The New Supply Chain Agenda

Driving Shareholder Value with Your Supply Chain

By

Reuben Slone
J. Paul Dittmann
John T. Mentzer



Introduction

You are shooting yourself in the foot. If yours is like the vast majority of the hundreds of companies we’ve examined, then you have incentives in your organization that drive down shareholder value, waste money, and hurt customers and suppliers. Think for a moment about how your sales team and your product design team are incented. We can virtually guarantee that the sales team is encouraged to maximize product revenue and the product design team is encouraged to drive down product cost. Makes sense, right? How else would you do it?

Now stop to think about what those incentives really do to your costs and customer service. Those incentives encourage product and SKU proliferation; the resulting complexity drives up costs in purchasing, raw materials handling, manufacturing, warehousing, and distribution, not to mention the toll it takes on profitability because of stock-outs of hot products and excess inventory of slow-selling ones. That’s what we call shooting yourself in the foot.

Essentially you have inadvertently decided to take a huge chunk of working capital and shareholder value and put it on a shelf to gather dust. This chunk of working capital certainly isn’t working, unless you consider attaching a boat anchor to your share price ‘working.’ Worse, you are encouraging your people to pile up more on the shelf every day.

Now think for a moment about what Toyota, Wal-Mart, Apple and Proctor and Gamble have in common aside from well-chronicled success in historically difficult industries? They all have driven superior shareholder value by dedicating themselves to supply chain excellence. Many executives would dismiss that statement. Supply chain is a cost center, they say. It has no direct relationship to shareholder value other than as a source of cost reduction.

The traditional view of the supply chain is a set of vertical functions such as warehousing and shipping, which don’t seem to have direct bearing on earnings and cash flow. This view does not reflect the success of forward-thinking manufacturers and retailers across the globe. These firms have invested in supply chain management initiatives and have fundamentally improved their ability to deliver products to customers at the right time, place and price point, with the lowest possible cost and working capital. Companies that are leading their industries, gaining market share, and increasing shareholder value have transformed their supply chains from a set of independent vertical functions into a strategic, horizontal activity governing the flow of information and material from partners and suppliers through the functional silos of the firm and out to the customer.

The functions of logistics, procurement and warehousing have not gone away, of course. They are still part of the picture – but they are no longer the entire picture. This new, broader view of the supply chain can bring dramatic results:

OfficeMax and their supplier Avery Dennison achieved major improvements due to their collaborative supply chain relationship, including a lead time reduction of 60 percent, forecast accuracy improvement of 30 percent, inventory reduction of 9% even though fill rates improved from 95 percent to 99 percent.

At Procter & Gamble, a shift to 2X concentrated laundry detergent made major cost reductions in the supply chain by allowing the company to halve the size of its bottles and ship twice as many wash-loads in the same size truck. P&G was clever enough to link product design to supply chain capability to dramatically lower shipping costs per bottle.

Small-town retail chain Stage Stores saved $2 million in annual distribution center costs by changing its compensation structure for buyers. Instead of rewarding them simply for staying within budget, they added the additional incentive to smooth their buying patterns, which prevented delivery peaks at the beginning of the month as well as end-of-month stock outs.

Whirlpool used its supply chain to attack working capital, and through supply chain initiatives cut its working capital by $600 million, freeing up critically needed capital inside the company rather than having to use the credit markets.

Coca Cola Bottling implemented new demand planning and inventory management software technology, and reduced inventory by 50%.

We collected these stories, and the dozens of others in the book through our work experience as supply chain executives with companies such as Whirlpool, OfficeMax, and General Motors, as well as through consulting work that all three of us have done; and that Tom Mentzer and Paul Dittmann are actively conducting as faculty members at the University of Tennessee. This database of best practice drawn from interaction with hundreds of companies provides compelling evidence that it is possible to delight the customer and still do what is best financially for the company and the shareholders. And the most effective way to do that is by viewing supply chain functions like inventory management and logistics as part of a constellation of activities including sales and customer service, merchandizing, product design, manufacturing, and procurement that work in tandem to deliver value to the customer. Supply chain excellence today involves collaboration across these organizational units to deliver outstanding customer availability at optimal inventory investment and cost levels.

This change is reflected in the more inclusive definition of supply chain offered by the Council of Supply Chain Management Professionals (CSCMP). According to the CSCMP:
Supply chain encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. Supply chain management integrates supply and demand management within and across companies.

Your Supply Chain and Its Impact on Shareholder Value
Chances are, if you have picked up this book you already feel that your supply chain is not delivering excellence, or that it could deliver more. Given the economic pressures brought on by the end of cheap energy, the increasingly global nature of manufacturing and retail competition, and the global Great Recession of 2008-2010, you probably are also looking for ways to unlock capital within your organization as an alternative to equity and debt.

Maybe you have never thought much about the supply chain before and are looking for new opportunities. Or maybe you have approved supply chain projects that produced disappointing returns. Either way, we assure you that true supply chain excellence, involving cross-organization and cross-company collaboration, can provide a sustainable way to reduce inventory and costs, while increasing customer fill rates and improving service levels. These actions translate into balance sheet, income statement, and cash flow improvements which together yield more economic profit for the firm – and as we’ll show, economic profit connects supply chain excellence directly to shareholder value.

Chapter One provides a detailed look at the connection between economic profit and supply chain excellence – and how executives can point their supply chain team toward a focus on what is most important to the firm: growing shareholder value. In brief, the connection between economic profit, shareholder value and supply chain is based on the simple concept that capital always costs something. Sometimes the cost to the firm is quantifiable, like interest paid on debt, and sometimes it is less so, as when capital is locked up in inventory and not available for opportunistic investments. Economic profit is, simply, profit less the cost of capital needed to generate that profit, and it’s a big deal because the higher a firm’s economic profit, the more it is delivering returns above the cost of the capital invested. The greater those real returns, the more real value shareholders are getting for locking up their money in a business.

Most executives try to increase economic profit by pulling on some pretty traditional levers: by increasing sales through new product releases or promotions, or by cutting costs. After years of seeking economic profit through these approaches executives may find they have wrung all they can from them.

Supply chain excellence provides a new means to the same end – one which has been largely neglected. This seems hard to believe given the extraordinary press in the past decade to the supply chain successes of companies such as Toyota and Wal-Mart. Yet these companies are viewed with awe expressly because their committed focus on supply chain excellence is still the exception rather than the rule. Unfortunately so, given that the benefits from supply chain excellence can compound over time, as improvements achieved from taking an expansive view of the supply chain apply not only to the year in which the improvement is made but to every year thereafter.

The goal of this book is not to convince you that it can be done – it is to show you how to do it. We should know, since we have had to do it ourselves; and have discovered, sometimes the hard way, the basic elements along the pathway linking supply chain excellence, economic profit, and shareholder value.

The Authors
Reuben Sloan is currently Executive Vice President of Supply Chain at OfficeMax. Reuben has also held senior executive positions such as V.P. Global Supply Chain, V.P. North America Supply Chain, V.P. Global e-Sales, V.P. Process Development and Change Management, with firms like Whirlpool, General Motors, Federal- Mogul, Electronic Data Systems, and Ernst and Young.

Paul Dittmann, Ph.D. is Director of Corporate Partnerships for the University of Tennessee, where he is responsible for the Supply Chain Forum, the Executive in Residence Program, and consults extensively with many firms on supply chain issues. Prior to this, he served as V.P. Logistics, V. P. Global Logistics, and V. P. Supply Chain Strategy for Whirlpool Corporation.

Tom Mentzer, Ph.D. is Chancellor’s Professor, and holds the Harry J. and Vivienne R. Bruce Excellence Chair of Business at the University of Tennessee. Tom is a past president of the Council of Supply Chain Management Professionals. He is one of the most prolific and recognized authors in the supply chain field, with eight books, and over two hundred articles in print. Tom has consulted for hundreds of companies over his career.

Collectively, our experience as supply chain professionals and academics have put us in contact with literally hundreds of companies, many of which have come to the University of Tennessee for in-depth supply chain audits, or have attended the supply chain forum sponsored by the University. Stories from those audits and forums have been collected into a 400-company strong database, from which the examples, stories and quotations used throughout the book, unless otherwise noted, are drawn.

Supply Chain Excellence Starts with a Strategy:
Our experiences with the firms we have audited, our consulting work, as well as our experiences as professionals at companies such as Whirlpool and OfficeMax, have allowed us to create a roadmap for companies to attain supply chain excellence. That roadmap begins, as we outline in Chapter Two, with the creation of a supply chain strategy.

The need for a strategy may seem obvious. Yet in the supply chain audits done by the University of Tennessee, almost no firm could produce a supply chain strategy with a multi-year road map to achieve excellence.

So what is a supply chain strategy? It is a set of actions that guides the firm’s supply chain evolution for the next 3-5 years. The strategy creation must start with the customer’s current and future needs, must comprehend the competitive threats, must recognize socio-economic and demographic scenarios, must account for the evolving technology and it must satisfy the economic profit goals of the company. Most importantly, it must do something: it must generate a set of actions that result in capabilities the firm needs.

All of that is pretty standard strategic planning stuff. But the supply chain strategy is special because the supply chain is a horizontal end-to-end process guiding the seamless flow of product across the extended enterprise. Products flow to customers from suppliers through the firm. But this flow must pass smoothly through vertical functional barriers. In addition, the requirements of the customer must guide the flow; and those requirements – in the form of feedback and information – must flow smoothly back through the firm’s functional barriers.

Five Pillars of Supply Chain Excellence
We have identified five pillars of a supply chain strategy that best create the conditions for this two-way flow to happen. Each pillar is elaborated upon in a dedicated chapter. The five pillars of supply chain strategy are:

1. Pick the Right Leaders and Develop Supply Chain Talent
Finding and developing the right talent is the number one pillar for a reason. Nothing is more important than having the right people with the right skills in the right jobs (Chapter Three).

2. Keep Up with Supply Chain Technologies and Trends
The second component of supply chain excellence is the rapidly developing supply chain technology landscape (Chapter Four). It is useful to think of supply chain technology in four buckets: Software such as ERP and supply chain decision support systems; e-Business technologies such as EDI and Internet portals; Visibility technologies such as RFID; and Process Advances such as Lean and Six Sigma. Appropriate technology use is a key enabler of collaboration and of efficient execution of various supply chain functions.

3. Eliminate Cross-Functional Disconnects That Cripple the Supply Chain
The third element recognizes that the supply chain process is the ultimate cross-functional process stretching from suppliers through the entire firm and then beyond to its customers (Chapter Five). As such, misalignment and miscommunication across functions can be absolutely crippling. SKU management is a classical cross-functional disconnect in most firms: operating functions feel the cost and weight of increased inventory caused by more SKUs, but Sales and Marketing feel they must appear innovative to their customers. In many companies, the actual value delivered by any given SKU is either unknown, or locked in systems that are not accessible by everyone – least of all the designers responsible for coming up with new product. Coming to grips with this and other cross-functional dilemmas is a key to supply chain excellence.

4. Collaborate with Suppliers and Customers
The fourth pillar focuses on building the seamless flow of products to the customer and the seamless flow of information back from the customer via collaborative relationships extending outside the walls of the firm (Chapter Six). The barrier to doing this often resides within the firm itself, ingrained in antagonistic policies toward suppliers or inadequate communication systems with customers. Supply chain considerations (and expertise) should be core components of business planning, including sales and marketing promotions, and of contract negotiations with customers and partners.

5. Implement a Disciplined Process of Project and Change Management to Successfully Get Things Done.
The fifth and last element of supply chain excellence is possibly the most basic, but its importance cannot be overstated. Without a disciplined process to get things done, everything else becomes irrelevant (Chapter Seven). Supply chain projects consistently consume the most IT resources in firms, and the supply chain organization constantly tackles projects that are highly cross-functional and cross-company in nature. The requirement for excellence in project management practices must start in the CEO’s office to assure that these tough cross-functional supply chain projects are successful.

How it all comes together:
Supply chain excellence achieved by focusing on the five pillars is not a futuristic ideal. On the contrary, we developed the five pillars of supply chain excellence through our consulting work, and our hands-on work with companies such as Whirlpool, OfficeMax and Stage Stores. In the years since that work began, there are a far larger number of firms addressing the inefficiency or ineffectiveness they see within their supply chains. Some of those companies and their senior management get the connection between cross-functional supply chain excellence and the achievement of their most pressing management goals. And some are continuing to grapple with underperformance in individual areas by creating point solutions for systemic problems. We provide examples of both approaches throughout the book, in the hopes that the mistakes and successes of others can inform your efforts as you move to achieve significant shareholder value through supply chain excellence.

The first step on that path is seeing – and helping your team members see – the impact the new, expansive supply chain vision has on the firm’s economic profit and its shareholder value.