Rath & Strong Management Consultants

As more and more companies improve their internal processes they are turning to Supply Chain Management (SCM) to get the next breakthroughs in performance. Adding fuel to the movement are advances in information technology that make it possible to share information within and between companies on more of a real-time basis. The challenges in implementing SCM are as much people-related as they are technical. This article addresses the challenge of creating a more cooperative working environment between companies, a critical ingredient for achieving the potential improvements in performance that SCM offers

Why Supply Chain Management?

Experience shows that the gains to be made in cost, lead-time and quality through working in partnership with customers and suppliers are significant. In industry after industry one observes that:

• 50-70 percent of total costs are supplier related (material versus direct labor or overhead costs).
• Supplier lead times are longer than one's own production lead times.

It goes without saying that the quality of your product depends on the quality of material your supplier provides.¹   With customers awarding more and more business based on total price, quality and delivery, the whole process from one's supplier receiving raw material to one's customer using the product has to be the target for breakthrough improvement.

Experience shows that customers use the products we produce in much more predictable ways than it first appears (see Figure 1). We assume that a customer's order pattern is related to his/her usage pattern. Often we do not look beyond the order pattern for information about actual usage. Worse yet we tend to create wide swings and unpredictability in buying patterns that would otherwise be stable and predictable.

Figure 1 - Typical Scenario

The consumer products industry learned that it often incurred more costs than benefits through consumer promotions. They trained consumers to wait for a sale, then buy and stock product until the next sale. Swings in demand were amplified through the supply pipeline adding cost as the bulge worked its way through the system. Retail stores clogged back rooms with inventory or ran out of stock. Distributors added inventory to cover unexpected demand. Manufacturers added finished goods inventory, increased production through over-time, and put pressure on their suppliers to deliver more in shorter lead-times. Wal-Mart broke the cycle with "Every-Day-Low" prices. A master in logistics, Wal-Mart understood that it was more profitable to always offer the lowest competitive prices to the consumer in return for more stable, predictable demand. The more predictable the demand, the easier it is to synchronize activities to true customer demand throughout the supply chain. The result is better on-time delivery, fewer stock-outs, higher customer satisfaction with less inventory, reduced administrative work and lower overall costs.

A Working Definition of Supply Chain Management

Let us define the supply chain as the flow of information and material to and from suppliers and customers. The objectives of Supply Chain Management (SCM) are to:

• maximize supply chain responsiveness and flexibility to customers,
• minimize total supply chain cycle time, costs, inventory, and
• maximize supply chain capacity, utilization, and Return on Assets (ROA).²

There are four fundamental operating principles at work in Supply Chain Management:

• Set up the simplest, most direct, flow of information possible to and from those who produce it to those who use it.
• Set up the simplest, most direct, flow of material possible to and from those who produce it to those who use it.
• Establish the smoothest possible drumbeat or rhythm of production and usage.
• Create the ability to react to problems through short lead-times eliminating the need for inventories.

Key questions to be addressed in implementing SCM are:

• What are the true demand patterns? Behind those patterns, what are the forces at work, i.e., the drivers?
• How can I get control over information that is there but hidden or getting to me late and/or distorted? How can I get access to up-to-date information as close to real time and on-demand as possible?
• What are the new "rules of engagement" in a more cooperative rather than adversarial customer supplier relationship? To whom do the benefits of SCM accrue?

The potential benefits of implementing SCM are significant. Analysis shows that time after time, industry after industry, the breakthrough improvement possible through SCM are as follows:

These percentage improvements apply to the entire process from the customer recognizing a need through order entry, distribution, manufacturing, and purchasing of raw material. It is where the process crosses organizational boundaries, particularly from one company to another, that the potential for improvement is the greatest.

Buying & Selling In An SCM Environment

One of the biggest hurdles to managing the overall supply chain is our traditional views of selling and buying. The purchasing systems we set up were based on the assumption that it is best to do business with many suppliers, who you change frequently and deal with at arms length. Our selling systems are based on doing business with many customers, who frequently change and make their final decision primarily on price. Whether you look upstream or down, the relationships between companies have been traditionally adversarial.

Capturing the benefits that SCM offers means changing from adversarial to more cooperative relationships between customers and suppliers. The changes in how we sell and buy are profound as summarized below:

The shift from traditional to SCM oriented selling and buying requires training, redesigning processes and selecting people who think strategically and believe in the power of cooperation.

Buying - Working With Suppliers As Partners in Improving Joint Performance

Take the example of two Scottish companies, a Scotch Whisky manufacturer and folding carton supplier, to illustrate the benefits of taking an SCM rather than a traditional approach to buying. A cross-functional team of middle managers from both companies identified over three joint working meetings (see Exhibit 1) the savings possible by applying SCM to two high volume product lines.

The "could be" scenario is based on a new process designed by the inter-company team.

How are such dramatic improvements possible? A production control manager from the Scotch Whisky manufacturer summed it up by saying, "each of us builds in buffers, extra time and inventory, in each segment of the pipeline because we don't see the bigger picture and don't trust the overall system." Having re-designed the process the team saw that paradoxically the new process was more secure with less inventory than the previous process because it was coordinated, visible and made manageable.

Working through the "as is" situation together the team saw the power of a dedicated supply arrangement with one supplier rather than three. Other lessons they learned in implementing the principles of SCM were:

• Select a SCM partner who is competing on the same basis (e.g., customer service) as you are.
• Start by getting control over information available about true demand.
• Reduce cycle-times to eliminate as much as possible the need for inventory.

By involving middle managers in a focused series of SCM workshops a spirit of cooperation and teamwork between the two companies has been created, a pre-requisite for proceeding with implementation.

Selling - From Product to Value

The shift in selling approach that is required to support SCM is the shift from selling product to selling value. It requires a shift from adversarial to cooperative thinking. Back to the example of the carton supplier. First, they set clear expectations of those in the new sales role. Second, they provided training to sales managers to help with the transition. Organized by end-user group (e.g., confectionery) the new sales role was (for that specific end-user group) to:

• Conduct in-depth market research,
• Know competitors' strengths and weaknesses,
• Devise a focused marketing strategy,
• Identify key accounts and develop business development plans,
• Establish multi-level, multi-functional connections with key accounts,
• Involve other employees and departments in executing plans,
• Create opportunities through strong customer relationships.

The sales managers were positioned as business development managers. A premium was placed on the ability to create opportunities in partnership with key accounts. Central to the strategy was the sales manager as team leader, bringing others in the company into the relationship as the situation required. It represented a dramatic change from working alone, selling cartons from the trunk of one's car.

Having communicated clearly the new expectations of a sales manager, a series of training events was held for the entire sales organization: internal sales personnel and support staff. If the external sales staff was to assume a more strategic, team leadership role, team members' roles would change as well. Over a period of several months, three training events were held to:

• Link the changing role of the sales organization to the company's strategy,
• Explain the new roles for everyone in the department in behavioral terms,
• Practice the new behaviors through role playing,
• Create personal development plans,
• Develop business development plans based on a consultative selling approach.

At the heart of the new approach was consultative selling. It is essentially working with a prospective or existing customer to define what is important to them, and establish how you (the supplier) can help (see Exhibit 2 training agenda).

Selecting The Right People

The shift from a traditional to SCM style of selling and buying is not one everyone can make. My experience is that on average 50 percent do. It means being clear about the tasks, skills, and behaviors expected in those key positions; managing performance closely during the transition and being prepared to bring in new players. It is a mistake not to manage the inevitable conflict that arises and make the difficult decisions such as finding a new position (inside or outside the company) for a long service buyer or seller. However, what is at risk is the company's ability to succeed in the SCM arena where the stakes are high. In industry after industry, customers are awarding more and more business based on a supplier's overall capabilities, not just on price, quality, and delivery. Creating and delivering superior capabilities means having people in buying and selling positions who think strategically and have demonstrated that they can lead cooperative efforts that get bottom-line results.

Conclusion

As companies get better and better at the processes under their direct control they are realizing how important long-term partnerships are with customer and suppliers. Effective partnerships are built over time, based on trust that is accumulated through experiencing that there is more to be gained by working together than by competing. Supply Chain Management is an important arena for customer and supplier partnerships given the substantial benefits in lead-times, quality and cost to be had. Training and SCM pilots can take you a long way toward creating a spirit of cooperation for bottom-line results. Making clear the new expectations of buyers and sellers, managing buying and selling performance, and selecting the right people for those key positions will determine whether companies achieve the full benefits that SCM offers.

¹ Thank you Edward Hay, Senior Vice President, Rath & Strong, for your contribution in defining SCM, quantifying the potential benefits and summarizing the implementation principles.

² Thank you Dr. Gerard Lyons, Senior Associate, Rath & Strong, and Director of the IT Centre, University College Galway, for framing the strategic advantages of SCM and for your insights into what to focus on first during implementation.

Exhibit 2 - Consultative Selling Workshop Agenda

• Opening Remarks: Consultative selling in the larger context of the company's strategy.
• Consultative Selling: What is it? How is it different from traditional selling?
• Account Plan Presentations: Prework on key accounts, what is important to them and how we can add value.
• A Typical Sales Call: A small group exercise.
• A Consultative Sales Call: Theory and role model.
• Role Play: Consultative selling.
• The Role of Sales Manager: As business manager and team leader.
• Learning Objectives: Creating individual learning objectives (A Learning Journal).
• Coaching Contract: Finding a colleague to work with on individual development.

About Rath & Strong...

Rath & Strong is a management consulting firm headquartered in Lexington, Massachusetts. Founded in 1935, Rath & Strong helps clients achieve desired change by providing consulting services in four main areas: process and operations management, organization development, counsel to leaders, and customer connection. The firm specializes in helping clients address issues relating to these four areas simultaneously from a systems perspective.