Better, Faster, Cheaper, Closer!

How Supply Chain Managementis Changing the Rules of Competition

Professor Martin Christopher

Page 2

New competitive realities

● Input costs are rising but customers’ expectations are for lower prices

● New sources of low cost competition mean that downward pressure on price will continue

● Continual concentration of markets means that bigger, more powerful customers will demand more from their suppliers

Page 3

The four pillars of supply chain excellence

Better CloserCheaperFaster

Supply ChainExcellence

Page 4

Focus on customer value

BETTER : Superior service quality

FASTER : Greater responsiveness through time compression

CHEAPER : Lower costs of ownership

CLOSER : Create partnerships in the supply chain

Page 5

Better!Better!

Page 6

Demand chain management : linkingcustomer value to supply chain strategy

Identifyvalue

segments

Develop thesupply chain

strategy

Identifythe market

winners

Define thevalue

proposition

What do our customers value?

How do we translate theserequirements into an offer?

What does it take to succeedIn this market?

How do we deliver againstthis proposition?

Identifyvalue

segments

Develop thesupply chain

strategy

Identifythe market

winners

Define thevalue

proposition

What do our customers value?

How do we translate theserequirements into an offer?

What does it take to succeedIn this market?

How do we deliver againstthis proposition?

Identifyvalue

segments

Develop thesupply chain

strategy

Identifythe market

winners

Define thevalue

proposition

What do our customers value?

How do we translate theserequirements into an offer?

What does it take to succeedIn this market?

How do we deliver againstthis proposition?

Page 7

Diminishing brand loyalty

60

62

64

66

68

70

72

74

76

1988 1989 1990 1991 1992 1993 1995 1996 1997 1998 1999 2000 2001 2002

% agreeing

“When I find a brand I like, I tend to stick to it”

Source : BMRB/TGI 2003

Page 8

The importance of availability

In mature markets on-the-shelf availability can transform profitability both for the manufacturer and the retailer.

Two thirds of all shopping decisions are taken at the point-of-purchase.

Availability can overcome brand loyalty where the shopper selects from a ‘portfolio’ of brands

Page 9

9%

15%

19%

31%

26%Do not purchase item

Delay purchase

Substitute differentbrand

Substitute same brand

Buy item at anotherstore

Shopper behaviour when faced witha stock-out

Page 10

Product outof stock

Boughtsame brand,different size

Boughtdifferentbrand

Postponedthe

purchase

Will shop inother stores

for brand

Boughtother

products% % % % %

Coffee 19 41 15 21 4

Tea 2 34 12 48 4

Soft drinks 10 29 15 36 10

Butter 3 55 16 24 2

Washingpowders

8 37 17 38 0

Bakedbeans

18 61 8 12 1

Toilettissues

0 20 40 39 1

Actions taken when faced witha stock-out

Page 11

On average the retailer loses 30% of purchases,and the manufacturer almost half, due to ‘out of stocks’

Consumer responses (%)

1617

9

3721

Buys adifferentsize

Returnslater

Doesn’tbuyanything

Buys adifferentbrand

Buys brandelsewhere

Range 12-31 11-20 4-10 21-65 8-41

Source : Roland Berger

Page 12

All studies show typical OOS rates inEurope of between 7 and 10%

Source : Roland Berger

7-10%

20%+

2%

Average Freshready-meals

Hair care

● Each lost family costs the retailer EUR 15K

● Each 1% lower OOS a manufacturer

can achieve equates to an additional

0.5% of growth

● Each 1% lower OOS a retailer can achieve equates to a 0.3% higher growth rate

● EUR 4 bn lost across Europe

Page 13

OOS causes supply chain inefficiencies

Source : Gruen, Corsten and Bharadwaj (2002)

Consumer● Brand switch● Store switch● Size switch● Timing delays

Inaccurate Picture tothe Supply Chain of● product mix● product levels● product flow

Sends an

Page 14

Faster!Faster!

Page 15

How long is the logistics pipeline?

CumulativeLead-Time

(Procurementto Payment)

Raw Material Stock

Sub-Assembly Stock

Intermediate Stock

Product Assembly

Finished Stock at Central Warehouse

In-Transit

Regional Distribution Centre Stock

Customer Order Cycle (Order-Cash)

Page 16

International logistics pipeline

Material Stocks& WIP

FinishedStocks

Warehouse Wholesaler Retailer

Manufacturing

ComponentSuppliers

SalesOrganisation

Customers

? 30 5 65 35 55

10

In-Transit

Total Pipeline Time 200 Days

Page 17

Demand SideInternalSupply Side

● Strategic sourcing

● Synchronised production & sequencing

● Co-location

● Reduce non-value adding time

● Reduce complexity

● Postponement

● Collaborative planning

● Co-managed inventory

● Visibility of real demand

Manage the extended enterprise

Pathways to time compression

Page 18

Zara’s value net design brings fashion to market …………. fast

1

24

5

Partners

Zara

Customersare youngfashionableprofessionals

6

3

1. Zara stores aredigitally linked toheadquarters; employeescollect and share inputfrom customers daily

2. Zara designerssketch new stylesbased on customerinput and “hot spot”trends

6. One distribution centre dispatchesproduct to stores twice weekly

3. Textiles aresourced fromglobalsuppliers

4. Zara’s parentperforms thecapital-intensiveproductionactivities

5. Local workshopsperform finalsewing/assembly

Information flows

Product flows

Source : Mercer Management Consulting

Page 19

Cheaper!Cheaper!

Page 20

Customer profitability

% of TotalProfit

Contribution

100%

100%

% of Total Customer

Page 21

Measuring the ‘cost to serve’

• Logistics cost accountingWhat costs?- Inventory- Transport- Warehousing- Order processing- etc

• All costs incurred from ‘order to collection’• Logistics cost accounting

What measures?- Full costs- Marginal costs- Avoidable costs- etc

Page 22

Activity based costing

● Customers create activity

● Activity generates cost

● Within each activity centre understand the cost drivers

● Analyse customers by the activity they generate

● Allocate costs according to relative customer activity

Page 23

Activity based costing

DeliveryInvoice &Collection

OrderCapture

OrderEntry

OrderApproval &

Confirmation

● Understand the order fulfillment process

● Identify the cost drivers

● Customer cost accounting

Page 24

Supply chain flows

● Products accumulate cost as they flow through the chain

● Products consume capacity and create costs differentially

● Customers contribute to costs differentially

● Conventional average measures are DANGEROUS

Page 25

Closer!Closer!

Page 26

From transactions to relationships

Strategic allianceA planned ongoing relationship where both parties have needs that the other can fulfill, and both firms share values, goals and corporate strategies for mutual benefit.

Out-sourcingA specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper’s defined performance goals.

TransactionA relationship built on a single event, or a series of separate single events.

StrategicAlliance

Outsourcing

Transaction

Page 27

7 “I’s” make “We”

● Importance - must be strategically significant

● Investment - both parties must be willing to invest

● Information - must have good exchange of information

● Integration - must connect at many levels

● Interdependence - cannot exist without each other

● Institutionalisation - must have formal mechanisms and structure

● Integrity - active respect in the relationship - mutuality and trust

Source : Rosbeth Moss Kanter

Page 28

Supply chain competition

“ Individual businesses no longer compete as stand-alone entities, but rather as supply chains. We are now entering the era of

‘network competition’ where the prizes will go to those organisations who can better structure, co-ordinate and manage the relationships with

their partners in a network committed to better, faster and closer relationships with their final

customers.”

M G Christopher