Go to Market Strategy before Supply Chain Strategy

This article is directed mostly towards practitioners who operate supply chains within companies which market and sell products. I have done a lot of thinking recently about the discussions going on concerning "is just in time dead" or "on-shoring / near shoring" etc. There are a lot of conversations happening relative to all sorts of strategies for supply chains (and no lack of consultants who want to sell you on the latest and greatest ideas). My thesis here is that the first thing you have to develop and fully understand is your business' go to market strategy. Then, after that is completely articulated and written down, you can discuss your supply chain strategy. 

So, what is a go to market strategy? It is simply writing down what products you will provide, what markets will you provide them into, who are your competitors, who are your customers and how will you compete? In a 1993 Harvard Business Review article (and subsequently in his book Double Digit Growth) Micheal Treacy and his co-author Fred Wiersema argue that most companies have to pick one strategy they will really excel at and exploit it. The three strategies, from which a company picks are: 1) Customer Intimacy 2) Operational Excellence 3) Product Innovation. It is a fairly rare unicorn which can "master two".

Just by the names of these strategies and without reading the book (Although I highly encourage you to read it) the reader can understand the implications for your supply chain strategy:

1. Customer Intimacy - High service is the calling card. Maybe not service at any cost, but high service nonetheless. The thesis here is that if you provide a truly differentiated and incredible service level, customers will be loyal and they will buy more from you. You will also keep your competitors away as they likely cannot functionally or financially compete against you. 
   
   
2. Operational Excellence - This is low cost. You will compete on cost and every nickel counts. Your customers do not want (and certainly will not pay for) extra bells and whistles. Just do what you say you will do. At this year's CSCMP Edge conference I attended a great presentation with one of the returnable pallet providers. Their strategy was all about efficiency and low-cost. 
   
   It is not "bad" to be in a low cost industry. You have to know it and embrace it and that is what this person did in his presentation. The company's network design, systems and operations were totally geared towards efficiency. They will do exactly what they say they will do with no frills, bells or whistles and they will do no more. The customer gets what they need at rock bottom prices. 
   
   
3. Product Leadership - Think Apple. This is where the product is so good that customers, while they want efficiency, will actually "pay up" or even wait for the product because that product is so good and desirable. Everyone uses the iPhone as an example of this and so some may think only Apple can do this. Let me use another example: The Kitchenaid Standmixer. I worked specifically for this division of Whirlpool for over a year and I can tell you, people will wait for that product. It is iconic. Everyone wants one. Mother's took bus tours of the plant with their daughters before they got married. So, yes, if you truly do have an exceptional and differentiated product, you do not need to be Apple to win. 

So, what does this have to do with supply chain? My submission is it has everything to do with supply chain because you first have to understand which of the three your company is doing to determine what your supply chain strategy will be. Imagine if the person from the pallet company decided his supply chain strategy was going to be "Customer Intimacy" and he built a highly responsive, high service and high cost supply chain. This would be a complete mismatch to the customer's desires and expectations of a low cost and highly efficient supply chain. The supply chain leader needs to fully understand the "go to market" strategy of the company before s/he can build out the supply chain strategy. 

One last bit of advice and warning: Be very leery of a company that wants to be one of the strategies above but is in an industry that demands another strategy. For example, many sales and marketing people want to be in a customer intimate industry because that is what they do. It is fun and energizing. But, this what they want. What do the customers want? If the customers want operational excellence or product leadership then what you will have is chaos. You will never get the supply chain strategy right.

In conclusion:

• Understand your company go to market strategy before you do anything.
• Ensure that stated strategy matches up with the industry you are in. 
• Then, and only then, develop and implement your supply chain strategy. 

After two years of supply chain disruptions and craziness, I tend to think I am Napoleon at Waterloo so tonight, I offer ABBA singing Waterloo:

What Have The Tariffs Taught us About Supply Chain?

This is not a political or even an economic posting relative to the tariffs and the current "tariff war".  Rather, I have been doing a lot of thinking about what this teaches us about supply chain and specifically global supply chain design. 

First, this topic has been talked about for a long time and it goes under the banner of "supply chain disruption".  We have always thought of these disruptions as either "natural disasters" (think hurricanes and earthquakes) or "man-made" disasters such as wars.  In either case the recommendations have been for supply chain professionals to stay very close to the impact of these and how long a company could survive should one hit.  Perhaps this tariff war is a way for us to practice before something we really cannot control occurs.

In 2011 both the hard drive industry and the auto industry were hit hard and interrupted significantly by flooding in Thailand.  Closer in time, the graph below from EPS news shows the types and number of disruptions just in the 2017 / 2018 timeframe:

You can see this is not an uncommon occurrence so, while the cause of this particular disruption this year (tariffs) may be surprising, what should not be surprising for supply chain professionals is the fact their global supply chains are susceptible to disruption.  What should you do about it:

1. Plan, Plan, Plan - scenario planning and conducting FMEA's are a must in this environment.  You should not have to make it up as you go along when a disruption hits.
   
2. Think about your supply chain as a portfolio.  You likely would not invest your entire life savings in one stock would you?  Why would you do it with your company's supply chain?  Diversity is critical to mitigating risk
   
3. Develop early warning indicators - each with a plan of action if it appears it is happening.  As you develop your FMEA you will likely identify a bunch of interruption scenarios along with probability and severity ratings.  You will then want to work diligently on the scenarios with the highest likelihood with very severe outcomes.  But, it is not good enough to just know them.  You then have to determine what the indicators you will begin to look at to determine if something is going to happen.  How can you monitor the global situation and determine the likelihood of an event?
   
   For example, on tariffs, this was a topic of the election and the US is doing pretty much what it said it would do during the election.  This was a red flag.  While you would never have known for certain what you did know is the "likelihood" of supply chain disruptions due to tariffs increased dramatically on January 20, 2017.  Was it enough to change everything that day?  Probably not.  Was it a good time to pull out your disruption FMEA's off the shelf and update them?  Absolutely.  

In conclusion, I am not sure the tariff situation has taught us anything new but what it has done is reinforced what we already knew and brought it to reality.  This was not a "Blackswan" event.  This was all within the realm of probability knowing what was being discussed.  

Time to get back to the basics.  Conduct FMEA, execute scenario planning and manage your portfolio.  

Kraft, ZBB and the Art of Designing Supply Chains

A lot has been written this weekend about what is happening at Kraft Heinz (KHC) and why they suddenly had to write down a huge portion of their brand portfolio.  Many articles are calling out the zero based budgeting (ZBB) program 3G installed after buying Heinz.  I disagree.  I think it is something far more basic: They lost sight of their customers.

First, a quick definition of ZBB.  ZBB was the darling of the consultant community many years ago as a way to wring costs out of bloated companies. Consultants loved it because it allowed for a lot of business ("I am a ZBB certified...), companies loved it because it had the promise of driving out costs and Wall Street loved it because they generally love all things that are short term profit boosters.  And, in my opinion, it is a good program.  It forces you to reevaluate your costs every year.  Just because you did "x" last year does not mean you need to do it again next year yet the standard budget process assumes programs and positions continue forever.  ZBB does not.  ZBB picks the arbitrary time of one year and says every year every cost needs to be justified.

The reason for this however may be what KHC and 3G totally missed.  The reason you do this is so you can reinvest savings generated from non value added (non competitive) functions of the company to value added functions or better said, programs which make your company more competitive in the market place.  Pocketing the savings or paying it out in dividends is a short term strategy which ultimately ends.  And that is what happened to 3G.  They did not appear to invest the money but rather they pocketed it.

This is also why KHZ and the 3G model relied on acquisitions.  The only way this method of ZBB works is if you keep acquiring bloated companies and implement the program with them.  It is somewhat of a Ponzi scheme.

So, what should they have done differently?  Many of you have read my writings on the customer centered supply chain and outside-in thinking.  This is the fundamental miss of KHC.  They were inside-out in their thinking as they were so focused on the drug of cutting costs then keeping the money they forgot to invest in the future.  Perhaps they felt they would have an endless stream of acquisitions so the music would never stop (Remember, they tried to buy Unilever but were rebuffed and they tried to buy Campbell's but they claim the price was too high)? What they did not anticipate is many of the acquisition targets had implemented their own ZBB and thus the opportunity to wring costs out after acquisition diminished dramatically.

There are lessons for supply chain design and management:

1. Always work and design using outside-in thinking.  Start with the customer and work your way back in.  Never start in and work out. 
2. Not all costs are bad.  You can break costs into competitive and non-competitive costs.  Competitive costs are this which deliver competitive advantage in the market place.  Those are good and necessary.  Non-competitive are those which are either excess or just "cost of doing business" and those you want to minimize.  
3. Your mother taught you this lesson:  Anything taken to the extreme can, and likely will, be bad.   Just because you have a hammer does not mean everything is a nail.  
4. Don't lose sight of your business.  Sears did this and perhaps KHC is doing some of this.  They are in the business of lightening up people's day by selling great food products.  The business is not "how can I cut costs the fastest".  The ultimate tail wagging the dog.  

Lots of lessons here and I just hope a great budgeting tool is not thrown out due to very poor execution.  

Start with The Customer - Ensure Profitability

Supply chain design is all about two things:  Provide extraordinary customer service through fast and full fulfillment AND do this profitably.  As a company, you will not survive if you cannot do both of these things simultaneously.  Sound simple?  Sure, but then why do so many supply chain professionals only do the back half?

As I work with companies I continue to emphasize that it is important for our supply chain to drive revenue.   Great supply chains (Read: Walmart and Amazon for example) are core to the company's revenue strategy and not just an evil cost to reduce.

But, there is this pesky thing called "profit" that also has to exist to make a world class supply chain complete.  The question really is what do you do first?  My view is you take care of the customer then figure out the cost.  If you are designing supply chains you are in a war with your competitors and the weapons of that war are speed and availability.  Customers, whether they be industrial, commercial or consumer are asking for the same thing:  They want what they want, when they want it, in the right quantity at the right price.  Those who figure all this out will win.  Those who do not will perish.  What are some things you should do now to get on the path to figure this out?  A few ideas below:

1. Start with the Customer:  Don't lift a finger to design a supply chain until you have personally interviewed, visited with, surveyed and embedded yourself into the customer.  This does not mean asking sales their opinion.  Sales is a first derivative source.   Go right to the customer.
   
2. One Size Does Not Fit All:  Design with the idea of multiple supply chains to service specific groups of customers.
   
3. Use Pricing to Give The Customer Options: You need to probe what customers are willing to pay for and what they are not willing to pay for.  Amazon is a master at this.  Do you get next day delivery?  Yes... Do you pay for it (through Prime)?  Yes...   Do most people spend more on Prime fees then they get back in avoidance of shipping costs?  Most likely.  The key here is to not say no to the customer, just provide options.
   
4. When In Doubt, Provide The Service Then Figure Out The Cost:  Many times there just is not enough time to ensure everything is perfect before you decide which direction to go.  But, once you are confident you are "close enough" to figure out the cost, launch!  There is no better way to ensure you have pressure to lower costs.  This is not a "ready, shoot, aim" strategy but rather it is one that avoids a supply chain being stuck in a conference room for years.
   
5. Constantly Reevaluate:  The industry is moving too fast to design a supply chain every 10 years.  You must constantly reevaluate where you stand relative to customer demands and competitive forces.  

This all sounds simple but I can assure you that if you really do this at your company you will be in the top 5%. Most try this but then just revert to the cost equation. The good news is you can win with this model.  In the words of Nike - Just Do It!