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February 4, 2022
15min

How to build your supply chain operating model?

Build, develop and maintain a Supply Chain Operating Model

“There is nothing quite so useless, as doing with great efficiency, something that should not be done at all.”

― Peter Drucker

Tl;dr

An operating model in supply chain is key to ensure everyone knows what to do, when and how. The operating model is the aggregation of all the business processes within a business. Supply chain models prevent any functional silo thinking applied against the selected Supply Chain organization archetype. It also includes key information such as how to resolve conflicts, escalation methods and SLA within and outside supply chain functions.

 

It takes effort to build and to continuously ensure its day to day adherence and integration. However, it is essential to ensure long term productivity, enable growth in your organization and a great working environment without unnecessary stress.

The core elements within a Supply Chain Operating Model

           1. Supply Chain Organizational Archetype (shape, size, etc.)

          2. Business Process Definition (RACI Matrix, SIPOC diagram, etc.)

          3. SLAs (within internal functions and external partners)

          4. Skills Matrix (must haves, nice to haves)

          5. Decision Making & Escalation Authority Matrix

Table of Contents

       ► What is an operatingmodel?

       ► Why do you need anoperating model for supply chain?

       ► What should be includedin a supply chain operating model?

What is an operating model?

First, let’s start with this quick paragraph from McKinsey:

Companies know where they want to go. They want to be more agile, quicker to react, and more effective. They want to deliver great customer experiences, take advantage of new technologies to cut costs, improve quality and transparency, and build value. The problem is that while most companies are trying to get better, the results tend to fall short: one-off initiatives in separate units that don’t have a big enterprise-wide impact; adoption of the improvement method of the day, which almost invariably yields disappointing results; and programs that provide temporary gains but aren’t sustainable.”

Essentially, it is about designing the executional layer to outline how the organization and each individual will contribute to delivering end to end and sustainable business value.

 

Again, according to Wikipedia, operating model and business model are often mistaken. Wikipedia’s definition of an operating model is the following:

“An operating model is both an abstract and visual representation (model) of how an organization delivers value to its customers or beneficiaries as well as how an organization actually runs itself.”

Thus, an Operating Model is a method to connect the gap between supply chain Strategy and Execution. It is a framework for a company, albeit typically used only by large ones, to organize resources and orchestrate the work activities to get an efficient and high performing organization from the short to the long term.

When applying this concept to supply chain operations, it becomes easier to distinguish business model and operating model.

Example : Amazon's supply chain operations

Let’s take the example of Amazon. One of its business models is to make profit from their platform connecting sellers and buyers (thus, I’m excluding here AWS and others business streams). They extract fees from each transaction.

To enable this, they’ve built a massive state of the art ecosystem combining digital technology as well as physical channels (manufacturing, inventory, logistics, delivery...) to deliver goods very quickly.

For Amazon, the operating model is describing how they are organized to ensure a turn key solution for the sellers and a very straight forward user experience for the buyers.

The supply chain model describes :

       ► what are the processes that need to happen

       ► their frequency

       ► what are the decisions required and what to do when things deviate from the plan

       ► without always having to reinvent the wheel

It includes at least the following elements (more details in the next chapter):

       1. Supply Chain Organizational Archetype (shape, size, etc.)

       2. Business Process Definition (RACI Matrix, SIPOC diagram, etc.)

       3. SLAs (within internal functions and external partners)

       4. Skills Matrix (must haves, nice to haves)

       5. Decision Making & Escalation Authority Matrix

Another way to distinguish the two is to take a global approach. Think about delivering the same business models but in two different cities, in different parts of the world. Let’s say London & Sao Paulo.

Clearly, while the same outputs are required, it will be two very different ways of delivering the outputs. There may be different activities required, some activities outsourced in one city and not the other one, the team capability and labor cost will impact the level of automation required, etc.

In summary, operating models are about turning a supply chain strategy into something practical and feasible in a particular context (here a context can be seen as time, geography, industry, people capability, partners available, etc.)

 

One of the challenges is to make sure that it is as simple as it needs to be, but not more.

Why do you need an operating model for supply chain?

► The Supply Chain Operating Model helps define the blueprint for:

► The structure, the location and the size of the supply chain function

► Where to draw the boundaries of the supply chain functions with other functionsinternally and with external providers

► How planners, supply chain managers and supply chain leaders work together withinand across these boundaries?

► How will the business generate value through its integrated supply chain? And howto measure it?

► What skillsets and behaviors should be developed and encouraged?

If you are a large company, aspire to be or growing very fast, it is essential to have a supply chain management operating model.

We have listed below the 7 key reasons why an operating model for Supply Chain Management is a must

7 key reasons why you need an operating model for Strategic Supply Chain Management

1. To ensure everyone in the organization abides by the same playbook

In any organization small or large there will be a number of people working on similar activities but in different contexts (e.g. geographies, customer, factories). Having an overarching framework (Supply Chain Integration) will avoid entropy across each business unit.

 

2. To save time defining your Key Performance Indicators (KPIs)

Having the right KPIs is difficult. Yet, it should not be massively different across your organization. Of course the target will change materially. Thus, leveraging an operating model that holistically defines the KPIs structure, rationale and method of calculation is essential. Then it is up to each part of the organization to know which data to use to derive the results and to define their respective KPI targets.

 

3. To leverage scaling opportunities

If you are in a large organization and you don’t leverage your scaling opportunities you will suffer from supply chain disruptions very quickly. Indeed, large companies are slower to react and have higher moments of inertia, but these are typically compensated by economies of scale that aren't available to smaller firms.

An operating model can help identify, integrate and merge across parts of the organization what can be combined – even outsourced – to focus on the core competency of the business.

 

4. To keep talent and harmonize desired skillsets

Supply Chain talent scarcity is high these days. Unfortunately too many business processes and too much knowledge often relies on a few key supply chain managers (and you know well what happens when they leave…).

Thanks to a standard cross-functional operating model across your organization, it will be easier to transfer people to other parts of the organization.

This will have a dual effect: first, it will help your organization offer a better variety of roles and responsibilities to your staff, without having a massive learning curve that impacts the business (a win-win for individuals and the business). And it will also help local parts of the organization benefit from receiving inputs from more mature parts of the business.

 

5. To make clear what are the "must haves" and the "nice to haves"

One key challenge faced by all companies is to find the right balance between too much prescription in how to perform the work needed and too much flexibility preventing any economy of scale and visibility on what is happening. A well-built operating model, will have a common trunk for 80% of the work to be done and some controlled flexibility left to the appreciation of the local needs.

 

6. To avoid reinventing the wheel all the time

Without an overarching operating standard, large organizations struggle to learn and disseminate know-how and capabilities across the business. An operating model can highlight how knowledge management is to be performed, how staff needs to collaborate across functions and have a set of basic guiding principles. The idea here is to make sure common ways of working, best practices and other elements are well communicated across teams.

 

7. To prevent different people from understanding different things from the same words and acronyms

Take one simple example, in Supply Chain Management different words and acronyms are used to mean different things. For example, some people call "S&OP" "IBP" and vice versa. In one part of the business a process may be called S&OP while the exact same one would be called IBP in another less sophisticated part of the business. The same applies for scheduling v master scheduling v short term planning, etc.

There are many other reasons why supply chain modelling is essential to building a resilient supply chain, I guess by now you get the point!

What should be included in a supply chain operating model?

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There is no one size fits all. And it should not be in a separated offline document produced by the central corporate team.

However, a mature operating model will cover with the right depth the following five elements.

1. Supply Chain Organizational Archetype (shape, size, etc.)

This one is all about defining the degree of centralization, shape, size, locations, capabilities and roles for the Supply Chain. This would also typically include the typical roles and their job descriptions to support the archetype.

See exhibit 1 from McKinsey for simple and crisp confirmation of what we are talking about here. The one selected would be deployed into practical details for your organization within the operating model.

2. Business Process Definition (RACI Matrix, SIPOC diagram, etc.)

Here we have written many articles on this blog about business processes. This section of the operating model would typically outline all activities that the company needs to do and allocate each activity and function into a matrix to cluster onto two axis:

       ► Operational, Tactical, Strategic

       ► From “just need doing” to “absolute competitive advantage”

Once done, a clear prioritization of the work appears. Each element can be mapped against the selected archetype associated with a detailed RACI matrix confirming the roles and responsibilities.

The learnings may require revisiting the choice and details of the Supply Chain Organizational Archetype selected in step 1.

3. SLAs (within internal functions and external partners)

This area is too often underappreciated in most companies from an internal point of view. Service Level Agreements (SLAs) are too often the remit of the relationship with external partners of the organization.

In fact, a mature operating model would outline equally the external SLAs and the ones between internal functions.

For instance:

       ► What is the delay for the Supply Chain team to confirm a last minute request from the sales operation team to ship stock to customers out of the standard lead time;

       ► What is the allowable range of KPIs deviation that the factory or the demand team will consider “normal” and what to do when it deviatse a lot in a short term, or a little but for too long;

Or what is the frozen period for the factories and what can be an exception to it, etc.

Of course, the SLAs should also be – and it’s typically what they cover first – about the lagging quantitative KPIs such as Supplier OTIF, Customer OTIF, Production Adherence, Forecast Accuracy, etc.

4. Skills Matrix (must haves, nice to haves)

The operating model should outline the different roles and responsibilities expected from the staff in the different part of the organization depending on their role and position in the Supply Chain Archetype.

Typically, everyone will need a basic end to end understanding of the supply chain strategies which then is augmented in set areas as per their local role and responsibilities

Doing this at company level avoids each pocket of the business having to reinvent the wheel with their own skillset, training initiatives and so on. Most importantly, a common platform allows a much easier movement of staff within the organization. Which is sometimes enough to keep the talent learning and working for the company longer, instead of seeing them leave as they find better career opportunities elsewhere. I believe this offsets the slower train when done centrally.

5. Decision Making & Escalation Authority Matrix

Finally, this last element is the least represented and in general not kept up to date.

It is in fact absolutely essential as it often avoids unnecessary slow mail exchanges and painful meetings where no one dares make a decision. And the decision ends up being pushed up the organization.

We typically see in mature organizations certain simple matrices outlining:

       ► The communication strategy: what is being communicated after each meeting, to customers when they order, if the order is late by x%, etc.

       ► Key points of contact: who to talk to internally or externally about specific topics to avoid the typical shout the most approach or preferred colleague

       ► Escalation matrix: who can decide up to what level and who is the next level up to go to after that

       ► Decision matrix: who get to decide about what topics, most elements are obvious, but think about nights where the typical staff is not present, do we follow the same principle or have a better approach?

There are many more elements and ramifications that can be added and detailed. It is important that the document is as digitalized as possible and does not stay on the shelf and gets deprecated as soon as published.

A possible way to manage this is to use a management process orchestrator like Process Metronome bringing the standard live. In fact, doing your work supporting by the solution will ensure the adherence to the operating model and a more efficient way to run it.

Exhibit 1

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