In yesterday’s post, we brought your attention to Tompkins Associates‘ recent white paper on Leveraging the Supply Chain for Increased Shareholder Value which nicely complements CAPS Research and A.T. Kearney’s study on Value Focussed Supply: Linking Supply to Competitive Business Strategies and echos our cry for Next Generation Sourcing methodologies. A cry which has been taken up not only by The MPower Group (and spearheaded by Dalip Raheja who has declared that Strategic Sourcing is Dead and invited you to the The Wake for Strategic Sourcing) but by BravoSolution (who are rallying the battle cry for High Definition Sourcing and who have given us A Futuristic Look at High Definition Sourcing). We told you how they declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain, outlined three supply chain objectives — Profitable Growth, Margin Improvement, and Capital Efficiency, and described six primary types of value enabling actions to achieve the objectives before telling you that we would spend the next four posts discussing some of these actions and why Tompkins Associates‘ white paper on Leveraging the Supply Chain for Increased Shareholder Value should definitely be on your reading list as you outline your Next Generation Sourcing strategy.
So, today, we are going to discuss the objective of Profitable Growth.
There are two primary methods by which a company can achieve profitable growth:
- Capture New Customers/Markets
- Outperform Competitors
Capturing New Customers and Markets
There are four primary types of strategies a company can use to expand its marketshare. From low risk to high-risk, these are:
- (Increased) Market Penetration
- (Further) Product Development
- Market Development
Each of these requires appropriate supply chain strategies to implement.
Increased Market Penetration usually comes as a result of an initiative to improve price, availability, or customer service — each of which depends on a supply chain contribution. In the first case, the supply chain will have to cut costs to allow for lower prices. In the second case, the supply chain will have to redesign to allow for further replenishment at hot points. In the last case, the supply chain will have to improve the return, repair, and replacement process to allow for faster, and better, customer service.
Product Development requires the supply chain unit to not only identify potential sources of supply but to model the potential costs associated with a design decision because up to 80% of the cost can be locked in at design time. If one design limits supply to pricey raw materials and high cost component manufacturers but another design allows for lower cost materials and a broader range of component manufacturers, the supply chain needs to steer design into the latter direction. A good product development strategy address the road-map, portfolio, product architecture, knowledge management, IP, and talent required for an effective end-to-end product lifecycle.
Market Development requires the supply chain to broaden its geographic base from a supply or distribution perspective and build a successful global operations model. If the new customers are in a new country, then not only will the supply chain unit’s expertise be required to set up distribution channels, which will likely include temporary warehousing locations, but the expertise will also be required to determine if the company should be manufacturing locally as well as selling in the local market.
Finally, Diversification, which often takes the form of a merger or acquisition for quick market entry, requires the supply chain unit to identify which competitors have supply chains that could be integrated smoothly with the company’s supply chain in a way that would improve efficiency and/or reduce cost.
Thus, a business can only obtain profitable growth in new customer or market segments with an appropriate contribution from the supply chain unit. So how does the business identify the right opportunity, which is the one that both the market and the supply chain is ready for? It uses a set of five filters to analyze each possible strategy: the basic value filter, the market filter, the strategic filter, the company-specific filter, and the supply chain filter to sieve out the right opportunity. (For more information on the filters and their application, see Leveraging the Supply Chain for Increased Shareholder Value.)
The other option a company has for profitable growth is to outperform competitors. A company is only capable of outperforming its competitors if it has a better understanding of the customers’ needs and wants than its competitors and delivers on those needs. In order to gain this understanding, a company has to continually be monitoring the market and collecting information on market trends, customer responses, and buying patterns — which come from POS (Point-of-Sale) and supply chain visibility systems. Hence, it is again the supply chain that provides the most critical information — what the customers are buying from the product line, and, most importantly, what they aren’t.
It is now easy to see the criticality of the supply chain for any company that wants to achieve profitable growth. In our next post, we’ll discuss the next objective of the Supply Chain Value Creation Framework, Margin Efficiency.