Guide to Supply Chain Management
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At an advanced level, the product can learn about the customer’s usage patterns. BlackBerry’s SureType feature learns the user’s vocabulary based on the names and addresses in the device’s address book and e-mail history.
Lifetime services
Having an intelligent product in the hands of a customer is an opportunity for enhanced loyalty through value-added subscription services. If the product has a means of gathering usage data, for example through a cookie on a computer or an RFID device on a vehicle, there is an opportunity to deepen the relationship by learning more about the customer’s needs and through interactions based on actual usage history.
For example, condition monitoring can be offered as a value-added service to equipment sales from farm equipment to oilwell drill bits, because it can reduce user downtime. Deere & Company has filed a patent application to predict the failure of an in-vehicle communications network for its farm tractors. Varel, a manufacturer of oilwell drill bits, offers run and post-run analysis services.
Usage history can also serve as a springboard into more solution-based revenue models. In addition to selling jet engines, manufacturers such as Pratt & Whitney and Rolls-Royce offer turnkey solutions such as power-by-the-hour on long-term contracts.
Netflix: customisation excellence
Netflix, a US online movie distributor that gives its members access to over 100,000 DVD titles online and has a growing library of over 10,000 downloadable titles, tracks more customisation metrics than most companies, including:
percentage of customers for which the profit margin is known;
customer satisfaction relative to expectations for cost, delivery, quality and overall;
percentage delivered by the time the company commits to;
standard deviation of order cycle time;
revenue per supply chain management employee per year.
Netflix makes personalised movie recommendations and ships more than 2m DVDs on a typical day, with delivery next day from more than 54 distribution centres to more than 95% of its 8.4m members. It also knows its competition well: almost all its employees can name the firm’s top three competitors.
As well as customisation-oriented metrics, the company uses other important supply chain metrics, including:
the percentage of obsolete or inactive inventory;
orders entered accurately;
shrinkage and stock accuracy;
the average age of available metrics (in months);
the order fulfilment cost per order;
the percentage of perfect order fulfilments.
9 Innovation: competing on revitalisation
Innovation is a necessary response to globalisation and competitive pressure. Product life-cycles are shortening for everything from toys to mobile phones. Information technology has had a big influence on the trend, but has not been the only driver. Technology and globalisation in general have been driving faster new product introduction.
The nature of innovation is changing rapidly and reshaping industries. Product life-cycles are getting shorter, increasing the need for quick and reliable new product introduction as well as smart tools for knowing when and how to best retire products that have matured and are at the end of their life-cycles. Also, new technologies can change industry structures. The telecommunications industry has changed dramatically in response to the massive popularity of wireless communications and internet telephony, as per-minute phone service is being replaced by multimedia information, communications and entertainment services.
The traditional view of innovation has been that it starts in research & development (R&D), but competing on innovation through supply chain management means the opposite: innovation begins with the customer. The role of the supply chain is to serve as an antenna to sense customers’ needs, to transmit them all the way back to R&D, and to push seductive new products back out to the customers rapidly, frequently and reliably.
Supply chains needs to be dynamic to meet the challenge. This chapter articulates a strategy for creating dynamic supply chains. The innovation stage comes after customisation because the user feedback that is gleaned through value-added services offered (see Chapter 8) on customisation can be used to create new technologies and improve existing ones. Even seemingly minor product updates and new features for existing products can be valuable to customers.
Success factors
Timing is crucial in launching new products, especially if they are seasonal. They are usually timed to be accompanied by costly promotions and advertising, and supply chain management missteps can cause physical shipments to miss advertised time windows.
The tremendous pressure for timely new product launches should not result in unwise risks, however. Sony had problems bringing its Playstation 3 (PS3) to market when it decided to use Blu Ray technology which offered higher definition and greater storage capacity, but it could not deliver half of the needed volume. Sony was forced to delay the launch.1
Timing is also important in pulling products out of markets when they have matured and are in decline. But gradually withdrawing them from sale requires co-ordinating on appropriate levels of maintenance inventory, as well as the management of other SKU assets after the items have gone out of active production.
Performance advantages
Companies that focus on innovation generate higher revenue growth than others, at 26% annual revenue growth over a five-year period, compared with 16% for their peer groups, for the companies ranking in the top 15 positions in Boston Consulting Group’s study of the most innovative companies of 2007.2 Another study on innovation by the Economist Intelligence Unit also showed a differential in performance.3 The companies in this study – 3M, Bell Labs (Lucent), British Telecom, Cemex, Cisco, Dell, JetBlue, Lockheed Martin, Netflix, Procter & Gamble, UPS and Wal-Mart – grew 2.4% per year faster over a five-year period than their industry peers. Table 9.1 shows revenue growth benchmarks for companies that focus on innovation supply chain strategies in a range of industries.
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Table 9.1 Benchmark one-year revenue growth rate of innovation-focused companies
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Industry
Benchmark one-year revenue growth rate of companies with innovation focus, %
Materials
32.5
Diversified financials
30.9
Banks
29.1
Energy
27.5
Telecommunications services
24.2
Software & services
23.7
Capital goods
22.7
Food & drug retailing
19.7
Technology, hardware & equipment
19.1
Transportation
17.5
Household & personal products
16.2
Hotels, restaurants & leisure
12.8
Insurance
10.3
Utilities
9.3
Average
21.7
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Source: Boston Strategies International, based on an analysis of data from Thomson Reuters and Boston Strategies International’s 2008 supply chain performance benchmark study
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Supply chain innovation strategies continually result in newer products and services by dramatically faster new product development and introduction cycle times, according to the author’s 2008 analysis of survey responses from 102 companies worldwide. Innovation leaders4 get 62% more of their sales from new products5 by launching 55% more new products6 in nearly half of the time that others take.7
Elements of the innovation supply chain strategy
How can companies best achieve innovation through SCM? Certainly, high R&D spending would seem to make a company more innovative, or vice versa. Most companies spend 2–6% of their sales on R&D (see Table 9.2).
More important than R&D spending, however, is the ability to
speed a product through the design and prototype stage on through commercial delivery, since this relies on the proper definition and smooth functioning of multiple processes.
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Table 9.2 R&D as a percentage of sales, by industry group
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Industry group
R&D expense as % of sales
Discrete manufacturers
3.8–6.2
Process manufacturers
2.7–5.3
Pure service companies
2.6–4.5
Fast-moving consumer goods
2.0–3.4
Extraction
0.7–1.5
Distributors/value-added service providers
0.3–0.4
Value-added service providers
0.2–0.4
Average
2.1–3.5
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Source: Boston Strategies International, based on an analysis of data from Thomson Reuters and Boston Strategies International databases
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A set of eight best practices leads to an innovation advantage:
Continuous market feedback
Concurrent product development
Rapid and early prototyping
Product life-cycle management (PLM)
Early supplier involvement
Forward branding
Designing for the supply chain
Continuous market feedback
No matter where you are in the value chain, you will be more powerful if you know how the end-customer really feels about the product. This principle is so important that it reverberates through the supply chain. The final link in the supply chain is the customer, so establishing a feedback loop completes the chain.
Procter & Gamble (P&G), which sells through major retailers like Wal-Mart, increased its bargaining power with Wal-Mart significantly when it got a closer handle on consumers’ wants and desires. A.G. Lafley, P&G’S CEO, created a position called vice-president of design, innovation and strategy. Resources were focused on getting close to customers – in their bathrooms actually watching them clean. P&G created an “innovation gym” to learn how to gather rapid feedback on new product ideas. The effort helped it successfully launch Mr Clean MagicReach, a bathroom cleaner on a 4ft (just over 1m) pole.8
Jeff Immelt, GE’S CEO, commissioned more than $5 billion in 80 initiatives under the umbrella of innovation, designed to lead the company’s growth into new markets and world areas. Its newly defined creativity process starts with observing consumers while they shop, eat and take care of other daily activities. Understanding consumers’ behaviour in the context of their environment is central to the innovation process.
Concurrent product development
When pitching a ball, the wind-up makes all the difference. Similarly, in product development and launch a product launch builds momentum throughout its conception, development and testing; a strong process maximises the chance of a fast and accurate pitch.
The serial model of product development takes too long for today’s rapidly evolving markets. To keep products coming to market at a rapid pace, design and engineering have to work concurrently in designing the product. After the prototype has been approved for production, engineering and manufacturing should work closely to ensure a least-cost, best-manufacturing process (which is called design for manufacturing). And after that, manufacturing, logistics and distribution should work together to ensure seamless order fulfilment. Innovation-driven companies spend twice as much time in cross-functional teams as companies that do not focus on innovation.
The challenge is especially large with complex products in long supply chains. Electronics often involve many components, making the upstream processes (procurement and manufacturing) complex, and long supply chains, making the downstream processes (distribution and merchandising) complex. M&C Specialties China, a manufacturer of mobile phone components, designs products concurrently with Motorola to help speed the phones to market. Many electronics manufacturing companies set up web portals to manage the collaboration needed to ensure adequate and balanced resource allocation and inventory levels.
Rapid and early prototyping
Rapid prototyping, whereby product development organisations produce many early examples of products or services under development, speeds products to market faster than the more traditional, slower “stage-gate” process, which requires new product ideas to pass a series of go or no-go approvals at defined milestones. Like concurrent design, rapid prototyping accelerates the introduction of products, and thus also profits and margins. Companies worldwide have used rapid prototyping to secure a competitive edge in otherwise declining industries.
Nypro gained a reputation for rapid product development that was based on rapid prototyping as well as a culture of innovation and a related ability to manufacture in low-volume, high-mix operations. Nypro’s rapid innovation has kept it in the leading position in its industry for the last 15 years.
Minteq, a US minerals company specialising in refractory products used for lining steelmaking furnaces, incubates custom-new refractory solutions on-site at customers’ locations. A continuous evolution of customised products, each with a slightly different formulation from the other, is the essence of rapid prototyping. The company put in place a process where it solicits ideas from staff on a routine basis, then set up a committee to look at those ideas and make business priorities.
Product life-cycle management
To a marketing person, product life-cycle management (PLM) means aligning the pricing and promotions with the stages of the product’s life-cycle: its introduction, growth, maturity and decline. To an IT person, PLM means a software application that is used to make engineering change orders (formal changes to the design specifications of products) and to maintain and update bills of material (BOM) that define the composition of products or services that the organisation produces. To an inventory person, it means an inventory approach that builds inventory during the growth stage and withdraws it in the decline stage.
To a supply chain expert, PLM means modulating the level of activity involved in each activity in SCM (R&D, engineering, production, logistics and customer service, for example) to suit the needs at each stage of the product life-cycle. Picture a mechanical snake of linked segments, each one rising immediately after the previous one, and then falling again, as the volume of sales rises and falls. Each functional area is like one of the segments of the snake, connected to the others and rising or falling sequentially.
Seasonal peaks and troughs are like product life-cycle stages, but much shorter, so seasonal businesses like iParty, a party supplies store, and Christmas Tree Shops, a home goods retailer, have particular challenges managing their supply chains. For them, one season is the entire life-cycle of some products. Consequently, many of their SKUs have no historical purchasing, sales or inventory performance to use as a gauge for making purchasing and logistical decisions. Three strategies can help to deal with this unpredictability: diversifying into non-seasonals to reduce the volatility; balancing the mix of SKUs so that the stability and predictability of old ones offsets the volatility and unpredictability of new ones; and applying statistical methods to reduce the forecasting errors.
The introduction of a new product usually involves pushing it to customers rather than pulling it from orders. The push supply chain is common not only in innovation-driven supply chains as part of the new product introduction cycle, but also in fast-changing industries such as fashion (sports apparel or jewellery), technology (phones or laptops) and seasonal merchandising (holiday paraphernalia), where production and inventory decisions must be made long before the customer ever sees the product.
Early supplier involvement
In the past decade there has been a transformation of conventional wisdom on relations with suppliers. Companies that had previously treated their supplier relationships as transactional and even antagonistic began to realise the benefits of maki
ng the suppliers part of their team.
While the partnerships used to be driven by cost reduction, buyers have more recently begun looking at suppliers as important innovation partners. Some have even begun expecting suppliers to participate equally in innovation, on the basis that the suppliers will benefit equally through the sales of new products. These examples demonstrate how three companies integrate their suppliers in their innovation activities:
CLP Power, Hong Kong’s major electric utility, has codified the precepts of rapid prototyping in its documented message to suppliers: “We consider our suppliers to be an integral part of our business, and believe that there are mutual benefits in working co-operatively and collaboratively using a shared vision and common goals.”
Toyota and Honda value innovation from their suppliers more than low cost, and are consequently reluctant to source from low-cost countries such as China.9
Blyth, an American consumer products company, sees the long-term future of SCM as more about product innovation than about logistics. “Retailers that don’t let their suppliers help them are losing out,” said Bruce Crain, a senior vice-president.10 Blyth aims to leverage supply chain management for innovation by stimulating creative collaboration with its suppliers so they add “design power, not just less expensive arms and legs”.11