Key Supply Chain Components
An effective supply chain management system (SCM system) can be described in terms of three key perspectives, i.e. the strategic, tactical and operational levels. Each aspect of SCM have both a push and a pull element, (or supply and demand side in economic terms).
Strategic decisions include consideration of factors such as the number of suppliers to be contracted in the supply chain, size of warehousing capacity in which locations and deployment of staff or third party transport providers. The selection of supply chain partners, transport mode, timing, load capacity and costs of service are key to sustaining efficiencies.
Increasingly vital to profitable strategies is also appropriate technological infrastructure design and implementation. The drive to maintain strong supply chain collaboration of all stakeholder companies is dependent on choosing well in terms of technical innovation.
The tactical execution of strategic initiatives determine success of overall business plans and SCM systems. The details of how partnership agreements play out can be a combination of fixed elements or on-going development. For instance, decisions related to inventory quantity, quality, timing and location will be made on contracting arrangements being made, but also during planning and carrying out of operations.
Tactical planning will include identifying progress benchmarks or applying performance indicators to monitor and review supply chain effectiveness and estimate future viability. Tactical analysis data can then feed into future strategy in a circular feedback loop.
Operational activity is the daily functioning at a ground level, including the third party service providers, how customer service is carried out, system administration and granular detail of how supply chain business objectives pan out. Detail interaction demonstrate how smoothly and efficiently strategic and tactical decisions run. Activities include sharing of shipping documentation, digital communications between staff, purchase order issuing, demand forecast report production, amongst other operational responsibilities.
From factory production to customer feedback on job completion, there will be supply chain strategic decisions of when production should happen, through distribution supply chain partnership contract development, through to retail channel marketing. Projections of demand requirements will be promoted by supply business leaders. By contrast, pulls on a supply chain arise out of actual customer or supply chain business partner demand. Push and pull strategies, tactics and operations occur within and between the supply chain.
Stages of Push and Pull in a Supply Chain Management System
Typically, supply chains go through five stages.
- Raw materials are sourced
- Manufacturers turn raw materials into products.
- Fresh products are shipped to warehousing and distribution facilities.
- A distributor supplies the products to retailers, or a fulfilment centre, for an e-commerce business
- Delivery of products to the consumer.
Promotional Drives and Push Business Strategies
When companies project future demand, they will seek to meet supply and promote those products and / or services to their supply chain. In this business operational model, therefore, “projected demand determines what enters the [supply chain] process”, says Steve Lander of Chron.
For example, seasonal demand expectations may lead to children’s toys being advertised in the months leading to Christmas, or plant machinery innovation might happen all year round, but product launch may be scheduled to coincide with industry trade shows, for instance.
By pushing demand, companies have greater predictability and control over their supply chain management system, knowing quality, quantity and timing requirements of their product range, they can stimulate demand with discounts or create scarcity to raise perceived value. Being able to plan production and supply to meet need allows a company to prepare for warehouse storage capacity, stock delivery levels, transport mode requirements and supply chain service needs. The benefit of anticipation lies in consistency of supply and revenue generation, which in turn supports further product development.
Flexible Demand (‘Pull’) Strategies
A pull strategy is triggered in response to increased demand. A widespread approach to inventory management is referred to in terms of the ‘just-in-time’ model of supply chain management. This system minimises stock available, to avoid losses through over-production and supply. Producers instead focus on more guaranteed revenues through last-moment delivery.
Producers preferring to employ pull side strategies aim to only deploy their supply chain when customer demand is proven according to their parameters. For example, food suppliers deal in perishable goods and while a vast amount of food product is wasted in supply chains, producers and wholesalers will only want to source what they will succeed in selling within a viable window of time.
Similarly, luxury goods companies who seek to offer customised products to customers direct to their buyers will wait until they receive an order or special commission from their consumer.
The benefit of a pull strategy is that a company avoids the cost of production and storage of inventory that may not sell. Of course, not having enough product to meet demand is a downside risk if they cannot scale production quickly enough as demand rises.
Push & Pull Combination Strategies
For this reason, generally, supply and chain management is often a combination of weighing both supply and demand considerations. To maximise the potential for market control, companies constantly seek to innovate and respond to customer trends arising in order to steal a march over competitors by filling a demand gap. However, given that innovation is costly, satisfying demand for staple products ensures consistency of revenue generation.
A well-balanced supply chain will anticipate processes up and down-stream to provide a best fit and be responsive to the wider supply chain. While distributors may want to stockpile products at key distribution centres while they and partners gear up their push strategies, or until the sales cycle shifts demand into motion, manufacturers might look to build up stocks of raw materials in anticipation of e.g. shortages anticipated in harvests, or price rises. This ensures production costs remain stable, providing predictability of budgets.
There are always risks and benefits in different strategies, practical measures and operational approaches. Companies seek to constantly spread risk between their supply chains in an ever-changing market place. Given the diverse and complex variables involved in supply chain decisions, those companies who can respond fastest will gain competitive advantage and explains the increasing importance of big data and machine learning in supply chain IT systems and automation that aid expert decision making.