Go for Growth! Supply Chain Management's Role in Growing Revenues
By Robert E. Sabath and David G. Frentzel -- Supply Chain Management Review, 6/1/1997
Corporate downsizing and reengineering over the last decade have helped U.S. and other multinational companies reestablish their global competitiveness. During this period, the most popular route to increased profitability was to cut costs rather than increase revenues. Logistics professionals played key roles in improving the cost competitiveness of their operations across the supply chain by adopting new strategies, closing warehouses, trimming inventories, outsourcing non-essential services, and installing powerful forecasting and material-control systems. Cost cutting across all parts of an organization, however, can be taken to the extreme. It can lead to a vicious cycle of plant closings, layoffs, and expense reductions ultimately leading to a gutted, weak corporation that is unable to sustain profitability for very long.
Today, with lean and healthy operations as their foundation, progressive companies are focusing intensely on growing revenues, thereby breaking the downsizing death spiral. Instead of merely striving to meet annual cost-reduction targets, managers at these leading companies are repositioning the supply chain as an enabler of growth. They are speeding the flow of new products; accessing new markets across the globe; developing new channels of distribution; customizing services to micro customer segments; and forging new value-added relationships with suppliers and customers. The new standard for the supply chain is value delivered, not cost eliminated.
Why the sudden interest in revenue growth? Because it has become clear that cost cutting alone is not a viable long-term business strategy. Few companies can shrink to greatness. Indeed, when our firm asked CEOs of U.S. corporations to identify their biggest challenges, growth topped the list (see Exhibit 1).
Moreover, if a company's ultimate success can be measured in terms of its total market value, our research clearly shows that companies that have charted successful growth strategies have been rewarded handsomely (see Exhibit 2). Companies that focused on cost cutting, on the other hand, did not fare nearly as well.
Reengineering based on cost reduction will continue to help certain companies, although few organizations have downsized their way to long-term profitability. Instead, long-lived prosperity lies in revenue growth. Successful growth companies often follow one or more of three key growth strategies: customer franchise management, new product development, and channel management. Each of these growth strategies depends on supply chain innovations. Importantly, to implement these strategic opportunities successfully, a company must have a solid foundation to support them. This includes the ability to consistently and reliably execute supply chain processes that provide superior value to the customer.
Superior supply chain strategy and execution are critical enablers of successful growth. Yet the cost-reduction mantra repeated by senior executives over many years has resulted in logistics managers who are experts at cutting costs and downsizing. The growth imperative requires a new way of thinking. Specifically, today's supply chain managers must understand how to align their operations to support and foster growth.
A Framework for GrowthIn their book Grow to Be Great: Breaking the Downsizing Cycle, Mercer colleagues Dwight Gertz and João Baptista analyzed growth companies and pinpointed key drivers of profitable growth that are common across a wide range of industries from computers to basic manufacturing (see Exhibit 3). The authors found that successful growth companies pursue one or more of the following strategies for growth:
- They focus selectively on aggressively developing and managing the most profitable customers. They constantly strive to know everything about those customers and their needs, and serve those needs with intense dedication. We call this customer franchise management.
- They become exceptionally effective at rapidly developing large numbers of new products that offer superior value to customers. This is a new products/services development strategy.
- They find and develop the most effective ways to connect customer segments with their products and services. This is the strategy of channel management.
Research suggests that although these strategies are important, they cannot deliver their full potential without certain organizational capabilities—what we call "foundations for growth." Companies must master and link all three growth foundations, which include (1) a superior value proposition, (2) superior economics across the value chain, and (3) consistently superior execution. Within this growth framework, supply chain management contributes significantly to the common growth strategies and affects all three foundation elements. Hence, designing and implementing a superior supply chain is one of the most important actions a company can take to fuel its growth.
The Three Growth StrategiesCustomer franchise management means managing customers as a portfolio of assets. High-growth companies increasingly seek ways to maximize the value of that portfolio. They recognize that growth flows from the acquisition, development, and retention of profitable customers. At catalog retailer L.L. Bean—a company known for innovative telephone-center operations and small-order handling—a comprehensive customer-information database and relentless focus on customer-service excellence have fueled domestic and international growth.
Growth leaders like L.L. Bean understand their customers' needs and economics. They then tailor product, marketing, and distribution strategies to serve the most profitable customer segments. By providing high levels of service and customized programs at reasonable costs, supply chain managers help companies build a strong and lasting franchises with customers.
Aggressive introduction of new products and services is another pathway to growth. Those companies that consistently bring the best new products to market first can fuel significant growth. For some high-growth companies, new products (developed in the past five years) represent 30 percent or more of revenues. In the case of one growth leader, Hewlett-Packard, it reaches 60 percent.
Frequent and rapid introduction of new products would be impractical without agile supply chains. Manufacturing capabilities and supply lines must rapidly move from prototype to full-scale production; adequate supplies of new products must be on the shelf in time to meet publicized introduction dates and customer commitments; and new forecasting methods, inventory deployment and stocking policies, transportation modes, and handling procedures must be swiftly implemented as required.
The third key growth strategy is channel management. Some companies have grown by creatively using alternative distribution channels, and in many instances developing multi-channel strategies. Gateway 2000 and Dell Computer, for example, experienced double-digit growth by selling personal computers through the mail. In an industry that traditionally sold through dealers or a direct sales force, this marked an innovative use of an alternative distribution channel. To protect their markets and fuel growth, Compaq and IBM, which long resisted mail order sales, have added this option to their multi-channel distribution approaches. Exploiting a new distribution channel typically requires significant changes to the supply chain. When Compaq introduced direct consumer sales, it also developed new order-fulfillment, small order "pick, pack, and ship," and after-sales support capabilities to meet the different needs of this new channel.
Three Foundations for GrowthIn addition to following one or more of the three growth strategies, successful companies recognize the three universal underlying prerequisites for growth: value, economics, and execution.
High-growth companies offer their customers competitively superior value. A product or service is competitively superior if it provides the highest value—as defined by the customer—at the right price. Growth champions invest vast resources in identifying how to create and increase value. Unless these products and services can be delivered with comparatively superior economics, however, the ability to deliver value to the customer and make money is undermined. When we examine a company's economic foundation, it becomes evident that the entire value chain economics—from raw materials to after-sale support—must be comparatively superior. Seeking unique points along the chain to add value is one effective approach growth leaders take.
Ultimately, it is the complete alignment of the organization toward delivering superior customer value and economics that leads to consistently superior execution. Superior execution is typically the hardest foundation of growth to achieve consistently. Execution pitfalls include conflicting departmental objectives, inappropriate performance measurements, insufficient training, functional rather than process orientation, and poorly communicated strategy.
Supply Chain's Role in Fueling GrowthHow can the supply chain fuel growth? There is little doubt that supply chain strategies directly influence customer-franchise management, new products and services, and channel management—the primary growth strategies. More fundamentally, however, the supply chain is a major underpinning of the three foundations of growth.
Value: Competitively superior value as determined by customers.
As a primary interface point with the customer, supply chain management can offer value in the form of competitively superior delivery and value-added services, as defined by customers. In this way, the value foundation translates to customer-service excellence. In parallel with the downsizing and engineering efforts of the past decade, customer service re-emerged as a key management priority for a wide range of manufacturers. But for many companies, meeting basic service requirements and achieving customer satisfaction are still the primary goals.
With the increasing recognition of the growth imperative, supply chain managers need to reorient their thinking and service programs toward helping customers grow profitably. Innovative customer-service programs can help companies successfully develop strong customer franchises, introduce new products, and strengthen channel economics.
The new success principle of customer service in this era of growth is simple: Help your customers become successful in growing their businesses, and you will grow and be successful as well.
Putting this principle into practice, however, is not so simple. It requires going beyond basic services and developing innovative programs by thoroughly understanding what it takes for your customers to grow and succeed. It means challenging your logistics programs to contribute to customer prosperity.
Traditional service-assessment approaches are not particularly well-suited to fostering customer growth. Innovation is not doing what customers ask you to do; that's merely good service. Instead, innovation means going beyond today's expectations and anticipating value-adding services. And this requires a more in-depth understanding of your customers' businesses and growth strategies. Leveraging the success principle and introducing innovation requires new perspectives on customer-service program development, execution, and assessment. These actions are central to developing such perspectives:
- Expand your customer-service research to comprehensively understand how your customers define, achieve, and measure success—including growth.
- Assess all customer-service offerings in terms of how they contribute to customer business and growth plans.
- Measure the effectiveness and efficiency of your customer-service programs on the basis of your customers' success.
- Communicate the success principle to your customers, and make it the basis of your relationship. Let customers know that your Number One priority is their success. Explain how your services benefit them.
- Become indispensable to your customer. Provide so much value that there would be virtually no advantage in bringing in a new supplier.
Understanding the success principle can bring large rewards. Companies such as Procter & Gamble and Newell, both manufacturers of a variety of consumer products, understood early on the growth ambitions and strategies of Wal-Mart. By tailoring their logistics to support the retailer's growth, they have grown as well. Notably, a major component of Wal-Mart's growth strategy has been superior economics, including a low-cost, highly efficient merchandise supply chain. The retailer backs up this strategy with significant investments in state-of-the-art logistics, information systems, and communications technology.
How then have companies like Procter & Gamble and Newell helped themselves by helping Wal-Mart grow? These suppliers have tried to make Wal-Mart's merchandise supply chain even more efficient by managing inventories and shipments to the retailer in a way that minimizes costs and maximizes throughput. They are teaming with Wal-Mart's logistics managers to exchange planning and execution data and to configure store-ready loads, streamline receiving processes, and optimize their joint supply chains.
Companies in other industries also have recognized the power of this success principle. The ValueLink program from Allegiance Healthcare (formerly Baxter Healthcare) directly targets health-care providers' strategies of growth through quality patient care at minimal cost. Through ValueLink, the hospital supply company delivers material directly to the clinical floors and storerooms. The hospital gets superior logistics economics while being relieved of the purchasing, materials-management and inventory burdens. This frees up resources to focus on patient care—the hospital's primary growth strategy. Similarly, W.W. Grainger, a $3 billion distributor of industrial maintenance and repair supplies, not only provides the required items, but also can often manage a customer's supply room for less money than the customer. This distributor thus becomes indispensable to its customers.
To cite another example, a supplier of packaging materials introduced a new customer-service program that included just-in-time deliveries to a manufacturer's production line. Why did this company offer a JIT program and incur additional expenses without being requested to do so? Because it recognized that the success of both organizations is directly linked to greater production out of the factory (increased sales of finished goods and usage of packaging materials). Unproductive assets such as packaging supplies stored at the manufacturer's plant provided little value to either party. The supplier reasoned that by eliminating this burden, the manufacturer could devote more resources to increasing output and subsequently boost the use of packaging materials. Because the supplier has numerous customers, it was able to provide the materials at a lower overall supply chain cost, which improved the manufacturer's economics.
Economics: Comparatively superior economics across the value chain
When we examine a company's economic foundation from a supply chain perspective, it becomes evident that the total supply chain economics (supplier-manufacturer-customer) must be comparatively superior. As the accompanying sidebar illustrates, these comparatively superior supply chains must be aligned with the customer's and the organization's growth strategies. In addition, trade-offs among logistics cost components exist throughout the supply chain—for example, longer, lower-cost production runs vs. higher inventory-holding costs. Because of these factors the total supply chain costs, rather than the individual components, must be optimized to deliver superior economics.
How do growth companies improve their supply chain economics? Our research indicates that growth leaders seek the broadest definition of their supply chains, clearly understand the economic drivers, and continuously reinvent themselves. For these progressive companies, the supply chain becomes a conduit of growth, not a bottleneck.
The first step in achieving comparatively superior economics is to define the company's supply chain as broadly as possible. W.W. Grainger provides a good illustration. Rather than viewing its own shipping dock as the end of its supply chain, the company redefined the terminus of its supply chain as the point of consumption within a customer's facility. For many customers, this perspective provides for the lowest total supply chain economics and increased sales.
Companies also need to consider environmental concerns in defining the supply chain. As these heighten in the future, they will need to plan for recovery and disposal at the end of their products' useful lives. This, in turn, further elongates the supply chain's scope.
Working in the opposite direction (up the supply pipeline), Wal-Mart views its vendors' supply chains as an integral part of its own. The company knows that the combination of the two enables it to deliver value to the consumer. Wal-Mart doesn't unilaterally dictate service requirements to suppliers, but instead seeks to work with them to minimize total supply chain costs for both parties. The retailer pursues such opportunities even if it means a change in the way the retailer does business.
After defining the supply chain, the next step is to thoroughly understand the economic levers—the cost elements that have the largest impact on supply chain economics. We recently consulted to a consumer electronics company that had spent considerable resources trying to align its supply chain economics with its growth strategy by substantially reducing cycle time. But because the company did not really understanding where leverage opportunities existed, it could only make modest improvements.
The breakthrough came with the development of a detailed supply chain economic model that let management identify the leverage points and tie actions directly to key corporate goals. Using interactive computer-modeling technology, managers instantly could comprehend the implications of their decisions. These models can be an effective tool for understanding the economics of suppliers' and customers' individual supply chains.
The final step to improving supply chain economics is to become more agile in order to adapt to the changing marketplace. To maintain superior economics, companies must continuously reinvent themselves. In doing so, they need to strive for speed and flexibility in everything they do—faster information flows, reduced cycle times, flexible manufacturing, minimal inventories, and integrated inter-company supply chains.
To cite one example, MicroAge, the $2 billion distributor of computers and related equipment, recently reinvented its supply chain in response to changing economics and customer needs. Instead of operating as a typical computer wholesaler—literally selling boxes—MicroAge saw value in configuring custom systems for customers. In this new environment, the company found it no longer needed warehouses. Instead, it required logistics centers for configuring computer systems to order on a just-in-time basis. In an industry with an average annual five-year growth rate of 8 percent, MicroAge's impressive 43-percent per year growth reflects the real potential of supply chain reinvention.
Execution: Consistently superior strategy execution via organizational alignment
As supply chain managers, we pride ourselves on being experts at execution—the hardest job of all. But sometimes we are our own worst enemy. Still common in many companies is the traditional "silo" organizational structure in which logistics, manufacturing, sales, marketing, and finance function as independent entities. These organizations are ill-suited to delivering competitively superior value and economics because they compartmentalize decision making and responsibility, restrict the flow of information, and dictate a command-and-control management style. In the end, these kinds of functional organizations can impede growth.
Traditional logistics departments typically strive to link the family of underlying functions as a way of overcoming this silo effect. But growth requires a supply chain organization and business processes that do more than just link functions. Through process redefinition and a horizontal management structure, supply chain management can integrate inter-dependent processes and their supporting internal specializations (such as sales and manufacturing) with external customers and suppliers. Conversely, functional silo or traditional logistics organizations lack these processes and level of integration. This shortfall often results in conflicting objectives, priorities, and measures. Most significantly, it leads to uncoordinated actions that can inhibit the effective execution of growth strategies.
Amgen, the rapidly growing billion-dollar pharmaceutical and biotechnology concern, learned this lesson well when its team-based, business process-oriented approach to new-product development averted a potentially costly mistake. Early in the development process, a supply chain specialist on the development team recognized that without major changes to the company's shipping capabilities, the new product would spoil in the warehouse before reaching customers.
Transformation to a process-oriented, horizontal organization is probably one of the most difficult challenges that companies face. Horizontal management inspires and enables people and functions across an organization to respond quickly, flexibly, and creatively to constantly changing customer needs. Mercer research has revealed five guiding principles of horizontal management that can transform how companies operate in the future:
- Companies must serve customers through horizontal processes. Business processes embody all of the work activities that transform capabilities—that is, skills, knowledge, culture and relationships—into customer value. Processes are both customer-facing (such as order fulfillment) and enabling (such as strategic management). Horizontal processes cross traditional functional disciplines within an organization and even extend beyond formal organizational boundaries to include customers, suppliers, and other stakeholders. By horizontally managing processes, companies can serve their customers more flexibly and effectively, which translates to customer delight and corporate success.
- Process owners, teams, and individuals are driven by customer accountabilities. Accountability is essential to process management. Process owners, teams, and individuals must be given the responsibility and accountability for developing, deploying, and improving processes to meet customer needs. Process management is line management. Accountability is facilitated by goal setting, clear assignment of responsibility, and rigorous performance measurement.
- Processes are the focal point for decision making and organizational infrastructure. Because horizontal processes convert core capabilities into customer value, processes must be the focal point for day-to-day and strategic decision making. For example, it is more effective to focus on the order-fulfillment process, rather than the underlying functions such as transportation, warehousing, inventory management, forecasting, and customer service that make up that process. Organizational infrastructures need to be designed to support the efficient management of processes.
- People must have the attitudes, skills, and behaviors required to sustain horizontal processes. Processes are different from functions. Employees' personal characteristics must reflect the realities of life in a dynamic, horizontal, customer-driven work environment. For individuals, this means a high tolerance for ambiguity and change, a willingness to trust others, and an integrative holistic style of thinking. Process teams must deeply commit to the success of each individual in pursuit of a common goal, while strengthening skills in group decision-making and conflict resolution.
Leaders need to adopt a communicative and collaborative management style. They must believe that teamwork and results are more important than position and power. Human performance systems and the organizational culture become critical enablers. Key goals include attracting, developing, leveraging, and retaining top talent across the organization and fostering a culture conducive to process excellence. This means encouraging individual and team innovation and risk taking; focusing on the customer; promoting values diversity and learning; and becoming results-oriented. - Information enables horizontal integration and adaptive learning. Real-time access to information enables the effective and efficient management of processes. To continually improve themselves, organizations require a systematic approach to capturing and applying knowledge. Timely information feedback on a daily basis allows for incremental self-correction of processes. Similarly, access to comprehensive historical information enables simulation and optimization modeling of processes in major redesign efforts.
Not many empirical studies exist that quantify the relation between supply chain excellence and above-average growth and outstanding bottom-line results. However, we can think of very few companies that have succeeded without a well-managed supply chain strategy. Through our case work, we have discovered that often the challenge is not so much convincing senior management of the value of supply chain management and explaining its influence on the issues they care about. Rather, the difficult part is helping the organization make the change.
In a recent study, we asked logistics managers to identify their top three barriers to implementing new supply chain approaches. Surprisingly, seven out of 10 respondents cited resistance to change as the biggest impediment. How then can a logistics or emerging supply chain organization overcome issues that might get in the way of supporting the company's growth strategies and solidifying the value, economics, and execution foundations of growth?
The answer is that successful companies create a culture open to change by focusing on three key areas: communication, participation, and alignment. Let's look at each in more detail.
- Communication. Communication is central to the change-management process. It is important to create a clear vision of the organization's desired competitive position, distinctive strengths, products and services offered, processes performed, and core values. This information must be communicated to all in the organization. In high-performing growth companies, every individual knows what to do, why it needs to be done, and how to do it.
- Participation. People support the change they have helped to create. Growth leaders recognize that tapping into worker knowledge and enlisting employee participation benefits both the company and the individual. Growth companies foster the development of change "champions" who enthusiastically and credibly spread the change message at all levels of the organization. In addition, these champions must have the resources, skills, and motivation to bring about change.
- Alignment. Mercer research shows that many high-growth companies embrace the principles of horizontal management, aligning performance measures and reward systems with their growth strategy.
In contrast to reengineering and downsizing, growth carries with it a positive and powerful message for shareholders, employees, suppliers, and customers. It also demands a new way of thinking about logistics as well as a new class of supply chain managers. By supporting the foundations of growth and the company's specific growth strategies, traditional logisticians can develop into growth-oriented supply-chain managers. With so many CEOs highly focused on shareholder value today, supply chain professionals who can deliver on the growth message are sure to gain new visibility and stature in the organization.
| Author Information |
| Robert E. Sabath is vice president of Mercer Management Consulting Inc. David G. Frentzel is a consultant to Mercer and principal of Northeast Logistics. |
|
View All Blogs
