Supply Management in the Decade Ahead IV: Impacts to Business Models & Strategies

In Part I of our review of Succeeding in a Dynamic World: Supply Management in the Decade Ahead, we overviewed the various external forces that will impact a company’s supply chain. In Parts II and III we took deep dives into the eight major forces that were identified specifically by supply managers who took part in the survey. In this post, we will address the impacts that these forces, and others, are going to have on business models and strategies in the decade ahead.

According to the report, the following five strategies, designed to improve the financial performance of companies and impact both their income statement and their balance sheet, will be the most salient in the decade ahead.

  • Focusing on Cost Competitiveness
    Due to the constant increase in available products from developing economies with low labor costs and the need to offer products and services at lower prices in developing markets, companies will need to take an extreme cost management focus. This means that supply management will have to achieve year-on-year cost reduction targets while developing supply strategies to offset or dampen the effects of unfavorable commodity price swings.
  • Aggressively Managing Resources
    The prediction is that many companies will be focused on increasing the return on their asset base and will choose assets that can be managed in such a way as to maximize productivity. Simultaneously, they will choose to reduce their asset base by outsourcing manufacturing and business processes or reducing working capital such as inventories and receivables. They may also invest in businesses with higher returns while exiting business with marginal or low returns on assets. Supply will have to find sources of capital equipment that is flexible, has high uptime, and that can be competitively leased rather than purchased. It will be increasingly involved in VMI (Vendor Managed Inventory), consignment inventory, and pay-on-use or pay-on-shipment inventory plans.
  • Pursuing New Revenue Sources
    Businesses will pursue revenue growth over the next decade through a combination of incremental and radical changes to their business models. A major challenge will be the need to enter emerging markets and compete against low-priced domestic markets to increase, if not maintain, market share. Supply will be tasked to find suppliers that can support growth strategies such as innovation and global expansion.
  • Targeting Specific Customer & Market Segments
    Same old, same old and supply will need to find suppliers that can support shrinking product life-cycles and constant innovation as well as suppliers with market-specific knowledge and the capabilities to manage the upstream supply chain to insure it adheres to sustainability and regulatory requirements.
  • Improving the Level and Speed of Innovation
    First to market will continue to be an important, and profitable, business strategy. Supply management will need to identify suppliers that can support shrinking product life-cycles and constant innovation while bringing knowledge of changing consumer tastes.

There’s no surprises here … and very little change from the state of affairs today. Companies have been focussed on cost-competitiveness for quite some time, have already begun to aggressively manage their resources to maintain that cost competitiveness, have always pursued new revenue sources, and have been targeting specific customer and market segments aggressively for at least the past 50 years! The only noticeable change is that innovation will have to continue to be sped up on a regular basis to allow a company to compete at the same level it is competing at today.

What I would have liked to see is some more aggressive predictions on the strategies that are likely to emerge over the decade ahead. For example, I predict the following trends will begin or continue through the next decade and that some early adopters who get it right will gain massive advantages over their competition, at least in the short term:

  • Vertical movements towards Keiretsu
      A keiretsu is a set of companies with interlocking business relationships and shareholdings. As private equity firms continue to take public companies private at an aggressive pace, they are going to look for ways to to maximize the value of their continually expanding portfolios. Some will pursue vertically oriented strategies and encourage their companies to form synergistic business relationships that will start to mirror the traditional Japanese keiretsu system.
       In addition, as certain verticals continue to come under intense competition from new entrants, public companies within those verticals will start to band together in an effort to more effectively compete as a group than as a set of completely independent entities. Although this will not be a widespread strategy, it is likely to emerge in the near future.
  • Increased Niche Specialization Around Talent Pools
    With talent harder and harder to come by in developed economies, some companies will choose to focus only on one or two business functions (for which they have an unusually large talent pool compared to industry norms) and literally outsource every other aspect of their business. Just like some major brands today outsource almost everything to contract manufacturers and do not own much more than their brand, the offices their employees work in, and the equipment they use, more and more companies, including non-brand name ones, will adopt this model. Some will specialize on design. Some will specialize on integration. Some will specialize on the manufacture of a single, common, component. You’ll also see this model in consulting as well – some of the bigger players struggling to survive in the more aggressive global marketplace will spin out or sell off divisions until they are focussed not only on one or two offerings, but often niche plays within those offering. For example, it won’t be just engineering design, or even automotive engineering design, but automotive frame engineering design.

In Part V, we will address the new and expanded missions, goals, and performance expectations for supply management as identified by the report.