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June 27, 2017
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The new supply chain imperative

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It's no longer enough for your supply chain to get goods to customers "cheaper, faster, today." It also must further long-term strategic growth.

After decades of obscurity, supply chain management is now receiving significant attention from executive management and boards of directors. But for most companies, the supply chain remains solely a way to lower costs and improve delivery reliability.

For years, efficiency and cost reduction were considered sufficient goals for supporting profit growth, but the competitive environment and investors have come to demand much more. Now companies need to be looking at how to position their products and services competitively, drive long-term differentiation, achieve targeted customer satisfaction, and build exceptional customer relationships. Yet overwhelmingly, supply chain organizations are still focused on "getting it here and/or there" or at best on addressing the many complexities and issues that occur in production, sales planning and promotion, procurement, and/or operations. While these are noble objectives, they are, for the most part, nonstrategic ones. Consequently, supply chain's value within an enterprise is often far less significant than it could be.

There are a few leading-edge companies that see their supply chain as an integral part of their corporate strategies and are using it strategically to differentiate themselves. These leaders include Amazon, Unilever, McDonald's, General Mills, Nike, 3M, Wal-Mart, and Johnson & Johnson. By integrating the supply chain into their strategies, they are using it not only to expand revenues and support both short- and long-term strategic objectives but also to add value for customers in ways that their competitors will not, cannot, or can only do at a significant cost differential. In other words, they make their supply chain the competitive differentiator that drives superior shareholder value. In spite of these examples of success, most companies still have not considered the strategic value that can be garnered through leveraging the supply chain.

Keep an eye on the competition

In today's world, it's critical that companies get the supply chain options on the table before key decisions are made and a strategy is developed. That's because supply chains are radically different and more complex than they were in the past. They can no longer focus on managing conventional, predictable shipments. Instead, they have to deal with far more demanding delivery times, a volatile array of suppliers and customers that are often scattered around the globe, frequent order returns, and the complexities of integrating operations and technology with supply, retail, and distribution partners.

Supply chains can play a critical role in resolving many of the salient strategic issues of today. Consider, for example, the Internet, which has introduced a new sales channel that has created immense challenges for retailers. These challenges are all being driven by new consumer preferences for such things as direct shipping, an explosive increase in stock-keeping unit (SKU) offerings, quick order turnarounds, free shipping, immediate accessibility of SKU details, frequent (and easy) returns, increasing packaging requirements, and an amazingly "long tail" of slow-moving but necessary SKUs to serve a highly fragmented end market. With the exception of SKU selection and pricing, every bit of this new competitive environment depends on the supply chain as its strategic backbone.

To respond to these challenges, companies should look at things differently and understand what is driving their supply chain costs and performance metrics. They need to focus on everything that differs from the average as well as everything that affects value for their company, their supply chain partners, and their competitors. This requirement that companies understand their competitors' supply chains and how potential changes could impact them represents a paradigm shift. After all, being low-cost, or even having the highest market share, will not drive profits. But competitive differentiation will, and the supply chain is one of the best opportunities to differentiate because it affects timeliness, geographic availability, and customer perception.

Yet most companies are making decisions about how to fulfill Internet sales in a reactionary or tactical way. All too often they are choosing to support online sales by carving off a portion of a distribution center (DC) for Internet fulfillment or setting up a fulfillment center as a separate "store" off a DC and fulfilling from there. While expedient, this method is rarely the most efficient or highest-service model. Nor is it one that will allow a company to differentiate itself to serve unique Internet segments.

The better way to address Internet sales is to determine what the target customer experiences should be and what service aspects and levels are desired under what circumstances, and then assess how your supply chain can meet those needs. Moreover, it's important to understand how Internet sales growth will impact the entire supply chain—inbound and outbound, online and brick-and-mortar. This understanding is critical because these costs will scale with volume. Once you have this understanding, you can then design your supply chain based on what you want the business to be, and not based simply on the lowest cost or what would require the least amount of change today.

And again, you have to be able to respond to what your competitors are doing, what you must do to keep up, and how you can differentiate—all while being sensitive to the fact that these targets are volatile and may be constantly changing. For example, Zappos does not offer free returns because returns are free, and Amazon does not keep moving to free delivery with shorter order-to-delivery times because it lowers costs. They do it because they either have to do so to make their business model work or because competitors with less scale and a smaller distribution network can't afford to match them—a winning differentiation strategy.

Another example of how supply chain decisions should be considered from a strategic perspective is the question of whether to invest in new, cutting-edge technologies such as driverless vehicles, "Uber" and other sharing models, drones, and the Internet of Things (IoT). Consider, for example, the IoT. Supply chain is a natural candidate for such applications, and they make sense from a tactical, operational perspective. They certainly can help to increase efficiency and minimize costs by improving such things as scheduling, maintenance, fuel purchasing, and customer interface. But far more importantly, they can also play a strategic role by providing added value to customers and helping to differentiate a company's supply chain. By using IoT applications, companies are able to tell customers not only where their order is but also what its temperature was and is, whether it has been dropped, and other status and condition updates. However, companies may want to provide such information only where it makes strategic sense. For example, sophisticated customers may see timeliness, reliability, and "perfect order" information as a differentiator. Less sophisticated customers may only see it as an added cost. Matching supply chain information to customer and segment requirements will provide strategic differentiation for winning corporations.

Confronting 21st century challenges

The 21st century market is a challenging one of low growth, global competition, and thin margins. At the same time, the operating environment is becoming more complex—with increased volatility, shorter product cycles, shifting international competition patterns, trade uncertainty, and customers that are more and more demanding. The companies that succeed will do so not because of the software they are using or the changes they have made to their physical infrastructure, but because they have made the paradigm shift from thinking about supply chain as being purely operational to being critically strategic.

It is important that supply chain considerations be included in the trade-off decisions a company faces, including capacity planning, channel and sales strategy, procurement strategy, geographic strategies, acquisition strategies, and product portfolio and segmentation strategies. While this may add complexity to these decisions, it is absolutely worth the effort.

Lee Clair is a managing partner at Transportation and Logistics Advisors LLC. Robert Sabath is the head of supply chain for Transportation and Logistics Advisors LLC.

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