Why should senior management care?

Roy Goni, Contributor, Jakarta

Along with today's abundant opportunities come various real challenges that compel most companies to rethink how to run their businesses more effectively. Among the challenges are: creating ways to manage the current proliferation of products in their numerous variants, creating products and services that specifically match consumer demands, responding quickly to the fickleness of consumers and calculating more precisely the cost- to-serve element in this highly competitive environment.

Quite a number of companies still regard the logistics aspect merely as another cost center, while some have correctly realized that in this age of advanced technology logistics can become one of their strategic advantages.

The following examples from 1997 clearly show that supply chain management can in fact be the "heart" or "engine" of a business in making it more competitive.

Michael Dell of Dell Computers said, "We now have a quick shipping plan for major customers ... delivery is within 48 hours."

Boeing -- the largest aircraft manufacturer in the United States -- announced a write-down of US$2.6 billion. Reason? Lack of raw materials, inefficiency in production and lower productivity.

Procter & Gamble (P&G) -- considered to be one the world's astute marketers -- acknowledged that one of the company's competitive edges was making the optimum use of supply chain management. P&G even estimated that they would be able to save some $65 million within 18 months. The essence, according to them, was better coordination between a manufacturer and its suppliers to eliminate unnecessary spending.

Often, companies are hampered by the following four types of mind-set when they intend to turn to a better supply chain management system as an alternative to their existing operational strategies:

The first regards logistics as just another cost center and not as a crucial customer-driven center. The second thinks that the service element of a company is not as important as its product element, as most of the company's marketing research focuses only on its product features rather than including the supply chain process as well. The third tends to be the kind of organization that is stuck with current functional principles and does not have an open mind to alternatives. The fourth often measures logistics within its budget sheets and in this case customer service is given minimum attention, limited to availability and lead time aspects.

To make a supply chain management system highly effective, the four following factors have to be taken into account. First, the system should never be regarded as merely logistical. Second, to give a positive impact to the bottom line, the concept, execution and performance of the related personnel should be combined in a holistic way. The third factor is optimum use of information, communications and sensitivity toward consumer expectations on the part of the supply chain manager. Finally, the degree of flexibility of the supply chain manager in adapting to any external changes.

Now the question is, how should a company set up effective supply chain management? Facing today's cutthroat competition and highly demanding consumers, a company has to set its own supply chain visions and choose the most suitable approach.

David M. Bovet of Mercer Management Consulting & Yossi Sheffi recommended three approaches. First is the flexible, integrated design, where the supply chain is regarded holistically while replacing former approaches that had a stronger emphasis on the functional principles of an organization. This type of approach also prioritizes flexibility, agility and integration of all related elements for better coordination from upstream to downstream parts of a company. One major company that uses this approach is Unilever.

The second is household replenishment, which makes the best use of Internet technology for automatic replenishment at point- of-use or, as is more commonly known, point-of-consumer. This technique, also often called postponement, is used by Amazon.com, for example.

Third is virtual organization, whereby supply chain management matches future demands through the setting up of a virtual organization comprising the company's intellectual capital, highly promoted brand, advanced manufacturing technology, development of new products and services as well outsourced distributions. Nike is one of the leading companies that uses this approach. It does not own even one single factory, despite its annual sales running into millions of dollars.

However, there are certain elements, at least six major ones, that have to be dealt with before a company revamps its existing supply chain management and turns it into an effective asset.

First is an internal diagnosis of the company's readiness including the preparation of some kind of a supply chain roadmap. Second, treating supply chain management in a more long-term and strategic way. Third is the full involvement of the company's chief executive officer as well as its top management. Fourth is getting suitable personnel ready for the new supply chain management. Element number five is the maximum use of today's advanced technology in information and communications, including the Internet. Lastly, using a global provider to support the company's virtual organization as part of its sophisticated supply chain management system.

Clearly it all boils down to one most important principle: Everything a company does and improves should be consumer-driven; that includes its newly set up supply chain management to meet most of the competition's rules -- speed, quality, increased productivity, increased revenue and reduced uncertainty in as many aspects as possible.(The writer is a lecturer in marketing at the school of economics of Unika Atma Jaya university, Jakarta)