PRTM: Article: View Your Supply Chain as a Key Strategic Asset

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PRTM: Article: View Your Supply Chain as a Key Strategic Asset

  1. 1. here are five configuration compo- T Align With Your Business Strategy nents that are the fundamental building blocks of your supply chain Your supply chain strategy should strategy: operations strategy, channel strat- directly support and drive forward your egy, outsourcing strategy, customer service business strategy. We believe that an effec- strategy, and asset network. However, to tive business strategy begins with a Core drive forward your strategic business objec- Strategic Vision (see Figure 1) that lays tives and gain a real competitive edge, these down the boundary conditions for your components and the choices you make business: what you are, what you’ll do, View Your Supply about each one must be aligned with your business strategy, your customers’ needs, and—just as important—what you are not and what you won’t do. Chain as a Key and your power position, and they must be adaptive because competitive advantage The Core Strategic Vision clarifies the answers to key business strategy questions, is temporary and market conditions change. such as: What are your overall strategic Strategic Asset These four criteria may sound elementary, but few companies actually follow them. objectives? What value do you deliver to your customers? How does your company Test your supply chain In fact, the practice of developing and man- differentiate itself in the marketplace? strategy against these four aging a supply chain strategy is not Unless the answers to these key questions criteria to make sure you’re widespread. Many of our clients over the drive your supply chain strategy and config- years have had only the most rudimentary uration, your supply chain will be operating getting the most value. supply chain strategy process in place, indi- in a vacuum. cating that these concepts are either not Here’s one example of many. We worked well understood or are difficult to imple- with an electronics company that had spent SHOSHANAH COHEN AND JOSEPH ROUSSEL ment. Let’s examine them one by one. millions to improve production and order- Figure 1: Boundary Conditions of the Core Strategic Vision Customer Requirements Market Size and Competitive Competition Situation External Core Strategic Internal Vision Core Financial Competencies Goals Key Business Policies © 2003, 2006 PRTM 1
  2. 2. fulfillment times. The company’s on-time Some aspect of innovation, cost, service, are critical, as are supplier and production delivery performance was excellent. There and quality is a part of almost every quality and inventory control. was only one problem—delivery perform- company’s strategy. But leading Hewlett-Packard (HP) traditionally ance was no longer the key to profitable companies focus on just one of these as a pursued an innovation-based strategy— growth. Increased competition meant that primary strategy—their basis of competition until an upstart competitor changed the customers were demanding, and getting, for winning in a chosen market. From a industry dynamics. In 1997, HP and other lower prices. What’s more, a slowdown in supply chain perspective, each basis of com- printer manufacturers were taken by several of its primary markets was cutting petition requires a distinct structure, surprise by Lexmark’s launch of a below- into revenues and sharply reducing return processes, information systems, and skills. $100 printer. When Lexmark had doubled on assets. The company’s president recog- its market share by mid-1999, HP nized the need to move to a much lower embarked on an ambitious program called breakeven point, but supply chain opera- Competing on Cost “Big Bang” to sharply reduce product costs tions were focusing on yesterday’s through new design and supply chain priority—customer delivery excellence. Companies that compete on cost offer changes. The goal? To compete directly Where does this type of disconnect come low prices to attract cost-sensitive buyers or with Lexmark on price. Big Bang was a big from? Simply put, the new business vision to maintain share in a commodity market. success. By 2002, HP had won back its of the company’s president had not been This strategy demands highly efficient, market share. translated into new objectives for the integrated operations, and the supply chain Efficiency and low cost are good things— supply chain. Although the overall plays a critical role in keeping both product but not at the expense of service, innovation, business plan clearly showed the volume and supply chain costs down. The low- or quality if one of those is a key element of and price declines and their impact on cost supply chain focuses on efficiency- your business strategy. Consider the low- margins, the implications for supply chain based metrics such as asset utilization, cost, offshore manufacturing that we operations had not been considered. It was inventory days of supply, product costs, discussed earlier. Most apparel manufac- only when the company began to lose and total supply chain cost. Product stan- turers outsource their production to money that a major supply chain reorgani- dardization and process standardization Southeast Asia, where contract zation occurred, which led to factory closures, facility consolidation, and out- Figure 2: Basis of Competition Drives Supply Chain Strategy sourcing of manufacturing. Translating your business strategy into Primary Source of Basis of Key Supply Chain an effective plan of action requires com- Strategy Advantage Competition Contribution munication and discipline. The matrix in Innovation Brand and unique Desirable and innovative Time to market and Figure 2 offers a framework for thinking technology products time to volume broadly about four typical ways that compa- Cost Cost-effiecient Lowest prices in the Effficient, low-cost nies compete—on innovation, cost, service, operations product category infrastructure and quality—otherwise known as the basis Superb Tailored to meet Designed “from of competition. The matrix shows the key Service service customer-specific needs the customer in” supply chain contribution for each strategy. Quality Safest, most reliable Products you can Supply chain excellence products count on and quality control © 2003, 2006 PRTM 2
  3. 3. manufacturers insist on fixed production Companies such as Sony, Nike, and L’Oréal is critical to innovation-driven companies, schedules to minimize costs. This low-cost seem to have a finger on the pulse of the ensuring the fast and sustainable launch approach also results in low flexibility and consumer and are fast to market with new of new products. Moving from can hurt margins at the retail level. If one products that buyers want. The underly- product development to volume produc- style lags while another takes off, the retail- ing source of power for such companies tion at the target level of quality requires ers are limited in their ability to change is unparalleled marketing and product management of processes, assets, prod- volumes and mix. With too many of the development. ucts, and information. Design chain/ wrong garments, the stores end up with How does the supply chain support a supply chain integration also ensures that marked-down inventory and eroded mar- company that competes on innovation? For when demand cranks up, the whole gins. Too often the missed revenue and new products and services, the window of supply chain is ready—that suppliers reduced margins associated with a poorly opportunity—before the fast followers start can handle your needs, that order-manage- aligned supply chain strategy are not includ- taking market share—can be small. ment systems support the new product ed when assessing the total impact of Innovative companies are acutely aware of information, and that sales channels supply chain strategic choices. the benefits of getting into a market early and service people are trained. Zara, the retailer owned by Spanish and gaining first-mover advantage, so new Consider again the example of clothing textile giant Inditex, chose a very different product introduction (NPI) is key. By getting retailer Zara. While most of the industry model. Zara positions itself as the new products to market faster, the supply focuses the supply chain on delivering designer-boutique alternative for the chain can boost revenues and profits. This the lowest purchase price, Zara’s price-conscious but trendy consumer. To is why it’s important for a company with supply chain supports its primary innova- deliver its strategy, it manufactures almost innovation as a primary strategy to tion strategy. Designers and planners use 50% of its garments in-house—an industry integrate the supply chain with the design point-of-sale information to adjust produc- exception. Although its manufacturing chain, which we define as all the parties— tion plans and designs to focus on costs are 15% to 20% higher than the both inside and outside the enterprise—that bestsellers. This translates into a much competition, Zara more than makes up for participate in defining and designing a new shorter time to market, higher revenues, the cost differential by using its supply product or service. and fewer markdowns. Between 2001 and chain to ensure that merchandise in the The challenge isn’t just time to market, 2002, when many fashion retailers stores matches what customers want. however. Time to volume is critical too. were struggling to break even, Zara’s The faster a company can pump up performance translated into steady production to meet demand, the greater double-digit growth and healthy EBIT Competing on Innovation are the profits, and the less likely imitators (earning before income taxes) mar- are to catch up. Creating strong demand gins, growing from 18.1% to 18.5%. By Companies whose primary strategy is for a new product and then being unable to combining innovation and cost innovation focus on developing category meet that demand is one of the worst things performance, Zara created an NPI- killers—“must have” products that bene- that can happen to an innovation- focused supply chain that delivers fit from significant consumer pull. And driven company. Achieving that time-to- spectacular results for the company and because their products are category killers, volume advantage is a major competitive its investors. these companies can command a price weapon. premium, the innovator’s advantage. Design chain/supply chain integration © 2003, 2006 PRTM 3
  4. 4. Competing on Quality The company’s flagship product, flaxseed fulfillment, and invoicing must be fast, oil, outsells the competition 20 to 1. consistent, and trouble-free. The ability to Companies that compete on quality are Freshness makes the difference. Barlean’s integrate internal processes and systems known for the premium nature of their prod- oil carries a four-month expiration date, with those of key customers is a core skill. ucts and services, as well as consistent and compared to other oils that can be up to Our research shows that best-in-class reliable performance. Quality products five months old before they even hit store deliver companies—those with exception- include well-known names such as Lexus shelves. Barlean’s manufacturing and dis- al order-fulfillment processes overall— automobiles, Maytag appliances, and tribution processes give the company are more than 20% more profitable than Tropicana juices. Product development is its edge. Conventional manufacturing average companies and are growing their obviously critical to quality, but so are key techniques expose flax seeds to heat, light, top-line sales 25% faster. Why does better supply chain processes like manufacturing, air, and over pressing, all of which com- service lead to such striking financial gains? sourcing, quality assurance, and return. And promise quality. Barlean’s designed a On a basic level, companies with superior if a product is perishable or fragile, trans- manufacturing process that protects its customer service processes avoid the costs portation and storage play an integral role. seeds from the elements. The company related to expediting and the short-term One key supply chain attribute relative doesn’t even press the seeds until an order churn that other, less adept companies face. to quality is traceability—the ability to trace comes in—a “press to order” production On a more strategic level, companies that a product back to its point of origin— method. Barlean’s also uses Express Mail excel at customer service develop the a growing requirement in a number of to ship orders so they arrive faster and ability to segment their customers. They industries. Concerns about food safety and fresher—a more expensive choice, but one understand the relationship between cost to the booming market for organic and that further supports the company’s serve and profitability and can assess the “ethical” products mean that consumers commitment to quality. In the crowded cost of offering customized services. As a want to be able to trace a product from health supplements market, Barlean’s uses result, they avoid offering customized “farm to plate.” In the U.S. tire market, for the supply chain to deliver on its commit- services to customers who don’t meet hard example, traceability back to the point of ment to quality, profitably growing sales business criteria. They also tend to focus on manufacture is a legal requirement. every year by 40% since 1999. the higher-value segments of an industry Moreover, counterfeiting has emerged in a and on developing relationships with their growing number of sectors, such as luxury priority customers, resulting in lower goods, entertainment, and pharmaceuti- Competing on Service account turnover and a decrease in cals. To offset this risk, manufacturers customer retention costs—all of which add increasingly use special tags, such as RFID Companies that compete on service tailor to the bottom line. (radio frequency identification), that iden- their offerings to their customers’ specific A case in point is Shell Chemical. It offers tify merchandise as genuine and closely needs and are known for exceptional cus- its manufacturing customers an inventory control product flows to consumers. tomer service. These companies customize management solution called SIMON (sup- The example of Barlean’s Organic Oils their products and services to build plier inventory management order network) shows how a supply chain strategy can customer loyalty and lock in repeat sales. To that simplifies their purchasing process deliver quality as a basis of competition. excel at service, all of a company’s and cuts costs from the supply chain at the Barlean’s is a $22 million family-owned customer-touching processes and informa- same time. With Shell’s automated company that sells health supplements. tion systems such as order capture, order replenishment system, customers no longer © 2003, 2006 PRTM 4
  5. 5. place orders, run out of inventory, or build competition. This sharp focus sets them (VoC) is a methodology we use that helps “safety cushions” of stock. Instead, they’ve apart from the competition and helps them our clients really listen to their customers integrated their IT systems with Shell’s so gain a competitive advantage. and understand their environment. VoC can that they can share information. Every night, The supply chain supports every business help uncover and translate customer needs data on consumption, inventory levels, and strategy, so make alignment a top priority. into requirements for new products and usage forecasts are recorded at the cus- Remember, though, that strategy is a bal- services that leverage your existing supply tomer’s site and forwarded to Shell. At ancing act. No cost leader can afford to ignore chain capabilities or pinpoint changes predetermined inventory trigger points, Shell customer service. Nor can an innovator you can make to exploit new business places a refill order for the customer, sched- ignore the price ceiling of a market. Supply opportunities. ules order transport, and tracks the shipment chain performance leaders understand the Aligning with customer needs also means until it arrives. The system is invoiceless. trade-offs among service levels, lead times, identifying the particular requirements of Each month, based on consumption figures assets, and costs and make decision that different market segments. As we shall see, that both parties share, the customer sends best fit their overall strategic mission. By Michelin’s passenger-car tire business has payment electronically. choosing where to focus and achieving best- two different market segments—automo- Shell’s solution makes life easier for every- in-class supply chain performance in those bile makers and the after-market customers. one. By cutting administrative costs for key areas, companies can set themselves The automakers are far more demanding, customers and the safety cushions of stock apart form the competition. requiring that tires be delivered directly to the that result from forecast uncertainty, the assembly lines right on time because any solution reduces the total amount of inven- delay can back up production schedules. tory in the supply chain and vastly simplifies Align With Your Customers’ Needs Besides being more demanding, the automo- inventory management. Shell gains an added bile makers deliver only razor-thin margins, bonus. In exchange for using the compa- Barlean’s Organic Oils identified fresh- compared with healthier margins for the ny’s service, and because the solution ness as a key differentiator. Shell Chemical less-demanding replacement market. Thus, couldn’t work if inventory from different realized the advantage of providing a new you’d think that the after-market would be a suppliers were mixed in the same tanks, service concept to it customers. Zara under- priority, right? Wrong. Tire manufactures customers agree to use Shell as their exclu- stood the market for high fashion at attractive such as Michelin always puts the automobile sive vendor for products managed under price points. Each of these companies iden- makers first because being on a new car cre- SIMON. By offering a value-added service tified solutions that would create a ates a pull for replacement sales and because and integrating with its customers’ IT sys- competitive advantage and aligned their sup- supply contracts contain severe penalties. tems, Shell is able to forge extremely tight ply chains accordingly. If you’re a tire manufacturer, you have to relationships with its customers—a Do you really know what your customers play according to the automobile makers’ powerful, supply chain-driven strategic want? Are there opportunities that you’re rules. If reliability and timeliness are key advantage. not exploiting simply because you can’t envi- customer requirements, as they are for The best companies understand that they sion them? Answering these questions can manufacturers such as Michelin, then you’ll can’t be all things to all people. They be a challenge. Often our assumptions about make it a priority to continually improve all identify how they will differentiate them- what customers want are wrong. Just as the supply chain activities that support those selves and drive their supply chain to often customers are unaware of or can’t fully performance goals—or pay the pricewith best-in-class performance for that basis of articulate their needs. Voice of the Customer high levels of finished-goods inventory. © 2003, 2006 PRTM 5
  6. 6. If customers don’t get what they need, subject to a penalty up to the equivalent of heightens the brand’s prestige. Customer you’ll lose market share. If you don’t know the revenue lost while the line is down. It’s service, fast delivery, or squeezing out what your customers want, then, ask them. written into the supply contract. Of course, supply chain costs and inefficiency can Or use VoC to find out. And check back not every company can do this. It requires seem irrelevant to companies with the periodically to understand how their needs power—the power of scale. hottest brands or products. Buyers of are changing. Companies with scale can exercise a high highly desirable products expect to wait— degree of control over the supply chain and and to pay a premium. structure it in a way that supports their Make sure that you understand your Align With Your Power Position own strategic objectives. When a company relative position before trying to exercise is bigger than its suppliers or its customers your supply chain power. Even consumer A good supply chain strategy is and they need it more than it needs them, packaged goods brand leaders, those whose grounded in an understanding of your the company calls the shots. But scale is product dominate a product category, are power and influence relative to customers relative. Companies often underestimate modifying their physical logistics to satisfy and suppliers. Why is this so important? their own power because they’re thinking the demands of key retail accounts. Your relative power determines what can be in broad, global terms instead of narrowing Manufacturers that occupy the less achieved realistically in terms of reconfig- their scope to a country or market segment. desirable second position on the retailer’s uring the supply chain to meet your overall Even relatively small companies can find shelf typically have to go even further to strategic objectives. ways to work strategically with select contribute to the logistics efficiency of their The reality is that many of the supply suppliers or customers to gain a competi- key accounts by, for example, modifying chain innovators you read about are in an tive edge. The key is to segment, focus, product packaging and providing very high enviable position: They’re big, with and consolidate. supply flexibility. The hard reality is that enormous market clout. But not every com- If you’re not a priority for your suppli- second-tier branded goods suppliers just pany is a Wal-Mart, able to strong-arm its ers and aren’t getting adequate collaboration don’t have the supply chain power of suppliers to eliminate inefficiencies. When and service, rethink your supplier relation- category leaders. Changes to their supply it comes to making fundamental changes in ships. Consider shifting the power equation chain must accommodate the retailer your extended supply chain, you need to by focusing on a few, smaller suppliers and requirements, even to the detriment of understand how much power and giving them an opportunity to grow their manufacture supply chain costs and influence you really have. business in exchange for working with you inventory performance. Scale matters. Big companies can more collaboratively over time to cut costs, When you’re developing your supply leverage their volume of output to buy boost efficiency, and improve overall chain strategy, take some time to assess inputs more cheaply, boost asset utilization, performance. the situation. Is your supply chain and reduce the cost of everything from Brand also can be a major source of brand-led, channel-led, or supplier-led? Do information systems to transportation. Just supply chain power, especially in the you need your channels more than they as important, they can impose their own consumer markets. If your products are need you? How about your suppliers? Who processes and rules on suppliers and highly desired by consumers, you’ll have has the power? If you’re a supplier in an customers. In the automobile industry, any more clout with retailers and other channel industry that’s fragmented on the sell side supplier who shuts down the production partners. Think of Louis Vuitton bags or but concentrated on the buy side, like the line by not delivering on time can be Rolex watches. Lack of availability only automobile industry, your power may be © 2003, 2006 PRTM 6
  7. 7. limited. The same is true if you’re one selling directly through the Internet, and These factors include: buyer among many in an industry with exploring other new channels. • A new technology that transforms the just a few suppliers—such as an electron- In other industries, such as aerospace, dynamics of your industry. The Internet, ics buyer of specialty components. fundamental supply chain changes occur for instance, created a direct link to As we’ve seen from these examples, less often—every 10 years or so—and have customers, so companies such as supply chain control is a possibility. For major consequences. Consider the supply Amazon could sell direct and cut out most companies, though, collaboration is chain strategies of Boeing and Airbus. the middleman. the best bet. Therefore, analyze your Airbus’s network of partners delivers • A change in the scope of your business. position in the supply chain. Explore how finished sub-assemblies direct to the If your company is offering new prod- you can rethink your interactions to cut company’s assembly line in Toulouse, ucts or services, targeting new markets, costs, eliminate inefficiencies, boost France, where fewer than 500 workers do or expanding geographically, you may satisfaction, or add value. And since final assembly. Airbus’s production model need to expand your manufacturing collaboration is tough to do well, pick your requires lower capital spending, spreads capacity, add new distribution capabil- targets carefully. Focus on key customers or development risks, and leverages the ities, develop new channels, find new suppliers, and look for opportunities where know-how of many partners. suppliers, and rethink your supply collaboration will have a real strategic Boeing today is in a state of continual chain strategy overall. impact. change. The company is achieving marked • A change in your basis of competition. improvements in efficiency by reducing its Perhaps a new competitor has emerged supply base and is working within the with a stronger value proposition, or Become Adaptive company and with suppliers to implement you need to change the type of service techniques of lean manufacturing. At the you offer to increase market share, or Change is a given. Market conditions same time, the company is involving more you want to compete in a new market shift, business strategies evolve, new risk-sharing supplier partners in its that requires faster delivery, greater technologies emerge. If you’re not paying business and making great progress toward flexibility, or higher quality. Any major attention, your supply chain can get out of large-scale systems integration. change to your company’s basis of synch. Your supply chain strategy, just like Given the major changes experienced by competition should drive a reexamina- your business strategy, has to adapt. the airline industry in the late 1990s tion of your supply chain strategy and Although change is constant, the and early 2000s, including bank- components. frequency of significant change will differ ruptcies, mergers, and acquisitions, and the • The need to assimilate a new acquisition. by industry. In the PC industry, companies impressive growth of low-cost carriers, it is Mergers and acquisitions can create a make fundamental changes to their supply likely that the supply chain strategies of need to reconfigure the supply chain. chains about every three to five years, driven major commercial aircraft manufacturers You’ll have to see where it makes sense by the constant pursuit of lower costs and the will evolve further to meet the airline indus- to eliminate redundancies, where to need for rapid new product introductions. try’s demand for cost-efficient solutions keep operations separate, and where Companies have adopted new operating and to deliver profitable growth. to integrate. strategies such as make to order, white-box Both internal and external factors deter- A company’s growth trajectory can packaging, and resale from low-cost mine your supply chain’s shelf life and can have major implications, too. Is your producers and are opening their own stores, trigger a need for a change in configuration. sales volume increasing or decreasing? © 2003, 2006 PRTM 7
  8. 8. Is your industry expanding or contracting? An organization and processes designed to manage and support a growing company may no longer be appropriate during retrenchment, when the focus is on cost control. In either case, your company may need to adjust supplier requirements and resize fixed assets. C O N T A C T S PRTM Director Joseph Roussel at jroussel@prtm.com or +33 1.56.68.30.35.7506 PRTM Director Shoshanah Cohen at scohen@prtm.com or +1 650.967.2900 Note: This article is excerpted from PRTM’s book Strategic Supply Chain Management (McGraw Hill, 2004). © 2003, 2006 PRTM 8
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