New Supply Chains Models Add Customer Value By Emphasizing Relationship Management

When analyzing new concepts in supply chain management, a contrast should be made between traditional processes and the newer technology-enabled styles of management. Technology, in particular, can make a world of difference.

In the past, traditional supply chain models were usually based on manufacturers producing goods and pushing them through the supply chain without any real feedback or information in regards to requirements or specifications. When this supply chain model is used, there are always gaps between supply and demand as fluctuations are inevidable, resulting in either shortages or waste.

Some of main characteristics of the traditional supply chain are:

•         Improper planning resulting in a lack of synergy between supply chain members

•         Focused on individual performance without considering intermediary causes and effects

•         Lack of long term growth plans and focus

•         Lack of company vision and mission

•         Lack of destination statements

•         Characterized by very low integration among various supply chain members.

On the other hand, newer and better supply chain models are usually based on pull distribution, with a focus on determining accurate customer demand and proper feedback. Still, it is very seldom for a company to implement the pull system all by itself but rather a combination of pull and push distribution and this requires supporting tools and the proper technology. But utilizing customer feedback, a company is much better able to make available and deliver the most desirable product types and designs in the right amounts at the right time.

Some of the main characteristics of these new supply chain models are:

•         Strong networking across the whole supply chain resulting in cost savings and higher profitability

•         Long term growth plans and strategies aligned with the company's vision and mission

•         Clear destination statements determining what the company wants to be and where the company wants to go

•         Strong connection between the suppliers and procurement managers

•         Constant monitoring at regular intervals to improve performance and efficiency

•         Reduction if inventory waste through effective supply chain management processes which synchronize supply with demand

•         All individual systems are integrated with all others so that processes are clear visibile allowing monitors to identify when and where individual supply chain processes should be adjusted.

Meanwhile, companies which continue to practice older model supply chains procure their materials with the traditional view that a satisfactory buying and selling environment consists of companies having long-term relationships with suppliers, distributions and retailers that continue to practice outdated methods such as:

•         Multiple inventory sites

•         Long delivery lead times

•         Fixed margins

It is true that this supplier relationship approach was at one time a step forward as identifying each partner's responsibility in particular procurement activities in advantageous, BUT …the driving force is still price, delivery and quality on terms dictated by the procuring organization rather than the seller's initiative to add customer value.

This approach tends to promote an adversarial relationship among suppliers rather than a mutually profitable spirit of collaboration, but it is a reality that most companies are still concerned with only price, delivery and quality. From their point of view, added value is strictly defined as on time delivery of an adequate product for the lowest price in the market. This view is shared by most 3PL who become partners with a company to manage logistics that includes warehouse and transportation. The emphasis remains fixed on pricing and the Delivery in Full On Time Damage Free and Error Free (DIFOTDEF) goal with rarely an emphasis on "customer value". In fact, even some of the longest and most successful business relationships are more or less defined by the bottom line alone and even when conditions are most favorable the both parties, customer value is all but ignored. But it doesn't have to be this way.

For example, once I heard of a company which prioritized forming long term good relationships with its suppliers. One day this company suddenly had a problem making payments, yet the company found that approximately 80% of its suppliers still wanted to do business with them even though the company admitted it had a cash flow problem. These loyal suppliers decided to still do business with the company as they have been working together for more 10 years and believed the company would not go bankrupt. Why? Obviously because the suppliers trust this company a great deal. From my points of view, this example is showing us that customer value can be achieved and even when cash flow is a problem, some loyal suppliers will facilitate a company's ability to continue to sell its products without interruption and ultimately solve its cash flow problem. It looks like value creation has occurred between this company and its suppliers. Most likely, if these business relationships had only existed for a year, then this type of support from the suppliers would not have occurred.

It should be noted that on occasion, companies that operate within the traditional framework can leverage their internal supply and demand capabilities while they develop new products.

What follows is a typical product development scenario of yesterday's supply chains.

First, select suppliers are invited to participate in development activities for a company's new product, but not all suppliers qualify. Only those companies having the appropriate technology to support the level of data and information transferring are acceptable. The qualifying companies are required to:

•         Arrange face-to-face meeting between company and supplier representatives

•         Create computer based data containing product specifications and send it through an electronic data interchange (EDI) system

•         Provide ongoing development data

•         Generate progress reports.

 

Typically, only one or two members within any supply chain are equipped to handle this level of commitment.

 

In the outdated supply chain model, the manufacturer/supplier making the product assumes all responsibility for meeting the requirements of customer satisfaction. This is problematic as it ignores the fact that each link in the supply chain contributed some degree of customer value to the final product, but nobody knows how much or how little. At the same time, company/supplier collaboration are not well understood and therefore not recognized as a reason for trading partners to work together.

These two critical elements alone make all the difference. Any supply chain that still holds on to these philosophies in today's technology driven commerce market can all but expect efficiencies.

 

Let's see how the high efficiency supply chains of today specifically differ from their outdated counterparts.

 

Today's successful supply chains are lean, nimble and agile, with much higher degrees of efficiency. Characteristics of these newer models include:

•         Increased momentum driven by collaborative planning, forecasting and replenishment (CPFR) activities

o    Collaboration in planning à consensus planning across departments and business units, between suppliers and manufacturers, between distribution and principals and by considering capacity constraints, production balancing, worker productivity, casual factors and other internal and external factors to achieve targets for all parties

o    Forecasting à demand driven to determine the right forecast and synchronize it with supply capacity

o    Replenishment à for both repeat orders of existing products and new products

•         The integration of business processes made possible through use of the Internet and the empowerment of the supply chain

•         Expansion beyond the physical and technical confines of any single company in areas like management decisions, new product development and business processes

•         More rapid fulfillment cycles at lower cost with fewer resources expended.

 

Today's new supply chains are also marked by their higher responsiveness to the end customer's desires and needs. The New Value supply chain creates value at every step of the process.

 

But keep in mind that the New Value supply chain is only as strong as its weakest link.

 

In order to create value, the company needs to activities the five levels of supply chain excellence:

•         Putting the right people with the right skills in the right jobs

•         Leveraging supply chain technologies, including system optimization and visibility tools

•         Eliminating cross-functional disconnects, including SKU proliferation

•         Collaborating with suppliers and customers to generate a seamless flow of information and supply chain improvements

•         Managing supply chain projects skillfully.

 

Mastering Relationships

Supply chain professionals must become masters of something the probably never studied in school: relationship management. That is because there are so many interactions to be managed today, including suppliers, customers, service providers and consultants.

 

And those are just those on the outside. We also have to foster deep and open relationships within our organizations personnel, such as direct customers, sales and marketing, legal, real estate, IT, finance and accounting, C-level officers and sometimes even board member. And, let's not forget governmental relationships at the national, provincial and local levels.

 

Are business relationships in general and supply chain relationships in particular, different from ordinary relationships? How do we initiate them? How are they maintained? Is each one really all that important?

 

 In the last century, one could have made the argument that relationships didn't matter all that much as most companies operated in relative privacy within their own organizations while outside they conducted transactions in often adversarial environments where positive relationships might even be counterproductive.

 

But in today's supply chain, we have entered an era of collaboration, or at least that's what the experts tell us and we must admit that collaboration without the foundation of sound business relationship in extremely difficult.

 

Sustainable collaborations are not simply about "being nice" to customers and suppliers but rather it's built on a foundation of disciplined and rigorous practices and processes designed to foster win-win results for all parties over long periods of time. However, this is not about traditional sales/purchasing feel good adventures with golf and drinks, dinner and drinks or drinks and drinks. Such "relationships" are superficial, transient and fragile.

 

Nor is it necessarily about partnerships. A true partnership has attributes of high trust, close communications, shared values, open books, common objectives and mutual benefits, so while honestly, courtesy and clear communications should be part of any business relationship, these qualities do not necessarily add up to a real partnership.

 

This holds true for both suppliers and customers. The secret to figuring out where to invest in deeper relationships lies in hard work, constant maintenance and frequent reevaluation.

 

Both manufacturing and supplier, as partner, must be selected on the basis of a structured and critical analysis of the company's mission, future prospects, alternative suppliers, customers and values. This entire process of relationship building is arduous, but vital.

 

As always, there is more to this story. The scope and range of today's enablers of success in the new supply chain go far beyond what we would have imagined a few short years ago and this is proof that it will always be the quality of the people that determines the long term success of any company.

 

Source:

Logistics Plus, Volume XI Issue No. 58