Why Every Strategy Deserves an Excellent Supply Chain
Last week I had the opportunity to introduce the key concepts of my book “Supply Chain Strategy and Financial Metrics” to a group of senior production managers in the Netherlands. When I introduce strategy using the model of Treacy & Wiersema, time and again I get the question whether supply chain is more important if your strategy is operational excellence. The answer is NO. Every strategy deserves an excellent supply chain. The focus of that supply chain will be different though, as will be its level of cost, working capital and fixed assets.
Think about which type of supply chain a product leader requires. Think about Apple launching the iWatch. How many pieces are you going to sell? You can easily be off by a factor 10. As such, before all, the supply chain of a product leader will require upward/downward flexibility and adaptability (using some SCOR terminology). That flexibility and adaptability will increase the cost, and will increase the assets significantly over that of the operational excellence player. Some people will argue that Apple has outsourced its manufacturing exactly for that reason. Well don’t be fooled, that makes Apple’s suppliers part of its supply chain. They will need to deliver exactly that type of flexibility and adaptability. In summary, the key objectives of the product leader supply chain will be about ‘scalability’ and a short ‘time-to-market’. To excel, a product leader will need an excellent supply chain, delivering these promises to its customers.
So why would we think supply chain is more important if our strategy is operational excellence? This is based on a monumental misunderstanding. The problem is that we mistake supply chain for cost and efficiency. As supply chain professionals, we’ve been raised with that mantra and beaten with that stick. If your strategy is operational excellence, then indeed the focus of your supply chain will be on cost and efficiency. Operational excellence is about having the lowest price in the market, and you can only get to the lowest price by getting to the lowest cost first. But why is nobody mentioning that product management, or marketing and sales are focused on lowest cost and efficiency in this case as well? Or why do we have the urge to state that the supply chain of a product leader needs to create agility but always at the lowest possible cost, while again not mentioning R&D should develop the newest and the best but also at the lowest possible cost? We should stop the confusion that supply chain equals cost and efficiency. Not supply chain, but operational excellence equals cost and efficiency, and for all functions, not just for the supply chain!
And what about the supply chain of the customer intimacy players? To deliver their “best total solution”, for sure they will carry a broader product portfolio. As a result the supply chain will need to be excellent in managing a long tail of slower moving products, by using enhanced forecasting and inventory management systems, but also by closely watching and monitoring SKU contributions and product portfolio health. Another element in the customer intimacy supply chain may be “staging” operations where multiple inputs need to come together, either at the customer site, or at a forward stocking point. Again, a customer intimacy player will require an excellent supply chain that knows how to ‘bring it all together’ and ‘make the magic happen’ when it delivers, installs and services its best total solution at the customers’ site. Carrying a long tail of products will require more inventory. More complex customer logistics for sure will carry a higher cost. The excellence for a customer intimacy player is in delivering complex solutions, better than any competitor. The customer intimacy player will require an excellent supply chain for that, but that will not necessarily be measured in terms of cost and efficiency.
In summary, we believe companies mistake supply chain for cost and efficiency, where cost and efficiency is actually operational excellence, and where it holds for all functions, not just for supply chain. Every strategy requires an excellent supply chain. For a product leader the excellence is shown in time-to-market and scalability. For a customer intimacy player the excellence is shown in delivering, installing, operating and servicing complex solutions better than any competitor. Oh, and yes, for an opex player, we need excellence in cost and efficiency, in the supply chain, but in all other key functions as well. The conclusion is that supply chain is about more than cost and efficiency. It is a key part of the operating model supporting the chosen strategy. Its key focus will depend on that chosen strategy.