Making Advantage Competitive

[From iSource Business, August/September 2002] Even amidst the continued slouching of the stock market, the Enron financial debacle and the consequent overhaul of the corporate accounting industry, one good thing did happen in business during 2002: The supply chain finally muscled its way into the boardroom and started getting the attention it deserves. Today, good economy or bad, the large majority of companies no longer doubt the benefits of e-tools on supply chains. What started with a few leading-edge corporations has become a saturated expectation across many industries. Corporations have rolled up their sleeves, analyzed their business processes, invested in supply chain technology, and educated their employees and suppliers on its benefits.

With technology implementations underway, executives now are peering outside the four walls and looking to utilize their newfound capabilities with business partners. The current market emphasis is on integrated supply networks and seamless synchronization with business partners. Such collaboration can offer huge cost savings and time-to-market benefits for all parties involved, and it even has some executives skipping out of the boardroom. But don't click your heals just yet. What proponents can describe as the efficient utilization of outside business partners for supply chain optimization can just as accurately be described as the disaggregation of the enterprise supply chain.

For all its real rewards, supply chain collaboration has spread supply chain functions across multiple organizations and frustrated business partners and end customers who feel as if they are working with eight or 10 companies instead of just one. In effect, the strides that some companies have made in hopes of gaining a supply chain "advantage" have yet to mature into - or be properly leveraged as - "competitive advantage," leaving many to believe there is still some work left to be done inside the four walls.

In this issue's cover story, iSource investigates what it takes to leverage a supply chain for competitive advantage, looking to executives at four companies to find out how they have been so successful at overcoming this learning curve.

Upstream or Down

The phrase "competitive advantage" has a tendency to be tossed around somewhat carelessly in boardrooms and on conference calls, clouding its original meaning. Companies refer to gaining a competitive advantage when talking about how they can get an "edge" over their competitors, which generally comes from the ability to offer more services, faster delivery or larger savings to customers, helping to drive more business and revenue to their company. Yet, some companies drive revenue by reaping the rewards of more services, faster delivery or larger savings from their suppliers; this offers just as much of an edge over a company's competitors, though it has little to do with end customers. Either way, competitive advantage relies largely on a company's ability to manage, maintain and maximize its relationships with its customers and/or suppliers.

Traditionally, the focus for consumer product companies has been, obviously, gaining and maintaining end consumers. Recently, however, just maintaining a customer base can be a` full-time job. According to Ann Grackin, vice president of supply chain strategy at AMR Research, the consolidation of the consumer electronics industry and the slaughtering in the PC industry is creating what she calls a "competition for creating customer loyalty." Grackin points to the Home Depots, Best Buys and Targets of the world that are marketing themselves as "total service providers" in an attempt to own the whole life cycle of the customer. This includes not only designing and distributing the product but also providing services like fulfillment and customer support.

The push for more "total service" customer care is accompanied by the race to keep up with rapid price erosion in most consumer product marketplaces. And you don't need a MBA to realize that offering more services at a lower cost is a pretty tall order for any company. Therefore, many companies are looking to their supply chain partners to fulfill such services, creating a rising wave of outsourcing. However, many companies have discovered that outsourcing's subtle affect on consumer product companies is the increased level of dependence and collaboration developing between these companies and their suppliers. So while outsourcing can offer companies great advantages, in today's market it takes a company that is calculated and organized from a supplier-facing standpoint to turn those benefits into competitive advantages.

Downstream, supplier and manufacturing companies are also finding their customers harder to maintain as they submit job bids and require participation in online marketplaces or ask for product tracking capabilities and customer service offerings, all of which require enormous investments in technology, not to mention the adaptability to bulk up offerings on a dime. Gone are the days of loyal, dependable suppliers with loyal, dependable supply chains; no longer will that offer an advantage. Today, competitive advantage for suppliers is determined largely by the bells and whistles of their supply chains.

The Customer is Always Right

The people at Solectron, the world's largest electronics manufacturing services (EMS) company, can speak with experience about the need for bells and whistles in their company's supply chain in order to remain competitive. According to Richard McCluney, director of supply chain operations at Solectron, "Competitive advantage comes in how effective your supply chain is and how you're managing that supply chain to deliver competitive advantage to your customers."

Solectron is a contract manufacturer, a category of companies that arose out of the first wave of outsourcing some 20 years ago when companies like IBM and Cisco realized they would be better off letting someone else actually manufacture and assemble their products. And with 2001 revenues of $18.7 billion, Solectron does not have a problem finding companies wanting to do the same and shed some manufacturing functions.

But recently, companies like Solectron are being asked to take control over even more of the product's lifecycle. McCluney explains, "Our customers want us to build the products and deliver them on time, but they also want our expertise on design and procurement, so they've asked us to take responsibility for that part of the supply chain. The way I look at it, we are here to provide supply chain services that our customers don't need to do."

New technology has certainly played a vital role in Solectron's ability to stay competitive. "There has always been a sense of urgency to improve the effectiveness with which we can execute for our customers and the tools to help us do that are absolutely key," McCluney says. But he also stresses the importance of understanding that technology tools can never offer a panacea for business processes and efficiency.

With this in mind, Solectron takes its technology investments very seriously in order to ensure that its money is well spent. "You have to look at it very pragmatically," says McCluney. "You have to break it down into pieces and say, this is the area I want to tackle and this is the process I want to change and this is how I want to change my organization and this is the tool set out there that's going to underpin this."

The decision to invest in new supply chain technology is one thing, but ensuring that it's implemented and managed properly - which also means reaping the full savings rewards - is quite another, especially when, for Solectron, that includes over 120 globally positioned manufacturing and service sites. With a company so large, Solectron knew it must have to have the right supply chain organization in place to support its technology investments. Wasting no time, Solectron set out to revamp its organization. During this process, one attribute stood out on executive wish lists: enterprise-wide visibility.

Today, Solectron's supply chain is broken down into three pieces: a Solectron-to-Customer group (also known as the Global Account Supply Chain), which is in charge of aggregating and leveraging organizational spend and managing commodity resources across the enterprise; a Solectron-to-Supplier group (Global Supply Management), which manages customer supply chain needs; and a group of supply chain managers from each manufacturing site around the globe. Although it is not uncommon for companies to develop supply chain organizations that manage commodity purchasing across the enterprise, Solectron's decision to develop an enterprise-wide, customer-facing component of the supply chain organization (Global Supply Management) speaks volumes about the importance of managing customer demands and leveraging some degree of customer customization for competitive advantage, especially for companies in the contract manufacturing industry.

McCluney describes the individuals within Solectron's Customer Supply Chain group as the "customer's advocates within the organization." "These guys are looking at it from the customer's perspective and working with the customer to figure out how to meet their needs," he says. Consequently, it is often the Solectron-to-Customer members who blow the horn when new technology and new services are needed.

Of course, when trying to meet individual customer needs, horns are being blown all the time. "The challenge," says McCluney, "is figuring out how to meet those customer needs without having 56 different ways of doing things within Solectron." AMR's Grackin notes that competing programs within one company is a problem for corporations across the board, and the danger, she argues, is not having a single face for their customers. "The first part of strategy engagement is just analyzing competing programs within a company and narrowing them down to one. Too many strategies within a company are the early whispers of corporate failure," she adds.

In order to prevent a crowding of initiatives and projects going on within Solectron, the company - like the executive team - has a fairly rigorous project management process. If there is a business process that needs improving, for example, managers from either the Customer Supply Chain or Supply Base Management group thoroughly outline the necessary modifications to improve efficiency, including determining the tools available to help improve the process; investigating the specifications for the tool's implementation; determining how much the tool will cost; building a return on investment (ROI) model for the tool and implementation; and outlining a plan and process by which the tool can be successfully implemented.

In addition to ensuring the legitimacy of initiatives being executed within the company, such a rigorous project management process is designed to facilitate increased adoption rates among Solectron's site facilities. It's what McCluney refers to as the carrot-and-stick system: Solectron facilities prove their need for the carrot by performing the due diligence of the stick. That way, investments rarely go to waste. "The aim, obviously, is to make it much more carrot and much less stick," explained McCluney. "But at the end of the day, if you decided on a process improvement, you have to have people follow it, particularly at an organization that is spread globally over many time zones. It's a slow process, but that's what it takes to keep people doing things consistently."

Consistency, in the way the company performs internally and deals with its customers, is the linchpin of Solectron's competitive advantage.

Buyers are from Mars, Suppliers are from Venus

At Chicago, Ill.-based Newark Electronics, CEO Mike Ruprich will tell a similar story about why he was motivated to move supply chain management into focus at his company, and it boils down to customer care. Three years ago, when Ruprich joined Newark, a division of global Premier Farnell, plc, and one of the largest catalog distribution companies in the Americas, he hit the ground running with the intention to address the new and emerging needs of Newark's customers. "After I joined the company, the first thing I did was look at how we were satisfying the needs of our customers," says Ruprich. "Having done a 90-day investigation, it was apparent that we were not meeting the needs of the customers in a number of areas and the supply chain was one of them."

Those more familiar with a CEO who grumbles about supply chain management as a back-office function may be surprised by Ruprich's seemingly innate sensitization to the importance of supply chain management issues and their relationship to customer satisfaction. But Ruprich, with a background in distribution, long ago became attuned to the needs of the customer and the benefits of supply chain management as a business management strategy. In fact, having always worked downstream from consumer product companies, Ruprich even stresses the importance of being sensitized to what division - and even what individual - you are dealing with at a customer company. "As a customer's supplier, you have to understand multiple needs. A design engineer in an organization has different needs than a purchasing agent or a maintenance engineer. You have to understand - down to the individual and up to the executive suite - what the different needs of a corporation are and then build systems to deliver based on those needs."

Having made the decision to make a significant investment into Newark's supply chain, Ruprich and his executive team set out to build a supply chain that could offer customers services like next-day delivery, order completion reports and real-time order tracking information. The first step toward this goal was recruiting people with the skill sets to understand different offerings and the different ways to invest in different technologies. Among the skill sets he looked for were technological expertise and an aggressive attitude toward systems processes and quality techniques.

One of the first recruits was Ray Kernagis, vice president, logistics. Kernagis, who helped recruit even more people to the company, was equally committed to the important role that quality, skilled people would play in Newark's ability to reach its goals. He emphasized the criticality of technical expertise, product management skills, and inventory and purchasing management skills with respect to attributes. "You have to have the talent to be able to effectively communicate cross functionally," says Kernagis. "It takes a broad skill set in order to be effective within the supply chain."

The ability to work cross-functionally was a desired trait with regard to the structure of Newark's supply chain organization as well. In order to foster this, Newark moved to an enterprise-wide supply chain organization, which it, like many companies, refers to as a "One Company" approach. The company took key individuals who were isolated at the time within divisions like distribution, purchasing or inventory management, and established a supply chain group that was empowered to work cross-functionally, both inside and outside the organization. Never dissolving the divisions within the company, the new supply chain organization essentially lay on top of those divisions in order to give its members visibility into all functions of the supply chain.

With the right organizational structure and the right personnel in place, Newark was ready to implement new technology. As many executives will tell you, getting employees to adopt new systems is often a harder job than deciding to make the investment. But one thing is for sure: If the technology is not properly adopted among company employees, it is a fast way to let a potential competitive advantage turn into a flat investment. Luckily, inside Newark, the technology and organizational changes were welcome because the company hadn't seen any major technology investments in several years. "In Newark, [employees] had been told for a number of years they would be moving from green screens to completely PC-enabled," described Ruprich. So when he came in and finally made the change happen, "It added a lot of excitement," he recalls.

Part of that excitement went back to the company's ability to satisfy its customers. "Our employees began to see that this [technology] was what their customers had been asking for ... and that now they could deliver it," says Ruprich. "Suddenly, we became a can-do culture."

For all of their work inside the four walls of Newark, the ultimate goal for Ruprich and Kernagis was to reap the benefits outside the four walls. "The key driver at the end of the day," states Kernagis, "is how effectively you're able to drive costs out of the system and, at the same time, provide the customer with real-time information as to where its products are."

Of Cost and Consistency

Upstream, the view outside the four walls looks a bit different. Traditionally, a consumer products company has had three customer-facing concerns: cost, quality and delivery. But with today's cost-efficient contract manufacturers and third-party logistics providers (3PLs), that formula has boiled down to a concentration on cost. This is not to say, however, that supply chain management is not a priority for these companies. Quite the contrary; just as suppliers are uncovering and leveraging the quality, delivery and service advantages in their supply chains, consumer product companies are uncovering vast pockets of cash.

Case in point: Pitney Bowes. In 1993, Pitney Bowes was largely a mailing equipment provider, manufacturing 70 to 80 percent of its products internally. At the time, most postage meters were manufactured using rotary drum technology, which Pitney Bowes was fully equipped to provide. However, around 1995 the requirements for printing technology began to change, and postal authorities around the world moved toward digital and inkjet printing technology. Rather than invest in new, digital inkjet manufacturing equipment, the company decided to move this manufacturing externally to its supply base. Although postage meters are still Pitney Bowes' bread and butter, today the $4 billion company has virtually reversed its manufacturing ratio, managing only 30 to 40 percent internally and outsourcing 60 to 70 percent.

Outsourcing significant parts of its manufacturing allowed Pitney Bowes to concentrate on its core competency: its products. In fact, today its products have branched out to include messaging hardware and software, document management and bill presentment services, outsourcing services, and such financial services as leasing and commercial banking. But back in 1995, its internal supply chain was still not a major priority for the company. As the Vice President of Product Supply at Pitney Bowes, Ray Hill remembers: "A lot of companies said, '[Supply chain management] is a back-office operation. Let's take out as much money as we can in terms of operating expenses and people, but let's not invest in it.' And that was incredibly short-sighted."

But that soon changed. "CEOs and, in particular, [chief financial officers], figured out there is a ton of money in the supply chain," says Hill. "The faster you can move the velocity of money and manage it effectively, it's equivalent to eight or 10 times what you would generate in sales revenue. It's a relatively quick improvement to bottom-line profitability." Consequently, Hill doesn't think Pitney Bowes was necessarily "progressive" in its decision to invest money in its supply chain. "When you realize there is a lot of money in this and you can improve your bottom line, it's an easy decision," he says.

Clearly, the people at Pitney Bowes are not shy about their motivations to invest in supply chain management technology, and they are not afraid to admit that their success in leveraging supply chain management for competitive advantage has little to do with customer care. "From a customer-facing standpoint," explains Hill, "[supply chain technology] has certainly reduced our overall cycle times. In fact, we've reduced cycle times down to hours. Theoretically, that should improve customer costs, but it mostly just improves our margins." To boil it down even further, Hill says there are only two groups that will reap the benefits when you're talking about bottom-line savings: "Either the customer sees the benefits or the shareholders see the benefits."

But cash savings can only offer some advantages to companies, and Pitney Bowes realizes that leveraging those savings hinges on its ability to manage positive, consistent relationships with its suppliers and business partners. To develop this, Pitney Bowes has begun an aggressive internal campaign to move to a One Company approach that is based on, in Hill's words, the realization that, "We could no longer afford to run the company as independent units. We started driving to a common platform across the business and ultimately into a shared services organization."

This One Company approach is a strategic, common, move for companies looking to manage their supply base in a consistent fashion, according to Matt Porta, a partner who leads the strategy for the Collaborative Value Chain Practice at PwC Consulting. "The increase in prominence in the One Company approach is, for many industries, driven by the fact that their overall value chain is becoming much more disaggregated," says Porta. "As a result, to work effectively with partners outside, you have to have one face to them. The one thing that a supplier, like a contract manufacturer, hates is to be interfacing with three different units of the same company."

Today, business units and functions at Pitney Bowes that were once independent, such as IT, human resources and procurement, are becoming centralized, enterprise-wide units. With the visibility to maintain consistency internally throughout the organization and externally with respect to its business partners, Pitney Bowes has ensured it will continue seeing those bottom-line savings.

It's the Clarity of the Call That's Important

For executives at telecommunications behemoth Sprint, talk of bottom-line savings will always manage to perk ears. Though shareholder benefits are important to Sprint, as an active participator in the infamous price wars of its industry, passing down cost savings to its customers is often necessary to remain competitive, which is all the more reason to wring every dime out of its supply chain.

Like Pitney Bowes' Hill, Ed Lucas, vice president of supply chain management at Sprint, attributes much of the company's supply chain progress over the past three years to executive support. "There has been a strong recognition at the most senior levels within Sprint that we want to have a single focus that makes sense for the company, and we want to drive things to the highest degree of commonality," says Lucas. "We have been successful in driving savings to the organization through some of the [supply chain management] initiatives underway."

Bill Esrey, chairman and CEO of Sprint, attributes much of that success to Sprint's ability to individualize its supply chain services. "Supply chain management has moved from being regarded as a back-office function to an integral component of our customer service experience," says Esrey. "The customers we serve range from residential, to small businesses to the largest multinational enterprises. Each has unique needs, and each demands quality, whether in voice, data or Internet communications. How we deliver that service and customer experience is dependent on an interconnection of telecommunications products and networks. Without world-class supply chain management we are vulnerable every step of the way."

Sprint has been calculated about its supply chain initiatives, too. According to Lucas, a clear vision was established for Sprint's supply chain organization, and the path to reach that vision was explored from both a technical and a business process standpoint. Ultimately, says Lucas, that vision is for Sprint to have "a world-class synchronized value chain." Lucas explains this concept using an interesting analogy gleaned from a recent internal meeting he attended: "If someone thinks about wanting a glass of milk, the cow immediately starts heading to the barn," he says. It's not the kind of high-tech analogy you might expect from a company like Sprint, but it captures the importance of having a certain amount of visibility and awareness up and down the supply chain.

Part of Sprint's calculated process for achieving the goal of synchronization includes actually plotting various supply chain operations on a graph. The x-axis of the graph gauges value, beginning with traditional operation performance and moving to integrated, collaborative or, finally, synchronized performance. The y-axis measures the maturity of Sprint's supply chain operations based on the scope of an operation's focus, such as departmental, enterprise-wide, or supplier- and customer-focused. By plotting where its operations fall on this continuum, Sprint can get a better idea of how far it needs to go in enabling its supply chain.

"We're in a process right now within the supply chain organization at Sprint," explains Lucas, "where we are going through and asking ourselves where each supply chain function falls within this [graph]. We think we've got some functions that are integrated in nature, but we probably have some that are still focused on departmental objectives. We've got some that we think have moved into the collaborative stage where we're looking to work with our suppliers and customers and our suppliers' suppliers and our customers' customers to ensure that we've got an effective communication link and an effective value chain."

Lucas says Sprint is supporting this drive for a synchronized value chain with a One Company approach, known internally as the "One Sprint" approach. "By focusing on things from an enterprise-wide standpoint," says Lucas, "there is more of an opportunity for us to generate larger savings for the corporation. There's been a recognition that, to the extent that we have multiple business units dealing with the same supplier, and in many instances for the same product, there is a significant leveragable opportunity there that would be passing us by."

To Lucas' point, there are significant opportunities to be had from leveraging enterprise-wide visibility, and a year ago that opportunity would have been identified only in the area of corporate spend. But today, what keeps executives like those at Sprint, Newark Electronics, Pitney Bowes and Solectron on the leading edge is their ability to recognize the opportunities that such visibility presents elsewhere, like in maintaining consistent relationships with business partners and supply bases. As executives at any of these companies will tell you, the linchpin of the supply chain success model is not recognizing the opportunities of today, but leveraging the opportunities of tomorrow.