Executive Briefings

Supply Chain Integration: Challenges and Good Practices

The last decade has brought a dramatic shift in the nature of competition for most companies. Technological advances, particularly in information technology, coupled with globalization, the rise of complexity and shrinking time horizons are driving order-of-magnitude changes in the competitive demands on strategic management of business and on the management of supply chains.

These competitive pressures have a strong direct effect on supply chain strategy and integration. Integrating activities both within and beyond organizational boundaries has become and will continue to be a major challenge for supply chain executives. Integration efforts now extend beyond traditional product-process design and functional integration to focus on extra-organizational links with customers and suppliers. The object is to produce "supply chain-enhanced" products and services.

Our examination of supply chain integration focuses on two key issues--alignment and linkage--both inside an organization and across organizations.

1. Alignment refers to common vision, goals, purpose and objectives across organizations, functions and processes in the supply chain. Alignment ensures that there is consistency in the direction and objectives as these plans and decisions are made.

2. Linkage refers to the communication and sharing of information needed for planning and decision-making, and the interaction of people involved in planning and decision-making. Linkage ensures that the information necessary for decision-making is available, and that different functions and entities in the supply chain are working with the same data as decisions are made.

3. Supply chain alignment and linkage do not happen in a vacuum. Supply chain management is a part of the broader management of an enterprise, and it must support the broader business strategy of the enterprise.

4. Business Strategy defines how the firm intends to compete in the markets or market segments it pursues. Broadly speaking, a firm can compete on low cost or through differentiation. Supply chains can contribute significantly to both sets of goals. However, different business strategies are likely to be best supported by different supply chains and supply chain management decisions. A business strategy based on speed of innovation and fast time to market would require a different network of suppliers, a different manufacturing infrastructure and a different distribution infrastructure than a strategy based on low costs. It is therefore critical that the strategies pursued and the decisions made by the supply chain group be consistent and aligned with the overall strategy of the enterprise.

Supply Chain Strategy Planning Decisions relate to coordinating supply chain management decisions with business strategy, product/service design decisions and with designing the physical supply chain. The right infrastructure, in terms of technology, people, control systems, relationships, policies and procedures are critical in facilitating alignment and linkage.

Our research identified four critical supply chain strategy areas:

1. Supply Chain Strategy and Vision, which defines the role supply chain management will have in the organization and in the pursuit of the business strategy.

2. Insourcing/Outsourcing Strategy, which goes to the heart of the firm's value proposition--what is it that the firm does better than anyone else--to create value for the customer. What is kept and what is outsourced depends on supply chain strategy and drives supply chain strategy.

3. Supply Chain Segmentation and Architecture, which addresses the design of the supply chain, its physical structure, its information flows, its cash flows and its "conceptual" structure. Supply chain segmentation broadens the familiar concept of market segmentation to the consideration of differential supply chains (manufacturing plants, distribution centers, supply bases) to support the different market segments.

4. Product and Service Design, which must include supply chain considerations in product/service design decisions. Product designs largely influence manufacturing efficiencies, distribution system requirements and customer service levels. By including supply chain perspectives, product and service designs can be more effective.

Supply Chain Execution Processes incorporate the operational decisions in supply chain management that must then be aligned with the supply chain strategy. The design and execution of these processes determine in large part how supply chains perform. The processes define how the firm matches supply with demand to deliver value to the customer. Included here are the processes for forecasting and demand management, order promising, operations planning, material planning and supply management. The key issue across these processes is linkage-- facilitating the communication and information sharing necessary for making decisions that are consistent and focused on meeting customer expectations. The three key supply chain processes identified in this research are:

1. Supply-facing Processes for Order Fulfillment

2. Sales and Operations Planning (SOP)

3. Customer-facing Processes for Order Fulfillment

Supply Chain Enablers are the final key to the puzzle. These enablers do not by themselves make alignment and linkage happen, but if they are not in place, alignment and linkage will suffer. The enablers identified by the research are:

Communications and E-systems, which comprise both the technology available for collecting and sharing data and information, and the mechanisms in place to facilitate people-to-people communication in support of decision-making. The systems help ensure data availability, accuracy and timeliness. Equally important, however, are the processes and procedures that encourage and facilitate the use of that data for effective decision-making.

Trust, which is at the heart of breaking down the functional and organizational barriers that impede true integration. Without trust and the willingness to collaborate, it is impossible to achieve aligned, consistent decision-making and actions required for the integrated supply chain.

Organization and People, which structures include reporting structures, team membership, and roles and responsibilities and, as such, largely shape the ways people will interact and relate to each other in an enterprise. The wrong organizational structure can exclude key stakeholders and key resources from important decisions and inhibit the collaboration needed to achieve alignment and linkage. Working within the organization structure, the skills and capabilities of people are critical to successfully integrating a supply chain.

Metrics and reward systems are critical factors in driving behavior within an organization and among organizations. Regardless of the "strategies" or "philosophies" around supply chain integration that are voiced by top management, it is the metrics and rewards to which people respond. Customer-centric metrics that are aligned and consistent across different functional groups and across organizations in the supply chain will encourage behavior that leads to aligned and consistent decisions.

Challenges to Supply Chain Integration: Based on the case studies completed as part of this project, we conclude that well integrated supply chains are not ubiquitous at this time. There are certainly many success stories and many pockets of excellent supply chain integration. There are also many cases of failures and breakdowns in integration. Through our research, we have identified 14 key challenges organizations must meet to achieve true supply chain integration.

1. Establish a vision of how financial and non-financial results will improve with supply chain integration.

2. Develop people, culture and an organization that supports the supply chain vision.

3. Develop customer-centric metrics.

4. Develop multiple supply chains to meet the needs of different customer and market segments.

5. Establish the correct positioning of work on a global basis.

6. Incorporate supply chain consideration into product and service design decisions.

7. Maintain sourcing as a first-level priority.

8. Stay focused and consistent in relationships with customers and suppliers.

9. Create an effective Sales and Operations process.

10. Develop valid and reliable databases, data and information.

11. Develop the capabilities and analytic tools required to make effective decisions in an increasingly complex and risky environment.

12. Build trust within and across organizations in the supply chain.

13. Find ways to share risk equitably among supply chain partners.

14. Find ways to share rewards equitably among supply chain partners.

This research does not provide all of the answers to overcoming these challenges to integrating your supply chains or even a comprehensive approach for doing so. But in the full report you will find strategies and good practices developed by our focus companies to meet these challenges and to push ahead in integrating supply chains.

To access the full report at the CAPS Research web site click the URL below. Please note that all first-time visitors need to create a user login profile to access the research documents.

Focus Study Authors: Phillip L. Carter, DBA, and executive Director for CAPS Research and Professor of Supply Chain Management, Harold E. Fearon Chair in Purchasing, W. P. Carey School of Business at Arizona State University; Robert M. Monczka, Ph.D., Director, Strategic Sourcing and Supply Chain Strategy Research for CAPS Research, Distinguished Research Professor of Supply Chain Management, W. P. Carey School of Business at Arizona State University; Gary L. Ragatz, Ph.D., Associate Professor of Operations Management, The Eli Broad Graduate School of Management, Michigan State University, and Peter L. Jennings, Research Associate, CAPS Research
CAPS Research

The last decade has brought a dramatic shift in the nature of competition for most companies. Technological advances, particularly in information technology, coupled with globalization, the rise of complexity and shrinking time horizons are driving order-of-magnitude changes in the competitive demands on strategic management of business and on the management of supply chains.

These competitive pressures have a strong direct effect on supply chain strategy and integration. Integrating activities both within and beyond organizational boundaries has become and will continue to be a major challenge for supply chain executives. Integration efforts now extend beyond traditional product-process design and functional integration to focus on extra-organizational links with customers and suppliers. The object is to produce "supply chain-enhanced" products and services.

Our examination of supply chain integration focuses on two key issues--alignment and linkage--both inside an organization and across organizations.

1. Alignment refers to common vision, goals, purpose and objectives across organizations, functions and processes in the supply chain. Alignment ensures that there is consistency in the direction and objectives as these plans and decisions are made.

2. Linkage refers to the communication and sharing of information needed for planning and decision-making, and the interaction of people involved in planning and decision-making. Linkage ensures that the information necessary for decision-making is available, and that different functions and entities in the supply chain are working with the same data as decisions are made.

3. Supply chain alignment and linkage do not happen in a vacuum. Supply chain management is a part of the broader management of an enterprise, and it must support the broader business strategy of the enterprise.

4. Business Strategy defines how the firm intends to compete in the markets or market segments it pursues. Broadly speaking, a firm can compete on low cost or through differentiation. Supply chains can contribute significantly to both sets of goals. However, different business strategies are likely to be best supported by different supply chains and supply chain management decisions. A business strategy based on speed of innovation and fast time to market would require a different network of suppliers, a different manufacturing infrastructure and a different distribution infrastructure than a strategy based on low costs. It is therefore critical that the strategies pursued and the decisions made by the supply chain group be consistent and aligned with the overall strategy of the enterprise.

Supply Chain Strategy Planning Decisions relate to coordinating supply chain management decisions with business strategy, product/service design decisions and with designing the physical supply chain. The right infrastructure, in terms of technology, people, control systems, relationships, policies and procedures are critical in facilitating alignment and linkage.

Our research identified four critical supply chain strategy areas:

1. Supply Chain Strategy and Vision, which defines the role supply chain management will have in the organization and in the pursuit of the business strategy.

2. Insourcing/Outsourcing Strategy, which goes to the heart of the firm's value proposition--what is it that the firm does better than anyone else--to create value for the customer. What is kept and what is outsourced depends on supply chain strategy and drives supply chain strategy.

3. Supply Chain Segmentation and Architecture, which addresses the design of the supply chain, its physical structure, its information flows, its cash flows and its "conceptual" structure. Supply chain segmentation broadens the familiar concept of market segmentation to the consideration of differential supply chains (manufacturing plants, distribution centers, supply bases) to support the different market segments.

4. Product and Service Design, which must include supply chain considerations in product/service design decisions. Product designs largely influence manufacturing efficiencies, distribution system requirements and customer service levels. By including supply chain perspectives, product and service designs can be more effective.

Supply Chain Execution Processes incorporate the operational decisions in supply chain management that must then be aligned with the supply chain strategy. The design and execution of these processes determine in large part how supply chains perform. The processes define how the firm matches supply with demand to deliver value to the customer. Included here are the processes for forecasting and demand management, order promising, operations planning, material planning and supply management. The key issue across these processes is linkage-- facilitating the communication and information sharing necessary for making decisions that are consistent and focused on meeting customer expectations. The three key supply chain processes identified in this research are:

1. Supply-facing Processes for Order Fulfillment

2. Sales and Operations Planning (SOP)

3. Customer-facing Processes for Order Fulfillment

Supply Chain Enablers are the final key to the puzzle. These enablers do not by themselves make alignment and linkage happen, but if they are not in place, alignment and linkage will suffer. The enablers identified by the research are:

Communications and E-systems, which comprise both the technology available for collecting and sharing data and information, and the mechanisms in place to facilitate people-to-people communication in support of decision-making. The systems help ensure data availability, accuracy and timeliness. Equally important, however, are the processes and procedures that encourage and facilitate the use of that data for effective decision-making.

Trust, which is at the heart of breaking down the functional and organizational barriers that impede true integration. Without trust and the willingness to collaborate, it is impossible to achieve aligned, consistent decision-making and actions required for the integrated supply chain.

Organization and People, which structures include reporting structures, team membership, and roles and responsibilities and, as such, largely shape the ways people will interact and relate to each other in an enterprise. The wrong organizational structure can exclude key stakeholders and key resources from important decisions and inhibit the collaboration needed to achieve alignment and linkage. Working within the organization structure, the skills and capabilities of people are critical to successfully integrating a supply chain.

Metrics and reward systems are critical factors in driving behavior within an organization and among organizations. Regardless of the "strategies" or "philosophies" around supply chain integration that are voiced by top management, it is the metrics and rewards to which people respond. Customer-centric metrics that are aligned and consistent across different functional groups and across organizations in the supply chain will encourage behavior that leads to aligned and consistent decisions.

Challenges to Supply Chain Integration: Based on the case studies completed as part of this project, we conclude that well integrated supply chains are not ubiquitous at this time. There are certainly many success stories and many pockets of excellent supply chain integration. There are also many cases of failures and breakdowns in integration. Through our research, we have identified 14 key challenges organizations must meet to achieve true supply chain integration.

1. Establish a vision of how financial and non-financial results will improve with supply chain integration.

2. Develop people, culture and an organization that supports the supply chain vision.

3. Develop customer-centric metrics.

4. Develop multiple supply chains to meet the needs of different customer and market segments.

5. Establish the correct positioning of work on a global basis.

6. Incorporate supply chain consideration into product and service design decisions.

7. Maintain sourcing as a first-level priority.

8. Stay focused and consistent in relationships with customers and suppliers.

9. Create an effective Sales and Operations process.

10. Develop valid and reliable databases, data and information.

11. Develop the capabilities and analytic tools required to make effective decisions in an increasingly complex and risky environment.

12. Build trust within and across organizations in the supply chain.

13. Find ways to share risk equitably among supply chain partners.

14. Find ways to share rewards equitably among supply chain partners.

This research does not provide all of the answers to overcoming these challenges to integrating your supply chains or even a comprehensive approach for doing so. But in the full report you will find strategies and good practices developed by our focus companies to meet these challenges and to push ahead in integrating supply chains.

To access the full report at the CAPS Research web site click the URL below. Please note that all first-time visitors need to create a user login profile to access the research documents.

Focus Study Authors: Phillip L. Carter, DBA, and executive Director for CAPS Research and Professor of Supply Chain Management, Harold E. Fearon Chair in Purchasing, W. P. Carey School of Business at Arizona State University; Robert M. Monczka, Ph.D., Director, Strategic Sourcing and Supply Chain Strategy Research for CAPS Research, Distinguished Research Professor of Supply Chain Management, W. P. Carey School of Business at Arizona State University; Gary L. Ragatz, Ph.D., Associate Professor of Operations Management, The Eli Broad Graduate School of Management, Michigan State University, and Peter L. Jennings, Research Associate, CAPS Research
CAPS Research