Price competition has grown more intense in most sectors we know primarily because purchasing managers exert much more influence over suppliers in business to business. In fact, they even threaten with denial of market access for certain manufacturers and distributors. This situation stems from a wider transformation of how organisations and end-users buy products and services, which affect all brands, but especially the second-tier brands that have fewer resources and weaker market positions.
The following four changes are working together:
1. Companies that purchase goods and services are becoming more concentrated within each industry
2. Purchasing functions are becoming more centralised within organisations
3. Purchasers are reducing their supplier numbers to improve their supply chain efficiency
4. The Internet increases a purchasing manager’s sourcing options by making it easier to find suppliers and prices worldwide
In addition, some retailers have turned to new merchandising strategies that put more pressure on suppliers, including house branding and category killers.
Croma and Westside from Tata Group, Future Group and many others are going all out to do this. They rely on contract manufacturers to produce their brands rather than pay premium prices for big names. Meanwhile, category killers such as the hypermarkets try to dominate one segment of the market. They are more sophisticated buyers than the smaller, more fragmented companies they have displaced. Suppliers can no longer control the channels through which customers buy. Customers have more options, and the prices for these options are known. As a result, many suppliers are seeing their margins decline. These changes have occurred with a rapidity that is unprecedented, and companies must make major strategic course corrections. Different companies already have employed different strategies: Some have attacked the cost side of the business, reducing headcount and inventory, and cutting expenses. But massaging the numbers through financial engineering is a temporary fix at best. For most companies, the greatest potential lies in changing the supply chain and distribution channels for their products and services. The supply chain means more than just interaction with the suppliers; it starts with raw material processing through sourcing, manufacturing, packaging, selling and distribution, and ends when the finished product or service is delivered to the end-user.
Here are five proven ways companies have changed their supply chain or channel:
By revising the supply chain to better serve the end-user.
By reallocating the value services in the supply chain.
By eliminating layers in the existing channel. A major FMCG company in the south eliminated wholesalers in selling its shampoos and soaps.
By focusing on narrow segments of the existing channel.
By creating a new channel.
To find opportunities like these in your own supply chain, prepare a supply chain value analysis for the company’s products and services, beginning with the end-user and working backward. Determine the value that your customers are trying to offer their customers and end-users. (Remember that value often is measured in intangibles, such as ease-of- purchasing, on-time delivery, insurance and information.) Look for ways your company can provide more value, or different values, to your customers or their end-users: For example, could some step in the process be shifted from you to someone else, or from someone else to you?
Revising the supply chain requires both operational and organisational changes as well as working with supply chain partners to discover efficiencies. Your strategy will depend in part on the relationships within the supply chain and the relative power of each partner. If each partner is dependent, there is more likely to be a balance of power within the supply chain.
While these ideas are straightforward, their execution and implementation are not. Consultants are usually called in when board members are frustrated by senior management’s failure to deal with these issues. In turn, we find that senior management generally has a set of excuses that sound
legitimate to them. For example, they say they cannot compete because competitors have a lower cost structure, or they argue that it has been tried before and does not work or that it does not work in their industry, or that the consultants do not understand their industry.
The velocity of changes will only increase, so the question is not whether an organisation should change, but how. Senior management must continually redefine how it creates value for customers and the end-user. That will trigger paradigm shifts internally for more efficiency and value creation across the value chain.
The writer spearheads execution and innovation for clients@CustomerLab