Creating value across the supply chain

Tags: Knowledge
Price competition has become intense today with hardly any meaningful differentiation in product or service offerings. While supplying to a customer, the buying department exerts so much pressure on you that you will just want to make a sale and forget about your premium and, in some cases, the margins too! The influence of purchasing managers run pretty high in their industry and can threaten you with blockages and market access in some cases.

This situation stems from a wider transformation of how companies and end-users buy products and services, which affect all brands. This is more so for the tier-II brands that have fewer resources and weaker market positions. The current market is driven by the following four changes, all of them working together:

n Buyers are becoming more concentrated within each industry.

n Purchasing functions are becoming more centralised within organisations.

n Buyers are reducing their supplier numbers to improve their supply chain efficiency. n 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. MORE retail chain from Aditya Birla Group and Big Bazaar are leading the way. They rely on contract manufacturers to produce for their store brands rather than pay premium prices for big brands. 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 are no longer able to 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.

Experts recommend the following five proven ways by which companies can change their supply chain or channel: Revising the supply chain to better serve the end-user, reallocating the value services in the supply chain, eliminating layers in the existing channel as some FMCG companies have done with wholesalers, and focussing on narrow segments of the existing channel and 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 find 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 we consultants do not understand their industry.

The speed of changes will only increase, so the question is not whether an organisation should change, but how. To minimise price competition, senior management must continually redefine how it creates value for customers and the end-user. After that, adding value requires close collaboration among all organisational functions and employees.

(The writer is CEO and MD of CustomerLab)

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