Gaining Competitive Advantage through Supply Chain Excellence
Dr Martin Christopher, Emeritus Professor of Marketing & Logistics, Cranfield School of Management
Real competition is between supply chains, not companies. Continued uncertainty and turbulence on both the demand-side and the supply-side of business, means firms must invest in effective supply chain management. As organisations have outsourced many of the activities they used to perform in-house, so too has their dependence upon other entities increased. Most commercial enterprises are now part of an extended network that involves multiple connections spanning the globe. Often, the full extent of that network and the related dependencies are not fully understood and hence, they are not always managed as closely as they need to be.
There are many stories in the business press about companies that have failed because of flaws in their supply chains. The recent events of Brexit, Covid and the energy crisis that ensued from war in Ukraine have highlighted how critical it is that supply chain management becomes the priority in every business sector.
Research has shown that excellence in supply chain management is crucial to a company's success in the marketplace. Procter and Gamble, the global manufacturer of fast-moving consumer goods (FMCGs), realised that it was not sufficient to have innovative products that met customer needs-the company also had to make sure those products were available when and where customers wanted them. This was the notion of what they termed ‘the two moments of truth.’ The first moment of truth was the product being on the shelf when a customer came into the store. The second moment of truth was if, once tried by that customer, it delivered an experience well worth remembering.
It is increasingly recognised that effective supply-chain management must begin with an understanding of customer needs. While it may seem obvious, too many companies have been focused on optimising internal performance at the expense of satisfying their customers. But now that is changing, the guiding principle for supply chains is to be designed from the customer backwards, rather than from factory outwards.
To achieve this transformation a number of principles emerge to guide the supply chain manager. These can be conveniently summarised as the ‘4Rs’ of responsiveness, reliability, resilience and relationships.
Responsiveness
In today’s competitive world, the ability to respond to customers’ requirements in ever-shorter time-frames has become critical. Not only do customers want shorter lead-times, they are also looking for flexibility and increasingly customised solutions. To succeed, suppliers must be able to deliver precisely what customers want and need more quickly than ever before. The key word in this changed environment is agility, the ability to move quickly and meet customer demand sooner. In a fast-changing marketplace, agility is more important than long-term planning. Because future demand patterns are uncertain, and therefore difficult to plan for in traditional ways, this makes planning something of a risky proposition.
In the future, organisations must be much more demand-driven than forecast-driven. The means of making this transition will be through the achievement of agility, not just within the company but across the supply chain. Responsiveness also implies that the organisation is close to the customer, hearing the voice of the market and quick to interpret the demand signals it receives.
Reliability
Supply chain reliability, in the sense that the system consistently performs exactly as planned, can provide a powerful competitive edge. One of the main reasons why any company carries safety stock is because of uncertainty. It may be uncertainty about future demand or uncertainty about a supplier’s ability to meet a delivery promise, or about the quality of materials or components. Meeting customer expectations is fundamental to achieving and maintaining market leadership. Significant improvements in reliability can only be achieved through re-engineering the processes that impact performance. Manufacturing managers long ago discovered that the best way to improve product quality was not by quality control through inspection, but rather to focus on process control. The same is true for logistics reliability.
One of the keys to improving supply chain reliability is through reducing process variability. In recent years there has been a considerable increase in the use of ‘Six Sigma’ methodologies. Six Sigma tools are designed to enable variability in a process to be reduced and controlled. Thus, for example, if there is variability in order processing lead-times, then the causes of that variability can be identified and where necessary the process can be changed and brought under control.
Resilience
As we have already commented, today’s marketplace is characterised by higher levels of turbulence and volatility. The wider business, economic and political environments are increasingly subjected to unexpected shocks and discontinuities. As a result, supply chains are vulnerable to disruption and, in consequence, the risk to business continuity is increased.
Whereas in the past the prime objective in supply chain design was cost minimisation or service optimisation, the emphasis today has to be upon resilience. Resilience refers to the ability of the supply chain to cope with unexpected disturbances. There is evidence that the tendency in many companies to seek out low-cost solutions because of pressure on margins may have led to leaner, but more vulnerable, supply chains.
Resilient supply chains may not be the lowest-cost supply chains, but they are more capable of coping with the uncertain business environment. Building resilient supply chains requires an understanding of where the supply chain is at its most vulnerable. Ideally the supply-demand network should be regularly subjected to a ‘stress test’ to identify the critical nodes and links which will then need to be reinforced and constantly monitored.
Relationships
It can be argued that good relationship management lies at the heart of supply chain excellence. Because we have observed that most organisations are highly dependent upon other players in the supply chain, it stands to reason that buyer-supplier relationships should be based upon the principle of partnership. It has been found that the benefits of ‘partnership sourcing’ include improved quality, innovation sharing, reduced costs and integrated scheduling of production and deliveries. Increasingly, companies are discovering the advantages that can be gained by seeking mutually beneficial, long-term relationships with suppliers. From the suppliers’ point of view, such partnerships can prove formidable barriers to entry for competitors. The more that key business processes are linked between the supplier and the customer, the more the mutual dependencies increase and hence the more difficult it is for competitors to break in.
Supply chain management, by definition, is about the management of relationships across complex networks of companies that, whilst legally independent, are in reality interdependent. Successful supply chains will be those that are governed by a constant search for win-win solutions based upon mutuality and trust. This is not a pattern of relationships that has typically prevailed in the past. It is one that will have to prevail in the future as supply chain competition becomes the norm.
Conclusion
Looking back over recent decades it is possible to find strong evidence of the link between supply chain excellence and success in the marketplace. Every year the consulting company Gartner conducts a survey of the world’s best supply chains and the results consistently indicate a correlation between supply chain excellence and financial performance. Companies as diverse as Unilever, Apple, Amazon and Schneider Electric have demonstrated the value of investing in the 4Rs of responsiveness, reliability, resilience and relationships – a powerful recipe for business success!
About the author: Martin Christopher is Emeritus Professor of Marketing and Logistics at Cranfield School of Management, UK. He has been at the forefront of logistics and supply chain thought leadership for many years and has gained an international reputation for his contribution to theory and practice in these fields. The ideas presented in this article are dealt with in greater detail in the author’s recently published book: Logistics and Supply Chain Management, 6th edition, Pearson Education 2023.
References
Christopher, Martin (1992) Logistics and Supply Chain Management 1st edition, Financial Times/Pitman
Martin, James (2014) Lean Six Sigma for Supply Chain Management 2nd Edition, McGraw Hill
Sheffi, Yossi (2015) The Power of Resilience The MIT Press
https://www.gartner.co.uk/en/supply-chain/research/supply-chain-top-25