"Supply Chain Management: From Cost Centre to Competitive Advantage"

JULY 2008 - Fast Thinking magazine

Article written by Carter McNabb

Over the last ten years in Australia, supply chain management has started to transition from the back office to the boardroom. Historically seen as a ‘necessary evil’ or simply part of the ‘cost of doing business’, supply chain was the realm of trucks, warehouses and burly men in fluorescent safety vests.

But this is changing and changing fast. Leading organisations have recognised that effective supply chain management can boost performance ratios such as Return on Capital Employed (ROCE) by reducing operating costs, increasing asset turnover and improving customer service levels.

And this is not just the realm of familiar global examples like Dell Computer. Some local examples include The Super Cheap Auto Group and Blackmores.

Super Cheap Auto increased operating cash flow by $12 million in 12 months whilst improving service levels by adopting leading demand planning techniques, optimising their inventories and up-skilling their planning team. They funded growth from operating cash flow versus debt and outperformed the industry during a retail downturn. Their share price then went on to triple 12 months after their FY06 results were announced. As a notable point of comparison, Repco was acquired by private equity and delisted from the ASX during this period.

Blackmores used their supply chain disciplines to respond swiftly and capably to the Pan Pharmaceutical Recall in April 2003. They quickly locked in supply contracts, serviced key customers and increased their market share sustainably when the rest of the industry was in disarray and still trying to formulate a response.

Both examples show how effective supply chain management can be a key competitive advantage and rapidly deliver market leading results. And these are real results.

A couple of quick facts to underscore the point. Looking at supply chain costs as a percentage of sales, did you know that ‘best in class’ performers have roughly half the costs of ‘average in class’ performers? In other words, if you’re an average performer, your supply chain costs are likely twice that of the best performers. Given today’s margin pressures, that’s a big difference. Do you know where your organisation sits on this spectrum? In addition, ‘best in class’ performers have higher asset turnover because inventories are lower, often by 20%-40% comparatively, whilst customer response times are faster. In a climate of tight credit and higher capital costs, those that can generate superior cash flows and ROCE returns will outperform.

So here in Australia and around the world, the view of Supply Chain Management is shifting from a cost-driven logistics function to an end-to-end process discipline that can deliver real competitive advantages and shareholder value.

And the pressure to improve these competencies is building, because this is what the road ahead looks like:

• Technology – The recent advances in supply chain planning, optimisation and execution technology are remarkable. By their nature, supply chains are complex and data intensive. As a result, smart tools for supply chain design, planning & optimisation and execution are essential. Leading organisations are employing these tools to drive sustainable cost, capital and service advantages in their business. If you are relying on spreadsheets, your ERP system or the knowledge of a few key individuals, there is significant risk and opportunity on the table.

• Skills – As supply chain becomes more a strategic and avails itself of these technologies, specialist skills become more important, and the market for these skills becomes more competitive. Bottom line is that it’s very hard to find people in Australia with the right combination of skills. In addition, management often don’t really understand the supply chain skill sets they’re looking for. Organisations must identify, acquire and develop the right skills if they’re to stay ahead of the curve, or even on it.

• The Economy – Tight credit markets. Higher capital costs. A potential economic downturn. Margin calls and locusts. As illustrated previously, supply chain management can have a major and rapid impact on cash flow, costs and responsiveness to change (for better or for worse). Both Super Cheap Auto and Blackmores converted disasters into successes because they understood this and had invested in the capability to respond.

• Al Gore – Whether you believe in climate change or not, we can all agree that energy costs are rising. We have the long, complex and global supply chains we do in part because of cheap fuel and transportation costs. As these costs increase, and as carbon costs are factored into our decision making, supply chains will need to adapt. These changes may be very significant (e.g. where products are manufactured), and we may feel the impacts of this much sooner then we think.

In summary, supply chain management represents a genuine opportunity, but the landscape is changing quickly. It’s an exciting time, but excitement can turn to panic rapidly if we find ourselves unprepared. Remember the Boy Scout motto?

“Always be prepared”.

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From Cost Centre to Competitive Advantage - Fast Thinking

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