”Business leaders are increasingly looking to the supply chain to create a competitive edge which will directly impact the financial performance of their company”In the last year or so there has been a lot of talk about a new approach to supply chain management – an approach which turns the supply chain from concentrating on cost reduction into becoming a flexible and responsive, service oriented commercial competitive edge. This new approach has been coined ”customer-driven logistics” – but is it just talk? Is it a commercial competitive edge or is it just a myth?
There”s no doubt that supply chain is coming out of the shadows and that it is increasingly being recognised by business leaders as a key driver for improving financial performance. Business leaders are increasingly looking to the supply chain to create a competitive edge which will directly impact the financial performance of their company.
As this recognition emerges, supply chain is becoming much more closely linked with sales and marketing and leading edge companies are making supply chain a competitive edge by integrating demand creation activity with supply chain capability. These new supply chains are much more customer focused – they deliver great service at lower cost and a key ingredient of their success is strong collaboration between supply chain partners, where all are focusing on the ultimate end customer.
These trends are emerging because supply chains are being pushed to the limit. Customers are more demanding than ever – if you order from Amazon you expect the goods within a couple of days, and at the opticians you expect your glasses to be created within one hour. There are more products to satisfy consumer cravings – look at the exponential expansion of hair care products over recent years. At the same time costs are rising and there are increasing regulations and restrictions like road taxes which are reducing flexibility. On top of all of this, environmental considerations have come to the fore and these are also impacting on supply chain design.
So it”s in this turbulent context that leading edge companies are taking this new customer-driven approach. These companies are designing and operating their whole supply network in order to win with the customer at the point of use or at the point of sale. This is a fairly significant mindset change for those companies which have typically regarded the supply chain as not much more than a cost, so the change to a customer-driven approach has had to be driven by leadership at the very top of the company.
Speeding information flow
This new approach means that supply chains in these leading companies have become much more responsive and flexible by reducing information and product flow time – requiring faster, real time flow of information up the supply chain, coupled with efficient product flow down it. These new supply chains are able to produce product and service differentiations which will actually build volume while at the same time continuing to be ruthlessly efficient but rooting out non value-adding activity and inventory.
These companies are succeeding because they are using the seven key dimensions of customer-driven supply (CDS):
1. Be externally focused by understanding what it takes to win with target customers, then link all your measures to those target customers. Integrate the whole supply network from end-to-end, working back from the customer all the way through to raw material suppliers. Do this through clearly defined go-to-market and operating strategies.
2. Get the basics right – supply chain partners rightly will not entertain any kind of collaborative development work if basic service is poor.
3. Collaborate to create value – this is about supply chain partners working together to create rather than transfer value in the network. Companies like Procter and Gamble invested in logistics account managers to work with customers to identify opportunities and then create and implement solutions. Value is created through improved responsiveness by cutting time from the end-to-end supply chain and by being able to leverage differentiation efficiently.
4. Ruthlessly manage complexity – so it”s important to ensure that whatever complexity is created as a result of increased differentiation definitely adds value.
5. Continue to manage costs and eliminate waste – it is still absolutely critical to keep costs under control. So you must continue with waste elimination work to drive out all non value added time, inventory, cost and complexity. You should institutionalise in-process measures to drive losses and time out of the network.
6. Use IT to synchronise information and product flow – IT can facilitate faster and more accurate information flow through the network. Practically, this is all about common platforms to enable the end-to-end supply network with visible, real time, integrated information.
7. Instill a customer-driven supply chain culture – this means investing in multifunctional customer teams including logistics experts who can work with customers to deliver value in terms of improved service and reduced cost across the shared supply chain. Practically, this is about joint business plans aligned with both commercial and supply chain leadership. It is about changing the supply chain culture and mindset from cost focus to customer focus.
PA”s view, which is also held by a number of leading companies, is that CDS is the next key approach to driving supply chain performance. In order to prove this PA Consulting Group and Supply Chain Standard ran a joint survey to get a picture of what is really happening on customer-driven supply. Above all we wanted to check the theory that companies that display the characteristics of a CDS approach actually do have better overall supply chain performance. So we designed a survey which assessed a company”s adoption of the seven CDS dimensions. The pan European survey ran across industry sectors covering retail, distribution, FMCG, automotive, health and engineering.
Initial results from the survey have confirmed that CDS is an effective approach at driving supply chain performance.
Companies who completed the survey were asked to rate their supply chain performance across three key dimensions (on time delivery in full, stock turn and cost). From this data PA identified the top quartile companies (top performers) and the bottom quartile (bottom performers). The relative performance of these companies on the seven dimensions of CDS were then analysed. Top performing companies scored better in all dimensions of CDS than the bottom performers. So adopting a CDS approach clearly does have a positive impact on supply chain performance, but even more interesting were the areas of CDS where the top performers were particularly good.
Top performers were particularly strong in the management of complexity, waste elimination and synchronisation. On complexity top performers were ahead both in getting rid of unnecessary complexity but importantly also in identifying what complexity it takes to provide significant product and service differentiations.
Now at the same time as taking a more externally and service-oriented approach, these top performers had not neglected their attention to eliminating unnecessary costs. Top performers were able to improve service at the same time as reducing inventory and cost whilst bottom performers had often improved service but extra cost.
Similarly, with the synchronisation of data flow up the supply chain top performers had better collaborative relationships with their customers and suppliers which meant that they enjoyed more accurate and faster visibility of demand data. This was enabling them to better line up manufacturing and logistics to meet variations in demand, for example on promotions and new product introductions.
Retailers were best performers
Analysis of the results at a sector level showed that retailers were the best performers in terms of the seven dimensions of CDS. In particular they scored well on customer focus – retailers are, after all, bound to be close to their customers who are immediately visible day to day in their stores, and because of that, issues with product availability are immediately obvious. In addition, in Europe, the combination of high physical throughput of product, and of limited space, coupled with the desire to avoid capital investment, means that retailers will typically work hard to sweat their assets – leading to higher than average stock turn.
Other sectors that scored well in some key dimensions were FMCG and distribution. The engineering and automotive sectors were further behind, perhaps being more removed from the customer was a reason for this but the principles of CDS apply equally well across all sectors.
While CDS is clearly being adopted to varying levels, there is still plenty of room for improvement. The system, process and perhaps most importantly, the cultural/organisational change required for this new approach do not happen overnight. Mindsets have to change to see the supply chain as a competitive edge. It is this mindset change which unlocks the potential of CDS. The survey confirms that there is a long way to go – only 24 per cent of companies scored ”high” in all the dimensions and only around a third (29 per cent), thought they were getting basic service and cost right.
Apart from changing the mindset practically, companies adopting this approach are starting by ensuring they have great basic service at the same time as eliminating unnecessary waste. After this they move on to developing a flexible and responsive capability to deliver product and service differentiations. Chances of success are significantly increased if the initiative is driven from the top of the business and has the support of commercial functions.
As a very first step, it is important to understand your current situation and where you need to focus – the PA survey can help here by evaluating how customer-driven your supply chain is. You just have to look at those leading edge companies that have already adopted a consumer driven approach to see the gains that can be made.
Perfect order performance
Procter and Gamble (P&G), implemented the CDS approach as long as go as 2002. A stronger focus on service coupled with improved flexibility and responsiveness led to a 17 per cent improvement in perfect order performance in the first couple of years. P&G made a conscious choice to make the supply chain a commercial competitive edge – they have invested in building supply chain capability to provide a better service and to be able to deliver differentiation efficiently. In the UK, for example, they built two large DCs to house all of their grocery SKUs together for the first time. This means that their customers can have a large range of SKUs delivered on one truck, so delivery quantities can be more in line with demand but still delivered efficiently.
Similarly, tyre manufacturer, Michelin, established joint teams from sales and marketing and supply chain to develop integrated strategies which combined demand creation activity with supply capability.
So CDS is not a myth – it is a reality. It is a comprehensive framework which delivers tangible improvement in supply chain performance. And in a world where supply chain performance is becoming a much more critical factor in the overall health of companies, CDS appears to be a way of not only fixing existing service and cost issues but also a way for the supply chain to provide a competitive edge through product and service differentiation.
Chris Poole is head of supply chain at PA Consulting Group. Email: [email protected]