Supply-chain excellence enhances shareholder value because it controls the firm’s heartbeat — the fundamental flow of materials and information from suppliers to customers. But accomplishing that goal isn’t easy.
In traditional organizations, the supply chain absorbs 60% to 70% percent of the cost of inventory levels. It’s time to adopt a different vision, one that’s suitable to the realities of the new era, draws on capabilities from around the world, improves resilience, and reduces risk from future disruptions. Supply-chain leaders need to invite fresh perspectives that enable their organizations to respond quickly to global change.
In the wake of the COVID-19 pandemic, turning supply-chain operations from cost centers to profit centers was the last thing anyone thought about. Customers were looking to retailers to provide items that barely existed in the weeks before. In response, suppliers had to make critical choices about the right products, as well as the best way to shorten lead times and cut production costs.
Companies might be tempted to adopt conservative strategies during a crisis of such proportions, but that is a strategical error. To respond to the marketplace with flexibility and speed, organizations should embrace a startup’s level of energy, hunger, agility, and aggressiveness.
Here are six tactics that supply chains can employ in the push to become profit centers.
Dynamic pricing. Dynamic pricing strategy models can produce a 5% to 10% increase in profit margins. This comes as a result of attaching unique, responsive prices to customer segments that move along separate demand curves, even for the same product or service.
B2B e-commerce. The e-commerce platform Sana finds that most organizations have “only 20% visibility into their supply chains, compared to the 70% to 90% needed to address key points of volatility where revenue and costs are at risk.” B2B e-commerce helps organizations meet business goals by enabling upselling and cross-selling, creating opportunities for additional revenue, and ultimately improving the bottom line.
A warehouse management system. A WMS allows companies to track every unit down to the lowest level of detail, resulting in improved order fulfillment and inventory accuracy. It makes inventory management faster, easier, and more efficient. A successful WMS implementation can provide an 18- to 24-month return on investment, with 5% to 10% in ongoing annual benefits. It can improve order fill rates, reduce freight and labor costs, open up alternative distribution channels, and lower work-in-process and finished-goods inventories.
Distinctive capabilities over competitive necessities. Create a competitive advantage by delivering value to customers in ways that competitors can’t match. Each successful company bases its strategic value proposition on its distinctive capabilities. Examples in the supply-chain arena include Amazon.com Inc., Apple Inc., McDonald’s Corp. and Starbucks Corp. Amazon’s supply chain embraces technology. Apple's success is attributed to the strong relationships it has with suppliers. McDonald’s uses a “win-win” strategy based on mutual, positive outcomes for employees, franchisees, and their suppliers. Starbucks relies on a vertically integrated supply-chain strategy which traces each cup of coffee from the grower to the brew it sells to consumers.
Customer-centric over profit-centric. As author Peter Drucker has said, “The purpose of a business is to create a customer.” To ensure long-term business growth and success, supply-chain management should place customers at the center of a company’s strategy. Here’s how:
Supplier partnerships. The relationships that drive supply-chain success are human to human. Supply chains that are agile, adaptable, and aligned provide companies with sustainable competitive advantage. For firms to meet newer demands, they need a strong supplier base built on trust and long-term relationships. Companies must be prepared to keep changing networks, and, instead of looking out for their interests alone, take responsibility for the entire chain. No technologies can do those things; only supply-chain leaders can make them happen. Suppliers are as passionate about your business as you are; they possess valuable expertise, insights, and ideas.
The supply-chain function is no longer just the part of the organization that buys parts and arranges for deliveries. Supply-chain excellence depends on cross-functional alignment, with the common goal of providing the highest availability of product at the lowest cost. The result is greater profitability and enhanced shareholder value.
Paramaguru Prakash is an APICS-certified supply chain professional and PMI-certified project management professional.
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