Determining the operating footprint (Article 1)

There is an opportunity to grow; you have assessed the market, tested demand, perhaps you are trading via a distributor, or you have operations on the ground already. Now it seems the time is right to make a bolder step. It could be this is on home turf and you are confident you know enough about your operation to make a big step up; it may be in a new geography, but business is business the world over and you are down the track on establishing new relationships. The supply chain has worked pretty well to date and any issues have been jumped on and solved. What could go wrong?

Scaling up operations and the associated supply chain activities are fundamental decisions; the consequences of getting them wrong are always serious and can be fatal to a firm’s competitive capabilities and survival. Capital employed and costs will increase; can these be offset by increased revenues in time? We will consider the 7 C’s that should be focus areas when expanding supply chain operations and how to navigate a path to success. This month exploring the fundamental operational and financial dimensions, in the next article, we examine the critical aspects of culture, organisation and leadership that determine success once an operating footprint has been established.

Capacity

Too much capacity and resources are underutilised, with costs driven up; too little capacity and customer demand cannot be served, and revenues are missed. The risks inherent to strategic capacity planning are in both badly configured resources at the outset and mismanagement of changing capacity over time.

Notwithstanding the role of financial assessments such as payback period, cost-benefit analysis, net present value and rate of return, there are some essential questions that need to be answered:

• What estimated demand must be satisfied and what is the range of possible volumes?
• What is the fundamental role of the new operations/sites created?
• How are the core supply chain trade-offs between service, cost, and capital affected and how are they expected to develop over time?

Net cash flows and discount rates rely on estimates of demand and an assessment of the risk associated with the capital investment. It is likely that forecast demand will show a smooth S curve over a defined period (typically a launch period followed by steep growth before volumes start to level out), probably as new capacity comes neatly online to satisfy it. [Graph below – side bar?] The likelihood of this happening is remote. Uncertainty around demand should be expected; delivering exact levels of capacity at set milestones is also questionable. Estimating the probability of expected demand with maximum and minimum ranges is helpful to support the development of a decision tree; we will discuss how this can be enhanced later. Similar estimates of project risk for new capacity will aid contingency planning.

It is at this point that the business must decide on its strategic approach to capacity planning; should capacity come on stream ahead of demand, should it lag demand or should increments be buffered with inventory (if feasible)? Some pros and cons are:

A key concern is how will the market react to a situation of under or over capacity? Will some degree of scarcity maintain or increase value? What is the scale of competitive threat and will any shortfall be seized upon? Could ‘spare’ capacity be used to drive and secure share at a key stage in market development?

Expanding an operation on a significant scale is a strategic decision; the role of new sites and facilities needs to be considered both in light of the business strategy and the potential opportunity that the site location(s) can bring. Treacy and Wiersema’s strategy model ¹ argues that a company can be a market leader by excelling at one of three strategies: operational excellence (cost), product leadership (quality) or customer intimacy (service). Factors such as tariff and trade concessions, reduced labour costs, capital incentives and subsidies are well established in many supply chain designs; important other dimensions such as customer service, supplier development, attracting skilled and talented employees, and the potential to create centres of expertise and excellence should not be overlooked. Can new sites do much more than simply add capacity?

Any supply chain is an integrated network of activities. Expansion at one link in the chain needs to be balanced with other elements. Somewhere in the chain is a bottleneck; knowing where this is and, when scaling up operations how this is affected, is critical for success. Collaboration, discussed later, can play a pivotal role here as it also can in managing uplifts to operating capacity to retain flexibility and manage the transition of variable to fixed cost as operations grow. A detailed analysis of the supply chain, including an appraisal of how capacity can be added and at what speed, will allow the drawing of a strategic decision tree that highlights options with associated risks and probabilities in support of a systematic approach [Illustration in side bar?]

All these factors can be weighed in an analysis that links supply chain design to financial trade-offs. Supply chain excellence is about balancing service, cost, and capital to deliver the business strategy and desired return on investment. Operational performance has clear links to revenue growth, cost optimisation and capital efficiency. Knowing these dimensions at the outset and how they are expected to develop as operations scale up, will provide a compass in a volatile and uncertain environment, allowing course corrections and clear priorities to be set.

Complexity

It is lazy thinking to suggest that growth automatically adds complexity. Scale is not necessarily the problem, it is the multiplier effect when poorly designed processes, systems and organisational structures are compounded.

Briefly pausing to reflect on potential causes of complexity in the business as it gears for growth is likely to be time well-spent. Homing in on the variables that drive complexity in your business will allow these to be proactively managed.

From a supply chain prospective, the main sources of complexity are:

• the range of products and services
• the number of operating entities in the network
• the variety of information systems and transfers between data media.

Of these, the range of products and services is by far the largest complexity driver. Portfolio management and the new product introduction process needs to be fully cross-functional with objective criteria for the inclusion and removal of products from the range. Without this, stock-keeping units have a strong tendency to grow with limited or no control.

A factor in scaling operations is the need to relinquish manual oversight on many decisions and actions. What may once have been within the capacity and capability of a supply chain manager to directly review, now needs to become exception based. The opportunity to grow a data-driven approach is significant and should form an essential part of scale up planning. If ever there is a time to enshrine digital ways of working, it is in this phase if it is not already a core facet of the business.

Costs

Scaling up an operation will increase cost. Tracking costs against budget is more challenging when demand estimates are uncertain. This increases the need to understand the nature of costs and how they are driven.

How fixed are fixed costs? At what timeline could they be considered variable? Is there a portion of apparently variable cost that is fixed? For example:

• adding a third working shift to a two-shift operation; effectively a ‘semi-fixed’ cost, and if additional staff are hired on temporary contracts, labour cost has a variable portion
• energy costs likely have a fixed portion with usage dependent on throughput volumes, a ‘semi-variable’ cost
• contracts for service provision may assume a base utilisation or have a retainer element.

An understanding of the break-even point for an expanded operation should a clear milestone in the programme. Having a clear picture on costs will help pinpoint when sales less variable cost equates with fixed costs and the business can move to profit.

Just as important for operations, if not more important however, is identifying contribution margin at capacity bottlenecks. It is likely that across the operation there is some form of bottleneck; that is, a constraint that sets a threshold on the demand the operation can satisfy within customers expected lead times. During growth, bottlenecks might move between activities in the supply chain. Here it is imperative for decision making, and profitability, to assess unit contribution margin per unit of scarce resource. For example, consumption of machine time for a unique process by product, where this process is required for most, if not all, products. Bottlenecks can sometimes be difficult to spot, but in a system, there is only one at a time and a common giveaway is the build up of inventory at the ‘entrance’, that is, just prior to this activity or process.

Given the supply chain is an interrelated network of activities, managing costs is inherently about identifying the main activities and how they consume costs. Understanding what is driving the activity and what factors cause change, is integral to effective management. An activity-based costing approach need not be cumbersome; a pragmatic judgement of the key activity drivers for your business and market sector will get you most of the way in what is more often an art than a science.

With a grasp on fixed and variable cost elements, together with pragmatic insight to activity costs, supply chain managers can make informed operational decisions and leadership teams can maintain control on cost development as the business grows. Adjustments to capacity plans can be made as demand and operational performance uncertainties reduce.

Capital

Capital investment will no doubt be assessed and form part of the decision to expand the operation. Fixed assets may well increase although as mentioned earlier, there may be options to collaborate with others as well as outsource some activities until volumes achieve defined thresholds. Measuring asset utilisation and throughput efficiency will allow operational performance to be aligned with the monitoring of return on investment. Particular attention should be paid to the difference between total capacity and effective capacity that determines asset efficiency. What constitutes unavoidable losses of capacity can be subject to debate; some reasons to reduce capacity that need monitoring include:

• capacity ‘cushions’ for demand fluctuations. This may relate more to poor forecasting and failure to share key information rather as a buffer to volatility
• changeover times in production. Whilst flexibility is important in a growth phase particularly, if this becomes ‘firefighting’ based on who is shouting loudest, then leadership action is needed
• maintenance losses related to quality issues. Reduced yields, or worse, returns from customers, that drive downtime in the operation may signal an ongoing problem that needs to be tackled.

Performance measurement that tracks asset utilisation and efficiency over time, with due allowance for the stage of business development, should form part of an ongoing supply chain ‘dashboard’. Working capital development can also be planned and tracked as part of the dashboard. Inventory, accounts payable and receivable, the ‘cash to cash’ cycle, forms another critical output of the supply chain design and ongoing supply chain management.

Summary

Supply chain design and management can be an engine of growth. We have touched on key dimensions that need to be drawn together to form a structured, coherent plan to scale up an operation and its attendant supply chain. With clear, fact-based insight and understanding, a tailored transformation programme can be developed that:

• maps out the key decision points, the options available, with associated probabilities and risks
• combines design analysis with critical change planning
• sets a control dashboard that aligns operational performance with financial outcomes.

1 Treacy M and Wiersema F (1995) The Discipline of Market Leaders: Choose your customers, narrow your focus, dominate your market, Basic Books, New York

Designing the organisation for growth (Article 2)

The supply chain for any business is not a simple, linear chain of activities; it is a dynamic network of integrated processes, technology, and people. Having determined the operating footprint that can support growth, as described in our previous article, it is essential to apply the same due diligence to the development of the expanding organisation. Communication across dispersed teams must be managed, operating frameworks for assessing skills and monitoring performance have to be designed with care and an adaptable mindset developed in leadership teams. What influences decision making and actions across the network, recognising cultural differences, should not be left to chance.

Culture

Planning for a scale up can seem a largely analytical exercise. It many aspects it is but at the core of excellent supply chain design are people. What skills and capabilities got the business to this stage, along with its culture and way of working, may not be what gets it to the next level.

The culture of an organisation can define it and its competitive advantage. Values and beliefs shape actions and decisions. With expansion, it cannot simply be assumed that what works now will work in the future and at scale. New operations and sites mean new employees and potentially different cultural norms. The due diligence applied to planning new assembly lines, factories, distribution centres should be matched in planning the organisational design, roles and responsibilities, performance measures and incentives. Leadership will be pivotal to change and may well need to adapt whilst seeking to maintain the central ethos of the business. Due thought should be given to:

• how trust is displayed and re-enforced across extended reporting lines
• how freedom to make decisions in the moment is coupled with responsibility
• what support is given whilst challenge offered
• how local leadership teams are formed and integrated into the business.

Operating in different countries brings further challenges. It is trite to say there are cultural differences between countries but there are also notable variations in sub-regions; just consider New York and New Orleans. It pays to be alert to:

• what may seem implicit in communication in one culture or location may not travel well
• what is common knowledge in one location probably isn’t elsewhere
• fault lines that could appear; ‘them and us’ develops all too easily
• corporate culture that could conflict with local norms.

Just as in capacity planning, a systematic approach can help:

• review potential points of difference; is decision making consensual or hierarchical? Is flexibility more valuable than procedural adherence? how is feedback shared?
• define your essential cultural ‘DNA’ where corporate values and ways of working need to overcome local tendencies
• ensure communication is well-defined and go that extra mile to make it explicit
• facilitate engagement; make sure all voices are heard and that people can prepare their input
• train, train, train; where particular values and ways of working are imperative, make sure training is delivered both at the outset and ongoing to engender key cultural norms
• create a diverse team that can draw on different skills and perspectives.

If culture is an afterthought, both internally and even more critically with customers and suppliers, then no technical masterpiece of operations design will save the business from struggle and potential failure.

Capability

Operating on a different scale asks new questions of people. Managing projects to develop new operations calls for skills in planning, communication, organisation, negotiation and problem-solving to name a few; combining these demands with running day to day operations can often be a very tall order. That said, it is a common fallacy that people in current roles cannot develop as the operation grows. A good starting point is to review capabilities with a structured competency framework; this will not only highlight any critical gaps, it can also set motivating development paths. The main supply chain management processes should form the core with essential skillsets for the context of the business and its market completing a framework to support objective judgements. It is less about the fine detail of all aspects of the current and planned operation but more about ensuring critical thought has been applied to the skills and capabilities needed of the team in a new operating context.

For some gaps, a good option may be to introduce consultancy and/or interim management support. More flexible working arrangements can certainly mean that expertise and particular skillsets can be called upon as needed.

As operations grow, leaders need to adapt. If there is one thing that can stall growth and inhibit the scaling up of operations, it is the behaviour and approach of leaders in the business. The more operational decisions leaders need to be involved in, the deeper they get involved, the more tasks they handle themselves, the greater the drag on scalability. Think about your personal workload; are you close to 100% time utilisation? If so, then anything that depends on you for a decision waits in a queue and wasted time rises exponentially. Combining a good understanding of capabilities in the organisation with clear roles and responsibilities should allow clear sighted delegation and make for an effective growth phase.

Identifying the role of the new sites was mentioned earlier. As part of planning the location of new operations, looking for clusters of similar, like-minded companies could be an effective option when scaling up. Access to relevant skilled labour pools, networks of suppliers and potentially supporting infrastructure for inbound and outbound logistics can have an important bearing on speed of growth and the potential for collaboration.

Collaboration

The types of relationship in the supply network reflect the strategy of the business, its ‘posture’ to collaboration and the dynamics of the market sector. Decisions around what activities are performed in-house and those outsourced should be reviewed as part of planning growth. Those activities deemed critical to the competitive advantage of the business are likely to be performed by the expanding operation but, should it be feasible, some outsourcing of activities can mitigate risk and maintain flexibility in volumes and associated costs. Some aspects to consider and assess if a modular approach is effective could include:

• component consolidation and sub-assembly
• final product configuration
• warehousing and distribution
• returns management.

Working in partnership with suppliers can offer significant benefits generally and certainly during operational development. Discussions should explore how:

• flexible responses to demand can be supported
• joint problem-solving could operate
• local knowledge can be shared, especially when expanding to new markets
• benefits from new ways of working can be secured.

The analysis outlined for planning capacity can be enhanced with a renewed perspective on collaboration across the supply chain. Applying a design thinking mindset can help to create options and test ideas; those that pass can add to the decision tree to aid growth planning.

Whilst it is a whole subject on its own, taking a sustainable approach to design, and supply chains in particular, should add a critical dimension to scale up planning. Industrial symbiosis as is defined as ‘the process by which wastes, or by-products of an industry or industrial process, become the raw materials for another’¹. Applying a sustainable lens can add to the identification of collaboration opportunities and the potential location clusters in new geographies.

Summary

Taking a systematic, structured approach to understanding how ways of working and organisational designs drive operational results will allow your business to manage trade-offs, identify opportunities and prioritise actions. It provides a vital starting point for:

• Monitoring performance and aligning teams on key activities
• Establishing a transformation programme to step-change capabilities
• Confirming opportunities and risks as part of due diligence in a growth strategy.

Plans need to adapt, ever more so when scaling up operations, but there are essential elements that need to be included to increase the chances of success and provide guiderails in a journey to supply chain excellence. The 7 C’s are a great starting point.

1 European Commission, Environment, European Green Capital [Online] https://ec.europa.eu/environment/europeangreencapital/wp-content/uploads/2018/05/Industrial_Symbiosis.pdf – Accessed 25.04.2021