First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  October 1, 2009  

Supply Chain at the Core


You should be careful about what you say on airplanes.


Returning this week from an event in Bentonville, AR  – home, of course, to Walmart - and I sat next to a corporate executive of a $2 billion or so consumer goods company. I know that, not because I spoke with this person – he/she was busy every second before and during the flight and didn’t really even acknowledge my presence, but because one of the several phone conversations this person conducted as we were waiting for the door to shut included something along these lines:


“With the way the markets are changing, and this “new normal,” I am not sure our current market value proposition is viable going forward.” A bit later: “We may have to make some significant changes to our structure and supply chain to remain competitive.”



After that, I must say I couldn’t resist a quick peak when a printed powerpoint presentation came out after we took off, and I was able to see what company was viewing things so direly. In fact, I thought it might be the CEO I was sitting next to, but a bit of research when I got back home told me that it was not the CEO, but someone on the executive team.

Gilmore Says:

Now supply chain doesn’t just deliver lower costs and great customer service, it is also serving as a sort of bank - providing investment capital.

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I will sum up what I think was meant, taking the comments and the type of company it is, though of course it is just an educated guess: “We are a branded product with a premium price point, and a combination of private label share growth and changing consumer behavior means our brand may no longer be able to command a premium price. But, our cost structure can’t now deliver a low total supply chain cost versus others.”


Anyone else feeling similar pressures?


All of which leads me to say that as miserable as this Great Recession has been, I think it has moved supply chain up another notch on the corporate ladder. In this company’s case, its existing value prop may need to change, and supply chain will be essential to making it happen.


One thing that struck me last week at the CSCMP conference (See CSCMP Full Review and Comment) was the number of times that I heard supply chain managers and execs at presentations say “This recession has made our supply chains stronger,” or words to that effect. The explicit and implicit meaning: we’ve discovered that we really could manage with lower inventories versus sales than we thought before, that we can be more agile, that we can lean out our supply chains even further.


From everything I know, General Mills has a pretty darn good supply chain. Yet, on their announcement last week of very strong quarterly results, the CEO cited, in part, the cost improvements in manufacturing and distribution as leading to the incredible 7 percentage point increase in gross margins (lower input costs were also key).


At CSCMP, I attended a great session on Wall Street and the Supply Chain (see summary in next week’s On-Target newsletter), and several of the panelists (Wall Street/private equity types) noted that, in what has been dire capital and credit market conditions, the supply chain has been key to unlocking capital for many companies. This is critical, as the credit to fund growth initiatives simply hasn’t been available or is too expensive to use.


Lowering inventory levels is obviously the biggest club in the cash flow bag. Probably next is the ability to do more with fewer physical assets, perhaps allowing the company to sell some assets and generate cash. Lowering supply chain operating costs, of course, also plays a role.


I understand that the relentless drum beat of lower costs and lower inventory is not an easy task master. I have talked to many executives and managers who simply feel worn down by these pressures.


Yet, I think it is clear that the financial crisis has elevated the overall position of supply chain in most companies, in the end, to the benefit of supply chain professionals everywhere. Heck, now supply chain doesn’t just deliver lower costs and great customer service, it is also serving as a sort of bank - providing investment capital.


There was yet another analysis just released which again showed that a number of companies are shedding the role of Chief Operating Officer. No number two to the CEO.


While I do not believe that supply chain executives should, or will, pick up that mantle fully (who wants to own sales and marketing?), a true “operating” executive – the Chief Supply Chain Officer – already has in many companies started to serve that role, and will do so in many more. The disappearance of president and/or COO from the executive team will accelerate that trend.

One more thing from the Wall Street and Supply Chain session: while many of us have argued for years that small and medium-sized businesses should pay more attention to supply chain management, a private equity investor brought out the importance of that in sharp relief.


Paul Carbery of private equity firm Frontenac said, in effect, that lack of supply chain sophistication is what enables his firm to buy many companies at a discount.


For example, he cited an innovative medical devices company that Frontenac purchased that had some great products, but a lousy supply chain in terms of cost and distribution coverage. Within 18 months of buying the company, the relatively simple supply chain fixes had led to a doublingof revenues and gross margins – meaning the company was now worth substantially more than before Frontenac acquired it.


The message I took away: supply chain is clearly not just for Walmart and Procter & Gamble, but SMBs too. These companies can often significantly increase the value of their firms by getting supply chain right. Don’t fail to leverage your innovation or sell to a PE at a discount because you didn’t put the focus there. Bring in some talent as needed.


One last thing – 2010 is shaping up to be one of the most difficult years to forecast and plan for in the roughly 25 years of the “supply chain era.” Bet too conservative and you may not only lose top-line revenue potential, but perhaps permanently lose market share if the economy really expands, as many think it will. Bet too aggressive and the costs will wreak havoc on the bottom line, leading to more – and perhaps debilitating cost cutting.


Wish I had a crystal ball for you on this one, but I will simply say that supply chains that are best configured to flex up or down will give their company’s incredible advantage next year.


Do you agree that the economic mess has led to better supply chains and a stronger role for SCM? Will this change be permanent? What is your approach to forecasting and planning for 2010 – and how can you build in the flexibility to win whether we have a big recovery or not? Let us know your thoughts at the Feedback button below.

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