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You've heard the rant a thousand times before when revenue and profits are stagnant. Marketing could drive more business if it just had more inventory and product variety to sell. Supply chain could increase margins if demand was not so variable. Product development can solve both problems - just build the newest innovations, and the customers will pay a premium price. This organizational dysfunction, which isn't new, is the crux of the challenge in achieving value chain excellence today. Yet as the economy continues to struggle, it's time these functions came together and play nice. Specifically for the supply chain team, becoming market-driven is as important now as it's ever been.
Here we are, at mid-year of 2011, and the latest economic indicators aren't encouraging. The U.S. Department of Commerce reported that consumer spending, estimated to represent roughly 70 percent of the U.S. economy, dropped 0.02 percent in June. Inventories have followed a similar path by declining in the U.S. and Europe. The Institute for Supply Management's manufacturing index for July registered 50.9, and the eurozone Purchasing Managers Index was 50.4. Both declined from 55.3 and 52.0 in June, respectively. Although individual businesses can't control the macro-economy, they can align themselves to grab a larger slice of this shrinking pie more profitably. To do this will require cross-functional cooperation between customer-facing organizations and supply chain operations, with product development embedded in the process.
Supply Chain Must Become Market-Driven to Increase Value
Fueling growth starts with driving demand, which is becoming more of a team effort. In consumer products, our past surveys have shown that new products are a top influencer of demand. The harsh reality of how innovation can impact demand is particularly evident in consumer electronics. For example, recent Gartner data shows that the Android and Apple operating systems have taken market share from rivals in the competitive smartphone segment.
But innovation is not just reserved for products. Across industries, we are seeing this innovation expand to services where supply chain capabilities are the source. A great example is in the defense industry, where budget pressure has driven customers toward buying complete, outcome-based capabilities, such as flight availability, not just the aircraft. In response, Lockheed Martin will provide complete logistics support services for the F-35 fighter jet and be paid for aircraft availability. This shift in thinking required a product design that addressed a variety of customer needs, with a view toward how supply chain would profitably support that aircraft over time. In a stagnant or shrinking market, generating demand through product and service innovation will separate the leaders from the laggards. Supply chain design must combine with product and manufacturing process design to be a differentiator.
Increased revenue at the sacrifice of margins is not a sustainable business model, so managing this demand profitably is essential. Our most recent survey of supply chain professionals shows that demand variability remains the top obstacle to achieving supply chain goals. Understanding the market and shaping this demand is where supply chain professionals must move to, once they've squeezed out the cost of supply through efficiencies. Supply chain leaders can influence demand by being knowledgeable about what product features and services truly drive that demand versus creating wasteful complexity. This capability to be market-driven allows supply chain to influence design decisions to grow demand profitably.
Accomplishing this is no easy task, however. It requires a seat at the table with the marketing organization, and supply chain talent that can contribute in a way that supports both revenue growth and profitability.
Overcoming Organizational Inertia to Create Greater Value
Manufacturers and retailers are wrestling with how to better align supply chain with the marketing and product development organizations. Many have addressed stock-keeping unit (SKU) complexity in their existing products, and squeezed out cost through value engineering and supplier efficiencies. They are now ready to move upstream to better understand the markets served, and ensure that value is delivered to both the customer and the business. Often times, achieving this is more about organizational change than business process.
Here are two methods we see used to overcome organizational barriers:
• Metrics and governance - Measuring performance against strategic business goals and enforcing accountability is often a prerequisite to breaking down organizational barriers. P&G holds the executives responsible for business results accountable for ensuring that value is derived from new product innovation.
• Talent management - New skills are required as supply chain seeks early involvement with customer-facing and product development partners. Raytheon has a formal program in place to regularly assess talent gaps as it marches toward more advanced supply chain capabilities.
Once organizational barriers are addressed, there are two process activities for deriving greater value:
• Supply chain segmentation - This ensures the supply chain design is aligned appropriately to the required service level of market segments. See the Case Study for Supply Chain Leaders: Dell's Transformative Journey Through Supply Chain Segmentation for a great example.
• Product planning for life cycle value - Developing products to profitably serve existing and new markets throughout the life cycle will derive the greatest value. Developing platforms versus unique products to serve market needs, a practice commonly used in the automotive industry, helps to deliver new product variants faster and more cost-effectively.
The formula for success in a stagnant economy is fairly straightforward: Capture market share by delivering customer value profitably with innovative products and services. Accomplishing this task requires a team effort where market segments, product designs and supply chain capabilities are aligned. The process improvement techniques are proven. Removing the organizational barriers to executing these improvements will likely differentiate those that break away from the pack.
As always, I can be reached at firstname.lastname@example.org.
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