Chapter 5: Control - Supplier, Partner and Operational Logistics

As we move to a more customer-focused business model, we need to be mindful of the two other key mini-ecosystems within the company ” supplier and partner logistics and internal operations.

Supply Chain Logistics

Globalization, the high pace of market change and the explosion of information resources have ushered in a new era of collaboration. Businesses used to operate as separate entities. Globalization has broken down the vertical integration that used to be the hallmark of successful companies. In the days of Henry Ford, the car company made the steel for its cars . Ford Motor Company s Rouge River factory covered more than a thousand acres and included a steel mill, a power plant, glass and cement factories and an assembly plant. Ford s only important suppliers were coal, iron ore and sand companies. Hearst owned pulp and paper mills. NCR made the screws for its mechanical cash registers.

The Japanese dubbed these vertically integrated behemoths, keiretsus . Horizontal cooperation between disparate parties in the marketplace was an anomaly. That s changed. Now it s a necessity. Vertical integration is a relic. The supply chain has dissolved into a series of inter-company relationships. Companies that continue to control the supply chain endtoend have lost their competitive advantage and will fail, unless they operate in a very specific niche with a small, sophisticated customer base.

Meta Group

Dale Kutnick, CEO of Meta Group, believes that partnerships, collaboration and information sharing constitute the road to success in the future. The companies that use information well are the ones that will do well. This externalization of information, as Kutnick calls it, has created 21st century keiretsus ”loose associations of autonomous companies in the supply chain.

The new information transparency brings suppliers, partners and customers into the process. Point of sale data allows suppliers to do their own resupplying. Combinatorial innovation (assembling old ideas in a compelling new way), which is responsible for the bulk of business success today, is made possible between partners . Overall operational efficiency is enhanced.

Kutnick defines these new companies, members of the new keiretsus, as those who make less than 30 percent of the components that are necessary to their products or services.

He gives Dell as a textbook example of a company that has capitalized on information sharing in this newly fragmented global economy.

• Dell manufactures nothing.

• It assembles parts from an array of suppliers into computers.

• It then sells directly to consumers.

• It has reduced its inventory turn on PCs from the traditional five to seven weeks of most computer companies to five to seven days.

• It is so wired in to its suppliers and customers that it does not order a part (a disk drive, a modem, etc.) until the equipment into which the part will be integrated is already sold.

  Kutnick warns that there are three pitfalls to watch for in the new keiretsus.

1. Dependency on and quality control of business partners

2. A tendency to rely too much on too little information

3. The complexity of managing a network of disconnected business components

 

Bearing in mind the risks Kutnick points out, we need to rise to the market imperative, which demands broad-based collaboration and increased specialization. Managing in the new horizontal structure requires a new skill set.

Managing complexity will be the issue facing CEOs.

Bob Parker, AMR Research Inc.

Bob Parker, Vice President of Enterprise Commerce Management Strategies at AMR Research Inc., calls this new collaborative market imperative the economy of scope advantage. It once was that the economies of scale inherent in verticalization were the key to corporate success. The Ford s and Hearst s were the models to follow. No longer. The days of mass marketing, automatic branding because of size and the inevitable focus on product value are over.

We are now, says Parker, in a market where microscale and the advantages of scope inherent in horizontal cooperation between companies determine success. Companies with a broad reach through established partnerships and supplier relationships and an intense specialization will be the successes of the future.

Parker pinpoints three issues facing these broadly allied companies in this time of intense global competition.

1. The need to leverage intangibles:

   1. Supplier relationships

   2. Customer relationships

   3. Intellectual property

2. Supply chain issues:

   1. Postponement. How can we offer more customized products and delay final packaging to the last moment?

   2. Capitalizing on product platforms. How can we build new products using existing value? Can we use, for example, the same drive train in the different cars that appeal to 40-year-old men and 25-year-old women?

3. Cash flow:

   1. As investors look less at earnings per share and more at cash flow per share, how can we increase the net cash the company is generating?

 

The key to resolving these three issues (and the crux of managing successfully in a horizontal structure of loose inter-corporate associations) is the single specific focus that drives everything a company does. Vision.

The breakdown of vertical structure has allowed companies to become more agile in a market that demands speed of response. But the fragmentation that can occur in large, siloed vertical companies is not necessarily solved . Inter-corporate associations can be equally fragmented, if each individual company does not drive its particular vision deep into its own organization and focus on its business. The balance is to extract the value of the new horizontal structure without falling prey to its pitfalls.

Information is the indispensable factor in the equation ”access to information and the ability to act quickly. Timely data enables a company to act quickly on small windows of opportunity. The logistics, supply chain and pricing strategy of a business must be capable of turning on a dime. A nimble company is a successful company.

Wal-Mart

Wal-Mart is one of the most successful and agile retailers in the world today. It s not because the company has the best customer service, although of course its customer orientation is good. It s because Wal-Mart is one of the best supply-chain managers around. The company has relentlessly squeezed costs out of the supply process. Wal-Mart has achieved a previously unseen level of operational efficiency. Why? Through its Retail Link system, the company captures all sales information within short intervals. It knows exactly what s happening throughout the company at all times. Not only is Wal-Mart agile and responsive to opportunities as they arise, but it provides the key information to its suppliers, so they too can respond quickly.

Vendors like Proctor & Gamble can track sales and proactively resupply, thereby avoiding stock-outs.

Take, for example, the days following September 11, 2001. The demand for American flags in Wal-Mart stores rose from approximately 6,400 on September 11, 2000 to 116,000 on the same day in 2001. On Wednesday, September 12, 2001, the demand was 200,000 flags. In hindsight, the increased demand for flags seems obvious. At the time, it was Wal-Mart s superior information and its transparency with suppliers that enabled it to react early to order re-stocks of flags. The speed of Wal-Mart s response time allowed it to respond quickly and service an important need better than its competitors .

 

The relationship with suppliers and the ability to respond quickly to changes in demand, as Wal-Mart has mastered, are just one aspect of the supply chain.

Procurement is another key decision-making point in the supply chain structure. Actionable information is essential. The potential for cost efficiency in procurement can dramatically increase the return on investment of a company. A single good procurement decision can save millions of dollars. In a well-functioning information ecosystem, a company can identify suppliers globally and aggregate procurement to secure the best deal on a worldwide basis.

But procurement decisions are not strictly information based.

TDWI

Wayne Eckerson, Director of Education and Research at The Data Warehousing Institute,TDWI, cautions that in the general rush to the Internet as the hottest new business tool, companies should be wary of regarding business-to-business (B2B) exchanges as a panacea to procurement problems. A few years ago an online auction-style procurement system was established for global companies. The system created a network of B2B exchanges intended to create a bidding process for procurement. Of course the object was procurement efficiency. The system failed miserably. Why?

The system did not take into account the complexity of procurement and the level of trust that companies have come to expect in their supplier relationships. It turned out that electronic trust could not be built in a day. Companies preferred the relationships they built one-on-one over a period of time.

 

That s not to say there are no gains to be realized in procurement processes. Simply that they are currently made within the ongoing relationships companies form with their suppliers.

To build trust in relationships with partners and suppliers in any aspect of supply chain management requires transparency. Transparency means an accurate and timely exchange of information between parties, so that everyone is on the same page, working from the same information. Open communication builds trust. Trust is the foundation for optimizing decision-making.

Here s one example:

METRO Group

In a drive to better manage its supply chain, METRO Group has created supplier scorecards. Sales, profits, market share trends, promotion contributions, on-time deliveries, returns and defects, and incomplete orders are all weighed in to the supplier score. With this high level of detailed information at its fingertips, METRO Group can conduct better supplier negotiations and give preference to suppliers with high margins and high sales volumes . The company works with suppliers to improve co-marketing results, reduce revenue loss from out-of-stocks and reduce markdown losses from overstocks. Both parties benefit from the transparency of the information flow, building valuable trust. Workflow-based category management functions are being developed and will support users in their category decision processes.

Most recently, METRO Group has integrated suppliers into the demand planning process via CPFR (collaborative planning, forecasting and replenishment). Sales data across several years form the common basis for demand forecasting in cooperation with the suppliers.

 

The more transparency and trust a company can achieve between its business and its suppliers, the more efficient they all are.

The benefits of agility don t apply only to retailers and their partners up and down the supply chain. Every company benefits from being flexible and responsive. The techniques of using information to react quickly to product demand and procurement issues can be applied in a range of other business situations.

Harrah s

For example, Harrah s has a program that enables it to visualize the activity on the slot floor. Using color coding, a map of the slot floor shows a gradation of red through blue to indicate hot machines and cold machines. The program allows Harrah s to track the activity around hot machines, to conduct a market basket analysis, to determine the best layout of the slot machines and to provide better service to higher worth customers. Harrah s plan is to have the program running in real-time in 2003. With this level of detailed information at its disposal, Harrah s can ensure that the right product is in the right place at the right time to optimize customer satisfaction and use.

 

The horizontal relationships between companies are more important than ever. Information and information technology that enables the necessary connections provide the framework for the required trust between members of the 21st century keiretsus.

Information and trust are the fundamental basis of every profitable relationship.

Building relationships and fostering information transparency in the supply chain, with customers, suppliers and partners, is only half the profitability equation. Internal transparency is the critical other half. Controlling operational logistics and fraud prevention is vital to managing profitability. Transparency and full information flow is essential.