Podcast #53:
Profitable Growth Podcast
Supply Chain Management: Part 9 of 9
Lessons Learned
Transcript:
By Jim Tompkins, CEO, Tompkins Associates
Jim
Hello, again. This is Jim Tompkins, CEO of Tompkins Associates/International. We are concluding today our Series on Profitable Growth. Joining me for this concluding Part on “Lessons Learned” is Gene Tyndall, the EVP of Tompkins Associates for our Global Supply Chain Services practice. Welcome, Gene.
Gene, you have consulted to numerous companies over your career, including many multinational companies, on how to leverage their supply chains for profitable growth. You have also served as President of a Global Logistics Service Provider where you were measured on this topic. Please provide us some of your lessons learned during these experiences.
Gene
Pleased to do so, Jim. You know, the term “profitable growth” is relatively new, having become popular during the early to mid 2000s when most companies were growing in sales and revenues faster than anyone expected.
Markets were expanding, unemployment was down, discretionary income was high, and people around the world were highly optimistic so they spent more than they saved. Thus most companies were so focused on top-line growth, they paid inadequate attention to bottom-line margins.
Growth rates became the measure of success. Many executives were driven by the “make it up in volume” philosophy. Something had to change that mentality. This is when “profitable growth” entered as a new term. However, it seemed to vanish from business vocabulary when the Recession hit. Now it is back, and companies need to work toward it more than ever.
Let me first cite a few big issues that still seem to permeate the goals and challenges of achieving profitable growth in today’s economic environment. After that, we can drill into them for lessons we have learned.
First, we find many senior executives who worry about how to manage both the top-line and the bottom-line. They may promote new growth strategies, but ignore the operational impacts and enablers. Or, they may direct that substantial cost reduction programs be carried out continuously, but let revenue growth just happen naturally.
Second, organizations are driven by shareholder/investor interests. If boards push for bottom line earnings, growth suffers, and vice versa. Management, Boards, and other stakeholders do not always line up on the same program.
Third, as our topical experts have conveyed during the Parts of this Series, supply chains are complex, inventory management is not viewed as growth facilitating, and information technology is focused on applications software and platforms, etc. These are examples of the challenges that executives and supply chain managers have in viewing their supply chains as any more than cost centers.
Fourth, the recent extraordinary pressure on cost containment has further limited the ability of companies to focus on profitable growth. Instead, we see costs continuing as #1 on the CEO agenda, and growth as #2. Note these are almost always separate.
Fifth, people perform in accordance with how they are measured. Have we even seen profitable growth as a performance measure? Other than for the CEO, and in certain companies, certain sales managers, no. Every other position in the company is measured under one or the other, including supporting teams.
Jim
The first was on the difficulties in managing both top and bottom lines together. What lessons do you suggest here?
Gene
The lessons here are about balance. Balance on the scorecard, balance on the Initiatives, balance on the resources, etc. Too much effort devoted to either strategy will harm the other. The second lesson is on alignment.
It is detrimental to balance the two strategies but not align them. In other words, effective operations must enable the growth plans. It does little good to “cut costs” of operations that are needed to achieve the growth goals. We observed way too much of this during the recession, and we cautioned many companies on it.
Jim
The second was on aligning boards, management, and other stakeholders. Lessons here?
Gene
How many times have we seen this? The classic issues of earnings vs. growth, short-term vs. long-term, and priorities for capital expenditures, are fundamental to every company. The best lesson I can share on this is to try and educate all parties about what profitable growth is really about. It is about directed growth -- growth we want -- with reasonable costs to get there. Just as all customers are not equal, nor is all growth beneficial. Growth should be planned -- with strategic markets targeted and cost-to-serve determined and managed. Continuing, effective education is the best lesson here.
Jim
Great. Now how about the heavy focus on cost containment, and your point that this is #1 on almost every CEO agenda?
Gene
Yes, and survey after survey bares this out (that, even though CEOs have raised growth up the ladder, we hopefully will see the gradual recovery boost spending) that cost management and containment continue to have the highest priority. By placing growth #2 (or even when reversing the ranking with cost management), we have the problem of separation. The problem being that the company focuses on them separately, with separate initiatives, separate programs, and too often separate people.
As our General Manager in China mentioned in his recent podcast, most companies operating in China are there for cost savings, but have growth in mind as the huge China market expands. But, we know that 95% or more of the company’s people in China are focused on, or held accountable for, continuous cost reductions.
I have two lessons to share on dealing with the separation of growth and operations. First, it is necessary for senior executives to understand that the two cannot be separated -- that growth will not come at high margins unless operations are integrated with it. Selling products at prices that cannot be cost-justified is, of course, the path to failure. Cutting costs so much that the supply chain cannot meet promotions, or meet expected levels of customer service, is just as damaging.
The second lesson is that strategic growth plans should increase operations. Targeting certain customers, opening new markets, or doing promotions, should all have a supply chain operations component.
Jim
Good, I certainly agree. OK, how about your fifth issue -- performance drives behavior?
Gene
Yes, this one is particularly interesting. As I stated earlier, whoever has profitable growth as one of their performance metrics? One story may provide a lesson. In the high growth 90s, LSPs were expanding double-digits year over year. New business was walking in, as company after company got on the outsourcing bandwagon.
Top line revenues were growing so much that the sales force was earning bonuses for just being there. But, when I joined an LSP, I found that operating margins were going the other way. Projects were being sold that could not be done efficiently, and operational excellence was nowhere near the top of the agenda.
The lesson here was to reward the sales force not for revenue growth, but for profitable growth. Yes, revenue growth rates slowed down, but profits went up.
Today we do find more sales people measured on revenue and margins, but not all. Nor are any others in most companies. The lesson here is that everyone in the company has two roles -- expand the business and make a profit doing that.
One final lesson. Over 75% of companies continue to view their supply chains as cost centers and not in any way contributors to growth. The strategy is to meet customer needs at lowest cost. In fact, the supply chain can help enable and contribute much to growth plans.
Once this is recognized and supply chain people have some growth-oriented performance measure to drive toward, good things can happen.
Jim
Thank you Gene, some very good insights on the lessons learned for profitable growth. This concludes our series on Profitable Growth, we look forward to being with you in a couple of weeks when we kick off a new series on Procurement and the impact on the supply chain. Thanks so much, we will be talking with you real soon.
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