FOUR CRITERIA OF A GOOD SUPPLY CHAIN STRATEGY

The configuration components—operations strategy, channel strategy, outsourcing

strategy, customer service strategy, and asset network—are the fundamental building
blocks of your supply chain strategy.

However, to drive forward your strategic business objectives and really gain a
competitive edge, these components and the choices you make about each one must be

Aligned with your business strategy

Aligned with your customers’ needs
Aligned with your power position (your influence)
Adaptive, because competitive advantage is temporary and market conditions change
The core strategic vision clarifies the answers to key business strategy questions such as:

1) What are your overall strategic objectives?

2) What value do you deliver to your customers?

3) How does your company differentiate itself in the marketplace?

We worked with an electronics company that had spent millions to improve production
and order fullfillment times.

The company’s on-time delivery performance was excellent. There was only one
problem—delivery performance was no longer the key to profitable growth. Increased
competition meant that customers were demanding, and getting, lower prices.

What’s more, a slowdown in several of the company’s primary markets was cutting into
revenues and sharply reducing return on assets.

The company’s president recognized the need to move to a much lower breakeven
point, but supply chain operations were focusing on yesterday’s priority—customer
delivery excellence.
Business plan clearly showed the
volume and price declines and their
impact on margins, the implications
for supply chain operations had not
been considered.

It was only when the company

began to lose money that a major
supply chain reorganization
occurred, which led to factory
closures, facility consolidation, and
outsourcing of manufacturing.
Some aspect of innovation, cost, service, and quality is a part of almost every company’s
strategy.

But leading companies focus on just one of these as a primary strategy—their basis of
competition for winning in a chosen market. From a supply chain perspective, each
basis of competition requires distinct structure, processes, inform
Competing on Cost Companies that compete on cost offer low prices to attract cost-
sensitive buyers or to maintain share in a commodity market.

This strategy demands highly efficient, integrated operations, and the supply chain
plays a critical role in keeping both product and supply chain costs down. The low-cost
supply chain focuses on efficiency-based metrics such as asset utilization, inventory
days of supply, product costs, and total supply chain costs.

Product standardization and process standardization are critical, as are supplier and
production quality and inventory control.
Hewlett-Packard (HP) traditionally pursued an innovation-based strategy—until an
upstart competitor changed the industry dynamics.

In 1997, HP and other printer manufacturers were taken by surprise by Lexmark’s

launch of a below-$100 printer. When Lexmark had doubled its market share by mid-
1999, HP embarked on an ambitious program called “Big Bang” to sharply reduce
product costs through new design and supply chain changes.

The goal? To compete directly with Lexmark on price. “Big Bang” was a big success. By
2002, HP had won back its market share.
Efficiency and low cost are good things

—but not at the expense of service, innovation, or quality if one of those is a key
element of your business strategy. Consider the low-cost offshore manufacturing that
we discussed earlier. Most apparel manufacturers outsource their production to
Southeast Asia, where contract manufacturers insist on fixed production schedules to
minimize costs
This low-cost approach

Also results in low flexibility and can hurt margins at the retail level. If one style lags
while another takes off, the retailers are limited in their ability to change volumes and
mix. With too many of the wrong garments, the stores end up with marked-down
inventory and eroded margins. Too often the missed revenue and reduced margins
associated with a poorly aligned supply chain strategy are not included when assessing
the total impact of supply chain strategic choices.
Zara, the retailer owned by Spanish textile giant Inditex,

Choose a very different model. Zara positioned itself as the designer-boutique

alternative for the price-conscious but trendy consumer. To deliver its strategy, it
manufactures almost 50 percent of its garments in-house—an industry exception.
Although its manufacturing costs are 15 to 20 percent higher than the competition,

Zara more than makes up for the cost differential by using its supply chain to ensure that
merchandise in the stores matches what customers want.
Competing on Innovation Companies whose primary strategy is innovation focus on
developing category killers—“must have” products that benefit from significant
consumer pull. And because their products are category killers,

these companies can command a price premium, Companies whose primary strategy is
innovation focus on developing category killers—“must have” products that benefit from
significant consumer pull the innovator’s advantage. Companies such as Sony, Nike, and
L’Oréal seem to have a finger on the pulse of the consumer and are fast to market with
new products that buyers want. The underlying source of power for such companies is
unparalleled marketing and product development.
How does the supply chain support a company that competes on innovation?

For new products and services, the window of opportunity— before the fast followers
start taking market share—can be small. Innovative companies are acutely aware of the
benefits of getting into a market early and gaining first-mover advantage,

so new product introduction (NPI) is key. By getting new products to market faster.
The supply chain can boost revenues and profits.

This is why it’s important for a company with innovation as a primary strategy to
integrate the supply chain with the design chain, which we define as all the parties—
both inside and outside the enterprise—that participate in defining and designing a new
product or service. The challenge isn’t just time to market, however. Time to volume is
critical too. The faster a company can pump up production to meet demand, the greater
are the profits, and the less likely imitators are to catch up. Creating strong demand for a
new product and then being unable to meet that demand is one of the worst things that
can happen to an innovation- driven company. Achieving that time-to-volume advantage
is a major competitive weapon
Design chain/supply chain integration6 is critical to innovation driven companies,
ensuring the fast and sustainable launch of new products. Moving from product
development to volume production at the target level of quality requires management of
processes, assets, products, and information. Design chain/supply chain integration also
ensures that when demand cranks up, the whole supply chain is ready—that suppliers
can handle your needs, that order-management systems support the new product
information, and that sales channels and service people are trained
Consider again the example of clothing retailer Zara. While most of the industry focuses
the supply chain on delivering the lowest purchase price, Zara’s supply chain supports its
primary innovation strategy. Designers and planners use point-of-sale information to
adjust production plans and designs to focus on bestsellers. This translates into a much
shorter time to market, higher revenues, and fewer markdowns.7 Between 2001 and
2002, when many fashion retailers were struggling to break even, Zara’s performance
translated into steady double-digit growth and healthy EBIT (earnings before income
taxes) margins, growing from 18.1 to 18.5 percent.
Competing on Quality Companies that compete on quality are known for the premium
nature of their products and services, as well as consistent and reliable performance.
Quality products include well-known names such as Lexus automobiles, Maytag
appliances, and Tropicana juices. Product development is obviously critical to quality, but
so are key supply chain processes such as manufacturing, sourcing, quality assurance,
and return. And if a product is perishable or fragile, transportation and storage play an
integral role.
One key supply chain attribute relative to quality is traceability

—the ability to trace a product back to its point of origin—a growing requirement in a
number of industries. Concerns about food safety and the booming market for organic
and “ethical” products mean that consumers want to be able to trace a product from
“farm to plate.” In the U.S. tire market, for example, traceability back to the point of
manufacture is a legal requirement.

Moreover, counterfeiting has emerged in a growing number of sectors, such as luxury

goods, entertainment, and pharmaceuticals. To offset this risk, manufacturers
increasingly use special tags, such as RFID (radio frequency identification), that
identify merchandise as genuine and closely control product flows to consumers.
The example of Barlean’s Organic Oils shows how a supply chain strategy can deliver
quality as a basis of competition.

Barlean’s is a $22 million family-owned company that sells health supplements. The
company’s flagship product, flaxseed oil, outsells the competition 20 to 1. Freshness
makes the difference
Barlean’s oil carries a four-month expiration date, compared with other oils that can
be up to five months old before they even hit store shelves.

Barlean’s manufacturing and distribution processes give the company its edge.
Conventional manufacturing techniques expose flax seeds to heat, light, air, and
overpressing, all of which compromise quality
Competing on Service Companies that compete on service tailor their offerings to their
customers’ specific needs and are known for exceptional customer service.

These companies customize their products and services to build customer loyalty and lock in
repeat sales. To excel at service, all of a company’s customer-touching processes and
information systems such as order capture, order fulfillment, and invoicing must be fast,
consistent, and troublefree. The ability to integrate internal processes and systems with
those of key customers is a core skill.
On a more strategic level,

companies that excel at customer service develop the ability to segment their customers.
They understand the relationship between cost to serve and profitability and can assess the
cost of offering customized services. As a result, they avoid offering customized services to
customers who don’t meet hard business criteria. They also tend to focus on the higher-
value segments of an industry and on developing relationships with their priority customers,
resulting in lower account turnover and a decrease in customer retention costs—all of which
add to the bottom line.
Shell Chemical

It offers its manufacturing customers an inventory-management solution called SIMON

(supplier inventory management order network) that simplifies their purchasing process
and cuts costs from the supply chain at the same time. With Shell’s automated
replenishment system, customers no longer place orders, run out of inventory, or build
“safety cushions” of stock. Instead, they’ve integrated their information technology (IT)
systems with Shell’s so that they can share information
Every night, data on consumption, inventory levels, and usage forecasts are recorded
at the customer’s site and forwarded to Shell. At predetermined inventory trigger
points, Shell places a refill order for the customer, schedules order transport, and
tracks the shipment until it arrives. The system is invoiceless. Each month, based on
consumption figures that both parties share, the customer sends payment
electronically
Shell’s solution makes life easier for everyone. By cutting administrative costs for
customers and the safety cushions of stock that result from forecast uncertainty, the
solution reduces the total amount of inventory in the supply chain and vastly
simplifies inventory management.

Shell gains an added bonus. In exchange for using the company’s service, and
because the solution couldn’t work if inventory from different suppliers were mixed
in the same tanks, customers agree to use Shell as their exclusive vendor for products
managed under SIMON.

By offering a value added service and integrating with its customers’ IT systems, Shell
is able to forge extremely tight relationships with its customers—a powerful supply
chain-driven, strategic advantage