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IntimateSupplyChain_scmreview_ David F_ Ross_01072006

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 Intimate Supply Chain By David F. Ross 10tips-index-logistique-10propositions_fr

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From the pages of Supply Chain Management Review

Propos recueillis par:   http://www.lomag-man.org/  23.09.2006


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IntimateSupplyChain_scmreview_ David F. Ross_01072006

The Intimate Supply Chain

By David F. Ross -- 7/1/2006

As far back as the early 20th century, business theorists have been wrestling with the concept of the distribution channel. Writing in 1915, supply chain pioneer Arch W. Shaw described distribution as composed of two separate yet interconnected functions: demand creation and physical supply. Demand creation, Shaw wrote, consists in communicating the value to be found in products and services that meet the desires and needs of the customer. However, the customer's willingness to expend the effort to make an acquisition would possess no economic value if these goods and services were not available at the time, place, and cost wanted. It is distribution's role to solve this basic problem of creating exchange value by ensuring that the flow of the output of production matches the customer's requirement as efficiently and as quickly as possible. Shaw felt that finding a solution “was the most pressing problem of the business man today.”1

Almost a century later, Shaw's comments have lost none of their pertinency. In fact, regardless of the industry, demand creation and management has never been more critical to success. Competitive advantage now more than ever depends on the ability to anticipate, understand, and channel the needs and wants of the customer and then construct flexible fulfillment processes that swiftly provide the optimal product/service solution.

Until now, companies have sought to compete by constructing supply chain models that leverage lean manufacturing and supply-side management. They have deployed agile and flexible assets and information technologies in the pursuit of supply-channel networks capable of supercharging everything from product development to fulfillment. And all the while they have searched relentlessly for cost reductions.

But while such initiatives have yielded sometimes dazzling advances in productivity and marketplace responsiveness, they are rapidly becoming insufficient in the face of globalization and the mass-consumption strategies of market leaders like Wal-Mart and Dell. In order to succeed against global competitors that can offer high-quality products at the lowest cost, companies must go beyond the traditional approaches to improving the business. But after they have removed the waste and streamlined the supply chains to minimize costs, what's next?

We contend that supply chains must move to the next stage if they are to remain competitive: They must evolve into what we call intimate supply chains. The essence of this “intimacy” is to create value for each customer at every touch point in the supply chain. As we describe in detail below, this intimacy is gained through the following integrated actions: 1) developing a portfolio of customer segments, 2) understanding the needs and opportunities of each segment, 3) fashioning customized value propositions that deliver a complete buying solution, and 4) using technology, tools, and metrics to build and maintain a supply network focused on the customer. In combination, these activities lead to a customer-centered supply chain.

A New Demand-Driven Environment

Understanding the nature and advantages of an intimate supply chain first requires an understanding of today's dynamic business environment. Business strategists have pointed out that competitive differentiation today is about much more than market size, products/services offered, “leanness,” or even the robustness of your channel networks. Instead, what makes companies successful is that they are customer-centered. Today's leaders see themselves not as an aggregate of products, sales territories, and brands, but as a “portfolio of customers.” These companies are organized for the sole purpose of enhancing customer profitability by conceiving, communicating, and executing superior value for the customer.²

Why is customer centricity so critical? The answer is found in the following powerful business trends that are affecting both the nature of customer demand and how businesses are responding to demand:

  • Power of the customer. Today's customers are exerting an ever-growing influence over channel management. They are demanding to be treated as unique individuals, and they expect their supply partners to provide configurable, solutions-oriented bundles of products, services, and information. With their expectations set by world-class companies, they are demanding the highest quality for the lowest price. Customers want computerized ordering tools that empower them to design product and service content. They're looking for speedy fulfillment, robust information content, ease of search and ordering, and self-service follow-up.
  • Globalization. Long-standing manufacturing and distribution models have been fundamentally altered by the maturing of the world's industrial economies, the explosion of outsourcing to developing countries, and the dramatic growth of industrialization in the Far East generally, and China in particular. Mass-consumption strategies built on low-cost, scale-economy production have dramatically overshadowed the tremendous productivity increases recorded in the West. This trend has had an impact not only on commodities but also on high-value goods and services.
  • Networked supply chains. The velocity of change in customer needs, product proliferation, and time to market, coupled with pressures for increased innovation, have required companies to seek out collaborative partnerships with their supply channels. The objective: to enhance core competencies and drive customer satisfaction and profitable growth.
  • Shift from a service to a self-service economy. As product/service choice and supply channels proliferate, single-source replenishment, rising brand loyalty, and dependable everyday-value pricing become the norm. At the same time, customers are increasingly called upon to search for, install, maintain, upgrade, and recycle personal capital goods like computer hardware and software. In this increasingly self-service environment, supply chains will need to shift their focus from producing and distributing products to making fulfillment a more customer-satisfying, solutions-driven experience. New approaches to marketing, merchandizing, and communication will be necessary to move supply chains away from managing transactions and toward managing customer relationships.

Supply Chain Response

These trends constitute a huge challenge to the traditional business models used to run companies and supply chains. Historically, performance measurement centered on how efficiently an organization was deploying capital and assets to produce the best mix of products/services that maximized financial return. To achieve this, supply chains were constructed based on the calculation of optimal cost/service exchange curves, product-line revenue generation, divisional/territorial profitability, and sales/cost ratios.

In contrast, today's marketplace is demanding that supply chains be organized around the customer. Each network node must possess the knowledge necessary to interact with, anticipate, and respond to each customer's individual wants and needs. In short, what's required today is an intimate supply chain.

To build a truly intimate supply chain, organizations need to progress through three distinct yet cumulative value-creating stages as shown in Exhibit 1. The journey begins with the adoption of lean principles, moves on to adaptive supply chain management, and then culminates in the intimate supply chain.

The Lean Supply Chain

Lean philosophies and operational tool sets provide the foundation for creating channel strategies that are capable of meeting the challenges of today's business climate. The concept of the lean supply chain evolved from the application of lean manufacturing principles to supply chain management (SCM). According to research by the analyst firm AberdeenGroup, lean strategies were designed in response to the following five critical imperatives:

  • Continued pressure to improve operational performance.
  • Demands to simultaneously reduce prices and dramatically improve service.
  • Pressures to improve profits.
  • Requirements to reduce customer order cycles.
  • Marketplace demand for lower prices.

Lean SCM speaks to all of these issues. The objective of the lean supply chain is to supply the right product at the right time with as little waste as possible. Achieving this goal means that companies must identify new ways to cut costs while improving productivity, quality, and customer satisfaction.

Lean's five core principles guide the effort to simplify and continuously improve all supply chain processes. They are:

1.        Produce value. The value offered must be determined from the perspective of the customer—whether that value be lowest cost, best delivery performance, highest quality, or a unique solution to product/service requirements.

2.        Optimize the value stream. Production and fulfillment processes must be mapped in detail to expose any barriers to optimizing value up and down the supply chain.

3.        Convert from batch processes to a continuous flow. Once barriers and waste are eliminated, the goal is to replace “batch-queue” thinking and related performance measures with a mindset of continuous flow of goods and services.

4.        Activate the demand pull. Following the flow mindset, supply chains can migrate from being driven by forecasted demand to being driven directly by customer demand.

5.        Perfect all products, processes, and services. With the first four principles in place, supply chains can focus their attention on improving efficiency, cost, cycle times, and quality.

What makes a supply chain lean? To begin with, a lean supply chain seeks to reduce waste found anywhere in the channel network; standardize processes across traditional, vertical organizational structures; and optimize core resources. Lean supply chains seek to create customer-winning value at the lowest cost through the real-time synchronization of product/service needs with the optimal supplier. To accomplish this, they strive to be both responsive (that is able to meet changes in customer needs for such things as alternate delivery quantities and transport modes) as well as flexible (for example, be able to manipulate assets, outsource, and deploy dynamic pricing and promotions). In lean supply chains, outsourcing is used to support internal weaknesses. Finally, lean supply chains are dedicated to the continuous improvement of people and processes throughout the extended supply chain.

The Adaptive Supply Chain

The goal of the lean supply chain is twofold: 1) ruthlessly eliminate waste found anywhere in the channel network, and 2) optimize the customer value stream—from superlative product design to world-class delivery. Despite these laudable objectives, today's hypercompetitive marketplace has shown that lean channels can be too brittle to withstand the unpredictable shocks that can arise. These shocks are caused by many factors, including spikes in demand for single-source solutions, increased global outsourcing, shrinking product lifecycles, demand/supply channel imbalances, and inability of operational and financial resources to adapt to rapidly changing marketplaces.

Effectively responding to these disruptive influences requires companies to move beyond lean to the next stage: adaptive supply chain management. This stage involves the deployment of lean, networked supply chains in combination with real-time, interactive information sharing and synchronized functions that enable the channel to rapidly adapt to marketplace changes. Lean networks seek to be responsive and flexible without changing the network configuration. Adaptive supply chains, on the other hand, can rapidly reconfigure themselves in response to market events, such as the introduction of a disruptive product or service, regulatory and environmental changes, financial uncertainty, and massive market restructuring. Importantly, these supply chains can adapt while still remaining responsive and flexible.

Successful adaptive supply chains relentlessly pursue the six critical competencies shown in Exhibit 2. Effective execution of these competencies provides companies with the three essential success factors shown at the bottom of the exhibit. To begin with, smart technologies and connectivity/networking enable companies to receive real-time information about demand and supply events that are continuously reshaping each node along the network. Operations excellence and optimization foster agility by endowing supply chains with nimbleness, simplicity, and speed to rapidly execute adjustments to demand and supply capabilities. Finally, collaboration and synchronization help foster effective supply chain partnerships, which can enhance and optimize the channel network's competitiveness and profitability.

The Intimate Supply Chain

Just a few years ago, a successful supply chain was measured by its ability to produce ever-expanding product lines that were priced at the lowest cost, distributed through complex sales channels, and increased product revenue and operational profitability. Today, leading supply networks must excel not only at managing the supply chain flow through lean and adaptive techniques but also at continuously enhancing customer value. Linking the customer and supply management is at the heart of intimate supply chain management. Customer-centric intimate supply chains proactively provide timely, unique solutions and product/service value—all at minimum cost and effort to the customer.

It's important to understand up front that being “customer-centered” and “demand-driven” are not synonymous. A demand-driven supply network (DDSN) essentially merges the principles of lean and adaptive SCM. A DDSN seeks first to identify demand as it occurs anywhere in the supply network. It then attempts to determine how the required products and services can be dynamically positioned at the right place, at the right time, and at the lowest cost to deliver the “perfect order.”

In contrast, an intimate supply chain strives to be proactive (not reactive to the customer). (Exhibit 3 summarizes the key differences between a lean/adaptive or demand-driven supply chain and a customer-centered, intimate supply chain.) Being customer-centered means that supply channels are organized around customers instead of around products/services. The better the supply chain is at understanding each customer's needs and behaviors, the more effectively it can construct superior value propositions. The more effectively that providers can unearth customers' unmet needs, the larger the opportunities for competitive leadership. But before supply chains can be truly “intimate,” channel managers need to understand what today's customers want.

More than ever before, what customers want from their suppliers are solutions to their problems. Moreover, they want these solutions to be accessible at the lowest cost and with minimum expenditure of time and effort. The desired solutions can be as small as acquiring a widget to perform a minimal value-added task or as strategic as implementing an enterprise resource planning (ERP) system.

The key point is that it is the solution and not the product/service that constitutes the key value for the customer. This means that supply chains that are “product-centered” can never really provide the encompassing solutions that customers so clearly value today. An intimate supply chain continuously strives to identify just who its customers are—especially the most profitable ones—and what solutions they want.

Segmenting the Customer Base

Without a doubt, the term “customer-centered” is one of the most overworked platitudes in modern management. After all, who's not in favor of operating the business with the customer's best interests in mind? In reality, though, supply chains are all too often organized around internal financial objectives like resource allocation, product lines, and business-unit profitability. When problems arise, companies develop a generic response that is then applied to all customers in the supply chain—whether they are profitable or not.

In theory, a demand-driven network is supposed to be able to take real-time demand information, rapidly reassemble supply channels, and create individually targeted customer solutions. But in reality, it is impossible to respond to the needs of each and every customer. That would be corporate suicide. This is because demand-driven networks have a strategy centered on standardized product lines, forecasted demand, and performance calculated by aggregate customer value. One of the major drawbacks of a demand-driven network is that all customer requirements are given the same weight. The result is that the value of the supply network is seen as the aggregate value of all customers. In this view product/service solutions are standardized around what the average customer wants, measured against the average return on investment. But in reality, not all customers are profitable. The profitability of a channel is, therefore, not the sum but rather the individual profitability of each of the customers it serves.

True customer-centered businesses are organized not around general performance targets but around a precise knowledge of each customer segment identified. An intimate supply chain determines performance on the value it can provide to the customer. It views all customer demand as unique and seeks to configure each solution to match the product/service features each customer values the most. In a customer-centered supply chain, someone is directly responsible for managing each customer segment. This means that managers have an intimate knowledge of what customers want and need. They are constantly driving new value propositions designed to attract and expand each segment's profitability to the supply chain.

Since not all customers are profitable, the first action in creating an intimate supply chain is to segment customers. Segmentation allows the supply chain to allocate scarce resources according to which customers should receive more product/service value and which less.

The question naturally arises, “How do you segment a supply chain's customers?” Traditional aggregation strategies, such as segmentation by territory, sales, costs, profits, and similar attributes, result in too broad a definition. Further, this approach does not tell us who exactly our customers are and what value they expect.

A far more effective approach is to segment customers according to the types of solutions they want. Importantly, this segmentation should be concise enough so that the impact of product/service propositions on customer behavior can be measured. Finally, an effective segmentation strategy must provide marketers with a scorecard that tells which customers are generating the most profit and which are marginal or even destructive to the channel's financial health. One useful metric in this regard, for example, is lifetime customer value (LCV). LCV calculates customer profitability by taking the total sales revenue of a customer over the lifetime of the relationship, discounted by interest and inflation. But whatever measure is used, the goal is to quantitatively determine exactly how each customer segment is contributing to or detracting from the profitability of each supply chain node and the supply network overall.

Identifying the Value Proposition for the Customer

Continuously crafting product/service value propositions that appeal to your different customer segments is no simple matter. It requires careful study and execution. The following steps can help in this effort:

  • Define value proposition. Key activities here include identifying the value profile for each customer segment in terms of the critical benchmarks of service (speed and reliable delivery), product/service wrap (desirability of products, service, and solutions), and customization (ability to provide configurable, unique solutions).
  • Create value-proposition portfolio. This entails assembling the solutions most wanted by customers in terms of design (form, fit, function), cost (competition, time from conception to sales), services (availability, ease of use, information), and quality (conformance, reliability, durability).
  • Determine scope of collaboration. At this step, determine how the competencies and resources of the supply network should be integrated to help in creating, sourcing, and delivering the value proposition portfolio.
  • Ensure customer buy-in before rollout. Before widespread rollout of the value proposition, apprise customers of the initiative and ensure that they buy into it.
  • Develop value-proposition metrics. Performance metrics need to be in place once the rollout has taken place. These measures will allow planners to gauge the effectiveness of the value-proposition portfolio and will provide the basis for the next round of improvements.

One of the most critical components of an effective value proposition is how the competencies and resources of the supply chain are leveraged. Because each customer touch point in the network has its own value-proposition portfolio, all channel members must be able to adapt and collaborate in a way that gives customers confidence that they are dealing with an integrated, seamless source of supply. Failure to properly align the supply network can cause the eventual deterioration of customer intimacy. This is not good because increasingly powerful customers can now choose from a variety of product/service value propositions; they are more ready to switch buying allegiances in the case of nonperformance.

Architecting the Intimate Supply Chain

With the value propositions identified, a company can begin the process of building and maintaining an intimate supply chain. This is essentially a five-step process:

1.        Create the climate for cultural change. Migrating from a product-centric to a customer-centric supply network requires dramatic cultural changes that will ripple through each channel partner. All of the partners, both external and internal, must agree that the key metric is how to increase value for the customer as identified by the targeted value propositions.

2.        Continuously examine customer segments. Dismantling product-focused silos and organizing around customer-segment profitability is crucial to the creation of the intimate supply chain. The goal is to continuously identify what each profitable customer segment values. From that information, new value propositions can be developed that not only deepen partnerships with the best customers but also help make the marginal customers more profitable.

3.        Devise the intimate supply chain map. The qualitative and analytical data from step 2 should provide a “geography” of the customer base and point to the key drivers for customer loyalty, value, and satisfaction. This knowledge, in turn, will permit demand managers in the channel to match the customer with the optimal solution offered by the most appropriate channel node. A map also will facilitate the coordination of products and services up and down the channel so that they always meet the customer's needs. In the end, the customer will not see several product owners scattered across a supply chain, but rather a single solution configured to meet its unique needs.

4.        Apply the right technologies. The state of supply chain technology today is still evolving. Available solutions run the gamut from marketing portals, packaged customer relationship management (CRM) solutions, contract and service management tools, collaborative planning, forecasting, and replenishment (CPFR) programs, and partner relationship management (PRM) solutions. In evaluating the expanse of products out there, supply chain executives must be careful to adopt those technologies that support customer-centric management everywhere in the supply network.

5.        Monitor, measure, refine. Perhaps the most difficult task of the intimate supply chain is to identify customer-centric measurements. The metrics should encompass the value-proposition performance of the entire channel. They need to focus intently on customer-segment profitability and should highlight changing customer behavior and needs. Without such measurements, supply chains will regress to former product/organizational silos focused on traditional cost/service profitability models.

Benefits of the Intimate Supply Chain

The main benefit of pursuing an intimate supply chain can be summarized succinctly: An intimate supply chain enables companies and their channel network partners to do business in a profoundly different way from the competition. This benefit is clearly manifested in two areas in particular: financial performance and competitive positioning.

Financial Performance. Intimate supply chain management enables all of the supply chain partners to increase profitability and attract shareholders by focusing directly on the real source of revenue and profits—the customer.

The right metrics assure that this focus remains steady. Whereas traditional profitability measures provide aggregate insights into how well the business is performing, customer-centered metrics in the intimate supply chain directly calculate the profitability (or unprofitability) of each customer segment. This ensures that valuable assets, productive processes, and value propositions are being adapted to pursue the most profitable mix of customers.

The results of an intimate supply chain are seen clearly in the removal of waste and misdirected effort. And this, in turn, results in a more effective application of capital and resources. Further, an increase in asset utilization and profitability increases stock price relative to earnings and book value per share. Today's best companies (think Dell Computer, Home Depot, General Electric, Microsoft, and so on) are succeeding because they understand that market share belongs to those that are focused on customer intimacy. According to AMR Research, companies that have implemented customer-focused, demand-driven networks hold 15 percent less inventory, enjoy 17-percent or higher perfect-order performance, and achieve a 35-percent shorter cash-to-cash cycle time than their average competitors. Such operational superiority translates into a 10-percent improvement in revenue and a 5- to 7-percent improvement in profitability.

Imagine the value that whole supply chains could realize by becoming customer-centered and creating value at all points in the supply chain. As we discussed earlier, lean, adaptive, demand-driven supply networks go only part of the way. Real performance leadership is achieved when the entire network links customer segmentation with targeted value propositions, thereby making the supply chain a massive, seamless enabler of customer satisfaction. In the end, an intimate supply chain generates more profit at lower cost, which in turn attracts additional investment capital.

Competitive Positioning. In addition to enhancing financial performance, customer intimacy can dramatically improve competitive positioning. Many companies today are feeling squeezed domestically by price-centered “big box” marketers like Wal-Mart and globally by low-cost, scale- economy manufacturing and distribution. These forces have been accelerated by low-cost, mass-consumption strategies that break down customers according to specific demographic attributes and then construct product/service formats in which all customers are treated identically.

In most industries (department store retail and automotive to name just two), it is futile to go head-to-head against the giants pursuing this strategy. Yet there's another way to compete—and the intimate supply chain shows the way. The customer-centric networks in the intimate supply chain are able to provide targeted customers with complete, bundled solutions that can be attained with as little cost, time, and effort as possible. This strategy is only possible when there is detailed knowledge of the profitability of the customer segments served, when the value proposition is stated for each segment, and when the supply chain network is capable of driving this strategy to the bottom line—each and every day.

Intimacy is a word not often associated with supply chain management. But for companies in many industries, an intimate supply chain can be their ticket to surviving—and flourishing—in a brave new business world.

Author Information

David F. Ross has authored several books on supply chain management, including Introduction to e-Supply Chain Management (St. Lucie Press, 2003) and Distribution: Planning and Control (Spencer Verlag, 2004). Currently, he is director of education and training at Lawson Software.


1.        Arch W. Shaw, Some Problems in Market Distribution, Cambridge, Mass.: Harvard University Press, 1915: pp.41-44.

2.        The phrase “portfolio of customers” was coined by Larry Selden and Geoffrey Colvin in Angel Customers and Demon Customers, New York: Portfolio, 2003: p. 7.

3.        Jane Biddle, “Best Practices in Lean,” AberdeenGroup white paper, June 2005.


glossaire_lexiquedico_translog_metiers     traduction\traducteur     


dichotomie de la logistique. fr     les_10_regles_optimisation_de_la_logistique  

wms-select_choixdusysteme-degestion-de-stock  Suite: wms-select_choixdusysteme-degestion-de-stock_SUITE

 Intimate Supply Chain By David F. Ross   10tips-index-logistique-10propositions_fr

From the pages of Supply Chain Management Review

Propos recueillis par:   http://www.lomag-man.org/  23.09.2006

   © 2006, Reed Business Information, a division of Reed Elsevier Inc. All Rights Reserved.


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