Creating Competitive Advantage: Tips for Successful Supply Chain Performance

Bruce E. Jacobs
BKD, LLP

In looking at the current state of the medical device industry, one thing becomes apparent: no longer can an enterprise’s competitive advantage be defined by superior products. In fact, competitive advantage is quickly shifting to enterprises that provide the highest level of customer service and added value—on the customer’s terms—with their supply chains.

Creating High-Performance Supply Chains

Next to the brand equity and recognition your products and services achieve in the market, a supply chain that serves your customers at the highest degree will move your company to the next level of competitive advantage.

  As supply chains compete with each other to serve customers at both the least total landed cost and the highest level of customer service, only those that perform the best will succeed and win the battle.

  What does winning the battle of supply chains mean? It doesn’t mean you survey your customers and make minor changes to close major performance gaps that allow your supply chain to provide mediocre customer service. Instead, it involves creating major breakthrough improvements in supply chain performance—ie, where the supply chain and all its business processes are focused on the customer and value-added activities that serve the customer.

  The following characteristics receive high marks as value-added processes for high-performance supply chain capabilities:
•    Quick response to inquiries
•    On time and accurate order fulfillment
•    Short lead times from receipt of customer order to delivery
•    As product is consumed, customer receives “pull-based” demand replenishment
•    Minimum inventories throughout the supply chain

  Typically, executive-level mandated performance improvements attempt to increase supply chain performance but use the same old supply chain model and business processes that cannot perform above their current levels.

Set Realistic Performance Criteria

The supply chain design you use now is only capable of delivering what it was designed to deliver; it will never outperform the highest level it currently achieves.

  For example:
•    2.5 annual inventory turns
•    180-day net cash cycle
•    94.5% customer service level
•    Slow revenue growth
•    Orders have five- to eight-day lead time to the customer
•    120 to 130 days to reconcile invoice deductions and holdbacks
•    5% of customers on continuous replenishment

  However, winning the battle means your supply chain reliably meets many of the same performance criteria documented in numerous industrial, trade and professional journals:
•    21 to 30 days of inventory in the supply chain system
•    99.5% customer service level
•    80% of your customer’s volume delivered on demand and “pull” continuous replenishment
•    90% lead time reduction from receipt of a customer’s order to delivery at the dock
•    1% invoice deductions and holdbacks
•    Zero penalties for nonconformance to customer specification
•    6% to 11% revenue increase
•    7% to 12% total cost structure improvement
•    40% to 45% reduction in SKU (stock keeping unit) offerings
•    90% reduction in inventory obsolescence and write-off
•    30% to 40% reduction in space needs for warehousing
•    4% to 10% reduction in the cost of purchased items
•    35% to 60% reduction in working capital requirements

  Remember, executive mandated performance improvement is not systemic. It takes vision and courage to invest in longer-term, systemic improvements and business models that provide major business benefits.

Where to Start

To make systemic performance improvements in your company’s supply chain, where do you start? First, imagine standing beside a customer at a product’s point of consumption. Next, look back through your supply chain to all the players and business processes that touch this customer.

  Now focus on the activities that create value for your customer and eliminate the non-value-added activities that drive costs and inefficiencies. Did you know less than 2% of most business process activities actually add value in the same way your customers perceive value?

  In redesigning your supply chain, it must reflect your customers’ perceptions of superior performance. Envision how your supply chain must behave to reach that level and develop the strategy and business model(s) to help it get there.

  Focus on all process lead times and every action or process that requires inventory. Lead time improvement with flawless execution of the business processes is the fastest method to achieving high performance in the supply chain.

  To reduce process lead times, strive to eliminate non-value-added activities and complexity—because both can add costs. Simplify, simplify and simplify to achieve the best practices for your business processes.

  Ask the questions “Why?” and “What should it be?” Assemble a cross-functional design team from your organization to challenge every process and practice. If an activity doesn’t add value, eliminate it. If you can’t eliminate a non-value-add activity, then simplify and automate it to reduce the cost of such activities.

  Design and implement new performance measurements (those that measure the performance of the new business model and new business processes). Make your performance measurements visible and, if performance declines, make tools available to help improve it.

Calibrating Benefits

For your supply chain performance to provide superior service to customers, it must be designed to provide superior service.

  How large are the potential business benefits in your enterprise? You can calibrate the magnitude of potential benefits. Consider the value of these items and determine their worth:
•    One point of customer service improvement is worth how much more revenue?
•    One day of inventory removed from the supply chain is worth how much working capital?
•    One less day of order lead time is worth how much in competitive advantage, additional revenue and added customers?
•    One percentage point of revenue increase over the current revenue base?
•    One percentage point of total cost removed from the total cost structure?

  Can your supply chain meet the competitive challenges that today’s customers dictate? Can it help you win the battle against competitors?

  As enterprises continue to compete, those with high-performance supply chains will succeed and win because serving the customer better with the least total cost and highest return on investment improves bottom-line performance.

Bruce E. Jacobs is a principal with BKD, LLP (www.bkd.com), one of the 10 largest CPA and advisory firms in the country, and a member of BKD Manufacturing & Distribution Group, providing solutions for the management and financial needs of medical device businesses (among others). Bruce has more than 26 years of experience in manufacturing and distribution business strategies, including significant experience developing worldwide supply chain networks and manufacturing operations improvements. BKD’s approximately 1,600 personnel, including more than 200 partners, are based in 27 offices within 11 states in the central United States. BKD serves clients worldwide as the largest member firm of Moores Rowland International (MRI), an association of independent accounting firms. Contact the author at [email protected].