Warehousing and Distribution: Finding Profitable Growth in the Supply Chain
Companies often underestimate the contribution that operational excellence, including supply chain operational processes like warehousing and distribution, makes to growing their customer base.
Effective supply chain management has as much to do with revenue growth as it does with margin improvement. This is true of the sell process of the supply chain - warehousing and distribution.
Management is learning that “pull” supply chains, stimulated solely by customer demand and characterized by customer service-intensive actions, do indeed contribute to revenue growth. Yet they also realize that, unless the company is 100% “make-to-order,” pull chains (also referred to as “demand-driven supply chains”) are complex to master and grow open-ended, unless the company is a catalog or Internet-based fulfillment business.
Today’s marketplace of high fragmentation, more channels, and rapid product proliferation makes it even more challenging.
Differentiation through service value is the critical success factor. Amazon, for example, has raised the service bar to customer delight through easy ordering and speedy delivery of the right products.
While many companies are beginning to measure the “Perfect Order,” the recognition that they are far from “perfect” becomes a wake-up call.
What is the “Perfect Order”? It is the order that is easy to enter, simple to track, delivered on-time as promised and in good condition, with perfect documentation, and accurate invoicing with easy payment. It also involves proactively notifying the customer of the order status, being responsive and keeping the order secure.
Very few companies can report their Perfect Order rates as being in the 90% range.
Perfect Order is one type of service that companies can use to differentiate themselves. Other services are made available by companies trying to achieve superior customer service. These organizations realize that differentiated customer service is not only profitable, it can be a true competitive advantage. An example of this is service bundling (i.e., channel-specific, product-service combinations developed to differentiate the company through service value).
Creating customer value is the end goal of the supply chain sell process. By creatively improving the customer’s performance, value is created for both parties. In fact, most supply chain managers do not think strategically about this goal; rather, they measure (and are measured by) discrete benchmarks, such as on-time deliveries or order fill rates.
The Procter & Gamble and Walmart partnership changed all of this by showing the world that an operations-based partnership could increase sales, reduce costs, and minimize working and fixed capital for both partner companies.
There are four key steps involved in planning and implementing profitable, differentiated service programs:
- Segment Markets and Product Groups. Most companies do some form of market segmentation, and target marketing messages for discrete products to discrete groups. Yet, few companies develop segmentation strategies that help them ascertain where and how to create customer value.
- Identify Key Value Points by Customer. All customers are not created equal. For each of the key customers, what elements of service would add the most value to their business? Cost reduction? Joint logistics? Collaborative planning? Joint promotions? Knowledge sharing?
- Identify Consolidation Opportunities around the Customer. When evaluating their supply chains, companies often discover that separate chains exist for certain products, or from different product groups, that often flow to the same customer. This is often found in multi-divisional businesses that have organized themselves around product lines so finely that markets and customers have taken a back seat. Consolidating supply chains across products, across geographies, occasionally across channels, and even across customers and segments, can improve costs and services.
- Identify and Create Common Processes and Systems around the Customer. Many companies have come to understand that the right balance of commonality can mean huge value payoffs in terms of the drivers of market value discussed here. Global, regional, and local supply chains that depend on the market, the product, the customer value proposition, and the common processes perform at higher levels. They also contribute to revenue growth.
There are various ways to satisfy ever more demanding customers. The challenge is to find those methods that are profitable to both parties – those that create customer value as well as supplier value.
Over-serving all customers (without corresponding value) is of course the wrong strategy, but likewise, is the separation of sales and marketing from supply chain. The solution is to develop “service-products,” targeted to the right markets, segments, and customers, so that win-win benefits will accrue to both parties.
Learn more: Download the White Paper:
Leveraging the Supply Chain for
Increased Shareholder Value
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