Underlying principles of Supply Chain

From the customer’s point of view, benefits result from increased efficiency, reliability, flexibility and innovation, and these are the underlying principles of SCM.

These benefits manifest as the 4 main supply chain strategies for companies:

1. Rationalisation is excellence in managing the operating costs through SCM to achieve cost leadership and greater profitability than competitors. It focuses on operating expense management rather than asset management (which is part of a synchronisation strategy), because many companies are driven by earnings targets rather than balance-sheet optimisation.

2. Synchronisation is achieving reliable and flawless supply chain execution (the right product at the right place at the right time) to produce the same volume of output with less fixed assets (production capacity) and working capital (inventory) than competitors. Asset productivity is part of the synchronisation strategy rather than the rationalisation strategy because some companies’ business and financial strategies, and hence executive compensation and performance, are driven by balance-sheet performance.

3. Customisation is excellence in building a unique capability in using the supply chain to enhance customer relationships, which leads to higher gross margins. Customisation embeds both responsiveness (“the velocity at which a supply chain provides products to the customer”) and flexibility (“the agility of a supply chain in responding to marketplace changes to gain or maintain competitive advantage”).

4. Innovation is using supply chain activities to enable rapid, frequent and effective new product introductions that enhance the brand in the customer’s mind (mind share), thus leading to an acceleration of revenue that otherwise would occur over a longer timeframe.

Companies that focus on a specific supply chain strategy are more likely to build shareholder value than are those that do not. Wal-Mart used its supply chain to become a low-cost leader. Dell used its supply chain to deliver reliably and just-in-time (JIT).

The choice of which strategies to pursue and how much effort to put into each is a multi-faceted one. With limited management bandwidth, most companies have to select which strategies to emphasise, and from that, select which tools can help them be most successful at those strategies.

Dell faced the same competitive environment that all PC-makers faced in 1985. Its success came from its decision to compete on SCM, and specifically the skipping of levels in the supply chain through direct to customer sales, the co-location of suppliers for just-in-time (JIT) delivery, and the deliberate up-selling and cross-selling through a highly trained inside sales force that handled customers who entered the website and then had questions.