The five basic strategies for the economic optimisation of a supply chain 

Andreas Kemmner

The ideal image of modern production logistics is characterised by the idea of market-synchronised production: we produce what the market needs. Ideally, not in advance, but just in time. This ideal vision of market-synchronised production is hardly feasible in any company today - if it ever was.

Customers and markets are far too impatient. They demand high product availability, want short delivery times and on-time deliveries. The increasing number of variants in the product portfolios further exacerbates this problem. Usually, an only moderately increasing demand is spread over a broad product portfolio, which lowers the demand for the individual product and increases fluctuations. In practice, when trying to produce this broadly distributed and fluctuating demand in sync with the market, we regularly hit our heads against the ceiling because of lacking capacities in production, missing personnel or the suppliers' inability to deliver.

Strategy mix against impatience

In order to survive economically in such an environment, it is necessary to find the minimum between flexibility costs of the supply chain and inventory costs. Five basic strategies are available for dealing with flexibility costs and inventory costs. The right balance of these variables is an essential element of a logistical business model:

  • Strategy 1: Maximise flexibility
    We increase production flexibility so that we can follow every hook that market demand throws up. This usually requires maintaining higher production capacities or, if we do not yet produce around the clock and around the week, fluctuating staff capacity. However, this not only costs overtime and special bonuses, but often also requires a generally higher number of staff. The advantage of this strategy is low inventories in the value chain.
  • Strategy 2: Maximise inventories
    Instead of demanding a high degree of flexibility in the value chain, we can also try to seal off production from the firestorm of the markets by building a firewall of inventories. Such a firewall is always possible at the logistical decoupling point - typically at the finished-goods warehouse in the case of make-to-stock manufacturers, and at the component warehouse before assembly in the case of variant manufacturers. Although this results in high inventory costs, it saves on flexibility costs in production.
  • Strategy 3: Pragmatic stocks
    A commonly used approach is to reduce product availability. As we all know, the required safety stocks explode at readiness levels beyond 95%. Every half percent of reduced product availability can save considerable inventory costs and, of course, increase liquidity.
  • Strategy 4: Pragmatic flexibility
    Just as reducing product availability reduces the necessary inventory costs, an accepted delay in delivery reduces the necessary flexibility costs in production.
Five basic strategies for Supply Chaon Optimization - Abels & Kemmner

Of course, neither of these strategies comes for free. At the very least, there is a risk that we will lose customers and turnover to competitors. Unfortunately, it is rarely possible to calculate exactly how high the opportunity costs are. But anyone with a few years of practical experience knows that these costs do occur.

  •  Strategy 5: Queue  As a last option, we can try to educate customers to be patient. From a pure logistical perspective, this is the silver bullet, allowing a high degree of forward planning in the supply chain and low inventory costs as well as low flexibility costs. The European automotive industry has been particularly successful with this strategy.  It can only be used by de facto or perceived monopolists. There are few of the former, but a lot of the latter - who would drive the "wrong" car brand, buy the "wrong" watch brand or switch from one long-standing and cheap supplier to another?   

If customers absolutely need the products, a de facto monopolist can perhaps force them to grudgingly wait in the short term, but economics shows us that de facto monopolies do not last long. Perceived monopolies can remain effective for a longer time, as the car industry taught us over the years, but this incurs high marketing costs and customers get lost anyway because of too long delivery times. 

None of the five basic strategies represents a real silver bullet. It is the right compromise between these strategies that is decisive for the success of supply chain management.   

By means of simulation, the solution is not witchcraft

The dynamic value streams of modern supply chains make it practically impossible to find the right strategy mix using simple static considerations, such as a classic value stream analysis. Neither is it sufficient to focus on representative items, nor are average values sufficient for a differentiated analysis of the situation.  

 However, finding the right compromises to work as economically as possible is not witchcraft. By applying a dynamic simulation based on empirical data, it is possible to develop a coordinated strategy mix. For this purpose, extensive data from the ERP system is transferred to a digital twin and thus the value streams are mapped together with the planning and control model. Such a digital twin not only allows a stress test of the existing logistical business model. It also makes it possible to further optimise the logistics strategy and arrive at the appropriate strategy mix. 

Andreas Kemmner

Autor | Author

Prof. Dr Kemmner has carried out well over 150 national and international projects in over 25 years of consultancy work in supply chain management and reorganisation.

In 2012, he was appointed honorary professor for logistics and supply chain management by the WHZ.

The results of his projects have already received several awards.

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