Value through the Supply Chain

Maintaining a competitive advantage is a balance between providing great value for customers and doing it in such a way that your costs remain competitive. If you cut costs too much, you destroy your ability to service the customer. And service is the key ingredient behind customer retention. If your costs are too high, then your competition may gain an advantage in properly balancing costs with customer value. It should be noted that the value-chain encompasses all activities from design of products and services all the way through to the support of customers after they buy the product.

The buzzword for this whole process is called Supply Chain Management (SCM). The objective of SCM is to have all links in the chain working together, delivering products and services to customers when, where, and how they want it. At the same time, SCM must focus on minimizing costs and resources so that value is enhanced. Most value chains will consist of three links:

Distribution: Delivering products and services to customers.

Production: Converting resources into finished products and services according to the demands of the customer.

Resources: Acquiring the materials, people, and other resources to produce the required product or service.

Since this entire process is customer driven and since Distribution is closest to the customer, we start by looking at the Distribution link. Traditionally, distribution had several links, manufacturer to agent, agent to distributor, distributor to retailer, and retailer to customer. In today's global e-commerce world, it is quite common to see only two visible links: Manufacturer selling directly to the customer. By removing links, we cut down on lead times and reduce costs within the supply chain.

One useful tool for streamlining distribution links is the customer product map. A customer product grid or map will differentiate customers. For example, some customers prefer to buy direct while others prefer traditional distribution outlets. Customer maps also identify product mixes, geographic markets, seasonal patterns, and other relationships important to customer demand. Collecting information about customer demand is extremely important. The objective is to get the customer involved in driving Supply Chain Management (SCM).

Once distribution has been re-designed around the customer, the next step is to integrate production into distribution. You need a production process that is fast, flexible, and centered around the customer order. Gone are the days of producing standard products within standard cost accounting systems. The process is now customer driven with throughput accounting, no longer relying on production forecasts.

After production and distribution have been engineered to fit the marketplace, you can move to the Resource Area with SCM. Resources must be managed on a Just In Time basis, delivering materials and other resources only as they are needed. This will require that you educate suppliers as to your marketplace needs. Establishing strong relationships with everyone involved is critical. In some cases, you may need to phase-out certain suppliers in favor of the more networked, leading-edge suppliers you can fit with e-procurement applications. Additionally, it may be necessary to share costs with suppliers in order to retain relationships.

A good example of reinventing the supply-chain is IKEA, a retail furniture store. The first part in the value-chain is product design: IKEA uses simple designs and parts. Secondly, IKEA keeps costs down by having the customer transport the product to the home and assembly the product. This eliminates non-value added links in the value-chain. Third, IKEA sells products of extremely high quality. IKEA also leverages technology and its Scandinavian image to create a competitive advantage through inventory management and marketing. The leveraging of core competencies is critical to squeezing value out of the supply-chain.

The entire supply-chain should be evaluated, from suppliers to end-users of the product. Supply-chains must be externally focused in a highly competitive environment. This requires that you work very closely with suppliers, customers, and everyone involved in the supply-chain. Finally, costs are controlled by looking at what drives the costs. The objective is to manage your activities better than the competition. Letting the customer guide the process (SCM) is how you can meet this objective.

Written by: Matt H. Evans, CPA, CMA, CFM | Email: | Phone: 1-877-807-8756

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