Sunday, February 13, 2011

Supply Chain Management: Is it Finally Taking Over?

We chose this month’s topic because an increasing number industrial marketers must sell into markets that utilize supply chain management — or claim to do so. I wrote this article in 1998, but the basic conclusions are still the same.—PWH

Supply chain management has become a market in its own right. Companies that have implemented the principles of supply chain management behave differently, and acquire products in a manner that is different enough to justify special emphasis.

But what is it?

Supply Chain Management (SCM) is the process that manages the suppliers’ role in a company’s value creation process, from raw materials into its operations. According to one VP of manufacturing, “it’s about figuring out who does which task best, letting them do it, and not duplicating efforts.”

OK, but what is it?

To really appreciate SCM, one first must understand a more fundamental concept: the Value Chain.

The term “value chain” was invented by Michael Porter about 15 years ago. Like many fundamental concepts, when you see it, you say “gee, that’s obvious! Anybody could have thought of that.” The best ideas in business are usually very simple to understand. Most are not obvious, however. The value chain is one such concept.

In a nutshell, it is extremely simple: You make money when you transfer something you have to somebody else who values it more than you do. That’s how people, companies, societies, and nations become wealthy.

What are five activities, in order:

Bring materials into the business

Operate on themMichael Porter did was to look specifically at a business, and figure out what it must do to become wealthy. There

Send them out of the business

Market them

Service them

In addition, Porter defined four support activities that act as a lubricant to the big five. They are:


Technology development

Human resources management


The support activities are omnipresent. Most companies have a procurement department, but it buys only a fraction of what the company buys as a whole. Most companies also have an R&D function, but it conducts only a fraction of the technology development that the company actually performs. And so on with the other support activities.

Nice concept. Everybody can understand that any business must do five activities to stay in business. In practice, it is of limited use. Mapping an entire value chain is a vast undertaking. In an environments where markets are changing, it is nearly impossible. Most companies that work on value chains start with their own supply chains, since they are easier to understand and control. Most of them end there too.

Another reason your customers focus only on SCM is based on organizational politics. A significant portion of supply chain management can be managed almost completely within the procurement department. In order for a company to execute a true value chain strategy, many functional areas must cooperate. That rarely happens, even in a crisis.

The Essence of SCM

Let’s examine more carefully what your customers are trying hard to do. They are trying to become more competitive by being more cooperative. That is to say, companies that have adopted SCM thinking are trying to discontinue the practice of viewing their suppliers as cost centers. In essence, they are trying to build a competitive advantage by developing a network of companies that, by sharing information, produce goods of market value faster and at lower cost.

In theory, it would work like this: Say your customer sells power tools to Sears, and you’re in the wire business. Every night, Sears downloads the number of power tools sold, by model, by location. Your customer then electronically orders more wire from you, in the appropriate gauge and composition. In turn, you order more base metal from your supplier.

The Reality of SCM

In reality, industrial companies talk a good game, but are a long wayfrom implementing anything close to supply chain management. In a recent survey conducted by Purchasing magazine, it was found that the majority of purchasing organizations are struggling with the basics. For example, while 69% of companies have taken steps to automate basic purchasing transactions, 73% of companies reported that they have seen no significant shift in their day-to-day activities.

Automated transaction processing is a basic capability all companies in the supply chain must have, but the companies that stand to benefit most aren’t close to making it a reality. When asked to rate their progress toward automation goals on a 1-10 scale (10 being “at goal”), buyers provided a weighted average score of only 4. Nobody rated their progress higher than 8, and only 27% rated their progress greater than 5.

Simply put, they’re muddling their way through it. Many companies are jumping on automation without rethinking how they get things done. To make matters worse, they are not involving other members of the supply chain. Buyers rated supplier involvement as a 6 on a 1-10 scale (10 being “very important”) and supplier’s willingness to cooperate as a 7 (10 being “very cooperative”). Yet, very few companies are doing anything at all with suppliers; they remain internally focused.

Yet, it is not uncommon today to receive requests for quote (RFQs) full of language that suggests that buyers are considering a number of supply chain factors in their decision making process.

Let’s be nice and say that, although their hearts are in the right place, the typical buyer struggles with the most basic steps of supply chain management. Even the ones who believe in the concept — and lots of “old school” buyers don’t — have trouble getting beyond simple comparing purchase prices.

How to Use SCM to Your Advantage

Earlier in this article, we said that SCM companies are their own niche. Given the low level of implementation, this statement may not seem to make sense. We think it makes perfect sense, and here’s why.

Companies that are trying to change their thinking about how they buy things are most likely to buy from you for reasons other than low price. In particular, they probably already believe that the goal is to design and manage a superior value delivery system for their customers. If your company positions itself properly and expends the necessary effort to target the right senior-level managers in your customer’s organizations, you are likely to win more than your share of new business.

Two implications emerge here: Simply responding to RFQs as they present themselves won’t work, and dealing with lower level purchasing managers won’t work either. You must identify potential SCM companies in your marketplace in advance, and present yourselves to their senior buyers before any RFQs come down the pike.

What you want to do is differentiate your company as the most capable partner for your customers to begin building a value chain. To make this strategy work, you must call on general managers or above — a Very Important Top Officer, or VITO as Anthony Parinello terms it.

How To Do It

The key to making this approach profitable is to first understand your customer’s current supply chain, and develop your own map of how your products impact your customers operation, with particular attention to the problems you generate for your customers. The map is not only your way of understanding how to position your company, it’s your selling toll.

To make the map effective, you must take two steps: First, understand how your customers make money, and how they expect to make money in the future. Second, your team must take a critical view of how your company gets in the way of your customers achieving these goals.

Your company, not just your products. Not just how you package, deliver, and sell, but also your contract terms, discount policies, distributor policies, your contract terms, and your customer service. Everything you can think of, from your customer’s perspective. Involve your sales force. They probably can tell you what you need to know in 20 minutes.

Next, you take this information and literally put together a picture for your customer — or a series of pictures, if you will. The picture will explain what problems you cause your customer, and how you propose to solve them. This will become your sales tool. For it to be effective, you must make sure you’ve identified an important problem and a real solution for it. And not just any solution — the ideal solution is one your competitors cannot easily copy.

When you make your call, explain up front that you’re not trying to make a sale. Instead, you’ve identified a problem that your company probably is creating in their organization, and you wanted to talk with them about making it go away. If you’ve done your homework, you will be able to be specific about the problem. Calling to say you’ve identified a “$2 million inventory problem” is an effective way of getting an audience with a top manager.

That’s the bait. Companies that are trying to implement SCM will bite hard and quickly.

In the meeting, you simply go through the logic of your map. Explain the situation from their perspective, and ask them to confirm your thinking at each step. Start with your company, its policies, products and practices. Most buyers will be pleased that you begin your meeting in this way. Conclude your presentation with a numerical example of how the problem impacts VITO. For instance, you might conclude by saying something like “and that’s how we concluded that the contract we’ve asked you to sign is causing you to carry $2 million in excess inventory. We’ve realized that as long as our policies create problems for you, they will create problems for us as well.”

The hook is set, now all you do is jerk the line. When you finish your presentation, VITO will realize that, finally, he has a vendor who really understands his problems.

VITO will glare at you and say “you’re right! So what do you plan to do about it?”

Then they’re hooked.

At this point you present the rest of your map, along with your vision for how your company can continue the process to address the core business issues your customer is trying to solve.

It works even better if you are calling on a competitor’s account.

What’s Driving VITO
Up the Wall

The reason you must focus your discussion on your customer’s top management is because at industrial companies, the P&L comes together only at the top. What they see at the top is that 30-40% of their final costs are tied up in physical distribution — transportation (15%), inventory carrying costs (9%), warehousing (8%), and administrative overhead associated with distribution (8%). Not only are these costs eating up VITO’s profits, but competition is fierce in the areas of price, and delivery.

Vito knows that 30-40% of YOUR costs are also tied up in distribution. If you show VITO how he can help you reduce that cost, he knows it will go straight to his bottom line.

The other things driving VITO up the wall are related to the overall Value Chain Problem. It’s so impossibly huge that it cannot be addressed economically or quickly. It can only be taken on in sections. Supply chain management is one section that is tied to material’s movement into the company. The three other key problem areas include:

New products. All the activities associated with developing new products.

Order-to-remittance process. All the activities that occur between receiving an order and receiving payment for it.

Customer service. All the activities associated with making it easy for customers to reach the right people to get satisfactory answers and resolutions to their problems.

To the extent that your solution map can address these other core issues, you will differentiate your company better than your competition. Once this relationship is established, it becomes the basis of your response to future RFQs. Your objective is to position yourself as an advisor to your customers as they write their RFQs.

Here’s an actual example of how a company did that. For many years a container company saw itself as being in the “box business.” They would produce corrugated containers to their customer’s specifications, and ship them to their customers’ plants on a JIT basis. The customers would put their manufactured goods in the boxes, and ship them to stores, where the goods would be removed and the boxes discarded. No matter how the container company tried to improve its products, its competitors always were able to match its performance and pricing.

After careful analysis, the company decided to bypass its traditional customer base and develop a strategy targeted specifically at Wal-Mart. The company built a state-of-the-art “package solution center” next door to Wal-Mart’s headquarters. Next, they invited about 20 executives, including Wal-Mart’s head of purchasing for a tour of the new facility.

As part of the tour, they presented Wal-Mart with their solution to one of Wal-Mart’s core problems: How to reduce merchandizing costs and get products on the shelves faster. The package solution center was capable of producing a full-color prototype package in a single day, beginning with a round-table discussion with the customer, rather than the usual 7-14 working days imposed upon Wal-Mart by other companies. It wasn’t long before the company was nabbing lots of new orders at premium pricing, and taking share from its competitors. The idea worked so well, they have put an executive in charge of the operation and expanded it into a “global package solutions center.”

As it turns out, Wal-Mart is one of those SCM-focused companies that we suggested you focus on in the beginning of this article. Supply chain management, although poorly implemented by most industrial companies, can be a powerful concept if utilized in a manner that positions your company to better solve your customer’s problems.—Prentis Hall