In benchmarking the Supply Chain Management (SCM) practices of hundreds of companies, we have learned that many companies actually achieve competitive advantage by leveraging the management of their supply chains. In this and the next two columns (January 17 and January 31), we will explore the most powerful of these SCM competitive advantage principles. The most important, and the one we will present in this column, is embodied in the following statements:
- Stick to your core competencies and outsource non-core competencies.
- Coordinate these functions across supply chain partners.
What is a core competency? The answer I hear from many executives is, "It is what we do well." My response is, "What if you are really good at running the company cafeteria?" This may be well done, but it does not help the company make money or achieve advantage over the competition. A more accurate answer to this question is core competencies are the things we have to do well to achieve competitive advantage. This may include superior R&D, superior production, superior marketing, or you guessed it, superior supply chain management. It the last case, this is a process of identifying what your company has to do well, and at the same time, identifying what your supply chain partners have to do well so the overall supply chain is successful.
To do this, I encourage companies to go through a simple, yet often insightful exercise. Think about one of your supply chain partners and create a 2 by 2 table with the first column labeled, "What Our Company Does Well," the second column labeled, "What Our Company Does Not Do Well," the first row labeled, "What Our Supply Chain Partner Does Well," and the second row labeled, "What Our Supply Chain Partner Does Not Do Well." I have done this exercise with dozens of companies to identify what are their core competencies (that they should never let someone else do for them) and what are the core competencies of their supply chain partners.
We are looking for two things here. The first are functions the supply chain partner does not do well, but are your core competencies.These are functions you can do for your partners that will tie them more closely to you as either a supplier or a customer (both of which are sources of competitive advantage.) The second are functions that the supply chain partner does well, that your company does not. These are functions you should let your supply chain partner do for you, which will get the function done better and at less cost to you (again, a source of competitive advantage..Of course, all these combinations require close coordination with the supply chain partner to ensure optimal performance of the functions and elimination of duplication of effort.
In closing, let me provide an example of how this works. Company A is in the consumer appliance business. Through the 2 by 2 exercise, they identified their core competencies as their brand name (which they already realized) and their inventory management capabilities (which they had not previously realized was a strength of theirs, but not of their major retail partner.)The retail partner's core competency was location and merchandising of their stores that created considerable exposure for Company A products. This led to Company A taking over more of the inventory management function for the retailer and led to Company A training their salespeople to see themselves, "not as account managers, but as asset managers." This change in orientation led to salespeople seeing their job as not selling product to retailers, but rather as selling product through the retailer to the final consumer, to achieve profitability for both companies.Company A trains their salespeople to act as inventory management consultants to retailers to help them manage their Company A inventory levels.
Since retailers can depend upon Company A to have the product desired in stock, and deliver it quickly, salespeople help retailers change their inventory management decision rules to carry less inventory (a source of profitability for the retailers.) In addition, salespeople work with retailers to determine the fast selling items, which items affect sales of other items, which items create the most store traffic, and share successful merchandising strategies across non-competitive retailers. The result is greater profitability for the retailers (one retailer credits Company A's advice with saving it from bankruptcy) and greater sales for Company A. Further, since -- from the retailer's perspective -- Company A provides not only products that create retail store traffic, but also expertise, retailers are very loyal to this company and work with Company A to sell more of their product -- often to the exclusion of competitors.
From Company A, we see a manufacturer achieving greater profitability (greater sales with lower inventory levels) and increasing market share, not just from making a quality product, but from realizing who are their key customers, what they value (retail store traffic and sales, with lower inventory levels), and treating them well -- sources of supply chain management competitive advantage for both the vendor and the retailer. All achieved because both companies know their core competencies and outsource non-core competencies to their supply chain partners.
John T. Mentzer holds the Bruce Excellence Chair of Business and is the Executive Director of Integrated Value Chain Forums. He can be reached at [email protected]
For over 50 years, University of Tennessee (UT) faculty have played amajor 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
