Business Edge, Volume 2, No. 5 - Operations Management

An increasing number of businesses are turning their attention to supply chain management to create competitive advantage and improve the bottom line. Many managers still view supply chain management (SCM) as a mechanism to improve profits through cost containment. However, it is important to recognize that effective SCM focuses primarily on meeting customer needs, rather than on cutting costs. Improved relationships with customers and more efficient product delivery processes can result in a clear distinction between firms and lead to sales growth. Alternatively, if cost cutting goes too far, the company may unknowingly eliminate services or product features that may be valued by customers.

The notion of leveraging supply chain service is particularly significant in situations where there exists intense competition on price, product features and promotional initiatives. In commodity-type markets where the standard is high-level service at the lowest cost, firms must reduce wasteful practices across the entire supply chain to create significant value. For example, in businesses like consumer packaged goods and automobile parts, firms have little choice but to compete on service to gain differentiation. Adopting a customer-driven perspective enables firms to view SCM as a tool for creating market value, rather than simply controlling costs.

Management of the supply chain can help firms distinguish themselves from competitors. Rather than limiting promotion efforts to the products they offer, the processes that accompany the products can be viewed as an additional means of adding value for customers. For example, manufacturing firms Unisys Corp. and Becton Dickinson have produced brochures that detail how their customizable distribution capabilities benefit customers.

It is rare that cost cutting alone can enable a company to improve long-term profitability and competitive position in a growing economy. Thus financial professionals must look beyond cost containment and focus on customer satisfaction as a major component of the strategic direction of the company¹. Embracing a customer-driven focus in the SCM process offers many tangible opportunities for financial professionals to actively participate in strategic planning and business decision making, and to be perceived as valued members of the management team.

To help their firms develop customer-driven SCM, financial professionals should:

Customer-Driven Versus Asset-Driven
Supply Chain Management
While many companies openly claim to be customer-driven, in reality, they tend to be more asset-driven². Managerial effort, performance evaluation and rewards are based primarily upon internally-oriented efficiency and productivity metrics rather than on the satisfaction of customer needs. In terms of SCM, customers value — and are often willing to pay a premium for — high-quality service, flexibility, reliability, customization and responsiveness. Unless firms adopt a focus broader than asset-driven cost control, the attributes critical to customer satisfaction may be overlooked.

In contrast to the internal focus of asset-driven companies, customer-driven companies maintain a more balanced focus by allocating time equally to tracking internal processes and external issues like customer needs and competitor actions. Senior managers may spend as much as one day a week meeting directly with customers. Formal customer service and satisfaction data is collected and regularly evaluated. Joint problem-solving meetings are routinely held with customers. A key determinant in performance evaluation and reward allocation is customer satisfaction.

Extensive familiarity with customers’ operations is important because SCM is essentially a trade-off between cost and service. An IMA research study³ in 1999 detailed how a company’s cost structure is dependent on the management of the supply chain. While it is important to control and contain such a major percentage of a company’s total costs, SCM can also have a considerable effect on “top-line” revenue growth. In order to realize the potential benefits in terms of increased sales and profits, management needs to understand the customer and recognize the value that customers assign to the various dimensions of service. It is essential that managers work across functional boundaries. SCM should not be considered the domain of any single functional group.

SIDE BAR

Supporting Customer-Driven Initiatives

Many customer-driven supply chain initiatives require considerable investment and may actually increase total costs. For example, an automatic replenishment program and a reverse logistics program are not only expensive to implement and time consuming to master, but often require that firms make radical changes to existing business relationships. Such investments are more likely if the potential benefits are recognized.

Automatic Replenishment Program
Automatic replenishment program (ARP) allows firms to develop exchange relationships in which the seller assumes responsibility for replenishing or restocking inventory based on actual product usage and stock level information provided by the buyer. Traditional product ordering processes are essentially eliminated; restocking quantities are determined based on daily sales data. ARPs create value by substituting information for inventory to reduce overall stock levels in the distribution channel. ARPs have benefited retailers and manufacturers by substantially reducing lost sales on out-of-stock items. For example, Campbell Soup and Proctor & Gamble are two companies that are leveraging ARPs to add value for their customers.

Campbell Soup uses ARP to ship products from its manufacturing plant warehouses to retailer distribution centers from where retail stores are restocked. Every weekday morning, retailers electronically communicate their current inventory positions and demand data from their distribution centers to Campbell Soup. Campbell Soup sends a resupply shipment to the retailer distribution centers based on this information. Initial evaluations⁴ indicated that the ARP process reduced inventories in retailer distribution centers by 50%, while service levels improved from 98.7% to 99.5%.

Proctor & Gamble saved its retailer customers more than $65 million over 18 months largely through using ARP to collaborate with retailers regarding the stocking of inventory⁵. Centralized demand planning is generally credited with helping Proctor & Gamble to achieve greater integration within their operations. The closer customer linkages achieved through the ARP have also significantly enhanced trade relations.

Reverse Logistics Programs
Traditionally, manufacturers have focused on adding value during the original sale and distribution process. However, opportunities to add or reclaim value also occur when goods need to be disposed of, returned, or exchanged. Successful reverse logistics pushes returns back through the pipeline and, when feasible, recovers some of the value.

Reverse logistics programs (RLPs) address various problem areas such as product defects (recall), customer dissatisfaction (exchange), returns (damage) and redistributions (seasonal and excess inventory). Recycling programs also fall under the reverse logistics umbrella, as does the disposition of hazardous or obsolete equipment. Effective reverse logistics processes can benefit a firm and its clients in a direct financial sense by controlling costs. Indirect benefits of a reverse logistics program, such as better corporate image and increased levels of customer satisfaction, may also add value.

RLPs are not “optional.” Firms are finding that they must be prepared to handle returns. Customer service initiatives, social responsibility and increasingly stringent legislation are steadily driving up the number of product recalls. The U.S. Product Safety Commission mandated 221 recalls affecting 8 million product units in 1988; in 1997, there were 362 recalls covering about 76 million product units⁶. Major recalls can involve several million units and significant financial costs. Intel’s well-publicized recall of 5 million chips resulted in a one-time charge of $475 million.

Some firms reclaim value by using reverse logistics to recapture products that would otherwise be lost. For example, DuPont collects and recycles its plastics, develops products from the recycled plastics, and sells the products to customers. It is estimated that 70% to 90% of every dollar generated through the sale of reclaimed assets goes to the bottom line as profit⁷.

As two specific examples, investments in well-executed ARPs and RLPs can significantly improve firm performance and service levels. Managers often find it difficult to quantify the payoffs associated with such initiatives. However, the benefits are potential cost savings and a closer relationship with the customer.

Adding Value Through the Supply Chain
Supply chain management adds customer value in three generic ways: effectiveness, efficiency and differentiation. It is important for finance professionals to recognize the product differentiation opportunity.

As an increasing number of businesses use SCM to create competitive advantage, it is important to recognize the importance of customer-driven SCM. If financial professionals are expected to help their firms develop customer-driven SCM programs, they must first appreciate the differences between customer-driven and asset-driven perspectives as applied to SCM. This important distinction will enhance the credibility of financial managers when operating in cross-functional teams and prepare them to best identify and support initiatives that capitalize on customer value-creation opportunities in the supply chain.

End Notes
1. See Barsky & Jablonsky, The Digital CFO, Strategic Finance,
June 2000
2. Supply Chain Management – The Basics and Beyond,
W.C. Copacino; The St. Lucie Press, Boca Raton, FL 1997.
3. See Cooper & Slagmulder. Supply Chain Management for the Lean Enterprise; The IMA Foundation for Applied Research, 1999.
4. See Cachon, Gerard and Marshall Fisher: Campbell Soup's Continuous Replenishment Program: Evolution and Enhanced Inventory Decision Rules; Production and Operations Management
6(3), 266-276 (1993).
5. Cottrill, Ken: The Supply Chain of the Future; Distribution 96(11), 52-55 (1997).
6. Berman, Barry: Planning for the Inevitable Product Recall; Business Horizons 42(2), 67-79 (1999).
7. Saccomano, Ann.: Many Happy Returns. Traffic World February, 22-24 (1997).

About the Authors
Alexander E. Ellinger is Associate Professor of Marketing and Supply Chain Management at The University of Alabama and received his Ph.D. from the University of Georgia. He can be contacted by e-mail at aellinge@cba.ua.edu.

Noah P. Barsky, Ph.D., CMA, CPA, is a faculty member in the Department of Accountancy in the College of Commerce & Finance at Villanova University, Villanova, PA. He can be contacted by e-mail at noah.barsky@villanova.edu.