Decision Phases in a Supply Chain

Successful supply chain management requires many decisions relating to the flow of informa­tion, product, and funds. Each decision should be made to raise the supply chain surplus. These decisions fall into three categories or phases, depending on the frequency of each decision and the time frame during which a decision phase has an impact. As a result, each category of deci­sions must consider uncertainty over the decision horizon.

1. Supply chain strategy or design: During this phase, a company decides how to structure the supply chain over the next several years. It decides what the chain’s configuration will be, how resources will be allocated, and what processes each stage will perform. Strategic decisions made by companies include whether to outsource or perform a supply chain function in-house, the location and capacities of production and warehousing facilities, the products to be manufactured or stored at various locations, the modes of transportation to be made available along different shipping legs, and the type of information system to be used. PepsiCo Inc.’s decision in 2009 to purchase two of its largest bottlers is a supply chain design or strategic deci­sion. A firm must ensure that the supply chain configuration supports its strategic objectives and increases the supply chain surplus during this phase. As the PepsiCo CEO announced in a news release on August 4, “while the existing model has served the system very well, the fully inte­grated beverage business will enable us to bring innovative products and packages to market faster, streamline our manufacturing and distribution systems and react more quickly to changes in the marketplace.” Supply chain design decisions are typically made for the long term (a mat­ter of years) and are expensive to alter on short notice. Consequently, when companies make these decisions, they must take into account uncertainty in anticipated market conditions over the following few years.

2. Supply chain planning: For decisions made during this phase, the time frame considered is a quarter to a year. Therefore, the supply chain’s configuration determined in the strategic phase is fixed. This configuration establishes constraints within which planning must be done. The goal of planning is to maximize the supply chain surplus that can be generated over the planning horizon given the constraints established during the strategic or design phase. Companies start the planning phase with a forecast for the coming year (or a comparable time frame) of demand and other factors, such as costs and prices in different markets. Planning includes making decisions regarding which markets will be supplied from which locations, the subcontracting of manufacturing, the inventory policies to be followed, and the timing and size of marketing and price promotions. For example, steel giant ArcelorMittal’s decisions regarding markets supplied by a production facility and target production quantities at each location are classified as planning decisions. In the planning phase, companies must include uncertainty in demand, exchange rates, and competition over this time horizon in their decisions. Given a shorter time frame and better forecasts than in the design phase, companies in the planning phase try to incorporate any flexibility built into the supply chain in the design phase and exploit it to optimize performance. As a result of the planning phase, companies define a set of operating policies that govern short-term operations.

3. Supply chain operation: The time horizon here is weekly or daily. During this phase, companies make decisions regarding individual customer orders. At the operational level, supply chain configuration is considered fixed and planning policies are already defined. The goal of supply chain operations is to handle incoming customer orders in the best possible manner. Dur­ing this phase, firms allocate inventory or production to individual orders, set a date by which an order is to be filled, generate pick lists at a warehouse, allocate an order to a particular shipping mode and shipment, set delivery schedules of trucks, and place replenishment orders. Because operational decisions are being made in the short term (minutes, hours, or days), there is less uncertainty about demand information. Given the constraints established by the configuration and planning policies, the goal during the operation phase is to exploit the reduction of uncer­tainty and optimize performance.

The design, planning, and operation of a supply chain have a strong impact on overall prof­itability and success. It is fair to state that a large part of the success of firms such as Walmart and Seven-Eleven Japan can be attributed to their effective supply chain design, planning, and operation.

In later chapters, we develop concepts and present methodologies that can be used at each of the three decision phases described earlier. Most of our discussion addresses the supply chain design and planning phases.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.