By Poul Breil-Hansen
A successful business trades primarily on satisfying the needs of its customers and shareholders/ owners alike. In a web seminar with participants from all over the world, Professor in Supply Chain Management, Richard Wilding from Cranfield University talks about how the supply chain plays a crucial role in the success of a business. He elaborates on this by going on to say that finding the right balance between cash flow and the level of service is the key to creating value for both customers and owners. Therefore, the logistics manager’s job is all about balancing the freeing up of cash flow and ensuring that service levels are maintained. Does that sound easy? On the face of it, it appears quite simple, but in the real world it is, of course, a complex and profound challenge.
What does the customer want?
All good trade is based on a win-win situation. If both parties are able to see a benefit in the transaction, something will come of it. Basically, consumers are looking for the right mix between product attributes and service level. However, the consumer balances these advantages with disadvantages or costs, such as transaction price, risks and the life cycle costs owning the product entails.
"The purchase price of a truck, for example, constitutes just 15% of its total cost, the remainder of the costs are made up of maintenance, taxes, insurance, fuel and other ongoing costs and charges. Ten or twenty years ago, Skoda was associated with a social risk in the guise of "what will the neighbours think if I buy a Skoda?" Consumers have to consider a multitude of factors in terms of social risks, delivery risks, reputation, maintenance difficulties etc." says Richard Wilding.
According to Richard Wilding, B2B customers basically want to "grow the business" and there are three ways in which both the seller and the purchaser in a B2B relationship can grow their businesses:
- by increasing sales
- by reducing costs
- by improving cash-flow (liquidity)
Ease the burden on the customer’s warehouse
Richard Wilding singles out biscuit producer Nabisco as a good example of a company that understands what its customers – grocery stores – really want. Nabisco has realised that the company’s customers would very much like to avoid tying cash-flow up in warehouses full of Nabisco’s biscuit and snack products. Consequently, Nabisco has launched a series of initiatives aimed at reducing the customer’s logistics costs:
- direct delivery to shops –> the customer saves on transportation costs
- holding stock on the customer’s behalf –> the customer is able to reduce inventory levels and cut costs
- ensuring precise deliveries, deliveries are adapted to meet the needs of the individual shop –> the customer avoids over-stocking
The upshot of this is that Nabisco’s products are normally sold before the shop/customer has to pay for the delivery, which results in improved cash-flow for the customer.
Do you use the supply chain to win orders?
"Nabisco doesn’t sell biscuits but rather supply chain advantages in the form of lower costs and higher service levels to customers," Richard Wilding tells us before adding: "Ask yourself whether you actively use the supply chain to win orders at the expense of your competitors?"
Richard Wilding prompts a quick poll among the several hundred seminar participants. The result is that approximately 38% disagree and 55% agree with the statement that they actively use the supply chain in the drive to win orders.
No service – no future
Professor Richard Wilding argues that the right level of service is a prerequisite for the company having a business in the long-term. He argues that we are moving away from an era in which the focus was on supply chain management to an era in which the focus is on demand chain managements and he defines demand chain management as: "The alignment of demand creation and fulfilment processes across functional and organisational boundaries".
"Demand chain management requires turning the supply chain on its head and taking the end-user as the organisation’s point of departure and not its final destination," he tells us, adding: "In many ways, demand chain management is the same as sales & operation planning (S&OP) which many companies use, to some degree".
Demand chain management and S&OP require robust integration between marketing and the supply chain, and Richard Wilding uses the web seminar to conduct a poll among participants to establish how integrated marketing and the supply chain is in their respective companies. The findings of the poll are that 51% reckon that their company has good or medium integration while 49% reckon that integration in their company is low or non-existent.
The supply chain has to underpin customer value
The reason that integration between marketing and the supply provides substantial advantages is that it should create the vital link between creation of value for the customer and the supply chain strategy so that the supply chain is actively able to underpin the customer receiving good value.
Richard Wilding recommends that companies take a closer look at how the "prefect order" looks. Most companies will come to the conclusion that crucial components of the perfect order include the following three elements:
- punctual delivery
- delivery of exactly what was ordered
- error-free documentation and invoicing
When companies take a closer look at what is needed to deliver the "perfect order", often it is clear that there are a vast number of factors that come into play and these factors are found before, during and after the actual transaction. A practical approach to identifying what plays the greatest role in the perfect order could be if marketing, the supply chain and senior management get together and list the critical success factors and give each of these factors a percentage rating according to how critical a role the factor in question plays. The percentage ratings for all the success factors together should add up to 100% and, according to Richard Wilding, the exercise is an extremely useful process for balance priorities across the various functions.
... however, it should also underpin shareholder value.
But, the mission is not accomplished when value has been created for the customer alone. If value for the customer costs too much money to deliver, it goes beyond the value the company owner/s receives. There has to be a balance between level of service and shareholder value and this depends on a considerable number of factors, such as:
- growth in profit
- cost minimisation
- fixed capital efficiency
- tax minimisation
- working capital efficiency
Learn the language of profit
"Thus, there are a vast number of factors that have to be taken into account in order for the logistics manager to deliver the perfect order. If the logistics manager is to both understand the concrete role the supply chain plays in the perfect order and is to be able to render this role visible to senior management and the other functions, then the logistics manager has to learn to speak "the language of profit" so that he or she can effortlessly translate the language of logistics to the language of finance and vice versa," Richard Wilding tells us.
He lists a number of direct links between the income statement and supply the supply chain lever:
| Income statement |
Supply chain lever |
| Net sales |
Customer service |
| Costs of goods sold |
Purchasing strategy + Capacity scheduling and control |
| Selling and administrative expense |
Order processing + transportation + warehousing + inventory control + packaging + support activities |
| Interest expense + Income before tax |
Inventory carrying cost |
He also lists a number of direct links between balance sheet assets and the supply chain lever:
| Balance sheet assets |
Supply chain lever |
| Cash + receivables |
Order cycle time + order completion rate + invoice accuracy |
| Inventories |
Inventory |
| Property, plant and equipment |
Distribution facilities and equipment + Plant and equipment |
| Current liabilities |
Purchase order quantities |
| Debt + equity |
Financing options for inventory, plant and equipment |
"There is no doubt that shareholder value comes from customer value and not from stock market transactions. However, neither is there any doubt that if the level of service is too high, it will certainly create greater value for the customer but it will also reduce shareholder value. Therefore, what the logistics manager should ideally be aiming for is to find the point where both customer value and shareholder value peak," says Richard Wilding.
Finding the right balance between the level of service and costs will quickly become a highly complex arithmetical problem and Richard Wilding stresses that, in that context, it is vital that the logistics manager is familiar with concepts and factors like:
- the costs of service
- the cost/benefit of service
- The Pareto Rule or the 80/20 rule for the way in which cost to service is distributed between products and customers
- Product/customer profitability
A quick poll on the web-based seminar with Richard Wilding reveals that many of them have limited insight into the costs of service:
Do you know the service costs of:
| Products? |
19 % |
| Customer channels? |
11 % |
| Products and customer channels together? |
26 % |
| No usable insight into logistics costs? |
44 % |
Richard Wilding concludes that the primary tasks of the logistics manager include:
- Reducing stocks held -> improving cash flow
- Reducing costs -> improving profitability
- Improving service -> creating sustainable profitability in the long term
Supplier’s attitude crucial
He also concludes that the logistics manager must be able to translate the language of logistics to a financial language that is easy for the CEO, CFO and other functions to understand.
He rounds the web seminar off with a witty observation of the reasons why customers stop doing business:
- 1 %: die, retire or are terminated
- 3 %: Transfer to other jobs, companies or locations
- 5 %: Give their business to other friends
- 9 %: Competitive reasons
- 14 %: Product dissatisfaction
- 68 %: Attitude of supply company
(Source: Research by Miller Business Systems)