What is a suitable supply chain? How to design a supply chain model that fits the organization’s product positioning? In the previous chapters, we shared the elements of supply chain capability construction in three parts: upper, middle, and lower. This chapter summarizes and models the previous content, allowing us to better understand the supply chain profit model OSTEP. We know that the first principle of supply chain design is to comply with adaptation: suitable suppliers, suitable prices, suitable quality standards, etc. There is a saying in the industry that buying Hermès with Uniqlo prices violates the principle of adaptation. OSTEP must adhere to the principle of adaptation.
The design of the supply chain is highly systematic and specialized. The design of the supply chain model includes five basic elements: Strategy (procurement objectives and strategies), Organization (organizational structure), Thinking (procurement thinking), Ethic (procurement ethics), and Performance (procurement performance). We take the first letter of these five elements in English and define it as the OSTEP model. The supply chain must be designed and organized according to these five elements, but it should also be adaptable based on the industry, product characteristics, and categories. However, the underlying logic remains consistent. Below, we will further explain the five elements and their logical relationships.
Procurement objectives and strategies (Strategy): The design of the supply chain is highly systematic. Previously, we shared that the procurement objectives and strategies must inherit the company’s product, service, and market positioning strategies. Different products require different supply chains. For example, if the company’s products are functional, a lean supply chain should be matched. Home appliances and automobiles are functional products, and their supply chains belong to lean supply chains. By integrating with suppliers, the total cost of lean operations is minimized, and Toyota’s lean production is used to control costs. If the products are innovative, an agile supply chain is needed to respond quickly to market demands. The life cycle of such products is generally short; for example, in the fashion industry, products are developed quarterly, and their life cycle is only 3-6 months. Experience-based products require a flexible supply chain to match, emphasizing service quality and flexibility, such as high-end customization, appliance customization, and home decoration industries. Each type of supply chain should also have differentiated performance assessment rules. In summary, procurement objectives and strategies should match the product strategic positioning.
Procurement organizational structure (Organization): The procurement department serves as a bridge, linking internal and external stakeholders. Internally, it connects with internal customers for design and development; externally, it links with external suppliers, ensuring the smooth flow of product flow (materials, semi-finished products, finished products, components), information flow (process standards, purchase orders, quality standards, etc.), and cash flow (payments) both internally and externally, ensuring the smooth operation of the supply chain. At the same time, it is essential to establish a procurement organization that serves the company’s strategy, based on performance-driven procurement processes, standardized procurement systems, reduced procurement risks, and alignment of procurement with corporate goals. The organizational structure design must follow the principle of separating ‘sourcing’ and ‘purchasing’, where ‘sourcing’ focuses on demand management, strategic sourcing, business rules, performance management, systematic construction, and standardized management, while ‘purchasing’ focuses on order management, placing orders, following up, and reconciling, ensuring timely order receipt. ‘Sourcing’ and ‘purchasing’ are like the two legs of the supply chain; coordination is essential for the supply chain to move steadily. In summary, the procurement organizational structure should have collaborative capabilities.
Procurement thinking (Thinking): Thinking determines action, and action determines results. As procurement personnel, one must possess ten types of procurement thinking, including strategic thinking, closed-loop thinking, data thinking, optimization thinking, risk thinking, holistic thinking, profit thinking, collaborative thinking, procurement professionalism, prevention of procurement corruption, and ensuring cash flow safety based on the company’s cash flow to determine payment cycles. Detailed discussions on procurement thinking can be found in 14 – Elements of Supplier Capability Construction (Part 2), which can be reviewed for learning. For example, to possess profit thinking, one must first have cost thinking, clearly understanding cost objectives, cost composition, market cost trends and levels, and cost sensitivity, while considering the impact of production line layout, capacity forecasting, equipment utilization, employee age, and procurement historical data on cost, delivery, and inventory. Procurement thinking is about being able to think of it first, then do it.
Procurement performance (Procurement Performance): Procurement performance includes the design of performance indicators for the supply chain itself and for suppliers. The value of these indicators is to quantify the operational efficiency of supply chain management and the operational level of the supply chain. The design of supply chain indicators was shared in detail in 18 – Supply Chain Focus Indicators, which can be referred to for comparison. Indicators include forecast accuracy, master plan achievement rate, inventory turnover rate, etc. Supplier performance is also assessed based on cost, delivery time, quality, and service performance rules. Performance is a tool to quantify the operational efficiency of the supply chain and the level of supplier management. Subsequent content on supplier management will share the principles, stage requirements, weight, logic, and scoring methods for supplier performance design. Performance management is also an input for supplier tiering and grading, which is essential for supplier development, nurturing, and strategic cooperation. These contents have systematic coherence. Setting indicators must also consider the different stage requirements and primary issues, adhering to the SMART principle. Collecting performance data is the most basic requirement for supplier management, while the goal of performance is to measure operational performance, identify existing problems and improvement points, and form a closed loop to enhance the operational efficiency of the supply chain. Procurement performance is a tool and leverage for quantifying management levels.
Procurement ethics (Ethic): When we think of procurement ethics, we first think of preventing corruption. Procurement involves dealing with money, which is a disaster area for corruption. There are many cases of this. I remember that in January this year, Tencent released its 2022 anti-corruption report, dismissing over 100 people, with 10 being transferred to the public security authorities for criminal suspicion. Ma Huateng stated at an employee meeting that the internal corruption problem is shocking; corruption is the bottom line of procurement. However, procurement ethics not only involves preventing corruption but also includes personal morals and values, environmental and procurement capabilities, procurement professionalism, cash flow safety, and determining payment cycles based on the company’s cash flow. Detailed discussions on procurement ethics can be found in 14 – Elements of Supplier Capability Construction (Part 2), which can also be referenced. Procurement ethics represent the most professional qualities and capabilities in procurement. This stage requires the ability to adhere to, learn, and summarize.
The content shared in this chapter is a summary and modeling of the previous content, with strong correlations and logical connections among all content. It is recommended that everyone connect the dots and review them together, fostering a comprehensive framework thinking about the supply chain through continuous learning. Then, design a suitable supply chain management system based on the characteristics of your industry.
OSTEP Model Diagram
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