We already knew that food prices are rising considerably across the board. They’ve risen so much (29% in the past year) that the World Bank estimates that 44 Million people have been forced into poverty since last June as a result.
If this isn’t enough, thanks to the skyrocketing price of cotton (which has more than doubled in the past year, hitting all time highs), clothing prices are set to rise 10% this spring. Considering that the average household spends about 15% of their budget on food and 5% on clothing, which are not discretionary expenses, the average household is now looking at a total increase in their non-discretionary food and clothing expenses of 5%. Given that, after housing, food, clothing, transportation, health care, insurance, and debt payments, the average household had less than 15% of their funds for discretionary expenditures, this says that the average household now has less than 10% of their funds for discretionary expenditures. That’s a 33% reduction in discretionary funds in less than a year!
This says that any company that provides a discretionary product or service to an average consumer is now fighting over a market-share that might have shrunk by a 1/3rd. Someone is going to lose and someone’s market share is going to get smaller. This means that a number of supply chains are going to have to get a lot leaner this year for those companies to survive. Is yours ready?
Last month, before our detailed dive into Next Generation Sourcing, we discussed the four levels of CAPS’ Value Focussed Supply, as put forth in their recent research report on Linking Supply to Competitive Business Strtegies. Companies on the VFS path start by eliminating value leakage (Part I and Part II), before increasing current value, and creating tomorrow’s value on their way to the stretch for added value. Companies will embark on the VFS path because if they don’t take their value to the next level, the value they see from the current generation of (e)Sourcing strategies and technologies will start to disappear as more and more companies adopt leading supply strategies and increase average performance across the board.
But how does an average company go about starting? Without a starting point, it is likely that if VFS emerges in an average supply management organization, it will be by accident, especially since this is how it appears to have emerged at a number of leading companies profiled in the report. And while a market leader may have the time and resources to experiment with different strategies (due to their superior market position and better financial position), in today’s economic climate, an average organization does not. So what should an average company do?
To this end, CAPS offered a “framework” in Chapter 4 of their report to get companies started. However, as it only outlined a high level process, and not any supporting technologies or (advanced) methodologies, it was more of a guide than a framework. But it’s still a good starting point, and appropriately presented outlines the mindset required to move from traditional supply strategies to value focussed supply strategies, such as High Definition Sourcing that can Move Category Excellence to the Next Level.
And like many guides these days, it can be broken down into a seven-step program that will get a company on its way. Specifically:
- Understand Customer & Supplier Markets
- Identify Directional Changes
- Link Insights into Directional Changes to the Business Strategy
- Evaluate the Company’s Strategic Options
- Set Holistic Value Focussed Goals
- Evaluate and Select Strategic Supply Options
- Identify and Implement Levers
The next few posts will explore this “program” and how a company can get started down the value focussed path.