CHAPTER 9

Creating Supply Chains for Competitive Advantage

After reading this chapter you will be able to

• Understand how one company created customized supply chains for its customers and in doing so created a strong competitive advantage for itself
• See how to apply concepts and techniques presented in this book to respond to real-world supply chain challenges and opportunities
• Gain some insight into how to leverage supply chain capabilities into longer-term alliances with the customers and suppliers with whom you do business

In many organizations supply chain management has gone from poor cousin to high strategy over the last 25 years. We have seen how companies such as Wal-Mart and Dell have risen to market prominence through their development and use of highly efficient supply chains. What can we learn from their success and the successes of other companies about creating supply chains that become major competitive advantages?

In this chapter we will use a case study of a fictitious company named Charlie Supply, Inc. to present ways in which a company can create supply chains that deliver key competitive advantages. We start with a description of Charlie Supply and its business goal. Then we discuss an initial business situation and a follow-on situation. For each situation there are exercises to work through that explore ways the company can recognize supply chain opportunities and respond effectively to capitalize on them.

I invite your e-mail responses ([email protected]) to the supply chain solutions I offer in this chapter. What do you agree with? What would you do differently? Why?

Charlie Supply Inc.—The Initial Business Situation

Charlie Supply, Inc. is a $2.8 billion company that distributes food-service items, janitorial supplies, and equipment. The company has grown rapidly over the last five years. It has acquired 13 separate companies during that time. Eight of these companies were major regional distributors of janitorial and/or foodservice supplies and five recent acquisitions were smaller distributors who specialized in one or the other of these product lines. Each had good reputations with their local customers and Charlie Supply acquired them in order to round out its geographical coverage in areas where it needed a stronger local presence.

Charlie Supply has followed a policy of decentralized management and left the companies it acquired largely free to run their own operations as they see fit. Each company or “business unit” as they are called, has certain sales targets and profitability levels that they need to meet. They are also required to buy 80 percent of their inventory from an approved list of manufacturers where the company has negotiated special purchasing and support contracts.

The business units serve their own local customers and, increasingly, they work together to win contracts from large national account customers. Local customers often pay a higher price for their products but they also buy smaller amounts. National accounts negotiate lower prices but they buy much more. National account business is growing because more big customers want a single supplier who can service all their facilities across the country and also deliver a range of products and customized supply chain services to help them manage their business and lower their operating costs.

The information technology (IT) infrastructure of each of the business units varies widely. Some of the bigger business units that have multiple branch locations now run a single, full-featured enterprise resource planning (ERP) system provided by a leading software vendor. Other business units still use custom-built suites of systems developed when they were independent companies. The smaller business units run several different ERP packages designed for smaller companies. These systems have been adequate to support operations up to this point. They run on a range of different computer hardware and operating systems. In two cases IT vendors have informed a smaller business unit that they must upgrade or else lose technical support on their hardware and software in the next 24 months.

All of the business units have interfaced their individual ERP systems to a system that Charlie Supply developed to enable the business units to exchange key data files with systems at corporate headquarters. That system is called the Inter-Company Communications Link (ICCL). All of the business units and company headquarters can electronically exchange six documents between their internal ERP systems and the ICCL system. Those documents are: (1) purchase orders; (2) invoices; (3) advance ship notices; (4) customer price books; (5) product masters; and (6) inventory stock status. There is a transaction-processing database built into ICCL that stores these documents and provides for some limited usage reporting.

The ICCL system also has connections to many of the company's customers and with the manufacturers whose products the company sells. It can send and receive purchase orders and invoices between the business units and these customers and manufacturers. The system does have some drawbacks in the way that it does error checking, so errors in orders, invoices, and product data can take longer to detect and correct than would be the case if every business unit was using the same ERP system.

The Business Goal

Charlie Supply just finished its four-year strategic plan. Among other things, this plan calls for the company to grow its total sales to $5 billion over the next four years. Management has decided that this growth should come from increasing sales to local customers by 50 percent and by growing national account sales by an additional $1 billion. To support this growth the company realizes it will need to review and reengineer selected business processes and the information systems that support those processes.

Senior management spent a lot of time defining the company's mission or goal for the next four years. There were some who felt the goal should be a specific revenue target. Others felt this was too limiting and should instead be more of a statement of the company's intention. It was decided that the goal would be a statement of senior management's intent and that there would be a short list of performance requirements such as the $5 billion sales target and others that would be the tangible measures of success that the company will use. The company's goal is stated as follows:

Business Strategy

Charlie Supply is a distributor, and distribution is a tough business. Gross margins are under more pressure than ever and national account customers especially are continuously squeezing them. Charlie Supply needs to differentiate itself in some significant way or else engage in a “grim race to the bottom” with its competitors as gross margins get squeezed to small single digit percentages.

Results of some of the analysis done during the strategic planning process are shown in Exhibit 9.1. Based on the markets being served and the strengths of the company, senior management has decided on a strategy it will use to accomplish the company's goal. The strategy is to develop a suite of supply chain service offerings that can be mixed and matched to meet unique customer needs. The company will find customers who need these services in addition to the products themselves and who will pay a few additional percentage points on the item prices in order to get them. It may not be possible to charge individually for specific supply chain services but management believes that the services can be bundled with the company's products and sold as a total package.

The business plan calls for the company to place its main focus on selling to new national accounts. Management feels the need to stabilize company growth and market share by acquiring a portfolio of multiyear contracts with big customers who each generate annual revenues of $10 million or more. Charlie Supply already has a group of national accounts and it is starting to see a good deal of similarity in the requests from these companies.

These big customers are consolidating their procurement activities and looking for single suppliers who can support them nationwide. It is also most likely that these big customers are the ones who value the supply chain services Charlie Supply can offer. This is especially true if these customers are in certain vertical markets where the products that Charlie Supply provides are central to the customer's daily operations. Given Charlie Supply's product offerings, that means customers such as national restaurant and grocery store chains, big property management companies, and building maintenance companies, to name a few.

EXHIBIT 9.1

One national account in particular is growing fast. This customer is a national restaurant chain named Green Planet. These cozy neighborhood restaurants serve prepared organic foods from brownies and chicken salad sandwiches on whole grain bread to full frozen dinners that can be heated and served to patrons at the restaurants or sold to customers who take them home to eat. In addition to providing great food, Green Planet is committed to promoting sound environmental practices and prides itself on its use of products that are environmentally friendly and recyclable.

Because of its great food and the growing public awareness and demand for organic food, the company's growth has been tremendous and it is opening up more and more restaurants every month. The company is continuously challenging Charlie Supply with new requests and requirements. It needs both products and supply chain services to support its growth and manage its operating costs.

Exercise Number 1: Supply Chain Strategy and Projects

Imagine that you are the Charlie Supply executive in charge of delivering the supply chain capabilities the company's strategy calls for. Take some time to consider how you would go about doing this. What kind of projects would you start? What would you do about the various different ERP systems used by the business units? How would you schedule the work to be done over the next 12 months?

Go back to Chapter 8 and look at the table in Exhibit 8.1. Which of these business operations would you improve and why? Then look at Exhibit 8.5. What would your initial project plans to improve these business operations look like? When you make your plans, follow the time boxes suggested in the Define-Design-Build system development sequence (see Chapter 8). See the sample cost/benefit analysis at end of Chapter 8 and use that template to do a cost/benefit and return on investment (ROI) calculation for your proposed projects.

Take some time now to write up your solution. State the business operations you will improve and why. Sketch out the initial plans for the projects to improve these operations and do quick ROI calculations for these projects. When you are finished, compare your ideas to the solution set I offer in the following section. My solution is not meant to be the definitive answer. It is based on my experience and on discussions with others who have thought about this. Use it as a point of reference to evaluate your own ideas.

Solution to Exercise Number 1

Since Charlie Supply serves steady and mature markets, competitive opportunities lie in improving the capabilities of customer service, demand flexibility, and internal efficiency. Given that the company already has a lead in the customer-service category, the company will get the best results by building on that strength and improving its customer-service capabilities to make them even more valuable to its customers. There is also an opportunity to pull ahead of its competitors in the area of demand flexibility. Improvements in these capabilities can be used to differentiate the company in the eyes of its customers and to provide value that its competitors cannot provide. Exhibit 9.2 shows where the company will make its improvements.

If you elected to make improvements in the company's internal efficiency so that it would equal or even lead its competitors in this area then I believe you have made a mistake. See the seven strategic design guidelines for designing systems presented in the last chapter on pages 252–255. The second guideline says to use systems to change the competitive landscape and the third guideline says to leverage the strengths of existing systems. If you elected to improve internal efficiency by doing something such as putting all the business units on the same ERP system, you are merely making a “me too” move to try to catch up with your competitors. It will be a very expensive move as well.

EXHIBIT 9.2

By improving internal efficiency, you are not changing the competitive landscape because it is unlikely that you will actually exceed the internal efficiency of your competitors anytime soon. And by focusing on trying to improve a weakness you are also missing the opportunity to leverage existing systems where you are already strong and could quickly get even stronger. Internal efficiency lags the competition, but it is not so bad as to endanger the company as long as it avoids engaging in a price war with its competitors. And the company has no intention of getting into a price war, anyway.

Charlie Supply defined six performance targets that it would strive to achieve in the areas of customer service and flexibility. These performance targets are:

1. Take Orders Any Way the Customer Wants (Customer Service)—as measured by ability to take customer orders through its own web order entry system, or by electronic data interchange (EDI), by extensible markup language (XML), or by direct, computer-to-computer file transfer protocol (FTP) with customer systems.
2. Deliver Uniform Quality of Service to All Customer Locations (Customer Service)—as measured by order-fill rate, on-time delivery rate, and item-return rates.
3. Support Customer Accounting (Customer Service)—as measured by ability to submit customized, accurate, and timely invoices and statement bills via whatever medium the customer requests whether it be EDI, XML, FTP, or e-mail attachments.
4. Support Customer Purchasing and Budgeting (Customer Service)—by providing them with data for planning and managing their purchasing budgets through online reports showing product purchases by customer location, by item, supplier, and volume over any period from one day to two years.
5. Be a Valuable Partner in the Supply Chain (Demand Flexibility)—as measured by order-fill rate and backorder frequency and backorder quantities.
6. Participate in Markets as They Evolve (Demand Flexibility)—as measured by ability to anticipate and stock additional products outside of the company's present bundle of products as demand for them emerges.

Twelve-Month Project Objectives

To meet these performance targets I would make improvements in four business operations that support supply chain performance. As shown in Exhibit 9.3 those operations are: (1) demand forecasting; (2) inventory management; (3) order management; and (4) delivery scheduling. The main thrust of these improvements is to deliver improved customer service and demand flexibility. However, since all four of these business operations also affect internal efficiency, improvements here will result in some increase in the company's internal efficiency as well. This is also shown in Exhibit 9.3.

When I look at the four business operations that are to be improved, it is clear that all four of them will benefit from the creation of an enterprise data warehouse. This will be my first project. The data warehouse will provide data to enable better demand forecasting, better inventory management, better order management, and better delivery scheduling.

There is already a transaction-processing database that is part of the ICCL system. This database is the data source that can be tapped to populate the enterprise data warehouse. The daily transaction documents (purchase orders, invoices, advance ship notices, product masters, price books, and inventory status) that ICCL handles form the foundation from which a very clear and detailed supply chain operations picture can emerge. This picture can be updated on a daily or even hourly basis as transactions flow through ICCL.

My second project happens once the first version of the enterprise data warehouse is in place. Software packages can be interfaced to the data warehouse. I would interface two packages and make both packages accessible over the Internet. The first package is demand forecasting and the second one is delivery scheduling. This will enable people in the business to do more frequent 30- to 90-day forecasts as market conditions change from month to month. These more frequent short-term forecasts will tend to be more accurate and will provide the input needed for better inventory management. Using the delivery-scheduling package, people in the individual business units will be able to continuously monitor and optimize their delivery routes as the business grows.

My third project would improve inventory management through the combination of better product demand forecast data and also better training in the use of the existing inventory management systems already in place at the business units. The best practices for effective inventory management have been widely understood since the late 1980s. Most inventory-management systems developed since the mid-1990s have incorporated the functionality needed to implement these best practices. No new systems are needed. What is needed is a renewed commitment to rigorous staff training and increased levels of proficiency in using the full functionality provided by existing inventory-management systems.

EXHIBIT 9.3

The increased training and the more accurate forecasting data will enable product managers to do a much better job of inventory management. New product demand can be better anticipated and inventory turns can also be increased. Once people have been trained, they should also have quarterly (not yearly) bonus incentives that keep them focused on delivering high levels of performance month after month.

The fourth project I would do is a project to improve how the ICCL system handles errors and status reporting. This will improve order management because problems and delays that affect customer deliveries, payments, and so on, will be spotted much sooner. This will enable cus-tomer-service representatives to be much more proactive problem solvers with their customers. They will be able to coordinate with customers and manufacturers more effectively to resolve issues as they arise.

These error handling improvements can be delivered very cost effectively by using business process management (BPM) software and interfacing it to the ICCL system and its transaction-processing database. The BPM software will provide a user-friendly Web browser-based interface and enable business people in customer service, credit, billing, and so on to define the set of rules they want to apply to each of the company's customers and manufacturers. Then the BPM system will monitor the data flowing through the ICCL system and send e-mail alerts to appropriate people when it detects exceptions to these predefined rules.

The time boxes and the scheduling of these four projects are shown in Exhibit 9.4. Notice how they are run in parallel as much as possible. Only project two depends on the prior completion of an earlier project. The other projects all run independently, so a slowdown in one does not impact completion of the others.

EXHIBIT 9.4

It is also important to notice the time boxes allocated to the design and build steps in each project. These time boxes must be strictly adhered to and that means tailoring the work in each step to the time available. Remember, each of these projects will produce just the first version of a system. Every feature does not need to be designed and built in this first version, just the most immediately useful features. Then further features can be added to these systems in following years as needed. This is agile systems development.

The projects are almost all scheduled for completion by the end of the third quarter. It is good to do most project work in the first three quarters of the year. Use the fourth quarter for finishing things up that got delayed earlier in the year and for planning the following year's projects. The fourth quarter also has the year-end holidays and for many businesses this is a very busy period. Development projects in the fourth quarter can hamper a company's ability to handle year-end business.

Integrated Supply Chain Knowledge Manager

Charlie Supply's strategy is to differentiate itself by excelling at customer service and leading in demand flexibility. Both of these capabilities are directly empowered by the data that these projects will enable the company to collect. The company's customers and its manufacturers will come to realize the value of the data Charlie Supply can provide them and this will enhance the company's image and business relationships.

These projects combine to put Charlie Supply in a position to become the organization that knows the most about the supply chains it participates in. This leverages Charlie Supply's position as the distributor (the humble middleman) and enables the company to use its position to collect more information about daily supply chain operations than either its customers or the manufacturers whose products it sells. Supply chain coordination and efficiency will become increasingly important in the markets Charlie Supply serves. And since coordination and efficiency require lots of accurate and timely data, Charlie Supply will be the company people turn to for the data they need. It is important to remember that the success of these projects depends on “having the right people on the bus,” as Jim Collins puts it (Good to Great, NewYork, HarperCollins Publishers, 2001). All the visioning and planning is for naught if we can't execute. And execution is a people function, so having the right people is a must.

New Opportunities Emerge—The Follow-On Situation

The successful completion of the projects just discussed has enabled Charlie Supply to grow steadily for several quarters. It is becoming well-known to the customers and the manufacturers in the vertical markets it serves. Its ability to maintain consistently high levels of customer service is indeed making the company the “distributor of choice” as stated in the company's business goal.

Big customers realize that by doing business with Charlie Supply their total cost of use for the products they use is actually lower than would be the case if they merely bought from the supplier with the lowest prices. Charlie Supply's systems allow it to tailor a customized package of products and supply chain services that meet each customer's unique needs. Customers also benefit from getting access to usage reports showing the items purchased every day at every one of their locations. This data is very useful in monitoring and managing current operating expenses. It is also valuable in planning operating budgets for the coming year.

Manufacturers who sell to markets served by Charlie Supply are also coming to realize that Charlie Supply is a very efficient channel to market for their products. Charlie Supply's systems enable it to exchange electronic purchase orders and invoices with suppliers using any format (from ASCII to XML) and any medium (from EDI to FTP) that is most convenient to each supplier. This lowers transaction costs, reduces error rates, and speeds up cash flow. And with select manufacturers, Charlie Supply also shares daily customer usage data. This enables better demand forecasting and production scheduling.

Charlie Supply Identifies a New Growth Market

The markets served by Charlie Supply are mature markets for the most part and they have been so for some time. The products sold to these markets are mostly commodities and supply almost always meets or exceeds customer demand. Under conditions like this you might assume that there is nothing new and exciting going on. That is exactly the assumption that Charlie Supply's competitors made. They continued to focus on improving their internal operating efficiencies. While they were occupied with these activities, Charlie Supply was paying attention to some emerging sales trends and some interesting developments in its markets.

Charlie Supply has just signed up a large new customer that shares a number of similarities with another important customer—Green Planet. These customers are very interested in purchasing environmentally friendly green products. Both customers are willing to pay a higher price for green products as long as they can be shown to work effectively and meet expectations.

The director of marketing at Charlie Supply has done some research and believes the developing market of green products is just about to go into a very strong growth phase. Manufacturers' research and development efforts are starting to yield products from green cleaning chemicals to biodegradable plastics for use in making disposable cups, plates, and eating utensils. Combined with this is the growing trend for certain influential companies and state and city governments to specify the use of green products whenever possible.

Based on this market research and the company's own recent sales experience, the senior management of Charlie Supply has entered into strategic alliances with some manufacturers of green products. To demonstrate its commitment, the company has made major stock purchases of inventory from these manufacturers. The company's entire sales force is now being educated about these products and new bonus plans give big incentives to sell green products to customers.

In return for this early support, the manufacturers of these green products have guaranteed that they will always provide the company with as much product as they can sell. Even if customer demand exceeds supply, these manufacturers will make sure that Charlie Supply will receive as much of their products as it needs. What this means is that if the green market takes off the company will have a secure supply of highly sought after (and thus very profitable) products. While other distributors may not be able to get as much inventory as they need, Charlie Supply will. So customers will come to Charlie Supply when they need a guaranteed source of supply for these products.

Exercise Number 2: Participating in a Growth Market

You have just been promoted to vice president of supply chain operations for Charlie Supply. As a sign of how important this position has become you now report directly to the CEO. The CEO has asked you to prepare a supply chain strategy that you will present to the board of directors.

What will your strategy be and why? What projects will you propose to support this strategy and how will you schedule them over the next 12 months? How will you support the company's new strategic alliances with the manufacturers of green products? Which of the four market capabilities will you improve and what business operations will you use to bring about these improvements? Take some time now to think about these things and draw up your plans. When you are finished compare your plans with the solutions I offer in the following section.

Solution to Exercise Number 2

In a growth market the single most important market capability is customer service. Even though the company already excels in customer service, the company will still get the best results by further improving its customer service capabilities. The company's brand image will be shaped by its abilities in this area. This will make it even more attractive to its important customers.

There is also an opportunity for the company to pull ahead of its competitors in the area of product development. Improvements in this area can be used to support and strengthen strategic alliances with selected manufacturers. In the eyes of these manufacturers the company will be seen as a desirable supply chain partner for identifying market needs and bringing out new products. Exhibit 9.5 shows where the company will make its improvements.

EXHIBIT 9.5

Once again, if you decided to make investments in improving the company's internal efficiency then you have made a mistake. You got some improvements in internal efficiency from the first round of projects completed earlier but at the same time your competitors continued to focus on improving their internal efficiency. You still lag them in this area. You are not going to change the competitive landscape by improvements there because you cannot be better than your competition.

Internal efficiency is important in mature and steady markets where customers are very price sensitive and companies need to lower their operating costs so they can compete for business by offering lower prices. However it is not a decisive capability in developing or growth markets. Focus instead on reinforcing the strengths the company already has in customer service because they are what you need to succeed in the growth market the company wants to enter.

Improvements in capabilities related to product development will also yield a competitive advantage for the company. As a distributor, Charlie Supply does not actually design or make new products. But it can be very much involved in identifying emerging market demands and introducing customers to new products that meet those demands. To the extent that Charlie Supply is seen by manufacturers to have superior capabilities in this area, it will strengthen the company's ability to attract and provide value to key strategic alliance partners. These decisions are shown in Exhibit 9.6.

The company identified five performance requirements that it would strive to achieve in the areas of customer service and product development. These requirements are:

1. Effectively Employ Collaborative Planning, Forecasting, and Replenishment (CPFR) Procedures with Key Customers and Manufacturers (Customer Service)—as measured by the ability to accurately forecast product demand and manage inventory to cover actual demand.

   EXHIBIT 9.6

   Charlie Supply Strengthens Customer Service and Improves Product Development Capabilities

   

2. Track Product Movement through the Supply Chain from Manufacturers to End Use Customers (Customer Service)—as measured by the ability to provide accurate end-to-end supply chain inventory visibility, which is updated on a near real-time basis.
3. Design Responsive Supply Chain Networks (Customer Service)—as measured by the ability to optimize on-going supply chain performance for high levels of product availability at the lowest operating costs.
4. Track Product Sales and Usage to More Quickly Spot Market Trends (Product Development)—as measured by the ability to plot trends based on near real-time data updates and quickly spot developments of interest.
5. Provide Efficient Pickup and Return Processing of Recyclable Products (Product Development)—as measured by the ability to optimize retrieval of recyclable material from end-use customer locations.

Twelve-Month Project Objectives

To meet these performance targets I would make improvements in five business operations. As shown in Exhibit 9.3 (see page 284), those operations are: (1) demand forecasting; (2) inventory management; (3) order management; (4) delivery scheduling; and (5) return processing. The main thrust of these improvements will be to deliver improved customer service. And to a lesser extent these improvements will also strengthen the company's capabilities in product development. This is illustrated in Exhibit 9.3.

The first project I will start is a project to train selected staff at headquarters and the business units in the techniques and process of CPFR (see Chapter 6, page 199). As people learn how to best use the systems already available to enable better supply chain collaboration they will see improvements in demand forecasting and inventory management.

The second project will be to start a pilot application using passive radio frequency identification (RFID) to better track pallet- and case-level shipments of some of the green cleaning chemicals. These products will be much in demand and thus valuable. That makes it worthwhile to track these products more accurately as they move through the supply chain. RFID tags could be used to track pallets and perhaps cases of these products. Knowing where these products are at all times will improve the company's ability to deliver them to the customer when and where they are needed.

The next project will be to extend the business process management (BPM) system to monitor sales of selected green products. As soon as sales of these products are made to a new customer or if sales increase significantly to any existing customer the BPM system will send alerts to appropriate people.

The fourth project will be to interface a network-modeling software package to the enterprise data warehouse. Once this is done it will enable Charlie Supply to collaborate with its manufacturing partners to design and test the efficiency of different network configurations for making, moving, storing, and delivering inventories of green products. This will work both for delivering products to customers and also for picking up used products that can be recycled. Exhibit 9.7 shows the project schedules.

The last project will be to implement dashboards and performance scorecards that are updated in real-time or at least on a daily basis. These dashboards and scorecards will be displayed and updated by using the BPM software that has already been installed. Different sets of performance targets will be defined for each group involved in supply chain operations and performance toward these targets will be tracked on scorecards designed for use by each of these groups.

EXHIBIT 9.7

There will be scorecards to track performance for groups doing business operations such as demand forecasting, inventory management, procurement, credit and collections, delivery scheduling, and return processing. Go back to Chapter 5 and review the metrics for performance measurement and diagnostics suggested by the supply chain operations reference (SCOR) model. See the sample dashboards shown in Exhibit 5.2 on page 175.

The operating capabilities provided to people by the first four projects should all be used to increase performance levels. These performance capabilities are reflected in each group's performance targets. Their dashboards and scorecards track their actual performance. The point is to make different business processes visible. Then devise quarterly bonus programs that encourage people to learn to improve and constantly make the adjustments needed to maintain high levels of performance in on-going business operations. As this happens, the whole company will come alive (see Exhibit 9.7).

Respond Effectively to the Opportunities of Growth Markets

In a world where customer demand drives markets, not product supply, Charlie Supply must be very good at seizing the opportunities presented to it by a growth market. This kind of market does not come along every day, so these opportunities cannot be squandered if the company expects to be successful. The company must develop the skills it needs in its people to keep up with events as the green products it sells move out of their development stage and into a major growth market.

Avoid getting bogged down in complicated, time consuming, and overly expensive projects. Charlie Supply must move fast and light, just like Alexander the Great! This means creative use of simple tactics and off-the-shelf technology that empowers and motivates people to work together (see Chapter 1, page 7). The company's mission is to conquer as much market share in this green growth market as possible before product supply catches up with customer demand and market conditions change.

Because of its excellent customer-service capabilities and manufacturer alliances, Charlie Supply can compete well against any other distributor in this growth market. But when supply catches up with demand and market conditions shift into steady and then mature, the two main competitors of Charlie Supply will have an advantage because of their greater internal efficiency. They will be able to offer lower prices to lure customers and still earn larger profit margins than Charlie Supply. In steady and mature markets Charlie Supply has to focus on specific customers with unique needs and avoid getting into price wars with its competitors.

One last point to remember is the power of market perceptions. Charlie Supply should maximize use of public relations to strengthen its appeal to customers. The company should be seen as an innovator and leader in the use of green products in its own operations. For instance, the company can convert some of its own delivery vehicles to use biodiesel fuel. Biodiesel is a fuel made from vegetable oil that can be used in a regular diesel engine. It is clean, renewable diesel fuel from waste vegetable oil that can be sourced from restaurants and other foodservice operations (often for free). It makes good business sense and the publicity this generates will be invaluable for building the company's reputation. Customers who value green products will want to do business with Charlie Supply because the company clearly shares their values.

Strategic Alliances for Competitive Advantage

To round out our discussion of creating effective supply chains for competitive advantage, we need to discuss alliances and how to form them. Effective supply chains are first and foremost alliances between cooperating companies. Many people feel that we are entering a time when competition will not just be between individual companies but instead will be between contending supply chains. If this is so then it is clear that some of the most strategic alliances companies make are in regard to their supply chains. This includes both selecting the suppliers they work with as well as selecting the customers they sell to.

Let's start with a working definition of what a “strategic alliance” is. Companies must find ways to outsource activities that are not part of their core value proposition. In this way each company focuses more attention and investments on improving its ability to deliver value to its customers. So a truly strategic alliance is a relationship with another company that enables the first company to better fulfill its core value proposition to its customers. Strategic alliances can be formed with other companies to perform a wide range of support activities that are necessary but not directly connected to producing the core value proposition. This concept of strategic alliances is illustrated in Exhibit 9.8.

Structuring Strategic Alliances

Although the details of every alliance are unique, there is still a common set of characteristics that all strategic alliances have in common. This is true for a supply chain alliance as well as any other alliance. A relationship not exhibiting all of these characteristics is not a strategic relationship. Strategic alliances display four characteristics:

1. Delivery of a customized blend of products and services to meet a specific set of business needs
2. Coordination of inter-company operations so as to achieve predefined performance targets
3. Longer term, three- to five-year contract time frames for the alliance partners to work together
4. Prospects for mutually profitable business growth over the life of the contract

Delivery of a customized blend of products and services to meet a specific set of business needs is the foundation of any strategic alliance. A strategic alliance starts when a company has a set of needs that go beyond short-term cost reduction. This creates the opportunity for an alliance partner to configure and deliver an offering to meet these needs. It is the customized offering that provides the greatest value to the company receiving it, and also the best profit margins for the company delivering it. If there is no need for a customized offering and simple commodity products or services will suffice, then there is no need for a strategic alliance.

EXHIBIT 9.8

Coordination of inter-company operations so as to achieve predefined performance targets indicates that both companies consider the relationship to be important and not just an arm's length business transaction. It also indicates that the performance targets are challenging and require more effort to achieve than merely negotiating a reduction in the prices that one company charges the other. Once the business requirements of the first company are clearly defined, then key performance indicators (KPIs) should be identified to measure the efficiency of the alliance partner in filling these requirements.

A longer-term, three- to five-year contract means that both companies agree to make a commitment to the alliance that will provide time for learning to work together and for improving the efficiency of the alliance. The extended time commitment allows the alliance partner to invest in staff and technology for delivering the customized offering and meeting the required performance targets. Unless there is a longer-term time frame for the relationship, there will not be much incentive for the two companies to make the effort or the investments that are part of a successful strategic alliance.

Prospects for mutually profitable business growth over the life of the contract are the reasons why two companies go to the trouble of forming an alliance. If there are prospects of profitable business growth for only one company, then whatever the relationship may be, it certainly cannot be called an alliance. In a strategic alliance one company outsources support functions in order to concentrate more on its core value proposition. An alliance partner takes on support functions and delivers a customized package of goods and services that best fits the first company's business requirements. The alliance is motivated by the prospect of growth for each partner. As the first company grows its core business, the alliance partner grows its outsourcing business.

Sustainable Growth and Productivity

If a company merely leverages its buying power to ratchet down the prices it pays to its suppliers, there comes a point where the suppliers will no longer make money in the relationship. They will then either go broke or resign the business because of lack of profits. Then the company has to find new suppliers and it may be hard to find them if the business was so unprofitable to the previous suppliers. Relationships of this sort are common enough in business, but they are not to be confused with what we are calling strategic alliances.

Strategic alliances require sustainable growth and productivity. And that calls for a process that generates rewards in the form of cost savings and/or revenue growth for both parties. In addition to generating rewards, this process must preserve and nurture the underlying source of these rewards. Effective cost management means managing a ratio of costs versus benefits so as to achieve a desired result. Costs can actually rise as long as the result is still a favorable ratio of costs and benefits.

It is this reality—that costs can rise as long as a favorable cost/benefit ratio is achieved—that is the foundation of a sustainable strategic alliance. If the alliance is beneficial it should result in your company being able to reduce operating expenses in noncore areas so as to concentrate on operations that produce your central value proposition. If your company is successful and grows, this results in increased operating costs to support the growth. These increases in operating costs are the increases in revenue and profits that your strategic partners need in order to make the alliance work for them.

The key to sustainable alliances is to define a set of performance targets that, if achieved, will clearly generate measurable benefits such as increased revenue, decreased operating costs, growth of market share, and so on. Make sure that the benefits can be measured and that a monetary value can be assigned to them. The purpose of the alliance then becomes to coordinate activities between companies so as to achieve these benefits. And the alliance is sustained because both your company and the alliance partner share in the benefits that are produced.

The alliance makes money every month from a hundred small adjustments that fine-tune operations so as to achieve performance targets. Since the business environment is constantly changing, constant small adjustments are required to deliver the best possible operating results. In effect, the agreement between two companies to cooperate is the capital in the strategic alliance. The continuous steam of cost savings and revenue enhancements that come from this cooperation is the interest earned on this capital. And to continue the analogy, we can say that the better companies become at cooperating with each other, the higher the rate of interest they earn on their alliances.

In the rush to get as much profit from a situation as quickly as possible, it is common for companies to fall into a pattern of behavior that in effect kills the golden goose. A strategic alliance cannot be a relationship where the only real objective is expense reduction. All strategic alliances provide a mix of benefits. Make sure the mix of benefits is clearly defined and their value is understood. Then make sure the benefits are accurately tracked and the rewards shared between both parties.

Chapter Summary

Charlie Supply maximizes its supply chain opportunities by building on its strengths to differentiate itself from its competitors. Charlie Supply is a distributor that has developed a suite of supply chain services it uses to customize its total offering to meet specific customer needs. By taking this approach, the company has chosen to focus its efforts on doing business with customers who need and will pay the price to get the supply chain services that Charlie Supply has to offer.

This means Charlie Supply will not go after a broad base of customers on the basis of offering the lowest prices on products. It cannot hope to compete this way because its competitors have more efficient internal operations. They will be able to make more money in a purely price-based competition. Charlie Supply chooses instead to focus its resources on developing its capabilities where it is already strong and where it can use these strengths to the best advantage.

Charlie Supply invests in improving its customer service and other capabilities that help it win business from the kind of customers it desires to do business with. Its strategy is to excel in areas valued by its target customers. In order to concentrate the resources to excel in these areas, the company accepts that it will lag its competitors in other areas such as internal efficiency. Its internal efficiency is good enough, as long as the company does not try to compete solely on the basis of product prices.

When Charlie Supply encounters the opportunity to distribute new environmentally friendly green products to a growth market, it moves quickly to capture market share. It makes early alliances with selected manufacturers, takes large inventory positions in green products, and trains and motivates its sales force to find customers for these products.

Charlie Supply maximizes use of its existing IT infrastructure. When systems are stable and work well enough, they are left in place. Performance improvements are gotten through training staff to use these systems more effectively and through selected enhancements to these systems.

New systems development is concentrated in the area of building an enterprise data warehouse and then interfacing several packaged software applications to it. These applications will help the company improve in the areas of demand forecasting, delivery scheduling and routing, and inventory management. Improvements in these capabilities can be used for significant business advantage.

All new development projects are accomplished using the three-step approach called Define-Design-Build. The time frames for each step are strictly adhered to and work is tailored to fit the time available. Development work is concentrated in the first nine months of the year. The last three months of the year are then available for finishing up delayed projects and for planning development projects in the coming year.

Charlie Supply looks for opportunities to enter into strategic alliances with its customers and suppliers. Strategic alliances display these four characteristics:

1. Need for delivery of a customized blend of products and services to meet a specific set of business needs
2. Need for coordination of inter-company operations so as to achieve predefined performance targets
3. Longer-term, three- to five-year contract time frames for the alliance partners to work together
4. Prospects for mutually profitable business growth over the life of the contract