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Using supply chain-enabled PLCM to boost margin growth
Product and service innovation serves as the fuel for continued revenue growth. Often, such innovation takes the shape of new variations on existing offerings, altering major or minor attributes to appeal to increasingly segmented categories in existing markets or to enter entirely new markets. While such innovation is a key element of financial success, there is a conundrum associated with expanded offerings: The consequent complexity resulting from product- or service-line expansion may consume revenue gains through increased costs incurred in the supply chain. Globalization, mergers and acquisitions, growing government regulation, and the emergence of new distribution channels dramatically increase the complexity associated with such expanded offerings.
Some innovative firms in search of a managerial strategy to help them grow revenue—and margin—through product and service expansion are borrowing a page from an old book. Platform Life Cycle Management, or PLCM, an idea that came of age a century ago, is increasingly being applied by leading firms to engage their supply chains in minimizing complexity and better managing operating cost and asset investment. PLCM has historically been associated with the U.S. automotive industry, but today the strategy is being successfully applied in industries as diverse as aerospace, pharmaceuticals, electronics, snack foods, and beverages.
[Figure 1] Sample scorecard for assessing the impact of PLCM Enlarge this image
[Figure 2] Platform activity flow Enlarge this image
[Figure 3] PLCM teams example Enlarge this image
While some of the tactics commonly associated with PLCM, such as consolidating bills of materials to streamline the number of suppliers, are familiar to most organizations, garnering the full benefits of PLCM requires a strategic focus on simplifying and standardizing product design, innovation, and marketing. By leveraging simple, standard processes across the supply chain, PLCM enables firms to more quickly bring proven ideas to market, thus accelerating revenue growth with greater margins.
The purpose of this article is to provide insights into the organizational changes required to implement PLCM and achieve the performance improvements it promises. To understand more about how companies across a range of industries are using PLCM to improve financial performance, and to identify key practices and challenges, the authors conducted interviews with managers and senior executives at 11 organizations that have successfully implemented PLCM. These benchmark companies were identified by members of an executive advisory group as leaders in extending PLCM implementation across the supply chain to drive financial benefit. The companies included in the research each reported significant improvement from the end-to-end engagement of the supply chain in PLCM work. For example, selected firms reported:
- 30 percent improvement in ideation-to-launch cycle time for new-product development
- 30-50 percent reduction in capital and working assets needed to launch new products
- 10-15 percent reduction in overall supply chain cost
The research revealed similarities in the process these benchmark firms are using to engage their supply chain organizations in implementing PLCM. The following section summarizes this process and provides examples from those firms.
Implementing PLCM across the supply chain
Managing across platforms—the integrated systems of design, development, and supply chain for families of products and services—provides organizations with a strategy for innovating while reducing market-response time and resource commitment. It does this by enabling different offerings and their associated brands to share design features, marketing and advertising, and supply chains.
The principal way platform management helps organizations find synergies across the value chain is through simplification and standardization. Simplification is achieved by driving out aspects of product design and processes that do not deliver value to the customer. This facilitates more readily standardized processes and components, equipment, and packaging, thus enabling volume leverage and quicker response to market. One of our sample firms, for example, has utilized PLCM to leverage new-product innovation to drive revenue gains while simplifying its product portfolio and streamlining manufacturing and procurement. The resultant reduction in complexity is expected to generate a 15 percent improvement in its cost position that will translate to positive margin growth.
The large initial investment involved in creating product or service platforms demands that they be managed with a life-cycle approach. This means that they are not only created but also managed and potentially improved to extend their longevity. Obviously, the longer the life cycle the greater the asset utilization and profit. Organizations, therefore, must constantly assess whether to utilize existing platform assets or develop ideas for new products or services that might generate significant revenue but require a different platform. The investment is great and the impact on the business as a whole and its brands is direct, therefore PLCM decisions must involve top-level strategic leadership.
Engaging the supply chain to implement PLCM requires an adaptation of a managerial concept called "demand and supply integration" (DSI) that is finding increasing acceptance among best-in-class firms.1 DSI focuses strategic decision making on balancing demand-creation activities with supply-fulfillment capabilities and constraints to optimize both the value created for customers and the firm's profitability. DSI requires development of the appropriate mindsets, knowledge, motivation, incentives, and structures throughout all levels of the organization to realize the performance benefits of profitable customer-value creation. While DSI has been manifested in such initiatives as integrated business planning and end-to-end information visibility, it has lacked the operational component that can enable profitable revenue growth while managing increased operational complexity and cost. The organizations that have formed the basis for this research indicated that PLCM potentially provides that missing link between strategy and practice.
The research revealed that the benchmark firms were using similar processes to engage their supply chains to implement PLCM. This process can be broken down into five distinct stages:
- Develop the corporate leadership culture, structure, and metrics needed to ensure a focus on engaging the supply chain to create and launch platform-based products and services at a profit;
- Build cross-functional linkages within the company and interorganizational linkages with suppliers and customers to create knowledge regarding integrated, end-to-end supply chain operations;
- Establish priorities based upon that knowledge to determine and direct where—and where not—to allocate strategic resources;
- Empower tactical and operational supply chain decision making that maximizes overall platform value creation; and
- Simplify and standardize supply chain processes to attain improved scale that meets demand at lower cost and increases the speed with which product innovations grow revenue.
The following sections will explain each of these stages and provide examples from the research.
Developing a PLCM culture
PLCM emphasizes early coordination of core product-family design and innovation with the materials, packaging, processes, equipment, and operations that are required to effectively deliver on demand. Such coordination requires broad organizational involvement, thus there are considerable leadership challenges that mandate visible, enthusiastic support by top leaders.
The research revealed that the first issue confronted by leaders was how to start the organization on the path of managing across a limited number of platforms. While PLCM may sound like common sense, launching such an initiative is far more difficult than it may seem, mainly because it crosses most activities in an organization. The appropriate starting point, therefore, is to begin the implementation process with organizational leadership and culture changes.
As with all successful business initiatives, implementation of PLCM must start with effective leadership. The benchmark organizations all had visible and vocal leadership to guide the PLCM implementation. The interviewees universally referred to what one called "a passionate zealot's" presence in leadership.
Successful PLCM initiatives also require involvement from all functions in the organization. The general manager's business strategy needs to include PLCM because it directs the approach to product design and management of the business, and thus impacts every function (marketing, research and development, sales, finance, supply chain, and so forth). Importantly, PLCM leadership should include R&D and supply chain as well as business and commercial representation. Cross-functional representation on PLCM teams is a critical component, and the culture must allow different functional groups to lead the decision making in areas that would normally fall within their purview. Thus, it is important to designate leadership for each key decision. One consumer packaged goods (CPG) benchmark firm, for example, suggested that the biggest challenge was to convince marketing to focus only on the commercial decisions that drive customer demand, leaving supply chain managers to make decisions regarding such things as supplier identification and manufacturing.
Interviewees also emphasized the important role of performance measurement systems in communicating the success of PLCM implementation efforts. The first step in such communication is for leadership to identify a clear, urgent, driving business need. Since PLCM requires multifunctional focus, priority, and work, the broader organization must clearly see the value of that work and the resulting return on the organizational investment. Measurement systems must include a robust, ongoing process for reviewing results and action plans and for making appropriate adjustments. In addition, there must be a visible scorecard that tracks critical PLCM measures. The key performance indicators (KPIs) on PLCM scorecards varied across the benchmark firms depending on the business need driving the initiative. In general, however, the metrics tracked the percentage of revenue generated by platforms overall and the revenue generated by each platform; these were in addition to measures that assessed the level of efficiency generated across the platform and the outcome measures of the scale and speed PLCM is enabling across the entire product life cycle. Figure 1 gives an overview of a sample scorecard for assessing the impact of PLCM.
Creating shared supply chain knowledge
PLCM's focus on product-family design necessitates the creation of processes that allow information to disseminate throughout the organization and across key supply chain partners, such as customers, first-tier suppliers, and lead logistics service providers. Successful implementation of an end-to-end supply chain PLCM strategy requires the technical/R&D community within the firm to collaborate with marketing, manufacturing, logistics, sourcing, and finance representatives both within the focal firm and with partners across the supply chain.
While earlier applications of platform strategies focused largely on equipment and product design, this perspective has been broadened to include goods and services vendors, operational-process owners, and customer operations across the end-to-end supply chain. To be most impactful, PLCM should drive new capabilities and work processes that link with key customers, suppliers, and other supply chain partners. To maximize revenue and speed-to-market as well as asset and cost savings, non-value-added complexity must be reduced or eliminated from processes extending from the supplier's supplier to the consumer's pantry. For example, one of the benchmark companies used PLCM to reduce the number of formulators in its skincare products from 40 to fewer than 10. It also reduced the number of raw materials by more than 33 percent. To support this aspect of PLCM, benchmarked supply chain organizations developed information systems that bring their understanding of their platforms and products down to the raw-material level.
In fact, a robust information system is vital to support an end-to-end PLCM strategy. Without such a system, it is difficult to identify many improvement opportunities and manage innovations. Thus, the benchmark companies identified investment in technological tools to facilitate collaboration as a key step in the maturity process. These systems provide highly visible "menus" that can be used to ensure that new-product designs include parts and/or equipment that are already being used. A large, global information-systems company in the benchmark group went so far as to create mobile applications that procurement personnel could use to access real-time parts menus as soon as they were approved by the technical/R&D community. Not only did this reinforce the platform work, but it also allowed sourcing to function in a far more efficient manner.
Establishing priorities for resource allocation
Platforms exist to serve both the business and the consumer. When designing, renewing, or expanding a platform, the first priority should be to understand what value the business and consumer needs now and over the next several years (with the time frame dependent upon the nature of product life cycles in the industry). To understand this, business leaders, marketing, R&D, and other functional leaders must be clear on what consumers value and what they do not. Moreover, all elements of a platform incur cost and create complexity, thus platform development and renewal activities are best completed with an eye toward avoiding unnecessary cost or complexity.
As a result, managers must make difficult decisions regarding the number of features that can be offered, recognizing that complexity increases as the number of features grows. Prioritization requires both identification of the product/service features that drive profitable revenue and the discipline to eliminate non-value-added elements. Commercial business management should take the lead in prioritizing features that are visible to consumers by determining whether a feature is something for which the consumer is willing to pay. Technical and operational leadership should manage the prioritization and simplification of internal product-design attributes and other features that are invisible to the consumer, again determining whether to retain a feature or not based upon whether the element adds customer value.
The key characteristic of prioritization is a continuing emphasis on simplification in platform design and management. Simplification seeks to drive out non-valued-added product design, organizational work, and processes to deliver immediate business improvement, typically with limited investment and cost. Additionally, it ensures that the product design, materials, packaging, process, equipment, and operations are optimized before they become standardized. Standardization requires significant effort and should not be attempted before non-value-added elements have been eliminated.
If the scope of simplification work is internal, it is likely invisible to the consumer. This would include internal product-design attributes such as an electronic panel inside a computer. The technical leadership, including both R&D and supply chain management, should manage prioritization of these "invisible" elements. If something is not visible to the consumer, then the technical leadership should determine whether it adds value. For example, one of the benchmark companies in the electronics industry turned over responsibility for standardizing components such as switches and plugs across multiple platforms to the technical and supply chain community, thus allowing the commercial unit to spend its time on features that make customers passionate about buying the product. This facilitated the design of multiple levels of capability into the same product; customer-requested upgrades could be easily facilitated by "flipping a switch," reducing complexity and saving cost.
The benchmark companies recognized significant opportunities to simplify product platforms. One global CPG company, for example, found that one of its product categories used 50 different types of green coloring; it subsequently was able to reduce that to fewer than 10. Another global CPG streamlined 16 different lavender fragrances down to three.
"Harmonization" provided the benchmark firms with another means of simplifying product/service offerings. Harmonization involves designing standardized products that can be sold in multiple regions of the world, avoiding insignificant differences created by design teams operating independently in different geographies. In addition to greatly reducing complexity that negatively impacts design and supply chain costs, harmonization can also increase customer value by minimizing the variation required in the supply and manufacturing process, thereby speeding the introduction of new product features to the market and improving overall product quality.
The benchmark companies that were most successful in managing resource allocation pointed to simplification as a means of ensuring a focus on the relatively small percentage of product/service platforms that deliver the predominant amount of revenue and profit for customers of choice, rather than on the large number of offerings that deliver only a small percentage of revenue and profit. Some companies have adopted a "one product in, one product out" policy, essentially limiting the total number of products to better manage the cost of materials, suppliers, production time, inventory, scrap/obsolescence, and customer logistics.
Empowering platform decision making
Standardization is a relatively simple and logical concept, but it is difficult to manage. With standardization, the organization is rewarded for developing "new and improved" ways of doing things, but these improvements must demonstrate that they create enough value to change the standard for the entire platform. If changing the standard does not generate enough value, then the current system should be maintained and creative focus directed elsewhere.
The resources and time required to create standardized material, equipment, processes, and operations are greater than the time and resources required to depart from the platform standard. For this reason, the benchmark companies have employed management processes to ensure that decision makers support sound PLCM practice. Once a platform is created and the organization transitions to it, the organization must focus on maintaining the standard if it is to reap the benefits.
Developing behavioral management systems that educate, empower, and reward key personnel for supporting the standardization process is an important element in the implementation of PLCM. Accordingly, the organization must implement standards with clear, well-written definitions; identify empowered decision makers to manage standards; and develop a reward system that supports a standardization culture across organizational and supply chain boundaries.
For example, material menus specify which raw and packaging materials may be used in product design. Supply chain and R&D executives define the scope of the menu to minimize the number of materials while still ensuring that enough flexibility exists to deliver what end users need. Mid-level managers in these two functions are given the autonomy to keep the total number of materials below the stated maximum. In this system, requests for new materials must not only be robustly justified, but they also must include materials to be eliminated so the maximum is not exceeded. This menu rigor has successfully limited new-materials requests to only those that benefit the consumer.
Equipment menus have been utilized in a similar manner. Typically, engineering owns and makes decisions about the equipment menu, defining the global standard for equipment and processes used to supply a family of products and providing the justification and plan for transitioning nonstandard assets to globally standard equipment. However, multiple companies noted that PLCM allowed their supply chain managers to identify features that should be retained and those that could easily be changed to differentiate products. For example, one CPG firm standardized the screw and caps of its shampoo and conditioner bottles in a manner that still allowed the products to look different to the consumer—the shampoo sits on the bottle base and conditioner products stand upright on the cap. This allowed bottle-production equipment to be standardized, and only the bottle size had to be changed for different products. Notably, a first-tier supplier was engaged to develop this innovation and ensure that the platform could be supported across the supply chain.
Finally, the benchmark firms adopted similar structures for fostering an environment that promoted internal and external collaboration with supply chain partners. Among the best practices that emerged was the establishment of commercial, technology, operations, and materials/supply teams to lead efforts for each platform. These teams must be cross-functional, with the commercial team led by marketing, the technology team co-led by a senior R&D and a senior supply chain manager, the materials/supply team led by a senior logistics or procurement manager, and operations led by manufacturing management. Furthermore, metrics and performance-evaluation systems must reflect broader platform goals in order to drive behavior that supports PLCM across the organization.
Figure 2 presents the cascading decision flows involved in prioritizing platform activities that were used by most of the benchmark companies in their PLCM initiatives, while Figure 3 provides an example of team structure and performance management for implementing PLCM.
Creating scale and speed in operations
As described earlier, PLCM operational improvement begins with platform simplification and then goes on to standardize the simplified platform. Standardizing reduces the resources and time required to conduct operations, positioning an organization to drive savings and revenue through improved scale and speed-to-market.
Together, simplification and standardization limit the necessary base business work, enabling the organization to spend a larger portion of its time on improving the business through value-added activities that are meaningful to the customer. The benchmark companies reported that PLCM allowed them to spend more time on innovation and improvement, which supported overall business growth. Importantly, these companies tended to have robust, multifunctional processes for justifying and designing new platforms in a way that balanced marketing's requirements with the supply chain's need for reduced complexity. To be justified, a new platform had to provide a game-changing innovation that would support a payout based on the total cost of ownership across the life cycle of the product. These firms focused on leveraging existing platforms for two types of innovations: continuous-improvement innovations (noticeable improvements valued by the customer) and innovations that provide market differentiation (promotional activity to keep the product in front of consumers). This approach allowed them to extend the life of those platforms until the next disruptive innovation was created.
The benchmark firms also utilized simplification and standardization to drive operational performance improvements that created opportunities to leverage scale within the supply chain. For instance, a global beverage manufacturer used PLCM to justify and self-fund the acquisition of certain craft beer brands. Following the acquisitions, the manufacturer switched the craft beer brands to its own material platforms, which dramatically cut costs while improving the quality of the new products. These products were then quickly integrated into the parent's existing production lines and distribution system to leverage manufacturing and bottling operations that were many times faster than the craft beer producers' previous capabilities, a change that drove increased revenue through the parent organization's larger distribution network. Another global beverage company partnered with a major soft-drink company to standardize aluminum specifications and can design. This effort generated high-volume leverage with its can suppliers, which the company believes saved between US $800 million and $1 billion in a single year, primarily from procurement scale.
Like scale, firms must also intentionally use simplification and standardization as a means to improve speed in their supply chains. Benefits of speed include an improved ability to address demand variation, deliver cost savings, transform ideas into new products, and globalize new-product launches from first to last market. At a strategic level, these benefits help address what is arguably the most damaging aspect of growth in complexity: reduced organizational speed and responsiveness to market changes. Multiple firms reported that the implementation of a PLCM strategy enabled reductions of 25 percent or more in new-product innovation and launch times. One example is a benchmark company in the tire industry that utilized PLCM to quickly launch multiple new products from small variations in the standard platform, and thereby save time, cost, and organizational resources.
PLCM as a strategic tool
While many firms have implemented some of the individual tactics of platform life-cycle management, those in the benchmark group are among a very limited subset of organizations that purposely use PLCM to manage the culture, structure, performance measurement, and other strategic elements of the company. For these organizations, PLCM provides the impetus to focus design and marketing on platforms that serve as the key assets that drive revenue. Growing margin and improving speed-to-market are additional benefits of engaging the supply chain in PLCM.
The benchmark research reported above shows that a PLCM strategy is particularly well suited for organizations that have already exploited supply chain functional improvement to drive profit and now need to deliver next-generation margin growth. The benchmark firms turned to PLCM when they determined that after years of margin growth driven by continuous-improvement programs, the remaining breakthrough savings opportunities existed within the seams of large, multifunctional organizations as well as between the organizations and their key suppliers. In addition, the benchmark firms found PLCM to be highly beneficial when a business suffers from exponential increases in complexity that are preventing it from focusing valuable resources on improving performance through new-product introductions, cost savings, and other improved capabilities.
Acknowledgment: The authors would like to thank J. Scott Meline, a researcher with the University of Tennessee's Global Supply Chain Institute, for his contributions to this paper.
A global consumer food and snack company in the benchmark group described in this article recently deployed operating-margin targets for its product categories that were more aggressive than in the past. The improvement targets were divided among business functions. The company had experienced an exponential increase in product complexity that was driven by historical local autonomy, acquisitions, and regulations as well as an increased rate of product innovation. The targets could not be achieved by means of the company's traditional improvement methods, and executives determined that the best option for meeting the mandate would be a product life-cycle management (PLCM) strategy.
The savings targets forced the PLCM team to take a fresh look at earlier product-design decisions, such as the diameter and/or thickness of a new cookie product. The company historically had used changes to the diameter of the cookie as a new-product differentiator. Because different equipment was required to produce different diameters, it ended up with 15 different production lines for just one product line.
After engaging supply chain partners and the manufacturing team in the PLCM process, the manufacturer discovered that the thickness of the wafers in the cookie as well as the flavor and color of the filling could easily be changed using the same production equipment, thus avoiding the need for multiple production lines to produce different product variants. Based upon this information, the manufacturer made two significant changes: it standardized the diameter of its cookie wafers, and it designed subsequent new-product launches in that platform around the thickness of the wafer and the filling.
The company credits the cost savings from this initiative with allowing it to reduce pricing while holding margin constant, which helped make products price-competitive in emerging markets. This commercial innovation helped top-line revenue grow from less than a 5 percent share in China to nearly 20 percent in a very short time.
The firm reports that although less than 50 percent of the required changes across the supply chain have been completed, nearly 40 percent of the expected savings have already been realized, which is well ahead of the planned rate of return. The key activities driving this success include:
- Recognition of a simple and compelling business need. Everyone in the organization as well as key customers and suppliers understand the urgency and importance of the work;
- The formation of technical community teams encompassing research and development (R&D) and supply chain to lead the work;
- Rigorous supply chain network-design analysis based on total cost of ownership (TCO) principles to justify and approve projects;
- Investment in a world-class project management process;
- Development of a global equipment standard with clear decision-making authority owned jointly by engineering and R&D and agreed upon with suppliers; and
- Establishment of a global menu card (product formats, raw/packaging materials, and components) with clear decision-making authority owned jointly by supply chain and R&D.
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