I don’t mean to gush, but I heard one heck of a supply chain story last week.

It’s one that includes themes like consumer-driven, supply chain collaboration, incredible linkage of business and supply chain strategies, the use of Supply Chain Management to drive revenue growth, the impact of SCM on free cash flow, focus on time-to-value with technology vendors, and smart outsourcing, to name a few.

So who deserves such accolades? Panasonic Consumer Electronics. Last week at the i2 user conference, I heard Michael Aguilar, Sr. VP of Strategic Supply Chain Initiatives for Panasonic, take attendees through a very powerful story of what the supply chain is really capable of.

The scenario: with the huge growth of the high end TV market (high definition, plasma TVs), and the nearly ten-fold increase in average selling price for these units over traditional models, Panasonic’s new CEO saw an opportunity to reinvent the company, in large measure using SCM.

According to Aguilar, Panasonic’s CEO had determined, “We can no longer be focused on selling products to dealers. We need to be focused on selling what the end consumer really wants, and to realize the sale doesn’t really happen until that consumer buys the product.”

As logical as that may sound, it is not how most of the consumer electronics industry, or indeed most companies and industries generally, really operate. Panasonic provides a great example. “To do this, we had to totally change our orientation, and virtually all of our processes,” Aguilar said.

Panasonic had to get focused not on channel sales, but point-of-sale at retail; in fact, it had to begin to think not like a traditional consumer goods company, but actually like it was in fact a retailer.

That involved many traumatic changes, including the way the North American sales organization was commissioned and bonused. Bonuses based on channel sales: gone. Bonuses based on point-of-sale: in.

Aguilar himself actually came out of the sales organization. To him, as with most companies, supply chain was a “back office” function. But to accomplish its transformation, he observed that Panasonic would have to “move supply chain from the back office to the front office. Supply chain would be the single most important thing that will ensure our profitability and drive increased sales.”

Panasonic’s goal was not to take out costs, but to drive market leadership in high end TVs and other categories, such as digital cameras.

To reach that goal, new supply chain software was clearly needed, but the traditional implementation cycle of 12-18 months to implement solutions just wasn’t going to work. “When your CEO has an idea, are they willing to wait 12-18 months to implement it?” Aguilar rhetorically asked. The timeline to implement a variety of supply chain applications (demand planning, replenishment, etc.) and get the whole program off the ground: six months.

This was accomplished with a deep partnership with the software provider, i2. Not only were i2 personnel deeply “embedded” in virtually every Panasonic functional team, Panasonic chose to use key “managed services” from i2 to actually run elements of the technology as an outsource provider.

The program and the technology – including many “custom workflows” to meet the needs of individual partners – were successfully rolled out in the six month time frame.

As part of the program, Panasonic also had to reinvent its customer/channel relationships.

“We went to our channel partners and told them, if we can do this, there will be a huge increase in free cash flow that we’ve never experienced, and you’ve never experienced, and a tremendous decrease in markdowns.”

It took more than just agreeing to agree. As a key element of the program, Panasonic wanted to manage forecasting and replenishment for its retailers – a major change in process.

“We no longer looked just at each customer as a customer,” Aguilar said. “We really started to look at each customer DC almost like it was an individual customer,” in terms of managing replenishment. This change was driven in part by data analysis that showed widespread mismatches between retailer DC inventories and the level and profile of demand at those DCs.

There’s a lot more, but the results speak for themselves:

• In 2005, Panasonic high end TV sales growth increased 500%, versus 200% for the overall market.
• Incredibly, average weeks of on-hand inventory decreased from about 17 weeks to only four; in the peak Christmas season, on-hand inventory shrank to only two weeks, with no out of stocks. As sales levels exploded, inventory levels remained virtually flat, with near perfect alignment between end demand and retailer DC inventories.
• Considered a tier 2 or 3 supplier in key categories by many retailers, Panasonic has moved to tier 1 in virtually all of them.

Maybe I’m missing something, but this is the best story I’ve heard in a long while. We’d love your comments.

As a quick aside, we have an exciting line-up of Supply Chain Videocasts™, our new technology that brings traditional webcasts “alive,” scheduled for June. This includes How to Select a WMS, How to Select a TMS, Real-Time Supplier Integration, The RFID-Enabled WMS, and Building a Performance-Focused Logistics Workforce. Please take a look.

What is your take on the Panasonic story? It seems mostly so logical – why is this transformation so hard for most companies? Let us know your thoughts.