. Adopting a differentiated supply chain strategy is not simply a matter of flicking a switch. Any company considering such a switch in strategy would have to spend some time strengthening its internal capabilities and instituting a prudent change management strategy. IT systems, for example, would need to be reconfigured.

But the greatest shift is likely psychological. Moving from a silo mentality to cross-functional cooperation—and from a mind-set that resisted variety to one that welcomes it—will not happen overnight. It takes some time to absorb such changes, but if there’s anything our work with differentiated supply chains has shown, it’s that doing something several different ways is, in fact, far simpler than doing it one way. 

 

 
 
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