27 May 1 Supply Chain Ecosystem = 1 Strategy?

In an earlier blog we have already analyzed that different strategies lead to different supply chains and that supply chain is often mistaken for operational excellence or lowest cost only. In this we analyze whether all partners in a Supply Chain Ecosystem share the same strategy. Why? Or why not?

Within the company boundaries we have shown that strategy defines the balance in the supply chain triangle. Different strategies are in fact different routes to generate the same ROCE. If I am a lowest price player, I’ll need to have the lowest cost. To have to lowest cost I will ban complexity. I will not carry a long tail of products as these cannibalize on my efficiency and efficiency means cost. As a result I will have less inventory and be able to put my assets at a higher use or in general work with less assets. A lowest price player will work with minimal margins but will compensate for that by employing less capital. If I differentiate, for instance by having the best total solution, a customer intimacy strategy, for sure I will have a long tail and need more inventory. As an investor I’m indifferent as long as you compensate for that with a higher EBIT. The challenge for the customer intimacy player is to drive a premium from his customers which compensates both the higher cost and the higher capital employed generated by the extra complexity.

When taking strategy across the company boundaries, if I am a product leader, should my suppliers be product leaders as well? Well, it depends. Kraljic has taught us we need to segment suppliers according to ‘how important is the supplier to me’ and ‘how important am I to the supplier’? Part of my spend may be on commoditized product with many alternatives. In this case I will go for the lowest cost, and the supplier will add value by having the lowest price, matching with an operational excellence strategy. On the other hand, if I want to have the newest, the latest and the highest specification product, I will need to work with some suppliers that have the newest, the latest and the highest specification raw materials or components. I will not be able to realize my product leadership strategy without having key suppliers that follow the same product leadership strategy. These suppliers are more unique and harder to replace. As a result they will be a firmer part of our supply chain ecosystem.

The same holds true on the customer side. Not all of my customers will have the same willingness to innovate. Some may still try to buy from me based on price instead of product quality or performance. I may want to keep some of these customers as they bring volume to the business. Just like I do a supplier segmentation, I need to do a customer segmentation. I will more deeply connect into customers following the same strategy. The ties with other customers will be more transactional and more opportunistic. In the given example, as soon as I no longer need the price-buyers I will drop them, as they will drop me as soon as they get a better deal elsewhere.

So in summary, our supply chain ecosystem has the strongest connections with suppliers and customers following the same strategy. By sharing the same strategy and the same operating model, we reinforce our common position in the market. Our ecosystem will contain suppliers and customers with different strategies, but these connections will be more opportunistic and change as market conditions change. They deliver strength as they generate temporary value, but they are less important to our strategic positioning.