Category Archives: Strategy

Supply Management in the Decade Ahead VI: Developing Category Strategies

In this post, we continue our coverage of “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, a detailed report based on research jointly undertaken by the ISM, A.T. Kearney and CAPS Research in an effort to update the 1998 CAPS Study on The Future of Purchasing and Supply: A Five and Ten Year Forecast. The heart of this report was seven critical supply strategies for succeeding in a dynamic world. This post, and the six posts that follow, will focus in on each of these strategies in detail, starting with the development of category strategies.

Category strategies are designed to maximize value by leveraging resources and capabilities. In the future, changes in business models, industry structures, technologies, customer demands, environmental regulations, and a host of other factors will change not only how value is defined but how external resources and third parties help you deliver it. We’ve already seen the transformation from “best price on assured supply” in the early 90’s to total cost of ownership in the early 00’s.

However, as the doctor has been predicting for quite some time, we’re starting to see the push towards total value, which will increase as time goes on. For example, as noted in the report, companies are now looking at options to outsource business processes and activities that are not core strengths, creating new categories, and for suppliers with capabilities that can add new types of value. For example, engineering companies are no longer looking for the lowest cost suppliers, but suppliers with NPD (new product design / development) capabilities and suppliers who can improve the the design of existing products. In the future, leading companies will seek to gain access to, and leverage of, each other’s value chains as a way to enter into new markets.

Category strategies – which will address how companies speed NPD, how they implement the best value for a category worldwide, and how they stimulate the creation of new products and services with the support of suppliers – will focus on the total alignment of customers and suppliers to meet competitive objectives across the end-to-end supply chain. For example, a robust category strategy could include multiple and concurrent initiatives, including low cost country sourcing, design specification change, and switching suppliers to increase product innovation and supplier development.

The report also noted that the time horizon for category strategies will extend beyond the typical time frame of three years (or so), to six or even ten years. Moving production from mature to developing countries, developing performance and capabilities knowledge about best-in-class suppliers, developing supplier relationships and establishing on-the-ground supply-market and government regulation knowledge all takes years to accomplish. Furthermore, given the short life-cycle of many of today’s consumer products, while you’re sourcing today’s product, you need to be actively engaging with your supply partners that are going to help you design tomorrow’s product and prepare it for production, while also engaging innovation experts to help you brainstorm the product that will replace tomorrow’s product.

The report also polled professionals on which strategies will be the most important in the days ahead. The top six strategies identified were:

  • Aggregation and Management of Total Expenditures for Key Categories Across the Enterprise
  • Spend Analysis in Products and Services
  • Drive Decisions with Total Costs
  • Develop and Manage Supply Strategies using a Formal Process
  • Price Benchmarks
  • Improve Price Forecasts

The report also found that the category strategy portfolio will have to increase significantly, and that the tools used to evaluate strategy alternatives and risks/rewards will have to multiply as well. The report highlighted the following strategies and tools as important extensions to your current strategy portfolio.

  • Supplier Integration into NPD and Order Fulfillment
  • Risk Mitigation and Contingency Planning
  • Total Value Measurement and Learning
  • Change Management
  • Category Strategy Documentation

The chapter concluded with some generic strategy enablers that will help you regardless of the strategy you employ:

  • Executive Engagement
  • Cross-Location and Cross-Functional Teaming
  • High-Quality Spend Analysis
  • Category Research, Fact Finding and Analytics

Finally, I’d like to point out that the report has a very good table on page 47 that compares the differences in strategy development and strategy enablers between the decade ahead and the decade past. The table alone is worth downloading the report for.

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.

“Demand Shaping” or “Demand Sensing”?

The EE Times ran a great article by Romit Dey and Manoj K. Singh last month on “Demand Shaping” and how it aligns customer trends with supply. But I have to ask, is it really “demand shaping” or is it more “demand sensing”. Is not “demand shaping” what marketing and advertising does? It’s true that supply chain has a supporting role, in terms of letting marketing know how much a product can be produced for, how many units can be produced, and how fast the units can be in consumers hands. However, what supply chain really does, in a company that runs like a well-oiled machine, is sense the demand that has been created, and the demand that is in flux, and adapts to the situation.

So what is “demand sensing”? According to the article, which calls it “demand shaping”, it is a demand-driven, supply-constraining customer-centric approach to planning and execution that aligns process with customer demand at strategic and tactical levels and with an organization’s capabilities which helps optimize use of resources, reducing excess inventory and improving inventory turns. More specifically, at the strategic level, the emphasis is on aligning customers’ long-term demand patterns to long-term resource and capacity constraints and at he tactical level, the focus is on understanding demand patterns and then influencing customers’ demand toward available supply, using the levers of price, promotion and products/services bundling.

How do you sense demand? As the article points out, you need three key capabilities:

  • demand pattern recognition
    who is buying what, when, and in what quantity
  • supply supportability analysis
    how much can be made, when, and how fast can it be delivered
  • optimal demand steering
    if demand patterns suddenly change, and you do not have enough of product A, can product B be used as a substitute and can customers be steered to that product instead

The first skill is obvious – you need to manage inventory appropriately so you aren’t holding too much, and generating excessive inventory carrying charges, or holding too little, and selling out before supply can be replenished. The second skill is less obvious, but easily understood – you need to know how much you can make, and how fast it can be made, to appropriately plan your inventory level.

The third skill is what takes “demand sensing” to a whole new level, to the point that it is almost “demand shaping”, but not quite, and hence the source of confusion. It is, as it’s called, “demand steering”. The Dell example the authors use is the best. By maintaining real-time visibility into its supply chains, Dell knows its inventory levels now and in the immediate future on an hourly basis. If a customer configures an order for a 60GB drive on their web-site, and Dell knows they don’t have enough stock to configure the system immediately, then Dell informs the user of a delayed ship date and presents the customer with an opportunity to replace it with an 80GB drive at a discount – steering the customer towards another product that can meet their needs, even if it is more expensive, but Dell takes a discount on margin to make the sale and keep the customer.

The key to success, as the article points out, is to make sure that all three processes are part of a single, integrated loop. A supply supportability analysis is run on a regular, automated, basis; inventory is updated on a near real-time basis; and short-term forecasts are updated at least daily. Each of these numbers is compared on an automated basis, and as soon as forecasts exceed inventory and obtainable supply, an alert is sent to a planner who determines whether there are alternative products that can be used to meet the need or if marketing and sales needs to be informed that they need to take actions to steer demand on their end. Then, customers are steered towards the alternative products through the appropriate channels – in real-time.

The article also does a good job at overviewing what is required for a demand sensing framework. The elements it outlines are:

  • inter and intra organizational connectivity
  • the ability to capture, structure, and comprehend data from customers and channels
  • advanced business intelligence to identify demand patterns
  • optimization
  • common processes
  • a common data model
  • common performance metrics
  • available-to-process capabilities
  • exception management
  • electronic negotiation and collaboration

The best thing about the framework is that these are basic capabilities and processes a good organization should already have in place. It’s just a matter of tying them together and using them wisely!

Collaborate, Collaborate, Collaborate, Collaborate V

Recently, Computer Sciences Corporation (CSC]), Supply Chain Management Review (SCMR), and Michigan State University (MSU) released the “Fifth Annual Global Survey of Supply Chain Progress”.

The report measured the performance of firms along eight dimensions of supply chain competence:

  • Alignment with Business Strategy
  • Strategic Customer Integration
  • Strategic Supplier Integration
  • Cross-Functional Internal Integration
  • Supply Chain Responsiveness
  • Planning & Execution Process & Technology
  • Supply Chain Rationalization / Segmentation
  • Risk Management

The report found that the less mature companies needed to focus on greater collaboration with business partners and pay more attention to areas of weakness. Another mark of leaders was greater strategic alignment and significant, positive, involvement of top managers.

But I think it’s pretty obvious that collaboration is the ultimate key. What better way to mutually identify and improve the areas of weakness? What better way to improve strategic alignment? What better way to maximize the positive involvement of management? Furthermore, without collaboration, you’ll never truly achieve strategic integration between customers, suppliers, or internal departments.

So you want to achieve collaboration, but aren’t sure how to sell it? A recent CAPS Research study by Stanley Fawcett, Gregory Magnan, and Jeffrey Ogden, as summarized in “How to Manage Supply Chain Collaboration”, puts forward a three step process to identify and compare the benefits, barriers and bridges to assess and communicate the viability of pursuing a path toward collaborative advantage. The three stages are as follows:

  • Introspection
    A company’s orientation and philosophy consists of two building blocks: customer orientation and systems thinking orientation.
  • Supply Chain Design
    A five step process: scan, map, cost, manage competency, and rationalize
  • Supply Chain Collaboration Relationship alignment, information sharing, performance measurement, people empowerment, and collaborative learning.

By figuring out where your company is, and then working your way through a proper supply chain design planning exercise, you’ll be in a position to align your relationships, share information, measure your performance, and progress collaboratively.

Exercising Common Sense (in Business Transformation)

Strategy+Business recently published an article by the same name that contained a 10-point checklist that leaders of large-scale transformation can use to put their wisdom into practice. Considering that managerial delusions are often rampant, that the Home Bias effect is often in full force, and that What Got You Here Won’t Get You There, any process that imparts a little common sense is a good thing.

As the article states, “successful transformation requires the common sense of experienced management. Unfortunately, the ability to apply that common sense, especially over the long time frame of a serious change in organizational culture, is all too rare”. To do so, a CEO needs to keep in mind at least 10 critical factors – and use a lot of uncommon concentration and awareness to put them all into practice.

  1. The CEO makes a strong case for change by clearly and persuasively articulating the factors that are driving it.
    “If you’re the leader, you’ve got to define the problem, no matter how brutal, and you’ve got to use honest and unambiguous language. Your staff can’t do it. Only you can tell people about the reality you are facing. If you don’t, they’ll never accept it.”
  2. Senior leaders set an aggressive, enterprise-wide target.
    Big goals are the key to driving big actions. An audacious, market-mandated target sends the message that transformation is not a matter of incremental changes.
  3. Senior management is firmly aligned.
    Every individual on the leadership team needs to have a stake in the transformation effort as a whole, rather than focusing only on the piece related to his or her business or function.
  4. An integrated enterprise-wide program for change is put in place.
    Cross-functional business solutions enable people to live out the new business model instead of remaining locked in the concerns of their day-to-day responsibilities.
  5. Senior leaders focus on augmenting capabilities along with cutting costs.
    The prospect of working to create a better future is highly motivating for most employees … thus … efforts to massively change the cost structure of an organization must always be set within the positive context of building new skills. An organization that fails to develop a positive and forward-looking future vision is likely to shrink under the pressure of simply cutting costs.
  6. “Moments of truth” are recognized and shared in order to demonstrate commitment.
    A “moment of truth” highlights precisely what needs to change in an organization.
  7. A detailed plan provides the blueprint.
    Leaders must develop a comprehensive guide to the changes ahead. The blueprint must specify the steps that will enable the organization to meet its targets, set aggressive yet achievable timelines, address the change management issues that occur at every stage, and identify new roles for people throughout the organization.
  8. Enabling triggers are built in from the start.
    The detailed map for the transformation should identify in advance triggering events that will clearly be important in moving the process of change forward.
  9. Communication is proactive and ongoing.
    Internal communications should be blunt and realistic about the market imperative driving transformation. External communications to Wall Street analysts, governing structures, and the board must not only be consistent with the transformation’s goals, they must be proactive and aimed at aligning these key constituents with the goals of the transformation.
  10. The results of change are sustained.
    New capabilities for achieving accountability, distributing benefits, allocating incentives, and tracking results must therefore remain in place even after financial targets are met.