Unformatted text preview: OPERATIONS AND LOGISTICS
SUPPLY CHAIN MANAGEMENT.
INTEGRAL LOGISTICS. ___________________________ READING:
“THE SEVEN PRINCIPLES OF
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No está permitido reproducirlo total o parcialmente sin permiso. Faculty: PhD. August CASANOVAS “THE SEVEN PRINCIPLES OF SUPPLY CHAIN
To balance customers demands with the need for profitable growth, many
companies have moved aggressively to improve supply chain management.
Their efforts reflect seven principles of supply chain management that, working
together, can enhance revenue, cost control, and asset utilization as well as
customer satisfaction. Implemented successfully, these principles prove
convincingly that you can please customers and enjoy profitable growth from
7 Segment customers based on service needs.
Customize the logistics network.
Listen to signals of market demand and plan accordingly.
Differentiate product closer to the customer.
Develop a supply chain wide technology strategy.
Adopt channel spanning performance measures. “THE SEVEN PRINCIPLES OF SUPPLY CHAIN
Managers increasingly find themselves assigned the role of the rope in a very
real tug of war, pulled one way by customers mounting demands and the
opposite wav by the company's need for growth and profitability. Many have
discovered that they can keep the rope from snapping and, in fact, achieve
profitable growth by treating supply chain management as a strategic variable.
These savvy managers recognize two important things. First, they think about
the supply chain as a whole, all the links involved in managing the flow of
products, services, and information from their suppliers' suppliers to their
customers' customers (that is channel customers, such as distributors and
retailers). Second, they pursue tangible outcomes, focused on revenue growth,
asset utilization, and cost reduction.
Rejecting the traditional view of a company and its component parts as distinct
functional entities, these managers realize that the real measure of success is
how well activities coordinate across the supply chain to create value for
customers, while increasing the profitability of every link in me chain. In the
process, some even redefine the competitive game: consider the success of
Procter & Gamble (see accompanying sidebar on "The Power Partnership").
Our analysis of initiatives to improve supply chain management by more than
100 manufacturers, distributors, and retailers shows many making great
progress, while others fail dismally.
The successful initiatives that have contributed to profitable growth share
several themes. They are typically broad efforts, combining both strategic and
tactical change. They also reflect a holistic approach, viewing the supply chain
from end to end and orchestrating efforts so that the whole improvement
achieved - in revenue, costs, and asset utilization - is greater than the sum of its
Unsuccessful efforts likewise have a consistent profile. They tend to be
functionally defined and narrowly focused, and they lack sustaining
infrastructure. Uncoordinated change activity erupts in even department and
function and puts the company in grave danger of "dying the death of a
thousand initiatives." The source of failure is seldom management's difficulty
identifying what needs fixing. 1 By David L. Anderson, Frank F. Bitt, and Donavon J. Favre.
David L. Anderson is managing partner of Andersen Consulting’s Strategic Services Logistics
Frank F. Bitt is a senior manager m the firm’s Strategic Services Logistics and Sales and
Donavon J. Favre is a manager in the Strategic Services Logistics Practice. . The issue is determining how to develop and execute a supply chain
transformation plan that can move multiple, complex operating entities (both
internal and external) in the same direction.
To help managers decide how to proceed, we revisited the supply chain
initiatives undertaken by the most successful manufacturers and distilled from
their experience seven fundamental principles of supply chain management.
Adherence to the seven principles transforms the tug of war between customer
service and profitable growth into a balancing act. By determining what
customers want and how to coordinate efforts across the supply chain to meet
those requirements faster, cheaper, and better, companies enhance both
customer satisfaction and their own financial performance. Bur the balance is
not easy to strike or to sustain. As this article will demonstrate, each company whether a supplier, manufacturer, distributor, or retailer - must find the way to
combine all seven principles into a supply chain strategy that best fits its
particular situation. No two companies will reach the same conclusion. Principle 1.
Segment customers based on the service needs of distinct
groups and adapt the supply chain to serve these segments
Segmentation has traditionally grouped customers by industry, product, or trade
channel and then taken a one-size-fits-all approach to serving them, averaging
costs and profitability within and across segments. The typical result, as one
manager admits: "We don't fully understand the relative value customers place
on our service offerings."
But segmenting customers by their particular needs equips a company to
develop a portfolio of services tailored to various segments. Surveys,
interviews, and industry research have been the traditional tools for defining
key segmentation criteria. Today, progressive manufacturers are turning to such
advanced analytical techniques as cluster and conjoint analysis to measure
customer tradeoffs and predict the marginal profitability of each segment. One
manufacturer of home improvement and building products bases segmentation
on sales and merchandising needs and order fulfillment requirements (see
Exhibit 1). Others are finding that criteria such as technical support and account
planning activities drive segmentation.
Viewed from the classic perspective, this needs based segmentation may
produce some odd couples. For the manufacturer in Exhibit 1, "innovators"
include an industrial distributor (Grainger), a do-it-yourself retailer (Home
Depot), and a mass merchant (Wal-Mart).
Research also can established the services valued by all customers versus
those valued only by certain segments. Then the company should apply a
disciplined, cross-functional process to develop a menu of supply chain programs and create segment-specific service packages that combine basic
services for everyone with the services from the menu that will have the
greatest appeal to particular segments. This does not mean tailoring for the
sake of tailoring. The goal is to find the degree of segmentation and variation
needed to maximize profitability. EXHIBIT 1
Sales & Merchandising needs High INNOVATORS
· Home Depot
· Wal Mart DEVELOPING
· Auto Zone
· Small retail stores
· Small industrial
& distributors LOGISTICS
· Westinghouse Low
Low Order fulfillment requirements High Segment customers based on service needs. Exhibit 1 - Needs-base Segmentation.
All the segments in Exhibit 1, for example, value consistent delivery. But those
in the lower left quadrant have little interest in the advanced supply chain
management programs, such as customized packaging and advance shipment
notification, that appeal greatly to those in the upper right quadrant.
Of course, customer needs and preferences do not tell the whole story. The
service packages must turn a profit, and many companies lack adequate
financial understanding of their customers and their own costs to gauge likely
profitability. "We don't know which customers are most profitable to serve,
which will generate the highest long-term profitability, or which we are most
likely to retain," confessed a leading industrial manufacturer. This knowledge is
essential to correctly matching accounts with service packages - which
translates into revenues enhanced through some combination of increases in
volume and/or price.
Only by understanding their costs at the activity level and using that
understanding to strengthen fiscal control can companies profitably deliver
value to customers. One "successful" food manufacturer aggressively marketed
vendor-managed inventory to all customer segments and boosted sales. But
subsequent activity based cost analysis found that one segment actually lost
nine cents a case on an operating margin basis. Most companies have a significant untapped opportunity to better align their
investment in a particular customer relationship with the return that customer
generates. To do so, companies must analyze the profitability of segments, plus
the costs and benefits of alternate service packages, to ensure a reasonable
return on their investment and the most profitable allocation of resources. To
strike and sustain the appropriate balance between service and profitability,
most companies will need to set priorities—sequencing the rollout of tailored
programs to capitalize on existing capabilities and maximize customer impact. Principle 2.
Customize the logistics network to the service requirements
and profitability of customer segments.
Companies have traditionally taken a monolithic approach to logistics network
design in organizing their inventory, warehouse, and transportation activities to
meet a single standard. For some, the logistics network has been designed to
meet the average service requirements of all customers; for others, to satisfy
the toughest requirements of a single customer segment.
Neither approach can achieve superior asset utilization or accommodate the
segment-specific logistics necessary for excellent supply chain management. In
many industries, especially such commodity industries as fine paper, tailoring
distribution assets to meet individual logistics requirements is a greater source
of differentiation for a manufacturer than the actual products, which are largely
One paper company found radically different customer service demands in two
key segments: large publishers with long lead times and small regional printers
needing delivery within 24 hours. To serve both segments well and achieve
profitable growth, the manufacturer designed a multi-level logistics network with
three full-stocking distribution centers and 46 quick-response cross-docks,
stocking only fast-moving items, located near the regional printers. Return on
assets and revenues improved substantially thanks to the new inventory
deployment strategy, supported by outsourcing of management of the quick
response centers and the transportation activities.
This example highlights several key characteristics of segment-specific
services. The logistics network probably will be more complex, involving
alliances with third-party logistics providers, and will certainly have to be more
flexible than the traditional network. As a result, fundamental changes in the
mission, number, location, and ownership structure of warehouses are typically
necessary. Finally, the network will require more robust logistics planning
enabled by "real-time" decision-support tools that can handle flow-through
distribution and more time-sensitive approaches to managing transportation.
Even less conventional thinking about logistics is emerging in some industries,
where shared customers and similar geographic approaches result in redundant networks. Combining logistics for both complementary and competing firms
under third-party ownership can provide a lower-cost industry wide solution.
As shown in Exhibit 2, the food and packaged goods industry might well cut
logistics costs 42 percent per case and reduce total days in the system 73
percent by integrating logistics assets across the industry, with extensive
participation by third-party logistics providers. EXHIBIT 2
Market Level Logistics
Individual optimization Industry-wide optimization Supplier
retailer Stores Customize the logistics network Exhibit 2. Market level logistics. Principle 3.
Listen to market signals and align demand planning
accordingly across the supply chain, ensuring consistent
forecasts and optimal resource allocation.
Forecasting has historically proceeded silo by silo, with multiple departments
independently creating forecasts for the same products, all using their own
assumptions, measures, and level of detail. Many consult the marketplace only
informally, and few involve their major suppliers in the process. The functional
orientation of many companies has just made things worse, allowing sales
forecasts to envision growing demand while manufacturing second-guesses
how much product the market actually wants.
Such independent, self-centered forecasting is incompatible with excellent
supply chain management, as one manufacturer of photographic imaging found.
This manufacturer nicknamed the warehouse "the accordion" because it had to
cope with a production operation that stuck to a stable schedule, while the
revenue-focused sales force routinely triggered cyclical demand by offering deep discounts at the end of each quarter. The manufacturer realized the need
to implement a cross-functional planning process, supported by demand
Initial results were dismaying. Safes volume dropped sharply, as excess
inventory had to be consumed by the marketplace. But today, the company
enjoys lower inventory and warehousing costs and much greater ability to
maintain price levels and limit discounting. Like all the best sales and operations
planning (S&OP), this process recognizes the needs and objectives of each
functional group but bases final operational decisions on overall profit potential.
Excellent supply chain management, in fact, calls for S&OP that transcends
company boundaries to involve every link of the supply chain (from the
supplier’s supplier to the customer's customer in developing forecast
collaboratively and then maintaining the required capacity across the
operations. Channel-wide S&OP can detect early warning signals of demand
lurking in customer promotions, ordering patterns, and restocking algorithms
and takes into account vendor and carrier capabilities, capacity and constraints.
Exhibit 3 illustrates the difference that cross supply chain planning has made for
one manufacturer of laboratory products. As shown on the left of this exhibit,
uneven distributor demand unsynchronized with actual end-user demand made
real inventory needs impossible to predict and forced high inventory levels that
still failed to prevent out-of stocks. Distributors began sharing information on
actual (and fairly stable) end-user demand with the manufacturer, and the
manufacturer began managing inventory for the distributors. This coordination
of manufacturing scheduling and inventory deployment decisions paid off
handsomely, improving fill rates, asset turns, and cost metrics for all concerned. EXHIBIT 3
Market Signals Distributor Uneven distributor Time
· Distributor demand
· Manufacturer forecast Retailer
(forecast) Manufacturer End user Stable end user demand Time
· End user demand
· New Vendor Managed
Inventory (VMI) forecast Listen to signals of market demand and plan accordingly Exhibit 3. Market Signals. Such demand-based planning takes time to get right. The first step is typically a
pilot of a leading-edge program, such as vendor-managed inventory or jointly
managed forecasting and replenishment, conducted in conjunction with a few
high-volume, sophisticated partners in the supply chain. As the partners refine
their collaborative forecasting, planned orders become firm orders. The
customer no longer sends a purchase order, and the manufacturer commits
inventory from its available-to-promise stock. After this pilot formalizes a
planning process infrastructure, and measures, the program expands to include
other channel partners, until enough are participating to facilitate quantum
improvement in utilization of manufacturing and logistics assets and cost
performance. Principle 4.
Differentiate product closer to the customer and speed
conversion across the supply chain.
Manufacturers have traditionally based production goals on projections of the
demand for finished goods and have stockpiled inventory to offset forecasting
errors. These manufacturers tend to view lead times in the system as fixed, with
only a finite window of time in which to convert materials into products that meet
While even such traditionalists can make progress in cutting costs, great
potential remains in less traditional strategies such as set-up reduction, cellular
manufacturing, just-in-time techniques, and mass customization. For example,
manufacturers striving to meet the needs of every individual customer efficiently
through strategies such as mass customization are discovering the value of
postponement. They are delaying product differentiation to the last possible
moment and thus overcoming the problem described by one manager of a
health and beauty care products warehouse: "With the proliferation of
packaging requirements from major retailers, our number of SKUs (stock
keeping units) has exploded. We have situations daily where we backorder one
retailer, like Wal-Mart, on an item that is identical to an in-stock item, except for
its packaging. Sometimes we even tear boxes apart and repackage by hand!".
The hardware manufacturer in Exhibit 4 solved this problem by determining the
point at which a standard bracket turned into multiple SKUs. This point came
when the bracket had to be packaged 16 ways to meet particular customer
requirements. The manufacturer further concluded that overall demand for
these brackets is relatively stable and easy to forecast, while demand for the 16
SKUs is much more volatile. The solution: make brackets in the factory but
package them at the distribution center, within the customer order cycle. This
strategy improved asset utilization by cutting inventory levels by more than 50
Realizing that time really is money, many manufacturers are questioning the
conventional wisdom that lead times in the supply chain are fixed. They are strengthening their ability to react to market signals by compressing lead times
along the supply chain, speeding the conversion from raw materials to finished
products tailored to customer requirements. This approach enhances their
flexibility to make product configuration decisions much closer to the moment
Consider Apple's widely publicized PC shortages during peak sales periods.
Errors in forecasting demand, coupled with supplier inability to deliver custom
drives and chips in less than 18 weeks, left Apple unable to adjust fast enough
to changes in projected customer demand. To overcome the problem, Apple
has gone back to the drawing board, redesigning PCs to use more available,
standard parts that have shorter lead times. EXHIBIT 4
Source Steel Plastic Components Level II
Unit Pack Level III
Carton Coating Same base
Standard card WalMart
Target Melding Same base
Bulk Home Depot Manufacture Level I
Assemble Bracket Subassy Kmart Same base
Two colors Postponement leverage point Differentiate product closer to the customer Exhibit 4. Packaging Postponement.
Consider Apple's widely publicized PC shortages during peak sales periods.
Errors in forecasting demand, coupled with supplier inability to deliver custom
drives and chips in less than 18 weeks, left Apple unable to adjust fast enough
to changes in projected customer demand. To overcome the problem, Apple
has gone back to the drawing board, redesigning PCs to use more available,
standard parts that have shorter lead times.
The key to just-in-time product differentiation is to locate the leverage point in
the manufacturing process where the product is unalterably configured to meet
a single requirement and to assess options, such as postponement,
modularized design, or modification of manufacturing processes, that can
increase flexibility. In addition, manufacturers must challenge cycle times: Can
the leverage point be pushed closer to actual demand to maximize the
manufacturer's flexibility in responding to emerging customer demand?. Principle 5.
Manage sources of supply strategically to reduce the total cost
of owning materials and services.
Determined to pay as low a price as possible for materials, manufacturers have
not traditionally cultivated warm relationships with suppliers. In the words of one
general manager: "The best approach to supply is to have as many players as
possible fighting for their piece of the pie, that's when you get the best pricing."
Excellent supply chain management requires a more enlightened mindset,
recognizing, as a more progressive manufacturer did: "Our supplier's costs are
in effect our costs. If we force our supplier to provide 90 days of consigned
material when 30 days are sufficient, the cost of that inventory will find its way
back into the supplier's price to us since it increases his cost structure." While
manufacturers should place high demands on suppliers, they should also
realize that partners must share the goal of reducing costs across the supply
chain in order to lower prices in the marketplace and enhance margins. The
logical extension of this thinking is gain-sharing arrangements to reward
everyone who contributes to the greater profitability.
Some companies are not yet ready for such progressive thinking because they
lack the fundamental prerequisite. That is, a sound knowledge of all their
commodity costs, not only for direct materials but also for maintenance, repair,
and operating supplies, plus the dollars spent on utilities, travel, temps, and
virtually everything else. This fact-based knowledge is the essential foundation
for determining the best way of acquiring every kind of material and service the
With their marketplace position and industry structure in mind, manufacturers
can then consider how to approach suppliers, soliciting short-term competitive
bids, entering into long-term contracts and strategic supplier relationships,
outsourcing, or integrating vertically. Excellent supply chain management calls
for creativity and flexibility.
For one manufacturer whose many divisions all were independently ordering
the cardboard boxes they used, creativity meant consolidating purchases, using
fewer and more efficient suppliers, and eliminating redundancy in such
processes as quality inspection. For many small manufacturers, creativity
means reducing transportation costs by hitching a ride to market on the
negotiated freight rates of a large customer. For the chemical company in
Exhibit 5, creativity meant tackling the volatility of base commodity prices by
indexing them (rather than negotiating fixed prices), so supplier and
manufacturer share both the pain and the gain of price fluctuations.
While the seven principles of supply chain management can achieve their full
potential only if implemented together, this principle may warrant early attention
because the savings it can realize from the start can fund additional initiatives.
The proof of the pudding: Creating a data warehouse to store vast amounts of
transactional and decision-support data for easy retrieval and application in annual negotiations consolidated across six divisions cut one manufacturer’s
operating costs enough in the first year to pay for a redesigned distribution
network and a new order management system. Price EXHIBIT 5
Indexed Pricing Procured compound price
Base commodity price index
Time Source Strategically Exhibit 5. Indexed Pricing. Principle 6.
Develop a supply chain-wide technology strategy that supports
multiple levels of decision making and gives a clear view of the
flow of products, services, and information.
To sustain reengineered business processes (that at last abandon the
functional orientation of the past), many progressive companies have been
replacing inflexible, poorly integrated systems with enterprise-wide systems.
One study puts 1995 revenues for enterprise-wide software and service,
provided by such companies as SAP and Oracle, at more than $ 3.5 billion and
projects annual revenue growth of 15 to 20 percent from 1994 through 1999.
Too many or these companies will find themselves victims of the powerful new
transactional systems they put in place. Unfortunately, many leading-edge
information systems can capture reams of data but cannot easily translate it into
actionable intelligence that can enhance real-world operations.
As one logistics manager, with a brand-new system, said: "I've got three feet of
reports with every detail imaginable, but it doesn't tell me how to run my
business." This manager needs to build an information technology system that integrates
capabilities of three essential kinds (see Exhibit 6). For the short term, the
system must be able to handle day-to-day transactions and electronic
commerce across the supply chain and thus help align supply and demand by
sharing information on orders and daily scheduling. From a mid-term
perspective, the system must facilitate planning and decision making,
supporting the demand and shipment planning and master production
scheduling needed to allocate resources efficiently. To add long-term value, the
system must enable strategic analysis by providing tools, such as an integrated
network model, that synthesize data for use in high-level "what-if" scenario
planning to help managers evaluate plants, distribution centers, suppliers, and
third-party service alternatives. EXHIBIT 6
Key aspects of Supply Chain Technology Strategy
management Supplier Manufacturer Customer Develop a supply chain wide technology strategy. Exhibit 6. Key Aspects of Supply Chain Technology Strategy
Despite making huge investments in technology, few companies are acquiring
this full complement of capabilities. Today's enterprise-wide systems remain
enterprise-bound, unable to share across the supply chain the information that
channel partners must have to achieve mutual success.
Ironically, the information that most companies require most urgently to
enhance supply chain management resides outside of their own systems, and
few companies are adequately connected to obtain the necessary information.
Electronic connectivity creates opportunities to change the supply chain
fundamentally, from slashing transaction costs through electronic handling of
orders, invoices, and payments to shrinking inventories through vendormanaged inventory programs. A major beer manufacturer learned this lesson the hard way. Tracking
performance from plant to warehouse, the manufacturer was pleased, a 98
percent fill rare to the retailer's warehouse. But looking all the way across the
supply chain, the manufacturer saw a very different picture. Consumers in some
key retail chains found this company's beer out of stock more than 20 percent of
the time due to poor score-level replenishment and forecasting. The
manufacturer now is scrambling to implement "real-time" information technology
to gain store-specific performance data; data that is essential to improving
customer service. Without this data, the manufacturer cannot make the
inventory-deployment decisions that will boost asset utilization and increase
revenue by reducing store-level stockouts.
Many companies that have embarked on large-scale supply chain
reengineering attest to the importance of information technology in sustaining
the benefits beyond the first annual cycle. Those that have failed to ensure the
continuous flow of information have seen costs, assets, and cycle times return
to their pre-reengineering levels, which undermines the business case for
broad-based supply chain programs. Principle 7.
Adopt channel-spanning performance measures to gauge
collective success in reaching the end user effectively and
To answer the question, "How are we doing?" most companies look inward and
apply any number of functionally oriented measures. But excellent supply chain
managers take a broader view, adopting measures that apply to every link in
the supply chain and include both service and financial metrics.
First, they measure service in terms of the perfect order; the order that arrives
when promised, complete, priced and billed correctly, and undamaged. The
perfect order not only spans the supply chain, as a progressive performance
measure should, but also views performance from the proper perspective, that
of the customer.
Second, excellent supply chain managers determine their true profitability of
service by identifying the actual costs and revenues of the activities required to
serve an account, especially a key account. For many, this amounts to a
revelation since traditional cost measures rely on corporate accounting systems
that allocate overhead evenly across accounts. Such measures do not
differentiate, for example an account that requires a multifunctional account
team, small daily shipments, or special packaging. Traditional accounting tends
to mask the real costs of the supply chain, focusing on cost of activities and
ignoring the degree of control anyone has (or lacks) over the cost drivers.
Deriving maximum benefit from activity-based costing requires sophisticated in
formation technology, specifically a data warehouse. Because the general
ledger organizes data according to a chart of accounts, it obscures the information needed for activity based costing. By maintaining data in discrete
units, the warehouse provides ready access to this information.
To facilitate channel-spanning performance measurement, many companies are
developing common report cards, like that shown in Exhibit 7. These report
cards help keep partners working toward the same goals by building deep
understanding of what each company brings to the partnership and showing
now to leverage their complementary assets and skills to the alliances greatest
advantage. The willingness to ignore traditional company boundaries in pursuit
of such synergies often marks the first step toward a “pay-for-performance”
environment. EXHIBIT 7
Joint Performance Measures
Account’s report card Future
Common report card Increased
growth Stable or
assets · Fosters a “price-driven” environment
· Puts manufacturer in an adversarial
position Manufacturer’s report card
· Manufacturers driven by growth
· Consistently squeezed on price Stable or
Fill rates Increased
· Joint measures
· Promotes win-win environment Adopt channel-spanning performance measures. Exhibit 7. Joint Performance Measures.
Consider the manufacturer of scientific products who kept receiving low marks
from a customer on delivery, even though its own measures showed
performance to be superior. The problem was that the two were not speaking
the same language. The customer accepted only full truckloads; anything
brought next week because it wouldn't fit onto the truck this week was deemed
backordered. To the manufacturer, however, this term did not apply.
A common report card can also help partners locate and capitalize on synergies
across the supply chain, as a manufacturer of health products did by working
with a major customer to develop a joint return-on-invested-capital model and
then used it to make such decisions as where to hold slow-moving inventory
most cost effectively. Of course, such success is possible only between
partners who begin with deep understanding of their own financial situation. Translating Principles into Practice.
Companies that have achieved excellence in supply chain management tend to
approach implementation of the guiding principles with three precepts in mind.
· Orchestrate improvement efforts
The complexity of the supply chain can make it difficult to envision the whole,
from end to end. But successful supply chain managers realize the need to
invest time and effort up front in developing this total perspective and using it to
inform a blueprint for change that maps linkages among initiatives and a wellthought-out implementation sequence. This blueprint also must coordinate the
change initiatives with ongoing day-to-day operations and must cross company
The blueprint requires rigorous assessment of the entire supply chain, from
supplier relationships to internal operations to the marketplace, including
customers, competitors, and the industry' as a whole.
Current practices must be ruthlessly weighed against best practices to
determine the size of the gap to close. Thorough cost/benefit analysis lays the
essential foundation for prioritizing and sequencing initiatives, establishing
capital and people requirements, and getting a complete financial picture of the
company's supply chain, before, during, and after implementation.
A critical step in the process is setting explicit outcome targets for revenue
growth, asset utilization, and cost reduction (see Exhibit 8). While traditional
goals for costs and assets, especially goals for working capital, remain essential
to success, revenue growth targets may ultimately be even more important.
Initiatives intended only to cut costs and improve asset utilization have limited
success structuring sustainable win-win relationships among trading partners.
Emphasizing revenue growth can significantly increase the odds that a supply
chain strategy will create, rather than destroy, value.
• Remember that Rome wasn't built in a day.
As this list of tasks may suggest, significant enhancement of supply chain
management is a massive undertaking with profound financial impact on both
the balance sheet and the income statement.
Because this effort will not pay off overnight, management must carefully
balance its long-term promise against more immediate business needs.
Advance planning is again key. Before designing specific initiatives, successful
companies typically develop a plan that specifies funding, leadership, and
expected financial results. This plan helps to forestall conflicts over priorities
and keeps management focused and committed to realizing the benefits. • Recognize the difficulty of change.
Most corporate change programs do a much better job of designing new
operating processes and technology tools than of fostering appropriate attitudes
and behaviors in the people who are essential to making the change program
work. People resist change especially in companies with a history of "changeonce-the-month" programs. People in any organization have trouble coping with
the uncertainty of change, especially the real possibility that their skills will not
fit the new environment.
Relationship between Supply Chain Principles
and Financial Outcomes
reduction 1. Segment customer based on
2. Customize logistics network
3. Listen to market signals and
4. Differentiate products closer to
5. Source strategically
6. Develop supply chain
7. Adopt channel measures
Information technology provides the
infrastructure required to capture benefits
across the supply chain High Medium Low Translating Principles into Practice. Exhibit 8. Relationship between Supply Chain Principles and Financial
Implementing the seven principles of supply chain management will mean
significant change for most companies. The best prescription for ensuring
success and minimizing resistance is extensive, visible participation and
communication by senior executives. This means championing the cause and
removing the managerial obstacles that typically present the greatest barriers to
success, while linking change with overall business strategy.
Many progressive companies have realized that the traditionally fragmented
responsibility for managing supply chain activities will no longer do. Some have
even elevated supply chain management to a strategic position and established
a senior executive position such as vice-president supply chain (or the
equivalent) reporting directly to the COO or CEO.
This role ignores traditional product, functional and geographic boundaries that
can interfere with delivering to customers what they want, when and where they
want it. The executive recruited for this role must have some very special attributes, the
breadth of vision needed to understand and manage activities from receipt of
order through delivery; the flexibility required to experiment and make midcourse corrections, coupled with the patience demanded by an inherently longterm effort; the superior communication and leadership skills essential to
winning and sustaining commitment to the effort at every level of the
organization, including the translation of intellectual commitment into financial
Many progressive companies have realized that the
traditionally fragmented responsibility for managing
supply chain activities will no longer do. Reaping the Rewards of Excellent Supply Chain Management.
The companies mentioned in this article are just a few of the many that have
enhanced both customer satisfaction and profitability by strengthening
management of the supply chain. While these companies have pursued various
initiatives, all have realized the need to integrate activities across the supply
chain. Doing so has improved asset utilization, reduced cost, and created price
advantages that help attract and retain customers (and thus enhance revenue).
At the same time, these companies have recognized the importance of
understanding and meeting diverse customer needs. Such tailoring of products
and services enhances the effectiveness of the supply chain and thus wins
customer loyalty. This loyalty translates into profits, Xerox has found satisfied
customers six times more likely to buy additional Xerox products over the next
18 months than dissatisfied customers.
By simultaneously enhancing customer satisfaction and profitability, the seven
principles of supply chain management can turn these once warring objectives
into a formula for sustainable competitive advantage. Procter & Gamble: The Power of Partnership.
Who says you can't please customers and achieve profitable growth from doing
so?, certainly not Procter & Gamble. But even this consumer products giant
recognizes the need for continuous change in order to enjoy continued success.
Since early in the century, P&G had based its strategy on delivering superior
products to consumers. "Sell so that we will be filling the retail shelves as they
are empty," said CEO Richard Deupree in 1911. By the late 1970s, this singleminded focus on consumers had earned P&G a reputation among wholesalers
and retailers for being inflexible and dictatorial. Perceiving the growing power of
these customers in the early 1980s, P&G revised its strategy to maintain a
constant focus on reinventing the customer interface in pursuit of sustained
The first seep was a series of merchandising and logistics initiatives launched
throughout the 1980s under the banner of “total system efficiency." Such efforts
as implementing more flexible promotional policies and a damaged goods
program came into a new emphasis on trade customers. These efforts paid off.
In 1990, P&G ranked 15th among the Fortune, and up from 23rd in 1979.
In the early 1990s, P&G took the next step, a sales reorganization creating
multifunctional teams with key customers, tested with Wal-Mart, to address
issues in key areas as category management, merchandising, logistics,
information technology, and solid waste management. P&G simultaneously
developed partnerships with suppliers to reduce cycle times and costs.
The results have been impressive. For example, the Just-in-Tide marketing
initiative uses point-of-sale scan data to determine how and when to replenish
product. Warehouse inventory turns have almost doubled; factory utilization has
grown from 55 percent to more than 80 percent; and overall costs have dropped
to 1990-1991 levels.
P&G more recently introduced the Streamlined Logistics program to improve
customer service and supply chain efficiency. The first phase consolidated
ordering, receipt, and invoicing of multiple brands, harmonized payment terms,
and reduced bracket pricing categories.
The implications for customers? As Steven David, vice president of sales,
explained: "Now they'll be able to mix a load of soap or paper or food products
on a full truck to get the best possible pricing. We're going to make available
common quantity pricing brackets across all our sectors. We're going to have
multi sector ordering for the first time."
To ensure customer satisfaction, P&G instituted a scorecard last year to enable
both distributors and vendors to evaluate P&G's efficiency in such key areas as
category management, assortment, efficient product introduction, promotion,
and replenishment. In the last six months, P&G has undertaken Streamlined Logistics II to reduce
unloading time in food-retailer warehouses. By combining such tools as activitybased costing and Electronic Data Interchange with drop-and-hook programs
and elimination of pallet exchanges, P&G expects to remove non-value-added
costs and improve consumer value, in the process saving $50 million, which
P&G intends to pass on to customers. ...
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This note was uploaded on 11/29/2011 for the course BUSINESS S 103 taught by Professor Casanova during the Spring '11 term at Universitat de Barcelona.
- Spring '11