By Dr. Lowell Yarusso and Ronald J. Sanderson
Many companies have risen to the top of their industry by creating and sustaining a single competitive advantage. In their 1982 book "In Search of Excellence," Tom Peters and Robert H. Waterman Jr. described companies that rode a specific core competency to industry leadership. While instructive, their work became more revealing when, 10 years later, several of those companies had lost their competitive edge and were rapidly losing their market leadership.
The lesson here is that silver bullets either do not exist or have limited life spans. What does this have to do with the supply chain? Companies such as Wal-Mart, Dell and Honda were able to distance themselves from their competition over several years, or even decades, by focusing on a specific strategic sourcing/supply chain competency. Unfortunately, in today's world of instant communications, viral information transfer, rapid technology changes and fluid movement of people from one organization to another, it is becoming more and more difficult to find, develop and sustain a significant competitive advantage based on specific competencies.
The "Five Forces" analysis of a company's competitive environment, developed by Michael Porter, still provides a useful tool to identify external competitive challenges and, in turn, potential strategies for competitive advantage. In Porter's framework, competitive advantage comes through being the lowest cost supplier, providing differentiated capabilities or focusing on a particular area of strength. But in today's environment, supply chain advantages can more readily and rapidly be matched by competitors through such means as common access to third-party logistics providers (3PLs), advanced communication technology, advanced inventory and distribution center technology and concepts, and fewer entry barriers.
Today, a company's advantage may only last months. Two years of significant advantage based on a single competency is now a nearly unattainable goal. Developing a sustainable competitive advantage in supply chain requires a new focus on creating value in a company. A supply chain needs to be viewed as a "value chain," in which all participants are truly integrated and share a common vision of goals, processes and information sharing. The one shared, high-level goal of all participants is to maximize value in the total supply chain.
To achieve this transformation and truly gain a significant competitive advantage requires a different way of thinking about supply chain performance and structuring. The key is a total commitment to seamless, value-focused supply chain performance. Value is more than simply achieving on-time deliveries or optimal inventory levels. It requires a more collaborative relationship with suppliers, customers and other stakeholders. And it requires a commitment to continuous improvement and the flexibility to adapt to constant changes in the marketplace. Here are six principles for how to accomplish this:
1. Collaborate, Don't Compete — A true value-oriented supply chain consists of an extensive network of integrated suppliers, suppliers' suppliers, internal supply chain participants and customers, all working together to maximize the value of the supply chain. When you develop relationships with suppliers, it is the mirror image of setting up customer relationships. Just as you want your customers to succeed, you should want your suppliers to succeed, too. Each participant's success and increased value has a positive impact on your supply chain performance as well as your bottom line.
Just as you want your business processes and people to be aligned in terms of goals and strategies and operations, your supply chain partners should be aligned to collaborate and develop ideas for mutual competitive advantage. Suppliers can often be the best source for new ideas on technology, process streamlining, inventory reduction and product design improvements. But making this work requires different methods of developing incentives and monitoring performance for partners. Fortunately, there are approaches to joint risk/reward sharing available that can be incorporated into supplier agreements.
2. Remember the Goal — Many strategic sourcing/supply chain organizations tend to get overwhelmed by the task at hand and lose sight of the bigger picture. This is a more significant tendency in organizations where people identify more with their function than with their company. A common trait of successful supply chain professionals is the recognition that, ultimately, they are as responsible for selling product as any member of the sales force. In other words, cost savings aren't sought to meet some functional objective but rather to improve the competitiveness and profitability of the end product.
Aligning goals with the company's overall direction has always been critical to the success of a supply chain. In the best circumstances, supply chains that have developed a competitive advantage actually work to create their company's vision and direction, not just respond to it. Computer maker Dell, for example, established a clear advantage in the late 1990s by streamlining its strategic sourcing/supply chain processes and focusing on servicing a market segment through its distribution strengths. The supply chain created a competitive advantage that became Dell's corporate identity.
3. Recognize the Complex, Manage the Simple — The buzz for many companies over the past few years has been about avoiding complexity. Unfortunately, the supply chain is not cooperating and, despite everyone's best efforts, the exact opposite is occurring. Global marketplaces, outsourcing of non-core activities, extended supply chains with multiple layers of suppliers, shorter lead-times/product lifecycles and so on are combining to increase the complexity of the business environment at an alarming rate. The key, therefore, is to simplify and clarify processes wherever possible. Successful companies constantly work at reducing the complexity in how they work internally as the only possible counter to the growing complexity they experience externally.
While this seems like a basic concept, many of the issues facing, for example, implementation of new enterprise resource planning (ERP) systems are the result of either relying solely on the technology to remove complexity (without addressing process complexity) or becoming enamored with the capabilities of a system and actually adding nonessential elements to strategic sourcing/supply chain processes — similar to building a rocket ship to get to Cleveland. In the end, redesigning supply chain processes and implementing technology should be about simplifying the way business is conducted, not about jumping on the newest technology bandwagon. A reasoned approach that focuses on simplifying the complex should be carried throughout the supply chain.
4. Treat the Issue, Not the Symptom — The supply chain can be analogous to the human body. Both are highly complex and provide a wide range of metrics that can be used to assess their health. Doctors typically focus on a relatively small number of key metrics to guide their effort to find an appropriate course of action when a patient experiences ill health. The key to the efficiency and effectiveness of the doctor's intervention is the ability to interpret those initial metrics and to quickly find the right combination of additional tests to complete the overall picture. Then, of course, the doctor has to draw accurate conclusions and predict the impact of various treatment options.
The same process should be used with the supply chain. A small set of key metrics should be monitored on an ongoing basis to confirm the health of the supply chain. If the key metrics reveal an overt symptom of something gone awry, the supply chain professional needs to analyze the key metrics, gather additional data and craft a response that gets at the underlying issues. If, for example, a key metric reveals an increase in missed shipments from suppliers, the fix is not to expedite product but to determine why there has been an increase (receiving issues, freight issues, vendor performance and so on). While this seems obvious, many companies do not include root-cause analysis as part of their operations and, consequently, frequently treat symptoms rather than causes.
5. Focus on Cost Drivers and Business Impacts — It should not be surprising that understanding what makes up the costs of your supply chain is critical to obtaining value from strategic sourcing/supply chain activities. Creating a sustainable competitive advantage requires more than that. Costs are symptoms; cost drivers are the cause. As we saw above, creating a sustainable competitive advantage requires that you focus on causes, not symptoms. Across the entire supply chain, your sourcing and supply chain professionals have to know more than just the cost difference between two possible solutions to a specific problem. They have to be able to answer the question "Why is there a difference?" and do so in depth.
In addition, strategic sourcing and supply chain metrics have to be tied in some fashion to economic/financial results. That is why most world-class strategic sourcing/supply organizations either employ financial analysts or work in concert with finance people to conduct regular financial reviews of their operations. Doing so makes it possible to become more accurate in predicting, and more confident in describing, the financial impact of strategic sourcing/supply chain decisions. The ability to link a supplier's cost driver with a business impact that affects your company's bottom line is a critical competency for professionals in this arena.
6. Don't Waste an At-bat — If an idea is worth pursuing, it is worth pursuing to its full and natural conclusion. Opportunities to make a sustainable competitive impact are all too frequently missed because strategic sourcing/supply chain personnel "drove one off the fence" and merely trotted down to first base, content that they had gotten a hit. To make a significant impact on the business, strategic sourcing and supply chain professionals need to understand that, over the course of a season, the difference between "hall of fame" and "journeymen" hitters is largely that the hall-of-famer is driven to excel on every swing. The utility players frequently take an at-bat off to "celebrate" their last extra base hit.
In the strategic sourcing/supply chain world, all too often an RFP is simply sent to a handful of known suppliers because it is the easy answer. Some savings result, but little thought is given to the potential for achieving a much greater impact if someone were to take the time to research all potential suppliers for that good or service. Decisions are far too often based on price rather than understanding what is the true value impact to a company because fewer internal feathers are ruffled by that approach. Regardless of the reason, when strategic sourcing/supply chain professionals take half-hearted swings, they are wasting the future of their company as well as settling for less than the best for them and their suppliers. If strategic sourcing/supply chain professionals are going to make a sustainable, competitive difference, they have to swing for the fences every time, whether in their dealing with suppliers or in their interactions with their internal stakeholders.
At the end of the day, the hardest part of achieving a competitive advantage is sustaining it. There is always a new financial vehicle, software package, logistics platform, manufacturing expertise or product enhancement emerging somewhere in the world. The key is to build an atmosphere of constant improvement and not present competitive advantage as a one-time revolution but rather as a continuing evolution. This means the strategic sourcing/supply chain team must keep up-to-date on emerging strategies and technologies and critically evaluate how any ideas can help create or sustain an advantage in the marketplace for their specific company. Management must take the time to invest in training — internal and external — to help generate ideas, must take time to insert itself into the process and must ensure cross-functional participation so that major issues or opportunities aren't missed. It takes discipline and patience, but once the ball starts rolling, the benefits will accelerate the transformation. Success breeds success and, in this realm, will drive a company to create, renew and maintain its competitive advantage.
About the Authors:
Dr. Lowell Yarusso is a senior vice president with The Mpower Group and has over 30 years experience in the delivery of professional education, especially in the areas of supply chain, strategic sourcing and change management.
Ronald J. Sanderson is a principal with The Mpower Group, with over 25 years of management consulting experience in supply chain, strategic sourcing, procurement, business strategy and operations for companies in a wide variety of industries.
More information at www.thempowergroup.com.