Supply Chain Strategy and Financial Metrics

The Supply Chain Triangle Of Service, Cost And Cash

Bram DeSmet

• Publisher: Kogan Page
• Year: 2018
• ISBN:
  9780749482589
• Edition: 1
• Topic: Business
• Subtopic: Industria per la vendita al dettaglio
• Index: Business

Supply Chain Strategy and Financial Metrics is a step-by-step guide to balancing the triangle of service, cost and cash which is the essence of supply chain management. Supply chains have become increasingly strategy-driven, and this Supply Chain Triangle approach puts the supply chain at the heart of the strategy discussion instead of seeing it as a result. Supply Chain Strategy and Financial Metrics fully reflects the 'inventory' or 'working capital' angle and examines the optimisation of the supply chain and Return on Capital Employed. Including case studies of Barco, Casio and a selection of food retail companies, this book covers building a strategy-driven KPI dashboard, target setting and financial benchmarking. Regular examples and diagrams illustrate how different types of strategies lead to different trade-offs in the Supply Chain Triangle. This ground-breaking text links supply chain, strategy and finance through financial metrics, therefore creating value for the shareholder. Online supporting resources include worksheets covering basic financial concepts such as cash flow and working capital, with example data sets and guidelines/exercises to make it interactive.

02

Strategy in the Supply Chain Triangle

In this chapter we will introduce Treacy and Wiersema’s strategy model and show how different strategies lead to different trade-offs in the triangle. This is important for two reasons. Firstly, it means that different strategies result in different targets for supply chain metrics such as cost and working capital. Secondly, it means that different strategies lead to different supply chains.

We will show how the different strategies are different routes to delivering value for the shareholder, using return on capital employed (ROCE) as the measure for this. We will conclude the chapter with three case studies. Two cases show the triangle at work at manufacturing companies; a producer of high-tech projection equipment and a producer of electronic watches. The third case study illustrates the triangle at work across multiple companies in food retail.

Let’s start by introducing Treacy and Wiersema’s strategy model.

Treacy and Wiersema’s three strategic options

Treacy and Wiersema (1995) argue that in any sector, a company can be a market leader by excelling at one of three strategies. Either the company is a product leader, is a leader by operational excellence, or leads in customer intimacy. We will give our interpretation of these three archetypes, and then analyse the impact on the Supply Chain Triangle.

Operational excellence

An opex (operational excellence) leader prevails through low-cost and hassle-free, no-nonsense, easy service. They are focused on being the cheapest as well as being easy to deal with. Commonly used examples are the low-cost airlines such as Southwest or Ryanair, who have disrupted the airline sector through a relentless focus on low-cost and hassle-free service.

Operational excellence as a strategy is not to be mistaken for ‘lean’¹ or ‘operational excellence’ as a management philosophy to improve operations, and as originally described in Womack, Jones and Roos (1990). Applying the principles of lean manufacturing will help in reducing throughput times, reducing work-in-progress (WIP) and improving quality measures like the first-pass-yield.² An opex will translate these improvements into a lower price for the customer, where a product leader will try to translate that into a shorter time to market. The strategy defines the ultimate goal.

An opex leader has a relentless focus on lowering cost. “In addition to lean, a second important principle or management philosophy is simplicity.” into “In addition to lean, a second important principle for an opex leader is simplicity.”

An opex leader has a relentless focus on lowering cost. In addition to lean, a second important principle or management philosophy is simplicity. Even without a lot of explanation, we instinctively ‘feel’ that simplicity drives efficiency, and that efficiency lowers cost, which in turn leads to a lower price. Crawford and Mathews (2007) give the example of Dollar General as a price player. They mention simplicity as a critical success factor for Dollar General.

Simplicity translates into every aspect of the business. One example is limited price points. To keep things simple for the customers, and for the company, Dollar General features only 14 price points, reducing check-out, accounting and inventory time. and allowing suppliers to preprint item prices on the packaging. Dollar General also limits itself to 4,500 SKUs, compared with about 35,000 offered by Wal-Mart.

A comparable example in Europe is Colruyt. Colruyt is a retail group headquartered in Belgium, of which the biggest chain is called Colruyt Lowest Prices. Their slogan is ‘simply retail’ – simplicity being a core principle to guarantee the ‘lowest prices’ in their name.

So where does that leave the service delivered by an opex leader? An opex leader doesn’t give bad service; on the contrary, it focuses on delivering excellent service, but it is excellence in the basics. Low-cost airlines like Ryanair or Southwest are known to have stripped the flying experience to the basics. There are no meals or free drinks, and they fly to smaller airports. Boarding is via mobile staircases instead of via jetways. They will cut back on numerous service parameters, except for key issues such as on-time departure and arrival.

In their book Blue Ocean Strategy (2005), Chan Kim and Mauborgne argue that in many industries competitors have focused on outperforming each other to the point of irrelevance. They consider it a rat race, reaching a level where...