Better, Faster, Closer How Supply Chain Management is Changing the Rules of Competition

Martin Christopher Professor of Marketing & Logistics

Only a few years ago, most marketing professionals would have answered the question: How do you compete? with the simple response : Through our brands of course. However, the marketplace has changed radically over the last decade. No longer is it enough to rely on the strength of consumer pull to provide the means of moving large volumes of product off the shelves. Brand loyalty is now a fairly rare phenomenon as consumers faced with a choice of equally acceptable alternatives, including retailers own brands, now focus much more on value and, in particular, availability. All the evidence seems to suggest that consumers have a portfolio of brands from which they are quite content to choose. If the preferred brand is not on the shelf, the tendency is to select another. For fmcg marketing people the big question now is : What do we have to do to convince the retailer to give us presence on the shelf? The same challenge faces those organisations that compete in business-to-business markets. These companies may be selling components to original equipment manufacturers (OEMs) or end products to distributors. For them the issue is : How do we achieve preferred supplier status?. As their customers increasingly seek to reduce their supplier base, manufacturers and suppliers generally must now focus upon the ways in which customer value can be created and maintained. Customer value can be defined as the customers perception of benefits gained from the relationship less the total cost of ownership. Whilst the measurement of perceived benefit is not straightforward - it is a mixture of the tangible and the intangible, marketing people normally talk about the core product or service and the product surround - total cost of ownership is a powerful, if little used, practical marketing tool. It involves the supplier looking into their customers value chain and asking the question : Where am I impacting the cost of my customers value creating activities?. In logistics, for example, this impact could come through the way in which the supplier reduces the customers need to carry inventory as a result of a vendor managed inventory (VMI) programme. Or again, if the supplier can respond in shorter time-frames to customer requirements then it is likely that the customers stock out costs will be reduced. In short, focusing on customer value provides a major opportunity to create longer-term relationships with customers and in so doing switch the emphasis from price to value.

The New Rules of Competition The rules of competition are changing. It is no longer enough to rely in brand values or proprietary technology. Certainly, strong brands combined with product and process innovation can provide a firm foundation upon which marketplace success can be built. But real competitive advantage comes from a combination of loyal consumers, committed customers and a superior supply chain. Figure 1 highlights the interplay of these three key competitive elements.

Marketing and logistics converge

Consumer Franchise Brand Values Innovation Benefit Focused

MARKETING ADVANTAGE

Customer Value Costs of Ownership Value-Adding Relationship Service Quality

Supply Chain Effectiveness Low Cost Supplier Reduced Asset Base Network management

Whilst no one element of this trinity is more important than the other, and they are highly inter-connected and interdependent, many companies are finding that the supply chain can provide them with an as yet untapped source of additional advantage. Supply chain management can be defined as the management of upstream and downstream relationships with suppliers, distributors and customers in such a way that greater customer value is achieved at lower cost. The aims of supply chain management are aptly summarised by three words - better, faster, closer. Better It has now become an accepted fact of commercial life that customer service is a critical determinant in winning and keeping customers. Todays customer in virtually every market is demanding ever-higher levels of performance from suppliers, particularly with respect to delivery service. In many organisations the focus upon inventory reduction has caused them to look closely at the quality of the in-bound delivery service they receive from suppliers. At

the other end of the marketing channel, consumers have become equally demanding in their service requirements. In the era of fast food and convenience stores, there is less willingness to wait. As a result, on-the-shelf availability will often overcome brand preference as we have already observed. The challenge to the organisation that aspires to be a leader in service performance is to recognise the service requirements of the different segments that it services and to restructure its logistics processes around the achievement of those service requirements. Organisations in virtually every market sector have come to recognise that differentiation through superior customer service offers an opportunity to avoid price competition. Whilst there will always be price buyers in any market, there are also large numbers of service sensitive customers. The success of Marks and Spencers in selling, at relatively high prices, oven-ready, gourmet-style meals demonstrates that there are significant numbers of customers who are time sensitive rather than price sensitive. Service quality is perhaps the most powerful element in the marketing mix today. Organisation that have focused on managing the processes that lead to higher and more consistent levels of service tend also to be the most profitable according to several recent studies. It is also recognised that increasing customer retention and hence customer lifetime provides higher quality earnings and simultaneously makes competitive erosion of market share more difficult. The key to improved customer retention it can be argued is in the provision of superior customer service. For that reason leading companies now measure their services performance in terms of perfect orders. In other words, that are looking at service through the customers eyes and are setting service standards based upon the achievement of meeting customers expectations 100% of the time. In turn, these companies recognise that the only way these demanding goals can be met is through better management of logistics and an integrated supply chain. Faster In recent years, one of the most significant developments in the way that companies manage their operations and formulate their competitive strategies has been the focus on time. There are clearly many ways in which firms compete and through which they seek to gain advantage over their rivals. However, the ability to move quickly, whether it be in new product development or in replenishing customers inventories, is increasingly recognised as a pre-requisite for market-place success. The late Twentieth Century has seen the emergence of the time-sensitive customer. These time-sensitive customers can be found in every type of market, be it in high-tech markets where short life-cycles demand short lead-times, or in consumer durable manufacturing where just-in-time assembly requires just-in-time deliveries, or in every day living where the pressures of managing a more complex, hectic life-style have led us to seek convenience be it in banking, shopping or eating.

Whole industries have grown up around time compression, from overnight delivery to fast food. Technology has facilitated this process : cellular telephones, fax and satellite communications have all contributed to the continued search for the achievement of quicker response to the demands that customers place upon us. Now, quality is measured not just in terms of product performance but delivery performance as well. Few industries have been immune from these pressures and managers must constantly seek ever-more innovative ways of squeezing time out of every business process. Indeed, the main driver behind the Business Process Re-engineering (BPR) philosophy has been the search for more timeeffective ways of doing things. Time reduction does not only lead to faster response to customer needs but, just as importantly, can lead to cost reduction and greater flexibility. Time is money may be a clich, but in todays competitive market place it has never been more true. Lack of responsiveness in logistics processes can heighten the risks both of stock-outs and thus lost sales, and over-stocked situations leading to mark-downs or stock write-offs. Compaq, the personal computer company acknowledged that in 1994 their inability to respond to an upsurge in demand for their range of notebook computers led to estimated sales losses of up to $1 billion dollars. At the same time, Apple Computers were reported to have been forced to scrap 30,000 brand new Newton personal organisers because of an over-estimate of demand. Similar examples can be found in industries as diverse as clothing and electrical components. Closer The emergence of the network organisation is a recent phenomenon that has given rise to much comment and analysis. These virtual organisations are characterised by a confederation of specialist skills or capabilities provided by the network members. It is argued that such collaborative arrangements provide a more effective means of satisfying customer needs at a profit than does the single firm undertaking multiple value-creating activities. The implications of the network organisation for marketing management are considerable and, in particular, the challenges to logistics management are profound. To make networks more effective in satisfying end-user requirements requires a high level of co-operation between organisations in the network along with the recognition of the need to make inter-firm relationships mutually beneficial. Underpinning the successful network organisation is the value-added exchange of information between partners meaning that information on downstream demand or usage is made visible to all the upstream members of the supply chain. Creating visibility along the pipeline ensures that the manufacture and delivery of product can be driven by real demand rather than by a forecast and hence enables all parties in the chain to operate more effectively. Supply chain management is concerned to achieve a more cost-effective satisfaction of end customer requirements through buyer-supplier process integration. This integration is typically achieved through a greater transparency of customer requirement through the

sharing of information assisted by the establishment of seamless processes that link the identification of a physical replenishment need with a just-in-time response. The important concept here is the idea of process integration. Processes are the fundamental ways through which value is created. Such processes include : new product development, order fulfilment, supplier management and customer management. To achieve real integration in the supply chain requires ideally that these processes also be integrated upstream with supplier and downstream with customers. Take, for example, the new product development process. If suppliers as well as customers can become part of an integrated process team (as now happens increasingly in the car industry) then it is more likely that innovative products meeting the needs of customers and consumers will be developed - and at greater profit to the members of the integrated chain. The same argument is true for all processes, i.e. that integration upstream and downstream will lead to a more responsive supply chain, an integration that is underpinned by the recognition of the need for mutual benefit which is made possible by the free flow of information up and down the chain.