ADAPTED WITH PERMISSION FROM SUPPLY CHAIN TRANSFORMATION: BUILDING AND EXECUTING AN INTEGRATED SUPPLY CHAIN STRATEGY, PUBLISHED BY MCGRAW HILL PROFESSIONAL BOOKS (SEPTEMBER 2012).
When you begin the hard work of developing a supply chain strategy for your company, should you start with an analysis of your suppliers and work logically forward through the supply chain, just as material physically flows through it? Or should you start with your customer's needs and work backward?
In my career in industry, I developed supply chain strategies starting both on the supply side and on the demand side. In my experience, the two approaches yield very different results. Starting on the supply side focuses strategy teams initially on determining supply chain best practices and on developing a strategy to appropriately employ those best practices from the vendor base to the firm, and finally out to the customer. This approach certainly is not all bad. Starting with the customer, by contrast, concentrates the supply chain strategy on responding to the needs of the customers and on determining how best to satisfy those needs all the way back to the vendor base. Does it matter which strategy you follow? You bet it does, as we'll show later—but first, a few statistics.
Supply chain strategy drivers
According to our database at the University of Tennessee, 85-90 percent of supply chain strategies use the supplier-forward approach. These strategies start with an analysis of best practices on the supply side and work forward to the customer. This was clearly evident when we recently surveyed 40 supply chain executives, whose firms range from retailers to manufacturers and vary in size from nearly US $1 billion in annual sales to over $50 billion, and asked them to indicate the main drivers of their supply chain strategy decisions. Their answers are shown in Figure 1.
These results indicate that understanding best practices on the supply side of the supply chain is the biggest driver of supply chain strategy decisions. Customer needs, as a strategy driver, is in fifth place.
It makes a lot of sense to me that the supplier-forward approach would be more popular. Launching a study of best supply chain practices is "supply chain stuff," and we supply chain professionals love digging into and learning more about our own area of expertise. It's our comfort zone, and we feel at home nestled in this cocoon. Unfortunately, that's where many of us stay or get stuck, and the customer becomes an afterthought.
When the customer comes last, two dangerous possibilities emerge. Either the company fails to meet the requirements of the customer, or it over-engineers in an attempt to adopt generalized best practices without taking the time to find out what is necessary and what is overkill.
While understanding the customer helps companies provide the right amount of product at the right time and in the right place, it requires a shift in mindset for many supply chain professionals. In a recent supply chain assessment for a manufacturer of a product that is used in residential housing and sold commercially, we almost never heard the customer mentioned. When we specifically asked one supply chain executive about the needs of the customer, he shrugged and said, "The sales folks are watching out for that." His perspective is not unique.
But who is the customer? Leading companies answer this question by looking not only at the next upstream point in their supply chains, but also to the end consumer of their products. For example, when I was at Whirlpool, we saw retailers like Lowe's and Sears as customers, and we viewed their customers, the general public, as our end consumers. We considered the needs of each to be equally vital but somewhat different from a supply chain viewpoint.
Starting with the customer gives a company a clear sense of the needs they are fulfilling and how those needs may be changing, as well as some insight into what will be required to continue to fulfill them through the planning horizon. Those requirements then need to be considered and balanced with the other key metrics that most companies use to assess supply chain performance. After all, supply chain professionals tend to be evaluated on a scorecard that includes more than customer service. Specifically, supply chain executives have at least two other major metrics, namely, cost and working capital (inventory). Leading companies look for ways to balance these three factors and meet their goals in each area. They want to serve the customer well, but they generally must meet very aggressive operating cost and inventory goals too.
In a recent supply chain assessment, we reviewed a company's North American supply chain strategy and noted that this company, like many, considered the customer to be a secondary concern. Its strategy focused on best practices in supply chain systems and processes. The senior supply chain executive posed an interesting and probably rhetorical question: "Does focusing the supply chain strategy on the customer mean that cost and working capital goals take a back seat?" He quickly added, "Of course, the reality of business today demands that we address all three simultaneously. We constantly react to aggressive demands by sales to take care of specific customer needs. Sales watches out for the customer. Sure, we in supply chain need to react, but at the lowest possible cost and inventory."
Know your customers' plans
We believe that the strategy development effort absolutely should start with the customer's needs. But that doesn't mean abandoning best-practice considerations. Nor does it mean that the strategy ignores the company's and its shareholders' needs in order to also achieve world-class levels of cost and working capital.
Starting with the customer may be unfamiliar ground for you, as it was for me. But customers should be regularly assessed to identify both their present and their future supply chain requirements. Failure to do so can lead to unforeseen and very costly consequences.
For example, a large retail customer supplied by a manufacturing company planned in two years to reduce the number of distribution centers (DCs) it maintained, and instead require its suppliers to deliver directly to many of its retail stores. The manufacturer's supply chain vice president told us that his company found out about the coming change when he interviewed the retailer as part of the strategic planning process, and that he probably found out at least a year before any official announcement. The change would require his company to increase the number of delivery locations from eight distribution centers, to four DCs and 386 store locations. This clearly represented a massive change in distribution requirements, and it required an aggressive and strategic response.
In another case, a supplier found that one of its large customers was close to launching a major electronic commerce initiative and would expect the supplier to provide delivery directly to consumers' homes. The manager of logistics told us, "We were blindsided by this request. Did not see it coming. We have no experience doing home deliveries. That's a whole new ballgame." Only by conducting an ongoing dialogue with your customers will you have the lead time you need to respond to these kinds of changes.
Other companies have found that customers' inventory sensitivity should be closely monitored for changes. Some retailers are hypersensitive to working-capital and cash-flow considerations, and some are not. Some require their vendors to carry inventory for them and to serve them quickly. Others believe that they need their own DCs in order to control the fill rates to their customers, and they can tolerate less frequent deliveries.
One manufacturer found that its customers' stock-keeping unit (SKU) strategies needed to be closely surveyed when one of its customers abruptly communicated its plan to greatly expand its SKU offerings beyond the limited set carried in a nearby warehouse. Because a major SKU expansion was in the offing, the manufacturer needed a strategy to deal with that.
As suggested by the experience of the companies mentioned above, a few of the questions manufacturing firms should routinely ask about their customers include:
These questions may seem tactical, but they could lead to the development of costly and complex new supply chain capabilities. Questions like these will be critical to your supply chain strategy.
End consumers are a completely different challenge. Retailers must understand the needs of their end consumers, and many manufacturers could benefit from understanding consumer supply chain needs as well. Firms need to anticipate how end consumers will behave in the future, and then use that forecast as critical input in determining what new supply chain capabilities they will need to create in light of those trends.
For example, one large retailer surveyed its customers and used that information to identify seven major consumer trends that would impact its supply chain strategy. They were:
In summary, companies should begin their supply chain strategy planning by understanding the needs of their customers, and then working back through their supply chain to identify the capabilities they will need to develop in order to delight those customers.
Note: Supply Chain Transformation: Building and Executing an Integrated Supply Chain Strategy, published by McGraw Hill Professional Books, lists for US $40 in hardcover, and is also available as an e-book.