In the new economic climate, taking a customer-driven supply approach can help firms survive and thrive.
Supply chains were already facing intense pressure even before the current downturn with companies struggling to juggle cost and service as a result of two trends: globalisation is leading to lengthening supply chains; at the same time customers are becoming far more demanding. The result is a growing need to find shorter andmore responsive routes tomarket, supported by agile and highly flexible supply chains.
As the economic downturn bites and competition intensifies, the temptation will be to take a hard-hitting approach to large cost areas such as supply chains. But how do you ensure you only cut the waste fromyour supply chain, rather than a fundamental element whichmay disable the business temporarily or permanently? And during these times, when cash becomes king, how do you drive out cash effectively? A few leading edge firms have developed an approach to answer both questions: customer-driven supply.
Companies which put this approach at the heart of their supply chain strategy have designed and aligned their processes in order to achieve the objective of winning the customer at the point of use or at the point of sale. The upstreamsupply chain is then designed backwards to deliver this. This is a significant mindset change turning the supply chain fromhaving only a cost reduction focus into becoming flexible and responsive. Thismore service oriented approach creates a commercial competitive edge.
Customer-driven supply is made up of six supply chain dimensions that, in combination, put customer focus at the centre of achieving business performance improvements. It concentrates on creating a supply chain that meets the needs of consumers and customers, designed from the shelf back while integrating commercial and supply chain teams to work collaboratively across the internal and external supply chain.
It consists of six key dimensions:
External focus requiresmeasures to be aligned with consumers and customers to ensure needs aremet and to enable customers to win
Operational excellence focuses upon getting the basics in place, on time, in full order fulfilment and joint inventory reduction with customers
Joint supply chain value creation requires suppliers to work closely with customers to improve service and reduce cost formutual benefit. Key enabler is the integration of commercial and supply chain teams to work collaboratively across internal and external supply chain
Responsiveness concentrates on delivering value-creating, differentiated services and products
Loss elimination focuses upon ruthlessly removing non-value-adding time, inventory and complexity
Synchronisation looks at achieving as near to real-time information flow as possible, such as actual sales data fromcustomers and visibility of order status.
Underpinning these six dimensions is the need to drive amindset and culture that puts the customer first. In studies on supply chains carried out in 2007 and 2008, customer-driven supply chains were found to have delivered significant benefits for organisations, including inventory reductions of 15%; a 17% improvement in perfect orders; 36% shorter cash-to-cycle times; and a 60% faster time-to-market. These benefits have resulted in 10% higher revenues; and 5-7% better profit margins than competitors.
Thismakes customer-driven supply highly relevant in todays trading environment. In 2008, PA ran a survey which confirmed that companies taking this approach have better overall supply chain performance.Our findings showed that top-performing companies scored better than poor performers in all the six dimensions described. Setting these benefits against the increasingly tough economic climate, it is clear that this approach does not just make sense but may also be essential for survival. You just have to look at those companies which have already adopted a consumer driven approach to see that they are already getting clear business gain fromit.
Procter & Gamble, for instance, adopted this strategy as far back as 2002. A stronger focus on service coupled with higher flexibility and responsiveness led to an improvement in perfect order performance in the first couple of years. P&Gmade a conscious choice tomake the supply chain a commercial competitive edge they have invested in building supply chain capability to provide a better service and to be able to deliver differentiation efficiently. In the UK for example, they built two large distribution centres to house all of their grocery lines together for the first time. Thismeans that their customers can have a large range of products delivered on one truck so delivery quantities can bemore in line with demand but still elivered as efficient full truck loads
SimilarlyMichelin established joint teams fromsales andmarketing and supply chain to develop integrated strategies combining demand creation activity with supply capability. These teams focused on designing and operating the supply chain from the end customer back and on what was needed to win with themat the point of sale. Thesemultifunctional teams ensured that sales andmarketing got amuch greater understanding of supply chain capabilities and limitations. And, supply chain rapidly came to understand what consumers really needed.Michelin achieved phenomenal results in reducing stock in the supply chain increasing stock turn by a factor of five.
As PAs survey findings show, leading-edge supply chain companies are right: adopting a customer-driven approach has an unquestionably positive impact on supply chain performance. And the key to a customer-driven approach is to take an end-to-end view of your supply chain. Although the start of this journey can be daunting, the consequences of not going down this roadmake the case for change compelling.
PA Consulting is a member of the Management Consultancies Association (MCA). For further information on the MCA visit www.mca.org.uk.
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