Professor Martin Christopher Better, Faster, Cheaper, Closer! How Supply Chain Management is Changing the Rules of Competition Professor Martin Christopher

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

The four pillars of supply chain excellence Better Faster Cheaper Closer

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

Better!

Demand chain management : linking customer value to supply chain strategy

Diminishing brand loyalty “When I find a brand I like, I tend to stick to it” % agreeing Source : BMRB/TGI 2003

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

Shopper behaviour when faced with a stock-out

Actions taken when faced with a stock-out

Consumer responses (%) 21 37 On average the retailer loses 30% of purchases, and the manufacturer almost half, due to ‘out of stocks’ Consumer responses (%) 21 37 9 17 16 Buys a different size Returns later Doesn’t buy anything Buys a different brand Buys brand elsewhere Range 12-31 11-20 4-10 21-65 8-41 Source : Roland Berger

All studies show typical OOS rates in Europe of between 7 and 10% 7-10% 20%+ 2% Average Fresh ready-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 Source : Roland Berger

OOS causes supply chain inefficiencies Consumer Brand switch Store switch Size switch Timing delays Inaccurate Picture to the Supply Chain of product mix product levels product flow Sends an Source : Gruen, Corsten and Bharadwaj (2002)

Faster!

How long is the logistics pipeline? Cumulative Lead-Time (Procurement to 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)

International logistics pipeline Material Stocks & WIP Finished Stocks Warehouse Wholesaler Retailer Manufacturing Component Suppliers Sales Organisation Customers ? 30 5 65 35 55 10 In- Transit Total Pipeline Time 200 Days

Pathways to time compression Supply Side Internal Demand 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

Zara’s value net design brings fashion to market …………. fast 3. Textiles are sourced from global suppliers 1 2 4 5 Partners Zara Customers are young fashionable professionals 6 3 1. Zara stores are digitally linked to headquarters; employees collect and share input from customers daily Information flows Product flows 4. Zara’s parent performs the capital-intensive production activities 2. Zara designers sketch new styles based on customer input and “hot spot” trends 5. Local workshops perform final sewing/assembly 6. One distribution centre dispatches product to stores twice weekly Source : Mercer Management Consulting

Cheaper!

Customer profitability % of Total Profit Contribution 100% % of Total Customer

Measuring the ‘cost to serve’ Logistics cost accounting What costs? - Inventory - Transport - Warehousing - Order processing - etc All costs incurred from ‘order to collection’ What measures? - Full costs - Marginal costs - Avoidable costs

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

Activity based costing Understand the order fulfillment process Identify the cost drivers Customer cost accounting Delivery Invoice & Collection Order Capture Entry Approval & Confirmation

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

Closer!

From transactions to relationships Strategic alliance A 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-sourcing A specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper’s defined performance goals. Transaction A relationship built on a single event, or a series of separate single events. Strategic Alliance Outsourcing Transaction

Source : Rosbeth Moss Kanter 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

M G Christopher 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