LEADERSHIP
VALUE
INTEGRATION
STEWARDSHIP
READINESS
CATEGORY
STRATEGIES
AND
SUPPLIER MANAGEMENT
Jim Frazier
24
S u p p ly C h a i n M a n a g e M e n t R e v i e w
· SepteMbeR 2007
www.scmr.com
“Prediction is very difficult, especially
about the future.”
—Niels Bohr, Danish physicist
M
What’s in store for supply
management—and supply
management professionals—in the
impact of cost management efforts.
The study concluded that success
will be based on how well supply executives plan and execute in seven critical
areas:
1. Developing forward-looking category strategies.
2. Engaging, developing and managing key suppliers.
3. Designing and operating multiple
supply networks.
4. Leveraging technology enablers.
5. Collaborating internally and externally.
6. Attracting and retaining supply
management talent.
7. Managing and enabling the future
supply organization globally.
This is the first of a three-part series
of articles in Supply Chain Management
Review that will explore the study’s findings in these areas. It covers category
strategies and managing key suppliers.
The next article will discuss supply networks, technology enablers, and collaboration. The final article will address
organization and talent management.
decade ahead? An in-depth study
uch can change in a
decade’s time. In 1997, conducted by CAPS Research, the
there were no iPods.
Institute for Supply Management,
The Euro had not been
and A.T. Kearney tackled this
introduced. Business
process
outsourcing question head on. In this first of a
to India was still in its
three-part series, we present the
infancy. Dot.com boom and bust hadn’t
findings on two key areas of the
entered the vocabulary. Terrorism was a
remote possibility in most of the devel- research: category strategies and
oped world. Yet, in ten short years, each
supplier management.
of these changes deeply affected how
businesses and industries operate. In
turn, they affected how companies manage supply—what they buy, where they
source from, how they work with suppliBy Robert M. Monczka and
ers, which tools and organizational modWilliam J. Markham
els they use.
What could change in the decade
Dr. Robert M. Monczka is a research
ahead and how might those changes
professor at the W. P. Carey School of
affect the future of supply management? Business at Arizona State University and
CAPS Research, A.T. Kearney, and the
director of sourcing and supply chain
Institute for Supply Management (ISM)
strategy research at CAPS Research.
have just released a research study enti- William J. Markham is a Fellow Emeritus
tled “Succeeding in a Dynamic World:
Developing Category
of A.T. Kearney, Inc.
Supply Management in the Decade
Strategies
Ahead” that provides some answers.
In the decade ahead, firms will think dif(See sidebar for study background.)
ferently about category strategies.
The study found that over the next ten years, business will
The essence of a category strategy is to create the most
be buffeted by strong forces of change including globaliza- value for the company by leveraging external resources and
tion, new demographics, natural resource constraints, height- capabilities. Changes in business models, industry structures,
ened environment concerns, shifting consumption patterns, technologies, customer demands, environmental regulations,
regulation and activism, technology and innovation, and the and other factors will change both how value is defined,
possibility of high-impact disruptive events. Business models and how external resources can help deliver that value. As
and strategies will change as companies pursue new revenue a result, traditional ways of thinking about categories must
streams, further squeeze costs, lean-out their asset base, and change as well. Exhibit 1 presents a model of how this might
reshape their capital structures to meet the opportunities and take place.
threats that lie ahead.
Until the mid 1990s many companies took a traditional
In turn, CEOs will ask supply to take on a broader, more approach to category strategy development. They bought
strategic mission, to embrace a more comprehensive set of the same components, products, and services that they had
goals, and to deliver a higher level of performance. Supply always bought, sourcing from the same markets and supplimanagement will be expected to deliver more innovation ers. Supply management was charged primarily with securing
from suppliers, contribute more broadly to revenue genera- the best price and assuring supply. With the advent of stratetion, anticipate and monitor supply risk to ensure business gic sourcing circa 1995, many companies started to aggrescontinuity and sustainability, and expand the breadth and sively challenge the status quo. They broadened their view to
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S u p p ly C h a i n M a n a g e M e n t R e v i e w
· S e p t e M b e R 2 0 0 7 25
Supply Future
Today, companies are looking beyond the
goods and services they currently source from
Creating More Value by Thinking Differently About Categories
external parties, and defining strategies for
whole new categories. The most common form
Value Chain
of this occurs when companies look at options
Leverage
Networks/
to outsource business processes and activities
Strategies
Ecosystems
to reduce costs. This results in new categories
d
e
as
appearing on the sourcing list such as contract
e-B ing
u
l
Extended
c
Va our
Enterprise
S
manufacturing, facilities management, and logisic
tics.
eg g
t
a
r
St urcin
Total
However, some companies are going even
o
S
Enterprise
l
further. Their goal is to find suppliers with disna
o
i
dit ing
crete capabilities that can add new types of
Tra ourc
Supply
S
value. Often these new “categories” relate to
Management
unrecognized and untapped competencies
Components,
Function
Discrete
New Business
and knowledge already in the supply base. For
Products,
Performance Capabilities for Opportunities
and Services
Value Creation
example, one food manufacturer used a flavoring
supplier’s knowledge and expertise to rationalize
Broader Definitions of Categories that Create Value
its own ingredient base into flavor and additive
Source: “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, CAPS Research,
A.T. Kearney, Inc. Institute for Supply Management
“modules” providing specific taste or texture.
This created significant savings for the manufacconsider functionality as well as form, and tapped non-tradi- turer and additional sales for the supplier. Most importantly,
tional markets. Purchase price gave way to total cost of owner- it also allowed the manufacturer to reduce time to market sigship (TCO). Supply management teamed with internal experts nificantly, a key to competitive advantage in their segment.
and user communities in the joint pursuit of more value.
We predict that companies will increasingly use this
“value-based sourcing” approach to leverage the full capabilities of its extended enterprise (whether just one supplier or
group of suppliers) to gain competitive advantage for categoAPS Research, A.T. Kearney, and the Institute for Supply
ries with high business impact.
Management (ISM) recently released a research study
At the extreme, leading companies will seek to gain access
entitled “Succeeding in a Dynamic World: Supply Management
to
and
leverage each other’s value chains as a way to enter into
in the Decade Ahead.” The study updates and expands the 1998
new
business
segments. For example, household appliances
research by these organizations.
manufacturer
Philips
DAP and consumer products manufacThe current research probed three key areas:
turer
Sara
Lee
combined
elements of their value chains to
What external forces will have the greatest effect on busicreate
Senseo,
a
unique
cup-by-cup
coffee maker. Sara Lee
ness over the next ten years?
differentiated
its
new
coffee
offering,
while Philips created a
• How will business models change as a result of these
kitchen
appliance
that
rode
the
marketing
introduction wave
forces?
of
a
premium
fast-moving
consumer
product.
Neither party
• How will the mission, goals, performance expectations,
could
have
achieved
such
success
on
its
own.
and strategies for supply management change to support these
Category strategies will become more robust and focus
new business models?
on
the total alignment of customers and suppliers to meet
More than 260 companies representing North America,
competitive
objectives across the end-to-end supply chain.
Europe, Latin America, and Asia/Pacific participated in the
Critical
enablers
will continue to build a foundation for
research. This included involvement by 113 supply management
effective
category
strategy development achieved through a
executives who participated in meetings and teleconferences
systematic
process
as illustrated in Exhibit 2 and discussed
with the research team, and 180 company responses to the ebelow.
Executives
will
have to be engaged with development
survey (many companies participated in both). About two-thirds
and
execution
of
strategies
for critical items as the strategies
of the participating companies came from manufacturing induswill
become
increasingly
cross-enterprise.
tries, while the rest were from service industries.
One supply executive characterized the challenge as folA high-level view of the study findings and A.T. Kearney’s
lows:
“How can we develop our category strategy so that we
perspectives on them are available at www.atkearney.com. A
will
best
be able to obtain leading-edge innovation, capabiliseparate, comprehensive study report from CAPS Research will
ties
and
performance today and tomorrow while blocking/
also be made available at www.capsresearch.org in fall 2007.
delaying our competitors from achieving the same results?”
Greater Organizational Reach to Create Value
EXHIBIT 1
C
26
About the Study
S u p p ly C h a i n M a n a g e m e n t R e v i e w
· September 2007
www.scmr.com
companies to change processes to improve working relationships, while developing incentives to
collaborate for value creation and enhanced perDeveloping and Executing a Category Strategy
formance.
The time horizon for strategies will extend
Robust
beyond three years and may approach five to ten.
Category Strategy
Development Process
For many purchase categories, multiple years will
Executive Engagement
Supply Network Focus
be required to achieve meaningful strategy change
and results. The following efforts, for example, all
Total Cost Analysis
Effective
Global
Critical
Spend Analysis
Benchmarking/
require longer term efforts: moving production
Cross-Functional
Contracting
Enablers
and Analytics
Supply Market
Teams
Process
parts from mature to low-cost countries; develUnderstanding
oping performance and capabilities knowledge
about best-in-class suppliers; developing supplier
Source: “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, CAPS Research,
A.T. Kearney, Inc. Institute for Supply Management
relationships and establishing on-the-ground supply-market and government regulation informaThe Strategy Development Process
tion; developing logistics capabilities, including the ability to
A robust category strategy development process begins with manage extended supply chains; and managing risks.
clear category strategy objectives focused on creating value.
Effective risk identification, mitigation, and contingency
For key categories, strategies will need to explicitly address planning also play a key role in category strategies. Risk to
how companies will speed new product development and revenue, continuity of supply, and customer service will have
obtain supplier technology innovations; how they will imple- to be evaluated on a predictive basis with appropriate risk
ment and achieve the best theoretical price for a category mitigation.
worldwide; how they can stimulate the creation of new prodChange management will be key to developing and impleucts and services with the support of suppliers;
how the category can become the source of new
EXHIBIT 3
revenues. As part of this process, organizations
Rapid Growth Seen for China, India and
will better define “value” and will increasingly
Eastern Europe as Source Markets
apply total cost and value decision-tools to assist
in sourcing decisions.
China
India
Breadth and scope of strategies will expand
25
25
2.4x
going forward. Supply base reduction and global
20
20
1.6x
sourcing, especially from emerging markets, will
continue to play an important role, as can be
15
15
2.4x
seen in Exhibit 3. However, in the next decade,
2.7x
10
10
strategies will focus more intensely on total cost
and value creation related to supply and sup5
5
plier contributions. This will be accomplished
0
0
through product/service design and complexNorth America
Europe
North America
Europe
ity reduction, supplier improvement initiaEastern Europe
Brazil
tives, design for supply chain effectiveness, and
25
25
enhanced collaboration between suppliers to
2.1x
improve performance.
20
20
Strategies will focus on ways to increase sup15
15
plier integration. Elements will include alignment of buying company objectives and strat10
10
2.1x
egies with that of Tier 1 and Tier 2 suppliers,
2.2x
1.4x
5
5
joint innovation efforts, and engagement of Tier
1, 2, and 3 suppliers in new product/service
0
0
North America
Europe
North America
Europe
development and collaboration. Integration of
suppliers into the customer fulfillment process
2007
2012
will need to be tighter as companies continue
Source: “Succeeding in a Dynamic World: Supply Management in the Decade Ahead”, CAPS Research,
to outsource both manufacturing and business
A.T. Kearney, Inc. Institute for Supply Management
processes. This will require suppliers and buying
www.scmr.com Percent of Goods and Services
Sourced from this Market
Percent of Goods and Services
Sourced from this Market
Percent of Goods and Services
Sourced from this Market
Percent of Goods and Services
Sourced from this Market
EXHIBIT 2
S u p p ly C h a i n M a n a g e m e n t R e v i e w
· S e p t e m b e r 2 0 0 7 27
Supply Future
menting innovative category strategies. More stakeholders will
be affected thereby increasing the potential of resistance.
Category strategies also will need to be more clearly
understood and presented as a means to achieve customer
requirements. Written documentation of the strategy and its
action plans that lay out detailed responsibilities, accountabilities, and timeline will provide a “playbook” to help everyone understand the what and why of the strategy. Knowledge
management tools will enable review and learning from prior
strategy successes or failures.
to meet aggressive performance goals.
High quality spend analysis and analytics will couple
accurate historical spend by purchase category as well as by
line item by suppliers and using locations. The analysis also
will address anticipated future requirements by category and
purchase items. Insights to future demand will be critical to
establishing the most effective strategies.
A global contracting process will not only address purely
legal considerations but also process considerations about
how firms will work together to improve working relationships and productivity. Company-wide
terms and conditions will be adapted to
local regions and countries. Important
legal considerations will be included as
process begins with clear category strategy objectives in the past.
Total cost analysis, benchmarking,
focused on creating value.
and supply market understanding will
take on greater importance. Detailed
Measurement and learning will involve all elements of information about the industry, competitive forces, cost
value and application of a balanced scorecard approach with structures, suppliers, and products/services will be required.
detailed and ongoing finance review and validation. As firms Supply chain information identifying technology leaders,
increase their attention to value, they will work to directly potential bottlenecks, and major risks also will be neceslink value performance to the firm’s income statement and sary. Predictive insights as well as historical data are needed
balance sheet.
in this regard. Companies must be able to look several tiers
upstream to identify and anticipate supply “choke points”
Enablers of the Strategy
and complex interactions among markets. They will invest
Development Process
in “supply research experts” who can collect meaningful data
Executive engagement will become more important in the worldwide and synthesize it into those factors most critical to
next decade. Top-level executives will increasingly play a key developing category strategies
role in the success or failure of the critical category strategies
Overall, category strategy development focused on value
by providing executive guidance, approval, and ensuring that and with executive engagement will be critical to the firm’s
key functions are aligned. They also will commit necessary future success. In addition, development of supplier and
resources to support the strategy. As one CPO commented, supply network strategies as part of the category strategies
“Category strategies will become integrated with the busi- will include strategic approaches to structuring the supply
ness, technology and operations/manufacturing strategies to base, improving working relationships with key suppliers, and
maximize overall financial performance.”
further developing supplier capabilities.
A supply network focus (vs. focus on an individual supplier) for category strategy development will become critical. To Suppliers: Key to Value Creation
support end-customer demand for goods and services, com- As firms think differently about their category strategies, so
panies will need strategies that leverage the interdependent, will they think differently about their supplier strategies.
complementary capabilities within a network of Tier 1, 2 and Going forward, engaging, developing, and managing suppli3 suppliers. Competing more effectively in the fast-changing ers will be key to value creation.
future—where speed to implement strategy innovations and
Based upon our research, three dominant themes emerge
reaction to market shifts are critically important—will require for the decade ahead:
category strategies aligning, linking, and achieving collabora• Structuring the supply base to support the business
tive efforts throughout the supply network.
model and category strategies.
Effective cross-functional teams are among the key
• Improving working relationships with suppliers.
enablers of a robust category strategy development pro• Developing the capabilities of suppliers to meet future
cess. This effort should encompass core and ad-hoc needs.
team members that will be held accountable for results.
Functional, business unit, and corporate executives will Structuring the Supply Base
need to assign the appropriate people from various disci- Structuring a world class supply base to meet specific complines to critical category teams, some on a full-time basis pany needs will assume more and more importance going
A robust category strategy development
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S u p p ly C h a i n M a n a g e m e n t R e v i e w
· September 2007
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The question of what supplier capabilities
will be required also will become more important because of broad-based trends taking place.
n designing and building its 787 Dreamliner, Boeing is well on it way
Examples include the emergence of “green” prodtoward applying many of the future supply management approaches
ucts/services and the changing requirements of
identified in this research. Driven by market demand for a more fuel
specific customer segments across industries—for
efficient aircraft, and by competitive pressures to shorten development
example, lower priced/cost goods in India, more
time, keep initial investment low and manufacture aircraft economically
fuel-efficient automobiles in the U.S., lighter
and quickly, Boeing set aside tradition and thought differently about how
weight and strong materials in the aerospace industo use a “global partner” network of key suppliers to optimize the overall
try, and greater product innovations in the consumbusiness.
er packaged goods industry.
For the 787, Boeing moved strongly to an outsourcing model to speed
Also of growing importance are the decisions by
development and help keep costs low. The company structured agreebuying companies about whether they want to lead
ments with its partners to share investment risk and revenue rewards. It
or actually manage supply networks and influence
defined new purchase categories that provided new sources of value; for
supplier collaboration. Given widespread outsourcexample, with the assistance of its partners Boeing developed and applied
ing and the fact that Tier 2 and 3 suppliers can be
carbon-fiber composites technology in fuselage construction, decreasing
located anywhere in the world, the potential risk
the weight of the aircraft and increasing its interior space. Partners were
to supply continuity and financial performance can
given lead responsibilities for detailed design that leveraged their experonly increase in the future. These issues are clearly
tise areas, with Boeing providing broad design direction.
evident when sourcing to contract manufacturers
Boeing teamed with more than 20 international system suppliers to
and to suppliers in emerging regions. Buying comdevelop design concepts and technologies. Major sub-systems of the plane
panies may want to exert increasing control over
were sourced with suppliers in China and worldwide to achieve quality,
Tier 2 suppliers for key materials or components,
cost, and delivery requirements. Suppliers work together directly, with
or with suppliers where technology is being develBoeing acting as “referee” to resolve conflicts. Boeing and its partners
oped.
share demand, scheduling, order, and engineering change information via
Overall, firms will ask how their category and
collaborative IT tools.
supply network strategies can be better aligned
Although the first delivery of the 787 will not take place until May
with their business models. For example, one firm
2008, the marketplace is impressed with what the Dreamliner offers. As
asked a set of integrated suppliers that normally
of June 2007, Boeing has well over 600 orders for the aircraft.
don’t work together to focus on a particular manuforward. Finding, working with, and developing the best sup- facturing line and look for improvements. The results were
pliers will be critical — not finding more suppliers! To most significant cost savings generated by packaging equipment
effectively structure the best supply base, firms must more manufacturers, the packaging companies, ingredient supplicarefully and strategically answer the following questions for ers and company engineers, R&D, and purchasing personeach of their purchase category families:
nel.
1. How many suppliers do we want for this category and
what role should each play?
Improving Supplier Working Relationships
2. What current and future capabilities are required and The research results show that high importance is placed on
where in the world should the supplier(s) be located?
supplier working relationships. The future requires improve3. Which suppliers do we want and why?
ment in these relationships with strategic suppliers, improved
4. Do we want to lead and/or manage supplier networks allocation of management attention and resources to the key
at the Tier 2 and 3 levels?
supplier portfolio, growing purchase volume from strategic
5. Which suppliers do we want to collaborate with each suppliers, and collaboration with important suppliers on cost
other and why, and how can we influence this collaboration? management, risk/reward sharing, and joint improvement
Having the correct number of suppliers to support busi- efforts.
ness requirements worldwide and establishing specific supReasons for improving strategic supplier relationships
plier roles will grow in importance. To illustrate, having include:
many suppliers that can provide lower prices from emerging
• Gaining access to the best ideas and technologies of the
regions but that cannot support product or process technol- most capable suppliers in support of innovation, growth, and
ogy advancements will not be acceptable. Similarly, having top-line revenues.
too many suppliers in high cost regions when cost reduction
• Driving additional cost savings and waste elimination
is the primary competitive driver will also lead to inadequate through joint efforts beyond volume concentration and price
competitive performance.
squeezing.
I
Boeing’s Flight Plan
www.scmr.com S u p p ly C h a i n M a n a g e m e n t R e v i e w
· S e p t e m b e r 2 0 0 7 29
Supply Future
• Protecting strong relationships to maintain preferential
treatment and gain additional value while demonstrating a
commitment to improve poor relationships.
To enhance future working relationships with important
suppliers, two important approaches will be taken: “initiative
driven” and “institutionalized.”
The initiative-driven approach establishes a leadership
team that will drive the firm to further rationalize the supply base, enhance supplier segmentation and identify preferred or strategic suppliers, improve supplier performance
scorecards, create or further develop current/future supplier
capability matrices, modify performance-driven sourcing
behaviors to truly identify and reward best performers, and
implement a company change program on improving supplier
working relationships.
Although the “institutionalized” approach has many of
these same components, it differs in one key way. Instead of
viewing improved working relationships with suppliers as “a
project to be worked on,” the institutionalized approach represents a fundamentally different way of doing business with
suppliers.
To move from an initiative-driven effort to an institutionalized state the firm must begin to view key suppliers as a strategic resource for the company. The goal of the supplier relationship must be focused on improved value creation along multiple
dimensions including innovation, revenue enhancement, business continuity and total cost. In other words, the focus needs
to extend beyond just driving out cost to reduce prices.
In addition, the transition to institutionalized relationships will require significant and sustainable change in people, processes, and systems. Critical areas for improvement
include:
1. Company culture and trust.
2. Extensive supplier strategy, predictability, consistency,
and cost and financial knowledge.
3. Collaboration fostered in the supply chain.
4. Mutual value created between companies.
5. Behavioral and system change to promote selective
information exchange.
6. Supplier development capabilities.
7. External customer-focused metrics.
Developing Suppliers
As the supply bases are being restructured and relocated with
improved working relationships, supplier development will
likely increase. In particular, outsourcing, globalization, and
establishment of a “best supply base” for strategic purchases
will require investment in supplier development.
Over the past ten years large firms have practiced supplier
development to some degree and in various forms. Elements
of such efforts have included quarterly business reviews,
training of suppliers, joint improvement efforts, joint investment, third party investment, (that is, private equity firms),
30
S u p p ly C h a i n M a n a g e m e n t R e v i e w
· September 2007
and so forth. Our research, in fact, found numerous current
and planned supplier development examples of the above.
These types of initiatives will likely become more important as a means to accelerate performance and capability
improvement with strategic/preferred suppliers. Open twoway dialog will be applied to drive improvement in processes
and performance at both suppliers and buying company to
integrate more effectively and reduce waste across extended
supply chains. As more firms establish suppliers in emerging
markets, finding and developing new (and existing) supplier
capabilities will assume added importance.
Finally, as firms better understand the risks they are taking
with less well-known suppliers worldwide, they will increase
investments in understanding supplier capabilities. In addition, they will be forced to take on supplier development
activities of both a reactive (problem solving) and proactive
(value adding) nature at different tiers of the supply chain.
Toward Value Creation
Tomorrow’s category strategies will be all about value creation. They will be more robust and forward-looking. And
they will be more agile, allowing them to be quickly reconfigured as conditions change. Strategy development opportunities will be examined across categories where synergies
are possible—for example, packaging and specific product
designs. Strategies will increasingly aim to block competition and influence supply markets. In addition, totally new
purchase categories will be developed because of changing
business models and technological advances. Finally, strategy
development for critical categories will require higher levels
of executive engagement not only from multiple functions
but across enterprises.
In turn, supplier strategies will focus on developing a
worldwide competitive supply base and suppliers who, more
collaboratively, help create value in support of the buying
company’s business models. This will be driven by global
competition, continuous outsourcing, and the need to develop supply chains for innovative products and services to meet
unique customer requirements worldwide. In addition, given
the increasing availability of information about the forces
affecting industry supply and demand, cost structures, and
supplier capabilities, we may be entering into an era where
firms look for ways to strategically leverage key supplier/buyer
capabilities for innovation and “enlarging the pie”. This as
opposed to playing the zero sum game where one firm’s gain
may be at the expense of the other. The importance of strategic partners—both buyers and sellers—will likely increase, as
will joint efforts focused on improving capabilities and performance. j
j
j
Coming in Part 2: A look at how multiple supply networks,
technology enablers, and internal and external collaboration
will help shape the future of supply management.
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