Category Archives: Supply Chain

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.

Tompkins Associates and the Next Generation Supply Chain, Part I

About the same time that CAPS Research and A.T. Kearney were releasing their study on “Value Focussed Supply: Linking Supply to Competitive Business Strategies” (which was discussed extensively on SI in VFS: Will Yet Another Acronym Solve Our Woes?, VFS Enablers: Competitive Enablers in a New Wrapper, VFS: Accident or Planned?, VFS Level 1: Eliminate Value Leakage Part I and Part II, VFS Level 2: Increase Current Value, VFS Level 3: Create Tomorrow’s Value, VFS Level 4: Stretch for Added Value, and VFS: Are You Ready) and not long after Dalip Raheja of The MPower Group (TMG) declared the need for Next (Supply Chain) Practices in his much debated post on how Strategic Sourcing is Dead (which was followed by his declaration that The Sourcing Emperor Has No Clothes, his contribution to the Strategic Sourcing Debate in Part IV, and his invitation to The Wake for Strategic Sourcing), Tompkins Associates quietly released a 41-page white paper on “Leveraging the Supply Chain for Increased Shareholder Value” that declared the need for a new Supply Chain Value Creation Framework and a renewed focus on business value in the supply chain. Stating that the supply chain needed to move away from a cost focus to a focus on value, Tompkins Associates defind three objectives for the supply chain — profitable growth, margin improvement, and capital efficiency — and went on to describe the actions that a modern supply chain could take to achieve these goals … actions that aligned nicely with the CAPS and AT Kearney Value Focussed Supply paradigm and echoed the need for Next Practices and Next Generation Sourcing.

The importance of supply chains and their effectiveness, or lack thereof, has never been more apparent. A single supply chain disruption can cripple, and even bankrupt, your business, and a single failure in quality control can turn into a PR nightmare overnight with effects just as deadly. But even worse, lack of value creation on a daily basis will slowly eat away at profitablity and the life blood of the company.

But this doesn’t have to be the case as good supply chains drive value, which ultimately reaches shareholders and investors. It is the supply chain mega process, Plan – Buy – Make – Move – Store – Sell – Return, that comprises the core operations of most businesses, and the four supply chain information flows — Materials/Product, Information, Cash, and Work Flow — that determine the effectiveness and efficiency of overall business operations. Thus, a well oiled supply chain greases the rest of the business and an efficient and profitable supply chain lays the foundation for an efficient and profitable business.

A supply chain that uses a Value Creation Framework, such as the one presented by Tompkins Associates in their white paper, and that focusses on Profitable Growth, Margin Improvement, and Capital Efficiency can deliver significant and lasting value to the business simply by adopting and executing on value enabling actions. The whitepaper outlines six primary types of value enabling actions and then dives deep into implementation strategies that your organization can use to create value in the supply chain. The next four posts will discuss some of these actions at a high level and outline 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.

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.

Can We Fix Supply Chain Education?

For the most part, supply chain education is broken. Consider this quote from a recent ChainLink Research article on the “2011 Supply Chain Education Survey Findings” that was contributed by an anonymous respondent:

“Offered programs are parochial in nature, designed to drive sales of a vendor’s tools or services, or are too generic to be of value. For example, [a major prestigious university] doesn’t even understand its own legacy in systems thinking. Supply chains are complex and there are no easy fixes. Grossly simplified views perpetuate myths and drive the wrong solutions.”

From my vantage point, most of the educational options, as pointed out by this astute survey respondent, fall into:

  • Academic programs that are more outdated than bell-bottoms
    And if they are that recent, you’re lucky. Plus, most of the professors only have expertise in one or two areas, and it typically revolves around whatever technology or model they’re researching, or should I say, trying to push on the real world. And the gods forbid if you try to change the curriculum without full approval. Unless you’re a full professor with tenure, they’ll smite you down so hard that you’ll never crawl back up. (And by the time you’re a full professor with tenure, you’ve had all the life sucked out of you and don’t have any energy to make drastically sweeping changes for the better.)
  • Third-party programs from associations designed to please the lowest common denominator
    In these organizations, with boards and steering committees as large as the pool of high paying organization members, the motto is none of us is as dumb as all of us and it shines through in the program that is developed. Full of useful topics, but the content is so watered down it’s worse than a self-serve soda at a Kwik-E-Mart trying to save on syrup.
  • Private programs from companies set up by people that used to purchase (but don’t anymore)
    Unlike academic programs which at least have competing theories (but no guarantee that any will be right), these typically have one theory from the energetic individual who started it, and a big slant to whatever type of procurement or logistics management he or she was doing. If all he really did was buy office supplies and equipment, or manage 3PLs, you might as well take your check and give it to some massive charity organization like the United Way. At least 10% of the money will help someone.
  • Vendor programs from vendors that sell a service or solution
    These can actually be quite good, but the content will be carefully designed to insure that you can’t put anything into practice without a tool to support you, and, surprise surprise, it will be ten times harder to use a tool that isn’t the vendor’s.

Now, there are a few good courses out there, delivered by consulting firms who tailor them to client needs, but the consultants get big bucks for these courses, and then more money to identify the next need and design the next course, so it’s actually in their best interest to get it right. But, by the same token, it’s also in their best interest to keep the courses targeted, specialized, and not widely available.

The net effect is that, at the end of the day, the overall state of supply chain education is poor. And the question we need to ask is “can we fix it?”.

I’m not sure. I see a solution, but it would involve invalidating pretty much all of the current theories on higher education, angering large groups of people in the process, and going against the grain of modern western culture.

The answer lies in the past. Years and years (and years) ago, there was a time where only a few people went to College. Higher education was reserved for those who intended to make a career of the intellectual pursuits, and the rest of the population chose a vocation, went into the trades, and apprenticed under a master. The answer is that newbies need to be hands-on trained by professionals, using curriculums selected or designed by the organization as relevant. The masters nearing the end of their careers need to be relieved of some of their leadership and management responsibilities and refocussed on training the new generation who will be tasked with capturing their knowledge and updating the company curriculums as they learn.

These curriculums can be shared among a network of peers, who embrace a co-opetition model where they compete for sales but cooperate on curriculum design and best practices, and refine over time. And we’d solve the talent crunch at the same time.

But as long as we culturally believe that College is a right of passage and all knowledge should reside within ivory walls, we’ll never get back to a societal organization that made sense for thousands (and thousands) of years (as apprenticeships date way back to the beginnings of ancient civilizations) and still do.

Is Your Emerging Supply Chain Ready for Growth?

According to this recent article over on CNNMoney.com on how emerging markets are hot, total sales are expected to rise an average 10% among S&P 500 companies that derive more than half of their revenues overseas. In comparison, we’re expecting just a 6% uptick in total sales for companies that draw a majority of sales from the US, where GDP grew a paltry 2.9% last year.

Growth is skyrocketing across the BRIC, where Russia saw 4% growth, Brazil 8.4%, and China 10.3% last year. And this growth is expected to continue. But growth in these countries comes with challenges. China has pockets of prosperity among wide expanses of poverty. Russia is also vast and most of the profit to be made is on lower-end consumer goods. Brazil still has large pockets of poverty, serious problems with drugs and weapons struggling, and only easily reachable coastal areas. In other words, in each of these countries logistics outside of a few areas makes North American distribution look like child’s play in comparison, violence can be a constant threat in poorer areas, and relative lack of wealth among the population at large compared to the US (and UK) makes price control a huge issue.

So, is your emerging supply chain ready for growth (and the distribution challenges that lie ahead)?