Competitive Supply Strategies for the 21st Century
New and quickly changing competitive forces will define what industrial organizations need to do to succeed in the future
By Dr. Robert M. Monczka and James P. Morgan -- Purchasing, 1/13/2000
Any talk about supply strategies for the next century or just for the next decade needs to be approached in the context of the current competitive environment. Strategies that will be used by leading companies in the early years of the 21st century--for the first decade at least--will be built on trends and competitive forces already at work in the global economy.However, the forms that corporate competition will take in the next decade are likely to be considerably more complex than what has been seen so far. As a result, an understanding of the supply strategies that will predominate must be measured against the very complex economic landscape that will face purchasing/supply managers. Looking out to 2020 or so, these (often competing) factors will be affecting and sometimes changing corporate supply and sourcing strategies:
- The need for individual companies to increase in size--either by internal growth or alliances with external companies.
- The need to provide products and services to customers that are, at the same time, unique, value efficient, and reasonably priced.
- The quick development, acceptance, and usage of e-business tools in the development of overall company and sourcing/supply strategies.
- Increasing financial pressure on companies to achieve high process performance as they affect or are affected by sourcing and supply--and increasing focus on economic value add (EVA).
- Growing emphasis by top management on cost control, reduced cycle time, increasing flexibility, the profit picture and process economics.
- The need to adapt standard processes for the manufacture and sale of technologically advanced products and services.
- Fundamental changes in distribution and the need to change the methods used in customer order fulfillment and customer demand management.
- Globalization of markets that formerly functioned as national or regional markets.
Grow--or else!
Among the most significant factors in the development of new supply strategies will be the new forms of financial pressure that will be put on organizations. Severe global competition continues to drive the movement toward fewer and larger companies.
Concurrently, more and more often the financial marketplace in different parts of the world is requiring that firms place either one, two or three in their relevant industrial sectors and generate positive EVAs, in order to be valued as a highly successful and good value equity investment. A company's ability to find funding for new development, in other words, will be greatly affected by how it is viewed in financial markets. Perceived importance also affects how successful individual companies are at initiating effective supply alliances with other companies.
Customer is king
Along with increasing financial pressures, the 21st century will also see an acceleration of what might be called the trend toward "customer democratization." Customers at all levels are becoming more knowledgeable. A major factor in this growing market sophistication is the Internet. As they develop greater market savvy, many customers also are demanding and getting more choices. They're also becoming more able to look for alternatives on their own.
One of the results of this greater customer democratization has been the growth in application concepts such as "mass customization" or design of products and services to meet the unique needs of customers. In plain terms, what's happening here is that a growing number of companies are developing approaches to product and service differentiation even as they develop new ways to standardize elements that make up a product or service.
In market terms, companies are learning to meet competing requirements. More and more companies are finding that it's necessary to identify how to give the customer a product or service that is unique while at the same time minimizing costs throughout the supply/value chain. Often they accomplish these goals through simplification of manufacturing processes to a point where they can produce product much more economically than in the past. Being able to achieve such goals gives companies the ability to deliver unique products that are also very cost competitive. Here are three examples of how principles of mass customization are beginning to be adopted by competitive organizations:
- In household appliances, electronic systems often are being marketed that allow people to adjust temperatures, lighting and anything in their houses at very low cost. This ability to add value while reducing costs is becoming critically important in competing for customers.
- Consumers now have the ability to tailor-make clothing based upon precise fit and description. The fitting precedes manufacture, so a different approach has to be taken to standard manufacturing steps that allow for both highly individualized customization and non-custom pricing.
- General Motor's recent effort to cut customer fulfillment cycle time on new autos and other vehicles. Under a new program headed by Harold Kutner, group vice-president of worldwide purchasing, GM is focusing on integrating various initiatives the company now has under way to reduce order-to-delivery times.
Demands of e-business
The real wild card in the changing marketplace is e-business. Where only two or three years ago e-business was considered mainly a helpful aid for industrial purchasers and an interesting new marketing tool, today it actually is changing the face of the marketplace. Technologies like the Internet not only are becoming successful tools for selling goods, they are actually changing the ways industries design products and services, produce them, and compete for customer sales.
The movement toward mass customization cited above is a good example of the unforeseen effects of the application of e-business tools on market competition. Today, buyers--consumers as well as corporate purchasing executives--are becoming much more market savvy about the availability of better low-cost technology and product features. Indeed, rather than being gratified with the growing attention to customer satisfaction, customers are making even greater demands on corporations and their product development staffs to come up with a growing stream of low-cost, uniquely featured items.
Buyers at the consumer level as well as the business/commercial level are now using various e-business tools to search the world for top value providers. Indeed, supply/sourcing executives, looking for their own supply alternatives, frequently are using e-business tools to cull out suppliers when they fail to add significant value in terms of cost, cycle time and process economics.
As the application of Internet and Web-based capabilities grow both across the country and around the world, there also are growing demands for delivery speed. And as these demands for speeded-up delivery times grow, the infrastructure is going to put more power in the hands of customers to shop and understand more and more about what constitutes value, how to get it, and how to win it from product developers.
On the distribution scene, changing business models are probably going to have a significant effect on distribution channels. As supply chains and the strategies that go with them are fleshed out, there will likely be less and less need for intermediate distributors. In addition, future development of e-business will further vitiate the need for "convenience store" distributors.
Testing the market
Interacting with all of the above factors is the globalization of markets and businesses. Even as companies fight for shares of world markets by meeting the unique requirements of specific countries or regions, they will continue to pass information back and forth among the different elements of the business.
As their ability to gather and process information improves, companies are developing better ideas of what it takes to compete effectively--in terms of growth and scale of organizations. More firms also are looking to see whether it makes sense to link up with other organizations in order to manage assets better. For many the emphasis is on measuring speed, cost, innovation and cycle-time responsiveness.
In some markets, of course, the hand of supply/sourcing management is being severely restricted by the need to continue to deal directly with governments. Therefore, in the future they will need to have the capability to establish to some extent supply bases in those countries. If, for example, a company announces plans to sell more product in a certain emerging country, the government may control the accessibility to those markets. Part of any agreement that opens the market often will include contractual obligations to develop producing operational capability in the country.
The critical six
All the above competitive pressures will probably have some impact on supply and supply chain management in the first decade of the 21st century. As a result of these competitive pressures, purchasing/supply managers will need to shape appropriate purchasing/sourcing strategies. Of all the areas around which supply strategies might be built, six stand out as the most critical. Here's a look at how these critical areas sort out into appropriate supply strategies:
STRATEGY 1. The absolute linkage of sourcing, purchasing and the supply chain to the financial plan or the economic-value-add contribution of the business. This strategy must provide for very specific linkages between everything that goes on in sourcing/supply chain processes and the end results that show up in the financial performance of the firm. And if the firm is using an economic-value-added model, there must be linkages to the elements that make up the value add. Very broadly these elements include revenue, variable costs, profit, and asset cost.
In addition, the implementation of any process or strategy within the organization's EVA will need to show a positive value add to the business. Firms that cannot do that will be far less than competitive with their peers. That's because when firms cannot trace their action on economic value add, they may be spending resources on activities that make no or only marginal contribution.
In the future everything that is done in terms of a purchasing/sourcing/supply strategy will need to be linked to positive contributions to EVA. In simple terms, that means organizations will need to have the capability to trace the effect of purchasing, sourcing, and supply chain strategy to EVA.
Without these linkages firms can be doing wrong things, doing things of marginal value, or ignoring things that will be critical to the long-term functioning of the company.
STRATEGY 2. E-business is an absolute driving force that will create revolution, not evolution, in sourcing and supply management. Firms that cannot maximize the use of Internet, intranet and Web-based technologies in every aspect of the business in linking across the tier 1-2-3 suppliers (and customers 1-2-3 levels removed) are going to find it very difficult to compete in coming years.
Lack of e-business capability will seriously limit the amount of information that is available. More important, lack of e-business capability will affect the speed at which information is transferred between key decision makers and people who have the information. Lack of key information will limit companies' ability to reduce non-value-added personnel costs--in spotting and getting rid of routine tasks.
Long-term lack of e-business capability also will limit a firm's ability to gain insight into developing next-level strategies. Since strategies to some extent are based on how well organizations are doing, valuable insights are lost when the e-business capability is not present. Good use of e-business capability adds a dimension to supply management that up to here has not been present.
E-business capability allows organizations to examine and reexamine how products and services are designed, produced and sold. Speed and transparency are touchstones of e-business technology. With it the outlines of business problems are almost instantaneous. Users can go to their screens and analyze data, and this provides them with the ability to provide quick feedback to customers and learn from customers and suppliers.
STRATEGY 3. Another absolutely critical area for supply strategies in the 21st century is the ability of firms to globalize purchasing, sourcing and supply management.
The challenge involves the ability of those in charge of the supply/sourcing strategy to truly integrate with product/service design and manufacturing operations on a global basis. Correct decisions need to be made about where to design, where and from whom to produce or provide products/services, and from whom to source on a fully integrated basis to improve responsiveness. Those in charge of making these decisions must have the ability to manage cost and speed/responsiveness. They also must have freedom and power to negotiate and gain advantages in the form of taxes, currency exchange and rate fluctuations.
Above all, those in charge of supply/sourcing management must have a presence in markets. They need to be able to develop information on overseas sources of new products and services or explore the potentials for producing products in targeted markets. They need to be able to develop and/or bring suppliers to various parts of the globe.
For many globalization strategies the center of the strategy may prove to be the establishment of global purchasing offices staffed by people with specific market experience. Typical questions that might be asked and answered at this level include:
- Where do I get an advantage to produce in a country where I want to sell?
- How and to what extent can I take advantage of tax breaks that certain countries might be willing to provide if I locate and help develop one or more sources on their soil?
- Does it make sense to locate a distribution center in or near my target markets?
The most important factor in all of this is that there will need to be a greater degree of flexibility by firms to maximize their global leveraging capabilities to design, sell, buy manufacturing operations, or provide goods or services.
With the globalization strategy will come the need for scale and the ability to influence suppliers about where they may do the work. How well this is carried out will depend on how well a firm integrates the other parts of its business--typically product/service/design and manufacturing--with sourcing and supply chain considerations within the strategic umbrella of the company, SBU or division. It's impossible to have these operating separately. In order to leverage globalization it's necessary to have a critical e-business capability--from a product/service creation perspective, from a customer fulfillment perspective, and from a customer service perspective.
STRATEGY 4. Insourcing/outsourcing decisions tend to come in waves and are typically driven by financial difficulty or the lack of resources to grow. What needs to happen very early into the new century is for organizations to take much more ongoing and strategic views of I/O decisions across business units. Big companies that have fragmented synergies will of necessity need to develop insourcing/outsourcing strategies and approach the strategies from a companywide perspective. In addition, there will have to be better companywide (and by SBU) very well thought through definitions of strategies focusing on a firm's core competencies.
There are instances where business units of big corporations make their own I/O decisions, but there is scant evidence that many of the decisions being made are subject to much companywide oversight. More often than not such decisions are made with little or no company headquarters participation or thought given to how such decisions affect the strategic direction of the business. Typically what happens is that while one group is making I/O decisions in one part of the business, there is no leveraging of resulting changes in capabilities of other parts of the organization, when possible.
Going deeper into the development of I/O strategies, firms must take a greater degree of leadership in influencing their customer value chains and their tier 1-2-3 supply chains to do the appropriate physical and intellectual work. And as they develop more efficiency in those supply chains critical to success they will also need to create a combination of insourcing/outsourcing strategies and supplier development techniques to ensure highest efficiency and effectiveness throughout the supply chain. A key part of this is the requirement that firms that are outsourced have the correct capabilities and fit with the customer organization.
One of the stickier areas of insourcing/outsourcing strategizing involves the relationships of supply organizations with their lower-tier suppliers. For instance, it's often not realistic to try to compel lower-level suppliers to do thorough I/O studies and make complex supply decisions. Perhaps more murky is the relationship of tier-1 suppliers with their lower-level suppliers. Up to here there has been reluctance on the part of most tier-1 suppliers to directly manage cost and quality at lower levels. As companies work to perfect their I/O strategies, a great deal of thought must be given to such things as supplier development, sharing assets, establishing higher quality requirements, and putting people in co-location with key suppliers to drive improvement on a continuing basis. Growth of I/O strategies will very much rest on putting some kind of systemic processes in place at lower-tiered suppliers to assure progress in cost, quality and responsiveness improvement efforts.
Another critical factor in the ultimate success or failure of I/O strategies involves planning aimed at assuring good decisions on where work is done--whether it involves product creation, customer fulfillment or actual operations. Much work is needed in this area to improve the decisions about where work is to be done and the management of successful transitions/implementations. Many organizations and supply operations need to be forced into becoming more sophisticated in their I/O decisions and implementation will depend on where the heat of competition is felt most acutely.
Perhaps the trickiest part of developing an insourcing/outsourcing strategy involves the need to develop an independent view of the policies that determine whether and when outsourcing and insourcing are appropriate. There are many problems here involving such factors as turf wars, people's jobs, and honest beliefs developed over the years that are no longer valid or only partially valid. In addition, determining a firm's core competency is difficult and requires participation by the executive and intellectual leadership of the firm. Better practices to determine core competencies of firms in the value chain will have to be developed.
STRATEGY 5. Strategic cost management is an area of supply strategizing that seems almost like a throwback to a prior era. Still, a basic question that is still asked by top management is, "Will we be able to get pricing and total system cost opportunities in the 21st century?"
The answer, of course, depends to a great extent on what is meant by pricing opportunities. If the question is mainly about being able to beat up on suppliers, the answer will probably be pretty grim--especially if capacity constraints begin to develop. But if those being questioned are allowed to speak in terms of savings and pricing opportunities, the outlook is much better. By merely looking through the supply chain, and just adding the cost elements up, it's pretty clear that there will continue to be very significant opportunities to find effective ways to manage and often reduce costs by taking a total system/value/supply chain view of costs.
In most companies the supply chain is made up of critical elements that need to be questioned and prodded. Whether through competitive positioning or identifying costs and cost drivers there are areas just asking to be analyzed. And, regardless of all the talk about strategic cost management, most companies are only at the tip of the iceberg in terms of actual practices--in terms of looking at where costs reside, looking at cost drivers, building cross-enterprise strategies, and sharing the results. All of those practices are going to need to be refined. Cross-enterprise cost management is and will increasingly be critical to a firm's success. Specialized groups will have to be established within firms to concentrate on strategic cost management and combined with supplier development activities.
STRATEGY 6. The product/service mix strategy involves the ability to decide what supply and value chains are truly significantly critical in gaining competitive advantage--based on technology, responsiveness, cost and quality needs.
Take a major product like a car, washing machine or computer. There are certain qualities within the products in each of these product groups that allow for differentiation. Some items making up the product are very commodity-like. Others are more unique. The key is to look at those non-commodity items that will help the company gain a competitive edge.
The key to uncovering such advantages gets down to first developing a much more refined strategic definition of those goods/services/technologies that make up the strategic supply chain or value chain--extending from paying customers back to tier 1-2-3 suppliers--and differentially managing them. Once this is under way, it's possible to tackle many of the other components and services that go into the product.
The first part puts significant emphasis on developing product and purchasing family strategies and frequently establishing strategic alliances, providing for sustainability of business with these suppliers, and information sharing. The second part of the business puts more emphasis on competitive positioning, using competitive bidding tools (who will give me the best pricing and quality?). Both of these approaches within the supply chain will require a great deal of information transparency regarding current and future volume, location and technology needs. This strategic positioning of supply/value chains is significant and difficult, requiring a key person(s) focus. Integrated supply/value chains will have to be mapped and integration fostered where appropriate by supply chain leaders to enhance effectiveness and eliminate waste.
In addition, current insourcing/outsourcing decisions may lead to firms buying more integrated systems than parts and services and leading managing firms in the supply chain in which there is no equity ownership. Complexity will, therefore, increase.
Eight more strategic areas
There also will be important, but not necessarily critical strategic areas to the same degree as discussed above, that will rise to the fore over the next few years. While they are not universally critical at the moment, some or all could become absolutely so by, say, 2003. In a way, these collections of strategies come with the territory. If companies are able to do these, they will at least be able to compete at the first order level. When supply/sourcing managers put these eight areas of potential strategy-making together with our critical six, they should be positioned to show real differentiation. The eight important (but not critical to the same degree) strategic areas, fall into these categories:
- The ability to create documented commodity purchase family strategies that utilize cross-functional sourcing teams and provide for continuous improvement in commodity and supplier strategies and relationships.
- Further refinement of world-class supply bases. The need of companies to assure that their suppliers are as good if not better than those of their competitors. The object here: To provide great value compared to that provided by the competition's suppliers.
- The need to put more processes in place to build better and stronger strategic alliances.
- The need to have the first level of integrated suppliers active in new-product development and customer order fulfillment. Literally they have to be part of the supply process. Examples include co-location, supplier managed inventory, and transparent information systems.
- First-level supplier quality improvement and supplier development needs to be in place and actively operating.
- A deep-rooted need to be able to analyze cost effectively--both from competitive market basis as well as a "should cost" basis for both goods and services.
- Appropriate sets of performance metrics that allow for specific evaluation of such areas as cross-functional team-sourcing methods.
- Basic information systems that allow for collection and analysis of data related to the corporate annual spend, pricing, and supplier performance.
People will make it work
Here's some interesting paradoxes noted while developing material for our upcoming book on supply chain management:
- Some of the purchasing/sourcing people interviewed downplay the whole idea of fully integrated strategic supply chain management.
- Other purchasing/supply managers interviewed want to take hold of the concept but their executive managements don't understand it.
- Some executive managers understand and endorse the idea of strategic supply management, but can't sell it to their lower-level managers.
At the executive level, the reluctance to endorse supply management strategies is somewhat understandable. To truly implement strategic sourcing and supply requires a substantial organizational investment--often in the tens of millions of dollars worth of resources. Many executives still haven't been convinced that the investment is worth the trouble.
Still, the only way that integrated supply chain strategies will be made to work is through the use of the correct people and correct investment, and risk taking. Both cost dearly. But as world competition continues to heat up, industry, especially in the U.S., is fast approaching the point where a corporate shift to strategic thinking has to be a breakthrough shift in terms of the number and quality of people that will be devoted to sourcing and supply/value chain management.
Put another way: Companies have little time left. They will need to have some of their smartest people--based around experience--in this area. They will need to have people with a multitude of experiences involving commercial, technical, functional running of businesses. To make the strategies outlined here work, supply chain operations will need to have people from different parts of the world who understand their cultures and interact with other business and government people in those parts of the world. The sourcing/supply chain team will need to take on a totally different view from what has been the case up to here.
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