New strategies mean less cost and risk

PUBLISHED : Wednesday, 03 February, 2010, 12:00am
UPDATED : Wednesday, 03 February, 2010, 12:00am

Supply Chain Management (SCM) owes most of its legacy of logistical skills and processes to the military, where life-and-death necessity has always been the mother of all invention. More recently, though, SCM in the world of commerce has taken on a life of innovation and strategic relevance all its own.

Globalisation and computerisation have led to a rethinking of product logistics so radical that, for once, the term paradigm shift is no exaggeration. In the hero companies of the early 21st century, products are no longer invented in isolation from purchasing and dispatch. Increasingly, the supply chain forms an integral part of the product's original business plan.

For the past five years, AMR Research has compiled a 'Supply Chain Top 25' list, featuring companies that have gone beyond the SCM basics of procurement, freight forwarding and distribution. What they are looking for is the creation of 'demand-driven value networks' that allow faster and more efficient responses to market and customer demand.

Top of the AMR list for the past two years has been Apple. The reason? Apple's iTunes music store and the iPhone App store are products which require neither inventory nor physical distribution. It is a radically different approach to the supply chain, but one that follows the basic SCM covenant of reducing cost and risk. Or as AMR says, 'an unbeatable combination of killer financials and stellar opinion scores'.

Not surprisingly, other new-technology companies also feature strongly. Dell, Nokia, Intel, Cisco and HP all make the cut - but so too do more traditional corporates such as Johnson & Johnson, ('high regard from its peers and outstanding return on assets'), Lockheed Martin ('lean strategies, masterful orchestration of its extensive partner network, and a focus on profit and loss'), and Tesco ('high inventory turns ... reflect Tesco's emphasis on 'smart standardisation' and loyalty management expertise').

The list only considers Fortune 500 companies, which by default benefit from economies of scale. Yet, as AMR's report summary notes: 'strikingly, the top 25 companies have outperformed broader stock market indices by almost 100 per cent in the year since publication of the previous report'. The common thread is cash - more specifically, ways of not spending it, or at least of using it for less time, while converting the company's products into revenues. Apple and dotcom icons such as Amazon and eBay serve as textbook examples of the innovation principle, defining new business models with new supply chain concepts integral to them.

IBM, the old warhorse of new technology, has proved itself a master of doing the same thing better and cheaper. In 2002-3, it introduced new SCM concepts that reduced costs by US$12 billion and inventory levels to 30-year lows, at the same time as sales increased.

And Wal-Mart, the masters of mass-consumer SCM, proved sustainability can be a catalyst to lower costs. Without changing its sourcing or distribution methods, it took 277 toys from its product line, redesigned them and shrank their packaging. This initiative, according to Wal-Mart's senior vice-president of international supply chain, Gary Maxwell, led to 727 fewer containers required to ship the toys from the mainland to the United States, saving more than 5,000 trees and 1,300 barrels of oil.

As a final indication of the increasing importance of SCM at a strategic business level, the 2009 Global Survey of Supply Chain Progress, from CSC, Supply Chain Management Review, the Council of Supply Chain Management Professionals and Michigan State University, provided two statistics worthy of note.

Of the 176 large (US$1 billion annual turnover) and medium-sized (US$250-US$1 billion) companies polled, 56 per cent reported their revenues had risen one-10 per cent over the past three years due to SCM, even during the economic downturn.

And, in 2008, 22 per cent of respondents said they didn't know whether their SCM initiatives were effective or not, or how much they had saved. Last year, that figure was down to 13 per cent.

Today's supply chain managers could well be tomorrow's CEOs.


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