The Path to Supply Chain Leadership
By Charles C. Poirier -- Supply Chain Management Review, 9/1/1998
In the never-ending quest to gain and sustain a lead over the competition, businesses in a wide range of industries are turning to the supply chain. They see the chain as a mechanism for transforming their company into an enterprise that is more efficient and more responsive to customer demand.
Unfortunately, the success of these efforts has been far from uniform. The result is a littered battleground on which a substantial gap exists between the leaders and the pretenders. The gap is so large, in fact, that some leaders now have a one- to two-year advantage over the competition.
That's certainly the case with the collaborative network established by Wal-Mart and Procter & Gamble. Toyota, too, has a business model that exceeds other automobile manufacturers' programs. Federal Express enjoys a year's lead over its competitors. And high-technology firms like Hewlett-Packard, Dell Computer, Sun Microsystems, and Intel are well ahead of the pack in the configure-to-order computer hardware industry.
Only a handful of such leaders, however, have reached the highest peak of supply chain performance. That means there's still a chance for just about every company to assume a supply chain leadership position in their respective industry. If they're committed to supply chain excellence, they can define the model for their industry and move to the front of the class.
Careful study of more than 300 global firms engaged in supply chain practices has revealed four levels to supply chain progression. The first two levels, where the vast majority of companies reside, are internally focused. The two higher levels, home to the true industry leaders, embrace a decidedly external focus. Exhibit 1 shows the key characteristics of each of the four stages.
The internal orientation of Levels 1 and 2 can yield significant savings in such areas as inventory, cycle times, purchasing, logistics, transportation, and warehousing. A few companies in the lower levels have even managed to improve customer satisfaction ratings.
Yet a wall separates the lower levels from the top ones. And most businesses find it too hard to get over that wall. They continue to concentrate their efforts on internal excellence, foreclosing on the advantages that external networks and alliances bring. The higher levels, by contrast, are externally focused—a perspective that results in greater and more lasting improvements. These are gained by leveraging shared resources to satisfy customers, reduce costs further, utilize total assets better, and build profitable revenue growth across a supply chain network.
The best of these organizations are building "value-chain constellations." These are organized networks of businesses that are working together by sharing resources and rewards in the pursuit of targeted markets and consumers. Working as a unified alliance and focusing intensely on the targeted opportunities, these constellations are outperforming the less tightly knit competing networks. The key ingredients of such advanced alliances are technology, digital commerce, cooperative use of resources, shared savings, and levels of trust not normally present in external relationships.
Only a few companies have steadily progressed to the higher levels. But their lead is becoming formidable over those mired in the internal myopia of the lower levels. The opportunity to define new industry modelsto forge those value-chain constellations—still beckon those organizations intent on using the supply chain to gain the lead position. The playing field is wide open.
This article marks out the path to supply chain excellence. As the journey proceeds, the reader needs to cast aside the traditional blinders that insist all good things are generated internally. Be open to a different perspective. Imagine how the best elements of a total supply and replenishment chain can create a new, defining model that satisfies today's consumers while optimizing invested capital and resources.
Level 1: The Sourcing and Logistics StageAt the first level of supply chain progression, the emphasis is on reducing sourcing and logistics costs. A driver is selected to lead the effort. Among the firms we studied, the likely candidate was a departmental vice president, usually from the purchasing and procurement function. These drivers are conscripted (usually under pressure) by a more senior leader intent on driving down the cost of purchased goods.
The driver generally displays a reluctance to be proactive. This stems from a feeling that purchasing already has addressed the need to keep costs low and to get the most value for each dollar invested. But those doing the conscripting override this notion. They insist on reducing the supply base and demand significant cost reductions.
The most notable of these efforts was fostered at General Motors a few years ago when Ignacio Lopez put his buyers on a "warrior's" diet, insisting that substantial savings be wrung out of the supply base. Positions of supply were bartered for substantial savings, often when there were no real benefits for the supplier. This approach led to both good and bad news. On the one hand, the automaker reported substantial savings; on the other, missing supplies shut down at least one major assembly plant.
Because purchased goods can amount to 40 to 50 percent or more of total costs, sourcing is a logical area of early concentration. The near-term benefits come from leveraging volume in exchange for cost transfer back to the suppliers. It's a simple game. A buyer offers a group of suppliers the opportunity to bid for a major portion of the purchases (and often a sole source position) in exchange for lowering prices, holding inventory until needed, and promising to come up with innovative ideas for improvement. The early efforts are typically successful, reflecting the real savings that can be realized when a larger volume position is spread over the same fixed costs.
The focus in the early going is on pricing, inventory reduction, logistics, and freight savings. And generally there's a special project or two thrown in to redesign some part of the supply chain relationship. The tools used at this stage revolve around teaming techniques, as team members use their functional experience and expertise to uncover savings that had eluded the relationship. Some companies conduct "idea exchanges" with a controlled number of key suppliers. Usually, these deliver good results. Novel suggestions on how relationships could be improved lead to real savings for both parties. An offshoot of this effort finds problem-solving teams being formed to discover root causes of poor performance or to look for new ways to perform old jobs.
Throughout these initiatives, however, the action area remains in the middle of the organization. What's the problem with this? It's simply that the improvement efforts involve neither the senior officers who need to drive real supply chain advancements nor the rank and file who will implement them. Typically, the improvement teams at this level are manned by internal departments, or occasionally by buyers and sellers jockeying for position and looking for low-hanging fruit. The best of these teams have cross-organizational representation, with key personnel from both parties working on focused projects or process improvements.
Cost data is the guiding light at Level 1. But as often as not, subsequent audits cast doubts on the savings reported. Claimed successes are used to solicit additional funding and to continue the programs, the theory being that the process is self-funding by virtue of the early rewards (the low-hanging fruit that has been harvested). The reach of these efforts goes into major cost categories, typically beginning in purchasing and then moving to inventory management, transportation, and delivery.
There is no real model guiding the efforts in the first level. Typically, the teams are simply looking for quick-hit savings as a means of justifying their programs and activities. Some preliminary alliances may be formed with a few trusted suppliers that are given larger positions as a reward for major cost concessions. Any training that does take place relies on team techniques. And usually it's based on available in-house programs.
One example of Level 1 activity comes from a manufacturer of small appliances. This firm began by reducing the supply base from 3,500 vendors to about 200 key suppliers, 20 of whom were considered elite "partners." This latter group of suppliers helped the company reduce sourcing costs by 20 percent and eliminated the need for superfluous inventories. As a result, turns went from three to five per year to 10 to 12. Logistics costs were reduced by 15 percent through various internal efforts. When this manufacturer solicited improvement ideas from key suppliers, more than 50 major opportunity areas were identified. Half of these resulted in significant savings.
Among Level 1 companies overall, purchasing costs typically decline by 10 to 15 percent. Inventories drop by 10 to 20 percent, and logistics costs decline anywhere from 5 to 10 percent.
Despite these gains, though, little attention is paid to more telling indicators like cycle times. Furthermore, white-collar costs actually may rise as people are added to support new interactive systems and track the results. In addition, technology improvements often are spurious at this stage because they tend not to focus on real business needs and how the information can be used for competitive advantage.
The biggest concern at this level is to make certain the improvements are real and not just a temporary exchange of costs from buyer to seller that are transferred back to the buyer at a later date. The following scenario illustrates this concern. If a company reduces the supply base to a single source and then insists that this source take responsibility for all inventory, the buyer realizes a temporary savings in inventory-carrying costs. If the seller then finds a way to eliminate the need for the inventory, the savings to the relationship are real. But if the seller absorbs the carrying cost, the margin on the business deteriorates markedly (beyond the discounted prices for the larger volume) and internal efforts are launched to recoup this cost. In the end there may be no real savings.
Following up on one purported success story, I found that the network savings announced could be more imagined than real. A major utility reported saving more than $200 million in inventory by transferring the material (poles, cables, transformers, and so forth) back to distributors. With an inventory-carrying cost of 10 percent, the annual savings claimed were $20 million. In attempting to verify the story, I found that the distributors taking responsibility for the inventory were adding a 15-percent fee for carrying costs. The message is clear: When pursuing improvements at Level 1, make certain the savings are real across the network of supply.
Level 2: The Internal Excellence StageThe driver in the second level of supply chain progression—achieving functional excellence internally—can wear many different hats. Some companies establish a director or vice president of supply chain management to lead the charge. And virtually all of the companies studied carve out a role for the chief information officer, bringing a new dimension to information technology's role in the supply chain. The power of this vital function is brought to bear in designing leading-edge systems and processes that lead to both internal excellence and more satisfied customers.
The expected benefits come from a prioritized list of improvement opportunities that become the means to introduce elements of continuous improvement to the effort. Every company I've worked with at this level has had a mechanism for creating a list of continuous-improvement opportunities. These lists are routinely reviewed, and resources are allocated based on potential return on investment. The focus moves toward the top of the list so that the most beneficial processes can be concentrated on the highest areas of return. As items are completed at the top, new initiatives are added to the bottom.
Companies at this level design tool kits with useful benchmarks showing the gap between their current performance and best practice. The demonstrated best practices are documented and studied to guide the teams in their quest for excellence. Plant and site visits to the acknowledged leaders become part of that effort. Business process re-engineering becomes a rallying cry, as BPR techniques are applied to root out the non—value-adding features of supply chain activities. Activity-based costing is usually employed to show just how wide the gaps really are while pinpointing opportunities for real improvement.
The action area expands from the middle to include some hourly groups as well as a few of the senior executives who believe in the supply chain's potential. Process mapping becomes a critical factor. This technique is used to detail the "as-is" conditions both within the firm and with suppliers, distributors, and key customers. Process mapping also is used to guide development of improved "to-be" conditions. In the more advanced Level 2 companies, the reach extends to particular business units where the leaders see the supply chain as a vehicle for enhancing unit performance.
Despite the tentative attempts to reach outside of the organization, the Level 2 focus remains largely internal. Accordingly, the teams are exhorted to deliver savings to the company. But as the constant hammering for improvement continues, some suppliers begin to lose interest in the initiatives—particularly if they don't see anything in it for themselves. This fact is lost on some companies, as the drive for internal improvement takes precedence over the more beneficial approach of shared savings.
A model for success begins to emerge for the Level 2 initiatives, but it is intra-enterprise in nature. Thus, the emphasis remains on how to improve the performance of the company and not the total supply network. This is the basic shortcoming of the second level of progression. So much effort is expended on internal excellence that some companies become experts at processes not valued by the customer or end consumers. Utilities have been especially guilty of this. They get better and better at internal processing (much of which adds no value for the end user), while increasing the cost to consumers.
Training remains largely underdeveloped at this level. But as the organizations begin to recognize that the supply chain can be a defining market differentiator, leaders begin to step forward to deliver that message.
Savings that flow from the Level 2 initiatives reach a new plateau over the previous level. Purchasing finds another 5- to 8-percent savings as key suppliers discover new ways to reduce costs. Logistics cuts another 3 to 5 percent, and inventory turns reach 15 or more per year. Organizations at the upper end of this level begin to challenge their infrastructure assumptions. They start to reduce the assets tied up in warehousing and distribution.
Several major consumer-products companies we studied reported reductions in warehouse space of 40 to 60 percent. They were able to consolidate operations, connect more directly with delivery locations, and, in many cases, ship direct to the customer. Software programs now widely available can help with these rationalization activities.
Level 3: The Network Construction StageA wall separates the internal and external stages of the supply chain evolution. Those firms to the left of the wall in Levels 1 and 2 work relentlessly on internal excellence, overlooking the opportunity to partner with external organizations to attain a better total network solution. Those organizations that remain mired in the internal supply chain stages will continue to focus attention on redesigning the corporation, typically using re-engineering techniques. In short, they maintain an intra-enterprise view of progress. Exhibit 2 illustrates the change in thinking necessary to vault over the confining wall.
At this third level of progression, a business-unit leader needs to assume the driver position. This is an essential transition. The supply chain VP's role continues and the involvement of the CIO has to be sustained. But unless a business-unit leader picks up the reins, the organization is doomed to recycle itself. Resources and capital inevitably will be expended on internal features. When a business-unit leader realizes the market advantages attainable through the network, the real breakthroughs begin. The company is ready to move externally and seriously solicit the help of allies in a position to strengthen the total network of supply.
The initiatives can come in the form of mutual investments to perfect the value-chain constellation. Or they could involve using assets more effectively by having the right partner execute a given task or function. For example, if both supplier and manufacturer operate similar plastic molding or stamping equipment, the best-able partner takes responsibility for the equipment and supply. Only a business-unit leader can make that type of decision.
Core competencies are objectively reviewed—without the usual emotion that surrounds this exercise. Based on that review, decisions are made on where to manufacture a component or provide a service. If a company can find a supplier better able to make a part of the finished product or perform an essential service, that activity is outsourced accordingly. One cross-functional team in which I participated found that almost half of the parts being made for final assembly could be outsourced for less than the cost to manufacture.
This objective assessment of core competencies brings a new dimension to the make-or-buy decision. It requires the involvement of the business-unit leader to settle the emotional issue of where parts should be made. Union considerations often enter this discussion and can affect the final decision. This is a potentially limiting factor that must be considered carefully before any new sourcing decision is made.
Once the supply chain's weak links have been addressed, the focus shifts to forecasting (the elimination thereof), collaborative planning, customers and services, targeted market opportunities, electronic commerce, and inter-enterprise objectives. This shift is critical as demand chain factors become linked to the supply chain. The need for forecasts evaporates as the linked organizations begin to work from information on actual consumption and not data created for financial purposes. These organizations connect their computers to communicate consumption activities across the network quickly. (Procter & Gamble knows by cash register what P&G products have gone through the Wal-Mart system.) Replenishment comes directly from manufacturing and not from buffer stocks.
A number of leading companies currently are working on an initiative dubbed Collaborative Planning for Replenishment. CPFR coordinates activities across a supply chain to respond to what is actually being consumed with the best replenishment system and the least inventory. To cite a few examples, Nabisco is hard at work with grocers Schnuck's and Weigmans to duplicate the kind of connectivity that exists between Wal-Mart and many of its suppliers. For over a year now, Hewlett-Packard and key suppliers have been collaboratively designing new products. HP also has linked critical suppliers around the world into its internal computer network (intranet) to keep planning going 24 hours a day.
New tools appear at this stage to help produce realistic metrics with meaning for the consumer and not the manufacturer. Eliminating out-of-stock incidents, reducing returns, having available-to-promise inventory, and achieving other network-oriented measures rise in importance over internally focused indicators. Mutual databases are mined deeply to find any information that will help in selling and servicing consumers. Sales-force automation and databased marketing become realities in this stage, as real data help the network focus on the consumers of choice.
Electronic commerce becomes the implementation tool as the world becomes digital. And the future is, in fact, digital. For the 90 percent of businesses that are still analog, making the transition to digital will be a difficult—but necessary—leap.
The action area at Level 3 moves from localized sectors to the total organization. The linked companies look both inwardly and outwardly across their network to determine where resources are best applied to build the desired competitive advantage. Companies that formerly viewed one another as adversaries begin to sit down and talk about mutual investments in leading-edge technology and equipment to capitalize on targeted market segments. The value-chain constellation starts to coalesce as joint resources are applied to cross-organizational teams pursuing the highest-priority opportunities—opportunities that result in better asset utilization and profitable revenue growth.
Advanced cost models are applied, as the teams work from meaningful activity-based costing data that clearly show the impact of their actions on the extended supply chain. With the help of data, the effort moves forward to concentrate on those processes that will differentiate the constellation from competing networks. The reach is across the full enterprise of interaction—from initial supply to final consumption and recycling.
Du Pont exemplifies a major Level 3 firm. The company is adopting an external focus as part of a new strategy for dominating selected industries where it supplies branded products. Using its nucleus position as a supplier of material for fibers, for example, Du Pont is searching for ways to better leverage nylon, Lycra, and other stable brands into new markets, with the help of suppliers and key customers. The focus of this initiative is on specific markets and end consumers.
Partial alliances are formed with key constituents at the third level. These are characterized as "partial" primarily because of the difficulty organizations have in accepting assistance from the outside and generating the necessary level of trust. Usually, these alliances are made with the most important suppliers, a few key distributors, and one or two major customers. Pilots often are conducted to test the validity of the new concepts and to find strategic advantages. The idea is to prove the concepts' worth and show doubters the value of an external focus.
Training programs do not really exist that address the requirements of this network construction stage. Instead, they have to be created as organizations look for help in how to team up and partner across a value-chain constellation.
Level 4: The Industry Leadership StageThe three necessary ingredients for progressing to the leadership stage of supply chain evolution are imagination, determination, and technology. A company with a culture steeped in traditional thinking will have great difficulty moving to this level. Its people will continue to insist that control is more important than innovation, that taking credit for any improvement outweighs finding new techniques that work, that the only good ideas are the ones developed internally.
A company that quickly loses its determination when confronted with obstacles and push-back will be similarly handicapped. And without heavy doses of network technology, there is little chance of assuming real supply chain leadership.
In this final stage of evolution, the driver has to be a management team determined to make the value-chain constellation work and committed to dismantling those boxes of traditional thinking. The team will push for the kinds of off-the-wall ideas that create tomorrow's solutions. It will seek the rich rewards that follow network superiority. Profitable revenues will flow to the industry leader because consumers will deal with no other network.
In brief, the linked organizations become the first value-chain constellation in their industry to reach the highest level, thereby securing the customers and consumers of choice. These are the organizations that will be around long after the changing of the millennium, the leaders who'll be determining what is being consumed.
Because more and more of the consumers will be making their choices electronically, the future has to include electronic response. The response from the leaders will come through a functioning intranet—a private, internal communication system that is carefully extended to a few suppliers to provide full online access to activity throughout the network. From the intranet, the leadership companies will use the Internet, a public and inexpensive medium of communication, to reach out to consumers of choice. The Internet will tell those consumers what products are available, which features these products possess, how they can be customized, how they can be bought, and what to do if something goes wrong.
Dell Computer, the acknowledged leader in this arena, now sells millions of dollars of computing equipment a day electronically. Boeing, General Electric, and other mega-firms are placing a substantial amount of their purchase orders over Web-based procurement systems. Industries have launched efforts to bring information transfer on a global basis through a variety of E-commerce means. The automobile industry, for example, has ANX (Automotive Exchange Network), a consortium of firms linked to the big three automakers, through which purchasing and design can be conducted.
The final move is to an extranet—a public communication system that is configured in a privileged and protected manner to create a glass pipeline of supply. With their view of the pipeline, the constituents of the value-chain constellation and their consumers can determine the location and movement of goods and services accurately on a real-time basis.
Critical needs are met by diverting the flow of important sub-assemblies or special parts, or by augmenting existing resources with additional ones. Safety stocks are reduced to absolute minimums. Forecasting disappears because the value-chain members are working from actual consumption. Working capital is reduced for all as the safety and buffer stocks of yesterday are pared down to absolute minimums.
The momentum toward leadership builds as the value-chain partners realize that information is the new source of power permeating their constellation. The combined forces begin to design the kind of network communication system that spans the enterprise and outperforms any competitor. The demand and supply linkage is solidified as the data become rich in the kind of details needed to satisfy the customers, creating the impression that a seamless entity is at work supplying exactly what they want. In the end, consumers select as their sources of supply the value-chain constellation over less-able and less-agile alternatives.
Global demand/supply linkages become the guiding principle as sourcing and delivery are accomplished around the world. The global market is the defining model as the value-chain members leverage their network capabilities to focus on targeted consumers. The previous stage's tentative alliances now are solidified into joint ventures as mutual capital investments build on the network advantage. The training that began in Level 3 now is developed more holistically to embrace all of the alliance partners, to identify even more improvement opportunities, and to keep innovations coming that will keep the value chain well ahead of the competition.
This exposition has offered a glimpse into the principal stages of supply chain progression. The majority of companies today are moving forward in Level 2. A few have found the means to jump over this stage's internal barriers and into the externally focused Level 3. An even more select few have reached the highest level of progression—true industry leadership achieved through the value-chain constellation. These are the pathfinders who are paving the way to the future.
In the vast majority of industries and business sectors, though, the opportunity still exists to forge the first value-chain constellation and dominate. Will your organization be one of those leaders?
| Author Information |
| A partner in the National Supply Chain Practice of Computer Sciences Corporation (CSC), Charles C. Poirier is the author of a number of business books including Optimizing the Supply Chain. His latest, Advanced Supply Chain Management, is scheduled for release by Barrett-Koehler Publishing later this year. |
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