This chapter is from the book
This chapter is from the book
This chapter is from the book
Value Proposition
The promise of supply chain management is highlighted throughout this introductory chapter. Collectively, the discussion provided in the definition, goals, and evolution sections indicate that supply chain management provides utility to customers, achieves fulfillment goals, and generates shareholder value. Each of these value propositions is discussed in the following sections.
Customer Utility
A review of marketing principles indicates that there are four utilities provided by a business. These five types of usefulness or benefits include form utility, possession utility, place utility, time utility, and quantity utility (Coyle et al., 2013). Form utility—changing the physical characteristics and value of components and parts by assembling them into useful finished goods—is the focus of manufacturing processes. Possession utility is the responsibility of the marketing process. It focuses on facilitating the sale and transfer of ownership of the goods. Generating place, time, and quantity utilities for goods is the mission of supply chain management.
Supply chains generate place utility by moving goods from production points to market locations where demand exists. By having goods readily available in locations that are accessible to interested customers, economic value is added to the goods. For example, moving flu vaccines from the factory to pharmacies and physician’s offices in regions where the risk of illness is high, patients get vaccinated and avoid contracting the virus.
Time utility is created by having products available when customers demand them. Supply chain managers must coordinate the movement of inventory from production and storage locations to demand locations as needed. Just-in-time deliveries of transmissions, engines, and other key components are essential for producing cars as scheduled. Similarly, backpacks, pencil sharpeners, and markers must be on-shelf when retailers launch back-to-school advertisements.
Quantity utility ensures that the right amount of product is available to satisfy demand. Supply chain managers must use a combination of forecasting, scheduling, and inventory to achieve quantity utility. Having too much stock increases cost; having too little results in stockouts. When Ford schedules the assembly of 500 Mustang convertibles, Goodyear must deliver 2,000 tires to the factory to support the production schedule.
Place, time, and quantity utilities work hand-in-hand to create value for customers. A great example is the capability of Disney World to temporarily set up refreshment carts along a parade route on a hot day. These dynamically supply chains provide an adequate supply of cold beverages where and when demand exists. Thirsty customers are satisfied, and Disney generates additional sales.
In addition, the issues of product variety, condition, and price are also required to achieve the supply chain value proposition. Thus, to satisfy and retain customers, supply chains must deliver upon the Seven Rights of Fulfillment: providing the right product, to the right customer, at the right time, at the right place, in the right condition, in the right quantity, at the right cost.
Fulfillment Success
Achieving the Seven Rights of Fulfillment is possible only if an organization establishes the supply chain capabilities to serve demand better, faster, and cheaper than its competition. Not only is it imperative to focus on effective satisfaction of customer requirements but it is also critical to fulfill demand as efficiently as possible. That is, the organization must minimize supply chain costs subject to its customer service policy to ensure that all parties derive value from the transaction.
Being better than the competition requires an organization to understand customer requirements and develop the supply chain capabilities to support them. Customers purchase goods on the basis of price, quality, delivery, and value-added services. Supply chain management facilitates these purchases by fulfilling demand at optimal performance levels. Thus, an organization must have the right product available in the supply chain with the capability to deliver the goods on time and in full. For example, the Amazon Prime program works only because the company understands demand and positions needed inventory at locations within a 2-day service area of consumers in the program.
Being faster than the competition depends upon the capability to quickly fill and deliver orders. Speed to market is a competitive differentiator for organizations that consistently meet the desired delivery windows of customers. Supply chain managers must also establish the capability and capacity to adjust that speed depending on the situation. A flexible supply chain that supports both premium service requirements (next day or second day fulfillment and delivery) and standard service requirements supports customer needs and creates opportunities for additional business.
Being cheaper than the competition depends on an organization’s capability to generate operational efficiencies. Improvement of day-to-day processes through redesign for greater productivity, better asset utilization, and reduction of waste are needed to achieve efficiency. Leveraging the existing resources and expertise of logistics service providers and other capable supply chain partners can also drive efficiency. The imperative is to generate a lower landed cost and lower total cost of ownership than customers receive from the competition.
The capability to concurrently accomplish these better, faster, and cheaper fulfillment goals is not an easy proposition. Conventional wisdom holds that a supply chain can readily provide two of the three desired outcomes. For example, a supply chain can be designed to provide 100 percent in-stock availability and next day delivery, but the cost of achieving this level of service could be crippling. However, leading manufacturers and retailers are working diligently to reach their fulfillment goals in all three areas.
Fulfillment success across all three better, faster, and cheaper goals requires that an organization improve internal processes and strengthen its cross-chain links. Internally, the organization must eliminate unnecessary steps and touch points in the fulfillment process to rationalize product flows. The supply chain managers must also develop collaborative, trusting relationships with suppliers and customers to improve communication, inventory visibility, product flows, and capacity utilization. Both internal and cross-chain cost control initiatives are needed to eliminate excess inventory and waste in the supply chain.
The value proposition and potential payoff for achieving the better, faster, cheaper trifecta of fulfillment goals is significant. The organization with the strongest supply chain in its industry will build a sustainable competitive advantage in the marketplace and generate a higher return on its supply chain investment. These are outcomes worth pursuing for the organization, its supply chain partners, and its shareholders.
Shareholder Value
From a value creation perspective, many organizations limit their financial focus to efficiency in the form of tighter cost control. Given the amount of money spent on logistics and order fulfillment in the supply chain, this is an important goal. However, a pure cost reduction focus misses multiple opportunities to positively affect the income statement. Over the last decade, multiple studies have shown that well-executed supply chain strategies can enhance revenues, improve fixed-capital efficiency, control working capital, and limit tax burdens.
Given the links between supply chain decisions and organizational financial performance of the organization, it is imperative that supply chain managers understand how their actions and resource utilization affect financial statements, profitability, and shareholder value (Wisner, 2011). A concise way to evaluate financial performance is via the Strategic Profit Model highlighted in Figure 1-5.
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Figure 1-5 The Strategic Profit Model
The model shows how return on net worth is a function of three controllable factors: net profit, asset turnover, and financial leverage. Return on Net Worth is a measure of a company’s profitability that reveals how much profit a company generates with the money that the equity shareholders have invested. Of the items identified in the Strategic Profit Model, supply chain strategies typically focus on increasing sales, reducing cost of goods sold, decreasing variable expenses, reducing inventories, and reducing accounts receivables (Stapleton, Hanna, Yagla, Johnson, & Markussen, 2002).
Figure 1.6 takes the general model a step further, linking logical supply chain strategies to their effects on the financial statements of the organization. For example, if a major retailer such as H&M successfully initiates an inventory rationalization strategy, positive outcomes can be achieved. As long as revenues do not decline, the reduced inventory levels in the H&M system will result in lower inventory carrying costs and a positive impact on profits. Likewise, the reduced inventory levels will produce higher inventory turns and produce lower working capital investment. These higher profits and lower investments generate higher return on net worth.
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Figure 1-6 Supply chain strategy—Financial performance linkage
To drive shareholder value, supply chain managers must think in terms of Figure 1-6. It is essential to connect the dots between their decisions, the immediate supply chain benefits, and the ultimate effect on organizational financial goals. Doing so will ensure that the supply chain team is making decisions that contribute to the success of the organization and its shareholders.