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Part - II

Strategy and Alignment: Keys to Mastery

A masterful supply chain strategy links carefully targeted accounts with well-structured supply operations through a well-designed set of channels and customer operations. All of the company's functional activities must be tightly aligned with this business model. Supply chain masters create this alignment by making well-crafted, parallel changes in five crucial areas: (1) account selection, (2) in-customer operations, (3) channel strategy, (4) core operations capabilities, and (5) management/organization structure. Each of these areas is discussed below.
(See also Exhibit 1)

Account Selection

Masterful supply chain management begins with insightful market segmentation. The essence of marketing is matching market segments to company capabilities. In the cases of Dell, Baxter, and P&G, careful account selection was a key element of supply chain success. These companies approached account selection in a highly disciplined manner: They carefully defined both target accounts and, importantly, accounts that did not fit with their supply chain strategy. Without this explicit component of the business model, all three companies' strategies would have failed.

Dell carefully targeted corporate relationship customers that had predictable, budgeted needs and that wanted a predetermined set of product models. The company also selected individual customers who were high-end, repeat purchasers with a preference for early technology adoption. Both account segments had the stable, predictable purchase patterns that Dell needed to make its joint build-product-to-order/buy-component-to-plan system work.

Similarly, Baxter targeted hospitals for the Stockless System according to a set of clear, predetermined criteria. The targeted accounts had to be large relationship buyers that were willing to enter into volume contracts. Importantly, the accounts had to be clustered together geographically for economical service provision. In addition, they had to have certain organizational characteristics, such as management stability and labor union cooperation. In a painful decision, Baxter determined that some important accounts were inappropriate for the Stockless System.

Here's how the Stockless System (now called ValueLink) operates: The hospital specifies its stock requirements for each ward; an on-site Baxter employee counts the stock in each ward each day or every few days; the employee enters this information into a hand-held device and transmits it to Baxter's warehouse, where a replenishment order is derived; at the warehouse, the order is picked into ward-specific containers; that order is delivered the next day or in a few days directly to the ward, and the Baxter employee puts the stock away; finally, Baxter invoices the hospital.

P&G also developed a careful account selection plan as part of an innovative product supply model. The company developed operating partnerships with major customers capable of linking electronically, taking full-truckload deliveries, and engaging in joint business process reorganization programs. Smaller accounts were shifted to master distributors, which in turn were selected for their ability to partner effectively with P&G.

In-Customer Operations

The ability to operate within their customers' organizations was crucial for Dell, Baxter, and P&G. This capability ranged across a spectrum from pure IT linkages to combined intercompany IT/operations links. Effective in-customer operations require powerful technical capabilities, crucial customer knowledge, and the ability to fit into the customer's organization and work processes. What ultimately differentiated these leaders from the competition was their ability to blend into the customers' day-to-day operations and culture. Their unique customer knowledge and customer relationships created a set of barriers to entry that others could not overcome. It was this capability at the grassroots level that drove these companies' meteoric increase in customer market share.

As the Internet becomes a more pervasive and powerful element of company business models, it offers companies the ability to differentiate themselves based on their in-customer operations. These enhanced capabilities make customer intimacy both more feasible and more efficient. In today's competitive environment, companies need to exploit these new Web-based opportunities creatively.

Dell, for example, differentiated itself in the corporate market by developing a set of extremely effective customer-specific intranet Web sites. Each Web site was highly tailored to the customer's individual situation. Dell worked with each customer to specify a particular set of product configurations that would work best in the customer's network. Tailored offerings were specified and developed for each customer. At the same time, Dell used its direct links with both corporate and individual customers to get immediate, real-time insights about latent customer needs and to identify new generations of products and services.

Channel Strategy

An effective channel strategy is a necessary element of supply chain mastery. In the process of choosing a channel strategy, the supply chain master can create a powerful new channel that reduces its competitors' access to important target accounts and market segments. In many industries, a battle looms between producers and distributors and among horizontal competitors over customer ownership through intercompany supply chain relationships. Most successful supply chain-based strategies offer significant advantage that is either explicit (for example, a hospital can only sustain a Stockless System relationship with one vendor) or implicit (a major customer generally only has the time and resources to enter into a joint intercompany supply chain project with one major vendor like P&G). The ability to control pricing through direct customer relations is another key element of channel strategy.

As it does with in-customer operations, the Web opens both new channel opportunities and new dimensions of customer service. However, this newly created channel must maintain the fit between a company's account set and its business model. All too many companies lose sight of this critical factor as they indiscriminately pursue incremental revenues.

Dell's direct-to-customer channel strategy was a breakthrough in the industry. In the early stages of a technology product's lifecycle, distributors are important for supporting new adopters. Dell, however, insightfully discerned a lucrative set of high-end customers that were ready for direct distribution with arm's length customer support from help lines. An innovative direct channel strategy gave Dell these crucial elements of its powerful business model:

• Real-time customer feedback and market insights.
• The ability to "sell what you have"-that is, using day-to-day pricing and sales incentives to shift demand toward products that are currently makable.
• Extremely crisp product life cycle transitions.
• Elimination of the obsolete and excess dealer stock that plagues the nondirect competitors.
• The ability to control pricing on a real-time basis.

Baxter's Stockless System created a powerful new channel that changed the ground rules for all other hospital supply companies. Initially, several important competitors refused to distribute through Baxter. However, the Stockless System was so attractive to key accounts that the hospitals forced these vendors to use it. Ironically, many of Baxter's own product managers initially fought the decision to distribute non-Baxter product through the new channel. In the long run, however, the shift to service competition led to significant sales increases as conversions to Baxter products naturally occurred. The company also gained significant first-mover advantage as it tied up key accounts with this new channel.

P&G's new supply chain strategy required direct distribution to major accounts. This channel arrangement enabled P&G to develop an extraordinarily high degree of customer intimacy and ongoing rounds of supply chain innovation in these accounts. At the same time, P&G quietly moved to end its direct relationships with numerous smaller accounts, setting up a set of master distributors to service them. The master distributors, in turn, gained enough volume to sustain direct value-added relationships with P&G.

Core Operations Capabilities

Beyond achieving overall operating efficiency, each master's business model required a powerful set of new core operations capabilities. These capabilities were rooted in each company's core business processes, many of which focused on supply management. The new supply chain masters consolidated their supplier bases in order to form more effective partnerships. The masterful suppliers that they kept realized large market share gains. Insightful suppliers also can help supply chain managers accelerate their supply chain mastery. To cite one example, Swift Rivers, an MIT spin-off company, has enabled supply chain managers to increase profits by 10 to 40 percent by changing the focus of their returns process. These managers have shifted from a narrow focus on operations cost minimization to a more strategic focus on profit maximization, which includes revenue and margin generation as well as cost control.

Dell developed a set of new operations capabilities in five crucial areas. First, it created the flawless make-to-order system that has been widely noted (but in fact is only one part of its business model). Second, Dell worked at length to build an effective supplier management function in order to shorten component leadtimes and maintain the absolute quality standards required by the just-in-time operation. Third, Dell developed the "sell what you have" system that was essential to matching supply and demand. Fourth, it instituted an extraordinarily crisp set of product life cycle management capabilities that yielded great cost reductions and strategic advantage. (Dell was uniquely positioned to do this because its customers were early technology adopters and its operations had virtually no inventory in the supply chain.) Fifth, the company worked with its suppliers to shorten their product life cycles, extending the Dell business model to the whole channel. Together these operating capabilities formed a cornerstone for Dell's business model.

P&G, for its part, developed operations capabilities in two key areas. First, it created a sweeping new set of industry-change programs such as ECR (efficient consumer response), CRP (customer requirements planning), and streamlined logistics. These programs required a solid new understanding of channel economics and the impact of supply chain innovation. Second, the company developed sophisticated IT ties to coordinate its product flow, enabling it to raise service levels to meet the needs of the new system.

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Source: The Net