In some ways, a supply chain is like a bonsai tree. It must be regularly pruned, shaped, and defoliated if it is to take on an aesthetically pleasing shape that is sustainable in the long term. This is especially true if the supply chain is going to be the foundation of corporate success. As per this article over on Supply & Demand Chain Executive on how most companies [are] paying a ‘Coherence Penalty’, companies with very few (one to three) firm-wide strategic priorities are the most likely to … have above average profitability and revenue growth.
Furthermore, if the company’s capabilities — namely the supply chain — support the company’s strategy, profitability and revenue growth will most likely be above average. And if the company is coherent, which is only true for about 13% of companies, it is twice as likely to have above-average profitability.
Thus, since there must only be a few strategic priorities, and since the supply chain must support those priorities, the supply chain must be lean and focussed on those priorities — and those priorities alone. If the supply chain sprawls, it will not be sharply focussed on the strategic priorities, and, chances are, the lack of focus will lead to a sprawl in priorities which will, in turn, lead to a sprawl in strategy. This will cause the company to lose coherence which will in turn stunt revenue growth and profitability.
So keep trimming that supply chain. The reward will be worth it.
In our last post we highlighted some of the key issues associated with the first three steps of the seven-step process for Value Focussed Supply as identified in the CAPS recent report on Linking Supply to Competitive Business Strategies. In this post, we will tackle more of the issues that need to be addressed if an organization is going to answer the questions necessary to formulate a good VFS strategy as part of a Next Generation Sourcing effort.
- Evaluate the Company’s Strategic Options
Now that the categories that are central to the current and future business plan are identified, the truly strategic categories and products need to be identified.
- What are the relevant macro and micro factors that need to be considered? Four types of data will be required to identify these:
- Customer Focus
What are the price to value ratio, overall value chain performance metric, and attributes critical to market success?
What are the specs, cost drivers, technology roadmaps, the anticipated rate of (technology) change, usage patterns, product life cycle, and (amortized) annual spend?
- Supply Market
What are the degree of competition in the supply base, pricing trends (and [raw material] cost drivers), cost structures, supply industry dynamics, major users, and government regulations?
- Supplier Data
What are their business strengths, risk exposure, capabilities, and performance levels?
- What type of analysis can be brought to bear on the data? Value chain mapping? (Should) Cost and Cost Driver modelling? Cost-to-Outcome Analysis? Segmentation analysis? Risk/Reward Analysis? TCO/TVM (Lifetime) modelling? Purchase pattern (trend) analysis? (Competitor) Supply (Strategy) benchmarking? Revenue Forecasts? Economic Forecasts? Scenario Planning?
- How will truly strategic categories be identified?
Most critical problems? Highest TCO? Lowest Value to Cost Ratio? Highest margin (potential)? Supply uncertainty and/or risk? Inventory / asset utilization (or lack thereof)? (Market) Leadership requirements?
- Set Holistic Value Focussed Goals
- How will the top priorities be determined?
Most critical problems? Highest potential ROI? Implementation difficulty (of new strategies)? (Potential) Future impact? Available value contribution from suppliers?
- How will the goals be set?
Where will the primary focus be: the organization, the supply base, or the distribution partners? How will the various goals be weighted: metric improvement, revenue improvement, cost reduction, sustainability, and/or future value?
- How will the performance levels be tracked and measured?
Our next post will highlight the remaining key issues that an organization must address to insure that it heads down the right VFS path.