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Part - III

Management/Organization Structure

Because supply chain mastery requires changes that affect key aspects of a company's business model, it shifts the mission and required capabilities of functional departments such as marketing and operations. It also raises a host of very thorny problems in each area. It is not surprising that significant organizational resistance is almost always a part of the transition to supply chain mastery. Successful companies must restructure their organizations and behavioral drivers, such as compensation and budgets, to ensure departmental alignment and follow-through.

Dell had no choice: It had to find a way of operating with no inventories in order to raise desperately needed cash. Yet even when faced with impending bankruptcy, Dell's top marketing and manufacturing executives still fought the establishment of the no-inventory make-to-order system.

Only when they truly had no choice did these managers embrace the new business model and begin to recast the organization to make it work. At the heart of Dell's model is the critical weekly supply-demand matching session in which the top managers from sales, marketing, manufacturing, and purchasing collaboratively decide the company's activities. This gives Dell the organizational fluidity and cohesiveness to respond instantly to emerging customer needs and market trends.

Top managers at P&G and Baxter also had to make major changes in the way they managed their respective companies. In the case of Baxter, the Stockless System required significant delegation of account control to operations managers and multidisciplinary account teams. The company changed its incentive compensation and eliminated quarter-end sales pushes. All of these changes flowed from top management's acceptance of the core importance of the new Stockless System. Yet organizational resistance remained, especially from marketing managers who were concerned about other vendors' products being distributed by the new business. Concern also was expressed over what would be done with the major accounts that did not "fit" the business model.

Exhibit 2 summarizes how Dell, Baxter, and P&G approached each of the change areas discussed above.

Five Steps Toward Mastery

Supply chain masters employ a powerful set of strategy-creation and change-management skills to successfully lead their companies. We have distilled the following five key elements of a supply chain mastery program from our observations of and work with successful companies: develop a fact base, engage your counterparts, sell the new business model, drive change in the other functions, and create a rollout game plan. (See depiction in Exhibit 3.)

Development of supply chain mastery is a process and is not by nature formulaic. It requires sound analysis but, more importantly, effective teamwork. Once analysis yields a broad target business model, only 33 percent of the work has been accomplished. Creating functional alignment with the business model and developing an effective rollout plan are ultimately the key determinants of success.

1.   Develop a Fact Base
The first step toward supply chain mastery is to develop a sound fact base involving both intercompany supply chain economics and market segment characteristics. The central analytical tool for systematically determining intercompany supply chain economics is a channel map. This is a dynamic model of the incremental cost and time spent on products at each stage as they move through a supplier and on to the customer company.

This example illustrates the generic channel mapping process, which can be adapted to a company's specific situation.1 Segmentation and selection. In this example, the example company started by examining the movement and accumulation of a small sample of products to selected customers in one operating region over a 26-week period.

Channel analysis. The company traced the product flow through the whole channel, from point of supply to point of consumption, to develop an understanding of the underlying patterns of consumption, product flow, and product accumulation. It also tracked the activities (e.g., transportation, unloading the trucks, stocking warehouse shelves, picking subsequent orders) at each stage and approximated their attendant costs.

Customer operations analysis. The company not only looked at intercompany order, shipment, and inventory patterns but also visited the customers to understand their operations. It identified the factors that were creating these patterns, along with the related internal processes and costs. With several customers, the company did a brief "functional cost study," in which it observed and figured out a rough cost for the materials management-related activities performed both by operations and other departments such as finance.

Channel modeling. It then related these activities to the current structure of operations, both internally and in its customers' operations, to identify large, hidden pockets of cost. With a manageable sample of products and customers, the company could gather specific information on the actual product flow and cost structure. It used this information to develop a set of PC-based cost models for each channel stage.

Business model creation. At this point, the company initially identified the key obstacles to efficient product flow. It then devised a new business model (in this case, one based on a continuous replenishment system) as the coordinating mechanism that would provide the most leverage in aligning the channel. The company then expanded the analysis to cover a number of other products, regions, and customers to confirm its understanding of the new model and to determine which products and customers were the best fit. This broader view enabled the company to verify many of its early hypotheses and to modify others as it quantified the trade-offs involved. A clear direction was beginning to emerge.

Business model confirmation and benefit estimation. The company returned to its original sample of products and customers and carefully thought through how the new supply chain-based strategy would allow it to restructure the whole channel. This step required particular care because the new strategy afforded the opportunity for paradigm changes throughout the channel. For example, it allowed both the company and its key customers to eliminate facilities, improve working capital turnover, and change long-standing processing and handling procedures. Substantial changes also were possible in both manufacturing and inbound transportation because of a more stabilized order pattern.

Benefit confirmation. The company made rough approximations of the new cost savings that could be achieved in each functional department, both for itself and its customers. It discussed these with the customers and reran its cost models using revised information to generate order-of-magnitude estimates of the overall benefits at each channel stage.

Business model functional alignment. Finally, the company identified the key operational, organizational, and administrative changes needed internally and among the other channel members to bring the other functional departments into alignment with the new business model.

Footnote
*This section is adapted from J.L.S. Byrnes and R.D. Shapiro, "Intercompany Operating Ties: Unlocking the Value in Channel Restructuring," working paper 92-058, Harvard Business School, 1991.

The most productive approach to channel mapping is to choose a few products and a few willing customers that represent typical product and customer categories. The team can then choose a representative period of time (often two to three months) and determine the cost buildup and order pattern. An important advantage of this approach is that once cooperative customers agree to participate, channel mapping becomes a more manageable process. Users will be able to understand the data fairly easily and intuitively see alternative ways of framing the business model. Also, the simplicity of this approach will appeal to counterpart managers who are less experienced in analyzing supply chain economics. Once a new business model has been developed, it's relatively easy to screen the rest of the company's products and customers to see how well they fit the model.

By choosing product and customer categories for the channel-mapping process, the team is implicitly segmenting the market. For this reason, key marketing managers must be included on the team from the outset, and discussions must be held continually. As the analysis proceeds and the team builds knowledge, the simplicity of the channel-mapping approach will allow the team to try alternative segmentations by mapping other sorts of customers. The channel maps typically involve only 10 to 20 actual product-customer sets. That makes it easier to estimate the likely market share gains that alternative business models will produce in different target segments and to pick the best approach.

The channel-mapping approach helps companies estimate the benefits of the new business model. Importantly, it does this in a form that is intuitively easy to understand-a factor that is essential both in selling the new business strategy to the manager's own company and in devising a way to allocate the gains to both supplier and customer companies. With this understanding, suppliers and customers will be more motivated to change.**

2.   Engage Your Counterparts
In a successful project, the key functional counterparts from areas such as marketing, sales, and finance need to be engaged from the outset. This is essential for two reasons. First, the new business model will change these other key functional areas, often in ways that are difficult to predict. For this reason, the counterparts' knowledge and experience are essential to building a viable new strategy, even one firmly rooted in powerful supply chain innovations. Second, because disruptive change will take place in the other functional areas, the counterpart managers must be fully involved in creating the new business model. This involvement enhances the prospects of full buy-in.

At the beginning of successful projects, effective supply chain managers take great care to understand the key initiatives of their counterpart managers. This enables them to incorporate these initiatives in a sensitive, effective manner. For example, a business model that features continuous replenishment is very compatible with many state-of-the-art manufacturing initiatives. This level of understanding not only enriches the new business model but also strengthens the internal alliance needed for strategy adoption and successful change management.

3.   Sell the New Business Model
In addition to involving counterpart functional department heads in the supply chain strategy design process, top management needs to be engaged from the outset. Senior executives have important relevant experience that can be tapped. Furthermore, they will be more receptive to the initiative if they participate in shaping its outcome. In fact, senior management needs to be active in selling the new business model-not only to signal support but also to drive the extensive changes needed in the company. Beyond this, there are two important tasks in selling the new business model: (1) developing showcase projects and (2) framing the estimated benefits in strategic terms.

Showcase projects offer an opportunity to demonstrate the viability of the new business model without top management's precommitment to change the whole business. The best showcase projects often are sited in relatively small, unimportant accounts in which the conditions are very favorable. (Unfortunately, many companies start with their most important customers, where there is often high risk and difficult conditions.) For example, Baxter showcased its Stockless System in a relatively small community hospital that had a very willing CEO, flexible work practices, a progressive labor union, and close proximity to a Baxter warehouse. Top management does not have to commit to the new business model before seeing a working example and understanding the business development process. A showcase not only lets companies work out the details without risking a major account relationship, but also gives top management more control over the decision of whether to proceed with the new business model.

One of the biggest problems facing supply chain managers is their inability to clearly articulate the benefits of supply chain-based initiatives in strategic terms. Counterpart managers in marketing and planning/development traditionally have dealt with competitive positioning, and they are skilled at framing arguments in these terms. Supply chain managers, by contrast, typically have focused on internal efficiency. Consequently, few are versed in gauging and articulating the strategic and market share benefits of supply chain mastery.

By engaging both senior management and counterpart managers in the process from the outset, supply chain managers can assemble a balanced team that is capable of both creating an effective new business model and validating the strategic and revenue-related benefits. Market share growth, channel domination, and stock price increases all can be projected in a well-documented way. These gains need to be credibly expressed by the team and validated by the top functional counterparts. Only when these two activities have occurred, will top management have the confidence to embrace the new business model and make the difficult changes needed to drive implementation.

4.   Drive Change in the Other Functions
The process of teaming with key counterparts from the other functional areas for channel mapping, segmentation, and business model development will provide an ongoing forum for identifying the changes that must be made in other functions. The team members must develop a clear understanding of the tightly aligned nature of a masterful business model.

The key to successful implementation of the new business model is to utilize a team approach with explicit behavioral drivers. The key functional counterparts must coordinate with each other-both in creating and implementing the business model-to achieve a joint result. They must share common performance objectives that span their functional areas and be organized in a way (e.g. periodic meetings) that forces them to focus systematically and often on their joint progress. These managers should be given detailed information that enables them to identify the causes of poor or good performance in their respective subunits. In this organizational structure, they will have the coordination and flexibility to make the many tradeoffs and adjustments that come with the complex task of specifying and implementing the new business model.

Dell has used the team approach very effectively not only in creating its masterful strategy but also in ensuring business model alignment on an ongoing basis. Dell makes computers in three hours but has a 60-day leadtime for components. In order to balance the system, Dell's top purchasing, manufacturing, and marketing executives meet weekly as a team to determine which products are "makable" that week. Dell manages demand by using day-to-day price changes and sales rep incentives to steer customer orders to the makable product set (this is the "sell what you have" system). These executives share a common set of performance objectives and compensation measures, meet regularly to focus on their common problems, and jointly analyze the information needed to develop a common course of action.

5.   Create a Rollout Game Plan
The key to rolling out a major supply chain innovation is to develop a systematic game plan. Yet many companies that have highly disciplined rollout procedures for products lack such a plan for supply chain implementations. They will simply turn to the first customer at hand (often the most important account) and try to "learn by doing" with that account. For most companies, this is a major misstep that carries with it significant downside risk. A systematic rollout game plan involves four key steps.

• Identify opportunities for an early showcase project, utilizing a relatively small account with very favorable conditions. This is essential both for gaining top management's acceptance and for demonstrating viability to other accounts. The small community hospital where Baxter pioneered the Stockless System is a case in point.
• Organize the initiative. Specify carefully which accounts fit the new business model and which do not. Explicitly decide how to handle those accounts that do not fit and develop plans to transition these accounts to a new arrangement. Also, develop a partnering process and identify potential account team members from relevant functional departments. These individuals will become involved in the partnership development process as it rolls out from account to account. Appropriate internal training programs should be conducted as well.
• Map the market. Identify early adopter accounts and move quickly to engage them in projects. This will create momentum and favorably influence those major accounts in which there is more resistance. At the same time, prioritize the major accounts according to willingness, fit, potential margin, and competitive vulnerability. Recognize that supply chain-based strategies carry substantial downside risks stemming from potential failures to perform on the part of both supplier and customer.
• Systematically realign the business model. It takes time to create the new business model and to adjust it to accommodate the company's evolving experience. Importantly, many changes require significant IT support, often with a sizable leadtime. Therefore, companies need to develop parallel timelines for both functional department realignment and market rollout. These timelines must be highly interrelated with periodic checkpoints. They also should recognize the long leadtime needed to change a functional department's capabilities, mission, and IT underpinnings. By starting with less-important accounts, the company can gain both crucial experience and leadtime so that these functional capabilities will already be in place and field-tested when major accounts are engaged.

An effective, systematic rollout game plan not only maximizes the likelihood of market success but also helps gain executive acceptance of the new strategy. Although senior managers may intellectually favor a masterful supply chain-based strategy, they may hesitate because of concerns about market acceptance. Most supply chain managers are far less experienced in market rollouts than their marketing counterparts are. By teaming effectively with marketing and adapting well-understood product rollout tactics, a supply chain manager can alleviate top management's concerns and lead the company to successful implementation of the new strategy.

The New Supply Chain Masters

In this age of dramatic supplier consolidation, supply chain mastery is the great frontier for market share increase, profit growth, and strategic advantage. The supply chain masters described in this article-Dell, Baxter, and P&G-experienced incredible gains from their new supply chain-based strategies. Yet supply chain managers in all too many companies are being left behind; they are stuck in the efficiency trap, focusing on cost reduction rather than revenue growth and strategic advantage.

At its core, supply chain mastery requires a sea change in supply chain goals-from internal efficiency to market share increase. In most companies, this represents a fundamental shift in the locus of strategic value creation. To accomplish mastery, a top supply chain manager must take the lead in allying with key marketing, operations, finance, and strategy counterparts to define a new supply chain-based business model that will realign the organization and drive quantum increases in market share.

Those who see-and imitate-only the operational aspects of masterful strategies (Dell's make-to-order system, Baxter's vendor-managed ward-replenishment system, P&G's continuous replenishment system), miss the real success factor: the tightly-aligned, comprehensive business model. These managers are doomed to mediocrity.

Ultimately, supply chain mastery will become the decisive win factor in most battles for customer market share. The supply chain masters who seize first- mover advantage will create strong market share gains and lasting strategic benefits that competitors simply cannot match.

Footnote
** Corbett, Blackburn, and Van Wassenhove refer to the important difference between logistics success and commercial success. The former refers to supply chain improvement and the latter refers to the benefits of trading with the partner. See C.J. Corbett, J.D. Blackburn, and L.N. Van Wassenhove, "Partnerships to Improve Supply Chains," Sloan Management Review, Vol. 40 No. 4, Summer 1999, 71-82.

William C. Copacino is managing partner of Accenture's Global Supply Chain practice and the recipient of the 1998 Council of Logistics Management's Distinguished Service Award. Jonathan L.S. Byrnes is a senior lecturer at MIT, where he teaches the graduate course "Case Studies in Logistics and Supply Chain Management." He is also chairman of Swift Rivers, a returns management software company.

Authors' note: The authors are grateful to the following current and former company executives for their help with this article: Stuart Smith of Dell, Michael Kremzar and Paul Hicks of P&G, and Richard Daly and Edward Jamieson of Baxter. We also would like to thank Yossi Sheffi and James Rice of MIT and Roy Shapiro of Harvard Business School.

Concluded.