Category Archives: Market Intelligence

Tompkins Associates and the Next Generation Supply Chain, Part II

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:

  1. Capture New Customers/Markets
  2. 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:

  1. (Increased) Market Penetration
  2. (Further) Product Development
  3. Market Development
  4. Diversification

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.

Social Networks Will Change Product Innovation

But not always for the better.

A recent post over on the HBR blogs declared that “social networks will change product innovation” because the new communication channels [will] actually force material changes not just in the way companies market their products but in the strategies and operations they use to develop and build those products.

This will happen because it is very difficult and costly to maintain a unified voice across all channels and to control information flows to the outside world. As a result, companies will need to adust to a 24/7 dialogue with consumers, investors, and other stakeholders.

This, in turn, will require changes in product strategy since the focus will have to be on products that will cut through the noise on the channels the consumers, investors, and other stakeholders are on.

But since products take money, development will be steered towards what developers think investors will want, which will, in turn, be driven by what investors say on the channels the company is following. But just like not all investors are fans of social media (even though most of the tech investors seem to be these days), not all investos are users of social media, so development is going to be steered towards the interests of a sub-group of potential investors who are regular users of social media. And if these investors are not in the target market of the product, who knows if the target market will be served at all.

For example, let’s say the target market is the average joe who makes 40K a year in a blue-collar job. This is not your aveage investor, who’s rich and able to drop 10 times that on an investment on a whim. Thus, they’re not going to be a buyer and should not be driving your development decisions, especially if their preferences add cost as a bule collar Joe making 40K a year doesn’t have a large disposable income after paying the mortgage, the bills, and feeding the family. So while the investor might like to see the intelligent toaster made out of titanium, the average Joe would be happier with more affordable aluminum.

So, at least for now, social networks aren’t the silver bullet that will change product innovation for the better.

For a Successful Supply Chain, Think Long Term

The HBR recently ran a great article on “Creating Shared Value” that quickly gets to the problem with many companies today, and, by extension, many supply chains.

Companies themselves … remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success.

By failing to take into account the well-being of their customers, the depletion of vital natural resources, supplier viability, and general economic distress of the communities in which they do business, companies are thinking very short term and sacrificing long-term success for short term gains. And unless they correct their thinking, and, according to the article, focus on shared value, they will fail to build real wealth.

But when the focus is on social good, the real reasons that long-term thinking yields supply chain success become muddied. Simply put, they are:

  • Lower Operational Costs
    Reducing the need for natural resources reduces the costs associated with those resources. Long term thinking selects the solution that will reduce the need for expensive resources in the long term, even if integration costs a little more in the present.
  • Lower Material Shortage Risks
    Switching to more environmentally friendly materials and materials that are not in short supply, even if costly up front, secures supply for the long term. In contrast, depending on a rare mineral or hazardous material brings the risk that a single natural disaster or environmental regulation can take out an only source of supply.
  • Lower Risk of Market Backlash
    If your consumer base all of a sudden goes green and you’re seen as the worst offender, bye-bye sales and no supply chain will save you.

So think long term. The savings will pay for the effort many times over.

How do you achieve allocation success? Focus on demand.

A recent article in Supply & Demand Chain Executive on “5 secrets to allocation success” hit the nail on the head when they focussed in on a demand driven strategy built on product life-cycles. The key to success in the consumer market is to fill real demand at the source, not fictional demand in cluster-based model. It’s not what you think will sell, but what customers actually want to buy. Honing in on that makes all the difference.

The tips detailed in the article were:

  • Use Demand to Drive Allocations
    Last year’s numbers don’t matter, especially if the current instantiation of the product is different, if the economy has soared or tanked, or the market has moved to a new platform. For example, if you’re selling software that runs on discontinued computers or smart-phones, you’re out of luck.
  • Think Locally
    Many retailers allocate product to store clusters in small geographic areas. While this sounds great in theory, since it’s easier to forecast demand based on regional averages, it’s lousy in practice since there can be micro-pockets of customers with similar desires that can result in significantly different demand levels at each individual store due to local economics and cultural factors.
  • Adopt a Push-to-Pull Strategy
    New products should be pushed based upon attribute-based demand profiles and then pulled based upon revised demand forecasts.
  • Hold Some Inventory Back
    Even though most product should be pushed and pulled using just-in-time deliveries, some inventory should be held in reserve, especially for new products, until the demand levels are understood.
  • Make Allocation Management a Priority
    Otherwise, it will go by the wayside.

3 Tips for Better Product Sourcing

A recent article over on Supply & Demand Chain Executive on “The New Product Shape Up” had three great tips that will help any Supply Management department improve its product sourcing efforts. Simply put, these are:

  • Focus on the Differences
    What makes your offering distinct from your competitions and, thus, what are the most important supplier and product/component characteristics to focus on when sourcing. Not everything is relevant — and focussing on the wrong characteristics and/or issues will just help the supplier’s sales person pull the wool over your eyes (with the misdirection ploy).
  • Implement Your Customers’ Ideas, Not Yours
    Don’t start with a supplier solution and end with an end product — start with the end product your organization’s customers want and work back to the appropriate supplier capabilities. And if the customers want something that is more expensive it’s not a problem if they are willing to pay a premium!
  • Conduct Interviews
    Mail, telephone, e-mail, and website surveys are great, but nothing is more informative than actually talking with current and potential customers, especially if they want to talk to you. So get out there and understand what they really want. It will not only make your organization more successful, but knowing exactly what they want will make your job that much easier in the long run.