Supply chain forges customer ties
It’s not what you do, it’s the way that you do it, say many of today’s leading business minds. This is particularly true when it comes to service and distribution.
Gone are the days when products sold on reputation and brand alone. Manufacturing today is characterized by increased competition in local and global markets, accelerated technological change, shortened product life cycles and a decline in brand loyalty – all of which is increasingly influenced by service-related factors.
“The real competitive advantage,” says Professor Martin Christopher, chairman and acting head of the Centre for Logistics and Transportation at the Cranfield School of Management in the U.K. and a world authority on this topic, “comes from a combination of loyal consumers, committed customers and a superior supply chain.” The supply chain has been a relatively untapped source of competitive advantage.
As component sourcing and product distribution become increasingly complicated, controlling the supply chain becomes an ever greater challenge. A badly managed supply chain can result in the fall of entire business empires, but a supply chain that is effectively managed can offer such rewards as lower overall costs, greater competitiveness and improved customer service.
For this reason logistics has become an important discipline in controlling all aspects of the supply chain, which encompasses everything from purchasing, material planning and sales, to production and distribution.
Says Christopher: “Supply-chain management is concerned with meeting end-customer requirements more cost-effectively through the integration of the buyer’s and supplier’s processes.” This requires the free flow of information throughout the chain and building processes within the organization that allow seamless methods of linking demand to a “Just in Time” response.
Christine Rowat, deputy director general of the U.K.-based Institute of Logistics, says that logistics are increasingly being used in the integration of the supply chain. This requires a company to recognize that the various parts of the chain influence each other and that a strategic approach must be taken to the ways in which this interaction functions.
Rowat explains: “It’s easy to forget the cost of logistics if you get it wrong.” Putting cost on inefficiencies in running the supply chain is difficult, however. According to an industry report, The Future of Distribution, by Martin Davis, Compaq Computer Corp. admitted in 1994 that lack of responsiveness in its supply chain led to estimated sales losses of up to US$1 billion – mostly due to its inability to respond to a surge in demand for its notebook computers. This report also found that Apple Computer, Inc. overestimated the demand for its Newton computers, reportedly causing the company to scrap 40,000 of the personal organizers.
Rowat underlines the point that a company needs to be driven by real demands rather than forecasts. She says that one way of improving inefficiencies is to make sales forecasts open to the supply chain internally. “This requires the sales team to take ownership of forecasts within the supply-chain system,” she says. They take more responsibility for the sales forecasts they make and on which manufacturing decisions are based.
Such an approach is coupled to the concept of “Just in Time” manufacturing, which aims to reduce inventory costs while also being more responsive to customer needs. While Japanese automotive companies pioneered this idea, other industries are realizing the benefits of moving away from traditional “Just in Case” manufacturing, with its large, costly stock levels, to “Just in Time” production, or “lean manufacturing” as it is also known.
Distribution a key factor
With this time-driven philosophy of manufacturing, emphasis moves to the efficiency of distribution networks. Distribution is now recognized as not simply delivering a product from point A to point B, but as a means of adding value and building customer loyalty.
In today’s markets, retaining customers is just as, if not more, important as finding new ones. So, part of the aim of distribution is to consistently deliver the right product at the right time to the right customer at the right price. Transportation and distribution take on as strong a profile as other aspects of the supply chain.
Traditionally the transport sector has been highly fragmented, particularly in Europe. Today, however, transport providers realize that providing a highly specialized service that is closely tailored to customer needs means long-term contracts. Major manufacturers such as SKF, which once carried out its own transport and shipping, have adopted “outsourcing” as a strategy. With outsourcing, transport and distribution activities are contracted out to third-party operators, who not only offer the ability to deliver products but also a range of sophisticated warehouse and distribution services.
Enabling technologies such as information technology and the Internet are providing manufacturers, suppliers and distributors with a means of organizing, managing and tracking progress of products from production to shipping. But the use of such technology, which transcends national boundaries, is not alone a guarantee of success. In this brave new world of integrated supply-chain distribution, the real strengths lie in partnerships between customers, manufacturers and suppliers. Two-way flows of information along the supply chain are vital, backed up by an understanding of each company’s needs within the partnership.
This also applies to internal structures with sales, manufacturing and the supply-chain organization, which have to learn to provide a level of cooperation and teamwork geared to satisfying the end customer’s needs.
Rowat warns about being too prescriptive in the approach to supply-chain management, stressing that each company comes with its own culture and work methods. The aim is to make that more effective. Suppliers and manufacturers must develop a relationship that takes into account each other’s different cultures. In a sense, “One company’s culture becomes part of another company’s culture,” she says.
Value in loyalty
The emphasis should be as much on keeping existing customers as seeking out new markets. Christopher says that such a strategy “provides higher-quality earnings and makes competitive erosion of market share more difficult.”
In business-to-business markets, companies aim to achieve preferred supplier status as large industrial customers in automotive and other sectors seek to reduce their supplier base. This means that manufacturers and suppliers are faced with looking for ways to make an impact on the cost of their customer’s value-creating activities, says Christopher.
“Today’s customer in virtually every market is demanding ever-higher levels of performance from suppliers, particularly with respect to delivery service,” he says. Several recent studies have shown that organizations that concentrate on managing the process offer better-quality service to customers and, as a result, tend to see the highest profits.
“The prizes in tomorrow’s markets will go to those companies that truly understand the meaning of ‘better, faster, closer,’” says Christopher.
Evolution’s technology editor