In my last column, I talked about companies achieving competitive advantage by sticking to their core competencies and outsourcing non-core competencies to supply chain partners. In this column, I will discuss how companies achieve competitive advantage by not trying to be all things (i.e., offering all products) to all potential customers. (See also part 3 Are Your Supply Chain Strategies And Reward Structures Aligned?)
The first step is to realize that not all customers are created equal -- some are critical to our success, some are less important and should be treated as such, and some are distracting us from serving the first two groups and should not be served at all. To understand these segments of customers, companies first need to answer several questions about their supply chains:
- Who is our customer?
- How do we reach our customer?
- How do we reach competitive advantage with our customer? (Hint: It is not always the product.)
As the first question indicates, identifying the relevant customer is the first step. Once we identify who the customer is, we must identify what the customer values, choose the customer values that we will emphasize, provide that value to the customer, communicate to the customer the fact that we are providing that value, and finally (and continuously) assess the customer's satisfaction with the value we are delivering.
This is true in business-to-business (B2B) and business-to-customer supply chains. Many companies in consumer products industries, when asked, "Who is your consumer?" will say, "The individuals who buy our products." When asked, "Who is your customer?" they will say, "Wal-Mart, Target, CVS Drugstore, Best Buy, Circuit City," or various other retailers that often represent a significant percent of their overall sales.
One company in the consumer products goods industry is a dramatic example of the 80/20 rule gone crazy. The 80/20 rule says that 80% of your business typically comes from 20% of your customers. However, for this manufacturer of consumer products goods, 90% of their overall North American sales went through only 10 customers, those 10 customers being 10 big retailers. In Europe, 60% of their sales went through only 4 customers, again big retailers. Clearly, this company had millions and millions of final consumers, but only a very small number of customers they had to worry about to create competitive advantage in their supply chains. Thus, much of their effort is spent building key vendor status for their company with these key retailers.
Some customers represent such a large percent of our sales that we should think about ways to create competitive advantage, not for our products, but for our products sold through those customers.
That question often involves more than just the product. We may make a product that is priced no differently than the competition, has no different brand equity than the competition, and is promoted no differently. In fact, the product looks, for the large part, like a commodity. There, seemingly, is no basis on which to compete, other than price. However, if we create a cluster of services around a product through the supply chain and through trade partners that gives our company a distinct advantage in the marketplace -- not product based, but supply chain service based -- then we are achieving this SCM competitive advantage idea.
Further, not all products contribute equally to the profitability of a company or a supply chain. In fact, many supply chains keep in stock a multitude of products that should be discontinued for lack of sales. As one supply executive put it, "We are great at introducing new products, but terrible at killing off loser products." This executive works for a company that makes telecommunications products. Analysis of their sales patterns revealed that one product that consumers buy has 2,200 different versions -- each version has to be kept in stock in case someone orders it -- but the final consumer cannot tell the difference in the features of any of these 2,200 different versions! Thus, this company keeps introducing variations of this product -- and spends millions of dollars stocking all the variations in inventory --- when the customer could not care less about the variations.
Too many products leads to overly complex supply chains, often with interesting results. One retail supply chain through which Company B sells does not work closely with Company B to coordinate supply chain functions. In fact, a Company B executive showed us a report received weekly from this retailer, detailing how much inventory of each Company B product this retailer has in stock. Our reaction was, "This is great. This retailer is finally starting to share supply chain information with you."
The reaction from management was not so sanguine, "You do not understand. This report has inventory information for the 1,300 Company B products this retailer has in stock, but we only sell 670 products to them. The other 630 are products we do not even make any longer, and this retailer still carries them in stock!"
Clearly, the retailer in this supply chain was not conducting on-going analysis of sell-through by product, and subsequently getting rid of the inventory that no longer sold (but still cost money to keep in stock.)
It is a difficult management responsibility to constantly assess the value of customers and products and manage them accordingly. Remember, though, if it were not difficult to accomplish, it would not be a source of competitive advantage. Anything that is easy to do is quickly copied by the competition and, thus, is not a competitive advantage.
The challenge to supply chain managers is to change the motivation and compensation of key executives, both within the company and in supply chain partners, to treat some customers and some products as more equal than others. It is this topic of motivation and compensation that will be addressed in my next column.
For over 50 years, University of Tennessee (UT) faculty have played a major role in the supply chain/logistics arena -- conducting innovative research, publishing leading-edge findings, writing industry-standard textbooks, and creating benchmarks for successful corporate supply chain management. Programming is top-ranked in Supply Chain Management Review, U.S. News & World Report, and Journal of Business Logistics. Certification is available. http://SupplyChain.utk.edu