How to Design a Supply Chain Operating Model in 4 Steps

How to Design a Supply Chain Operating Model in 4 Steps

Imagine this: your supply chain team is scrambling to manage demand fluctuations while siloed operations are creating bottlenecks at every turn. Sound familiar? Many organisations struggle to align their supply chain processes, leading to inefficiencies, missed opportunities, and a lack of agility in a rapidly changing market.

This is where a well-designed supply chain operating model becomes transformative. By unifying workflows, establishing clear roles, and aligning with strategic objectives, tailored operating models offer the structure needed to eliminate chaos and maximise efficiency. In this guide, we’ll explore actionable steps to craft an operating model that fosters collaboration, enhances visibility, and positions your supply chain for long-term success.

Key Takeaways:

• Define Customer Segments: Tailor your supply chain operations to meet the unique needs of distinct customer groups for maximised service and profitability.
• Strengthen Forecasting Techniques: Use predictive analytics, scenario analysis, and customer segmentation to align supply and demand more accurately.
• Collaborate with Stakeholders: Build robust customer and supplier relationships to enhance data-sharing, reduce disruptions, and improve planning accuracy.
• Customise Logistics Networks: Adapt your logistics processes to prioritise timely delivery and meet the demands of different market segments.
• Embrace Innovation: Continuously refine and innovate processes to maintain a competitive edge and address evolving challenges.
• Leverage End-to-End Integration: Align operational and commercial functions for a seamless flow of data, improving decision-making and operational transparency.
• Automate for Efficiency: Streamline repetitive tasks through automation to reduce errors and free up resources for strategic initiatives.
• Embed Sustainability: Incorporate eco-friendly practices into supply chain operations to meet consumer expectations and reduce environmental impact.
• Avoid Common Pitfalls: Mitigate risks in MTS and CTO models through improved forecasting, streamlined processes, and strategic planning.

Understanding the Challenges of Supply Chain Operating Models

A well-defined operating model is paramount. It serves as the backbone, guiding every participant on what actions to take, when to execute them, and how to proceed. This model unifies all business processes, effectively eliminating the risk of siloed thinking that can hinder the effectiveness of a supply chain organisation. A comprehensive supply chain operating model also encompasses crucial details, including conflict resolution strategies, escalation methods, and service level agreements (SLAs) both within the supply chain and with external partners.

Developing such a model and ensuring its seamless integration into daily operations requires substantial effort. However, this endeavour is vital for achieving long-term productivity and fostering organisational growth, all while maintaining a stress-free working environment. A strategic approach to expediate this process is through the implementation of supply chain orchestration.

Core Elements of a Supply Chain Operating Model

1. Supply Chain Organisational Archetype: Defines the shape and size of the organisational structure.
2. Business Process Definition: Utilises tools like RACI Matrix and SIPOC diagram to delineate processes.
3. SLAs: Establishes service level agreements among internal functions and with external partners.
4. Skills Matrix: Identifies essential and desirable skills required for optimal operation.
5. Decision-Making & Escalation Authority Matrix: Outlines authority levels for decision-making and escalation paths.

The Necessity of a Supply Chain Operating Model

A well-crafted supply chain operating model serves as a strategic blueprint, delineating:

• The structure, location, and scale of supply chain functions.
• The demarcation lines between supply chain functions and other internal or external operations.
• The collaborative interactions among planners, managers, and leaders across these boundaries.
• The methods by which the business derives value from its integrated supply chain, alongside metrics for measurement.
• The skill sets and behaviours that should be nurtured and encouraged.

Avoiding Common Pitfalls in Operating Model Design

Each operating model, whether MTS or CTO, comes with inherent challenges that can lead to inefficiencies if not managed correctly. From handling demand shocks in JIT to forecasting accuracy in MTS, understanding these pitfalls is crucial for smooth operations. A strategic approach to mitigating these risks ensures that the chosen model remains effective and aligned with business objectives.

1. Configure-to-Order Pitfalls

Complexity of Product Variants: Configuring products to order introduces significant operational complexity, as every variant requires accurate data management, including a detailed Bill of Materials (BOM) and precise inventory tracking. Managing this extensive array of configurations can drive up administrative costs and operational demands, making it essential to streamline data accuracy to prevent delays and inefficiencies.

Lead Time Variability: Despite its flexibility, Configure-to-Order (CTO) is still subject to lead time variability, particularly when certain components face high demand or supply chain issues. These fluctuations can impact delivery timelines, ultimately affecting customer satisfaction. Effective planning and supplier collaboration are crucial to minimise these disruptions and meet customer expectations.

1. Make-to-Stock Pitfalls

Creating Accurate Forecasts: Forecasting for Make-to-Stock (MTS) models requires precision; inaccuracies can lead to surplus inventory, stockouts, or lost revenue. Solely relying on historical sales data may not capture the full picture, as it omits factors like market shifts or consumer sentiment. Incorporating comprehensive forecasting techniques, such as market surveys and trend analyses, can improve accuracy and reduce the risk of costly misjudgements.

Unpredictable Consumer Trends: Make-to-Stock models, while effective for stable demand, are vulnerable to shifts in consumer trends. Forecasts based on past performance may fall short when preferences change, leading to overstocked or obsolete inventory. Conversely, underestimating a trend can leave manufacturers unprepared to meet demand. Staying agile and periodically adjusting forecasts can mitigate these risks and align stock levels with evolving market preferences.

1. Pitfalls and Solutions in the ETO (Engineer to Order) Model

The ETO model is highly tailored, enabling customisation but also presenting operational challenges. Mitigating these pitfalls ensures smooth processes and consistent delivery.

1. Inadequate Demand Forecasting
   Pitfall: Predicting demand in ETO operations is difficult due to the bespoke nature of orders. This often leads to poorly allocated resources and bottlenecks in production.
   Solution: Using predictive analytics and scenario planning allows for more accurate forecasting, even for custom orders. For example, analysing past order patterns and integrating this with real-time demand data helps align resources and avoid delays caused by unexpected demand spikes.
2. Long Lead Times
   Pitfall: Custom designs and production steps extend lead times, making it challenging to meet tight customer deadlines.
   Solution: Segmenting production stages with lean methodologies, such as Kanban, can reduce waiting times between tasks. For example, identifying non-value-added steps in design approval or material preparation can streamline processes, cutting unnecessary delays without reducing customisation.
3. Complex Supplier Coordination
   Pitfall: Managing suppliers for bespoke parts often leads to delays due to miscommunication or inconsistent delivery schedules.
   Solution: Ensure adequate stocking of raw material or part complete components to ensure it can be rapidly converted when the exact demand is known.

1. Pitfalls and Solutions in the MTF (Make to Forecast) Model

The MTF model offers predictability but requires precise planning and flexibility. Addressing key pitfalls ensures efficiency and cost control.

1. Inaccurate Forecasts Leading to Overstock or Stockouts
   Pitfall: Forecast errors in MTF models result in either surplus inventory or stock shortages, increasing costs or missing demand.
   Solution: Incorporating advanced analytics and machine learning tools refines forecasting accuracy. For instance, analysing historical trends alongside real-time data ensures more precise alignment between production and actual market needs, reducing the risk of excess stock or shortages.
2. Insufficient Flexibility in Responding to Market Changes
   Pitfall: Changes in demand or market conditions can overwhelm static production schedules, causing inefficiencies.
   Solution: Using a dual operating model, such as combining just-in-time (JIT) and just-in-case strategies, allows rapid adjustments. For example, maintaining a flexible safety stock for high-demand items ensures responsiveness without overproducing lower-priority stock.
3. High Inventory Costs
   Pitfall: Holding excess inventory to meet forecasted demand ties up capital and increases storage costs.
   Solution: Segmenting inventory by customer demand profiles enables tailored replenishment strategies. For example, fast-moving items can follow tighter inventory cycles, while slower-moving stock is minimised to avoid unnecessary holding costs, keeping the overall system lean and cost-effective.

Pitfalls of the Make-to-Order (MTO) Supply Chain Model

The Make-to-Order (MTO) model, while offering customisation and reduced inventory holding, presents significant challenges that impact operational efficiency, customer satisfaction, and overall resilience. Here are three key pitfalls to consider, aligned with the priorities of supply chain leaders:

1. Demand Volatility Fuels Delays and Operational Inefficiencies

Pain Point: Unpredictable demand patterns can severely disrupt production schedules. By relying on precise demand signals, MTO increases the risk of delays, resulting in late deliveries and misaligned operations that frustrate customers and weaken trust.
Solution: Advanced forecasting and scenario planning, powered by predictive analytics, enable leaders to navigate demand fluctuations effectively. These approaches optimise production schedules and reduce bottlenecks, ensuring smoother operations.
Impact: Poor responsiveness to demand fluctuations erodes customer satisfaction, impeding efforts to maintain competitive market positioning and build long-term loyalty.

2. Over-Reliance on Supplier Responsiveness

Pain Point: In global supply chains, delays from upstream suppliers can disrupt MTO workflows, especially when responsiveness is critical. The reliance on a narrow supplier base magnifies these risks, increasing exposure to external disruptions.
Solution: Implementing supplier segmentation and distributed network designs reduces dependency on single suppliers. Buffer strategies and diversification enhance resilience, mitigating the risks associated with external delays and safeguarding continuity.
Impact: Excessive reliance on specific suppliers jeopardises operational stability, making it harder to achieve objectives like resilience, risk mitigation, and elevated customer satisfaction.

3. Inventory and Capacity Challenges Undermine Agility

Pain Point: Balancing inventory and production capacity is a persistent struggle. During low-demand periods, underutilised capacity drives inefficiencies, while peaks strain resources and disrupt workflows, tying up capital unnecessarily.
Solution: Dynamic capacity management and inventory optimisation tools enable supply chain leaders to maintain operational balance. These tools ensure that capacity and inventory levels align with demand, reducing waste while maintaining responsiveness.
Impact: Poor capacity utilisation and mismanaged inventory undermine profitability and limit the ability to achieve strategic growth through operational excellence.

Step-by-Step Guide to Designing and Customising a Supply Chain Operating Model

Designing an operating model tailored to specific market segments enhances agility and operational performance. This process includes steps like expanding supply chain visibility, strengthening supplier relationships, and embedding sustainability.

Key Components of a Tailored Operating Model

1.    Demand Segmentation: Demand segmentation is critical within tailored operating models because it enables supply chains to precisely align resources, inventory, and service levels with the unique needs of each market segment. By structuring operations around specific demand characteristics, organisations can achieve cost efficiency and agility.

2.    Supplier Collaboration: Digital platforms enhance transparency and trust by enabling real-time data sharing across the supply chain. Access to comprehensive supplier management tools allows businesses to share critical information, such as forecasts, orders, and inventory details, with multiple tiers of vendors. This visibility supports prompt decision-making and real-time commitments, reducing the potential for disruptions.

5-Step Process for Building a Tailored Operating Model

Step 1: Expand Supply Chain Visibility: The foundation of supply chain efficiency lies in heightened visibility across logistics operations. Effective inventory management strategies are essential, enabling real-time tracking as stock progresses through various stages—from receiving to warehousing and, eventually, to packing, picking, and shipping.

Step 2: Cultivate Strong Supplier Relationships: Clear, consistent communication with suppliers is essential to prevent shortages, delays, and unforeseen issues. A dependable supplier who monitors work-in-process inventory (the transformation of raw materials into finished goods) plays a pivotal role in maintaining product quality and ensuring timely replenishment. Establishing solid supplier relationships bolsters planning accuracy and agility.

Step 3: Automate Supply Chain Processes: Automation is a powerful tool for improving efficiency, reducing errors, and enhancing the speed and accuracy of supply chain operations. Automating repetitive tasks—from order processing to shipping—streamlines processes, optimises productivity, and frees up human resources for more strategic activities.

Step 4: Integrate End-to-End Supply Chains: End-to-end integration bridges traditional operational functions (such as manufacturing and supply) with the commercial side of the organisation. This alignment creates a seamless flow of operational and financial data, enhancing transparency and supporting better, faster decision-making across the enterprise.

Step 5: Embed Sustainable Practices Across the Supply Chain: Modern consumers are increasingly concerned with sustainability, looking to partner with companies committed to reducing their environmental impact. Embedding green initiatives, such as adopting SIOC (Ships In Own Container) packaging or using eco-friendly, biodegradable materials, helps minimise waste and may reduce shipping costs.

Best Practices for Optimising Supply Chain Operating Models to Align with Business Objectives

Crafting an effective supply chain operating model demands a strategic alignment with the business’s overarching ambitions. Establishing clear operating principles is essential, as these will guide the decisions on managing activities at various levels—be it global, regional, local, or specific to business units. Below are key practices that have proven invaluable in optimising supply chain models for consumer packaged goods (CPG) companies.

Establishing Operating Principles

After defining a strategic vision, it is crucial to develop operating principles that underpin design decisions. These principles dictate how activities should be managed and grouped, ensuring that the supply chain operating model aligns cohesively with business objectives.

Building and Scaling Functional Skills

Achieving functional excellence is critical, and this often involves consolidating skills where they can generate the most synergies. In many CPG firms, planners and logistics managers operate in isolated environments, each using distinct tools and methodologies. This results in inconsistencies in planning and logistics performance. A more integrated approach involves creating virtual or physical supply-planning hubs. These hubs centralise supply planning, fostering accountability and ensuring that staff utilise the latest tools and best practices.

Resource Allocation Across Markets

Optimising resource allocation across various markets and categories is pivotal. By distributing assets, capital, and other resources wisely, companies can curtail spending while boosting return on investment. For firms grappling with capacity constraints, implementing a global sales and operations planning process can facilitate more flexible capacity allocation across different segments of the supply chain.

Integrating End-to-End Supply Chains

Research underscores the value of integrating functions across the supply chain—from procurement to distribution. This end-to-end integration connects traditional operations with commercial functions, enhancing both operational and financial transparency. For instance, closely aligning the order-to-cash process with the commercial organisation can significantly improve decision-making. Several CPG companies are moving towards such integrated models, where supply chain leadership teams assume roles traditionally outside their purview, such as capacity management and production planning.

Recognising Regional and Business Variations

An effective supply chain operating model must accommodate the distinct characteristics of various regions and businesses. Beyond the evident differences between emerging and mature markets, there are nuanced variations that necessitate distinct approaches to customer engagement. For example, the logistics organisation responsible for retail delivery in Asia may require a more localised setup due to market fragmentation and regional specificities, unlike the broader regional approach feasible in Europe.

By adhering to these best practices, companies can develop tailored supply chain operating models that not only meet but exceed business needs, ensuring they remain agile and competitive in a complex global marketplace.

A Tactical Guide to Optimising Supply Chain Operating Models

Building a resilient operating model starts with evaluating existing processes and defining clear goals aligned with SMART principles. Selecting the right SCM system and configuring it to fit unique organisational requirements is essential for effective implementation. Through pilot testing and iterative improvements, companies can refine workflows and ensure system stability for sustained operational success.

1. Evaluate Existing Processes and Define Requirements
   Begin by conducting an in-depth evaluation of your current supply chain processes, from procurement and production through to inventory management, logistics, and distribution. This diagnostic step aims to pinpoint inefficiencies, bottlenecks, and improvement opportunities, setting the foundation for a more resilient and agile operating model.
2. Establish Clear Objectives and Goals
   With areas for improvement identified, define precise objectives for your supply chain management (SCM) system implementation. Each goal should follow the SMART framework (Specific, Measurable, Achievable, Relevant, and Time-bound), enabling focused progress tracking. Examples might include:

• Cost Reduction: Reduce procurement costs by 15% in the first year.
• Increased Efficiency: Cut order fulfilment cycle time by 20%.

1. Choose the Right SCM System
   Selecting the appropriate SCM system is essential to achieving your supply chain goals. Evaluate each option based on:

• Scalability: Will the system support future growth?
• Integration: Ensure compatibility with your enterprise systems (ERP, CRM).
• Functionality: Look for core features like demand forecasting, inventory optimisation, and supplier management.

1. Configure the System
   Tailor the SCM system to align with your organisation’s unique processes and operational requirements. Customisation could involve:

• Workflow Design: Map key processes such as order processing, inventory replenishment, and supplier management.
• Dashboard Configuration: Develop intuitive dashboards to provide real-time insights into critical metrics and performance indicators.

1. Data Migration and Integration
   A seamless data migration process is critical to maintaining operational continuity. Key steps include:

• Data Cleansing: Ensure all data is accurate and consistent before migration.
• Integration Protocols: Define reliable protocols for linking the SCM system with other enterprise platforms (ERP, CRM).
• Testing: Conduct comprehensive testing to validate data integrity and system functionality after migration

Tim Richardson
Development Director
Iter Consulting