Battle of Supply Chains: Creating Disruptive Innovation for Competitive Advantage

Bruce E. Jacobs
BKD, LLP

A fierce battle is waged daily among supply chains competing to meet increasing, ever-changing customer demands. Success depends on the ability to reach the higher performance levels customers expect, conform to customer demands to reduce costs and provide outstanding service that meets customer specifications.

With so much riding on satisfying customer demands and changing service standards, there is simply no room for mediocre service and performance. Many suppliers already know this, as more of their customers:
•    Demand lower prices and higher service levels
•    Purchase the same quantity but want to reduce inventory by pushing it back to  suppliers
•    Expect special services without added cost
•    Create penalties for a supplier’s poor performance
•    Demand shorter lead times between order placement and expected delivery
•    Require technology applications and
information integration with suppliers

It is difficult to satisfy steeper customer demands and constantly evolving service standards while, at the same time, achieving higher performance levels and cost reductions. The classic methods many companies have used—reducing head count, increasing inventory levels, raising prices, adding pricing for new services—no longer work and are ineffective when it comes to meeting today’s challenges.

To gain real ground and hold it, your company must reinvent some of its main business models and processes.  

Creating Distinction

The United States is a great nation for manufacturing and distribution, but reinvention is a process we are slowly learning to master.  When you begin to think about reinventing your business model, it may help if you try to see your company the way your customers and competitors do.  

In terms of product, pricing, quality, function, feature and service, many customers find it difficult to distinguish one supplier from another or one supplier’s product from another’s. Methods that can help distinguish your company include innovating services and new products, as well as providing the highest level of customer service with supply chain performance.

The question is, will your current business model and customer-response processes allow you to implement these methods and meet new customer demands without adding major costs? Probably not.

Keep in mind, your company’s business model was designed to achieve specific results.  Meeting the challenge posed by new customer service demands may necessitate a redesign—not only of your business model and processes, but of your information support systems, too. In fact, you may need several business models to address the needs of different customers, market channels and industry segments.  

The barriers to new markets are falling away because nearly all products and competitors can cross market and industry channels. However, different and more highly customized supply chain models and business processes will be required to respond effectively to customers in many new markets.

The entire supply chain and all its players need to participate in the design and implementation of the new business models.

Consolidation Is Stressful

The dynamics of the continuing consolidation among industry competitors support the need to review the adequacy of your current supply chain and business processes:
•    Customers acquire each other to gain market share and create greater leverage with suppliers.
•    Competing manufacturers acquire each other to increase their brands, products and market share and create greater leverage with customers.
•    Customers acquire suppliers to ensure their supply source, lower costs and create leverage with their own customers.
•    Manufacturers acquire distributors to ensure a customer base, own the supply chain all the way up to the customer and create leverage with customers.
•    Distributors search for new value-added offerings for their customers as the supply chain consolidates and the value proposition that distributors offer manufacturers becomes less distinguishable.

Customers are getting larger and stronger to grow their businesses, add share and grow their products and markets.  The consolidation of industries and players in the supply chain creates significant pressures and challenges on every player in the chain.

Disruptive Innovation

To provide products and serve customers at the least total landed cost, be prepared to make dramatic changes in your business model. This means you may have to reinvent it from the ground up.  

In fact, the battle waged today by competing supply chains is won by those that can be effectively reinvented. Creating “disruptive innovation” is key to this process.

Disruptive innovation is a journey that begins with a supply chain vision and strategy. It’s when a totally unique concept or business model is implemented in the marketplace—one that focuses on the customer.

It’s also when “breakpoint changes” (giant leaps and crucial shifts in the rules that govern success) occur in methods of doing business with the customer, as well as business practices, policies and procedures.

Supply chain vision and strategy is where disruptive innovation begins.  From there, high-performance supply chains, business processes and information support systems must successfully be combined end to end across the supply chain. This involves the use of enabling information-support technologies that will help you integrate across the supply chain and enable disruptive innovation to be systemic.  

As you begin to reinvent your supply chain business model and business processes and practices, you also must have harmonious key performance measurements in place to help drive the right behavior, improve performance and solve problems.

Just how do you create disruptive innovation?  Begin by improving the following:
•    Supply chain vision and strategies—to exploit market opportunities and meet customer requirements by adding more value (eg, continuous product replenishment at the rate of customer use without the customer having to reorder)
•    Process designs—to eliminate non-value-added operations and improve supply chain performance and customer service (eg, the customer has no inventory, and the manufacturer manages product flow up to consumption—the customer pays for the product when it is used)
•    Business policies—develop those that encourage customers and suppliers to collaborate, which enables more efficient, cost-effective processes to serve customers and operate the supply chain (eg, net pricing and elimination of returns, damage allowances and unauthorized invoice deductions and invoice holdbacks)
•    Business processes—to eliminate waste, reduce lead times, improve quality and provide products and services at the least total landed cost with the lowest working capital investment (eg, continuous replenishment and “pull-based” demand product flow)
•    Information support systems—to integrate across the supply chain and provide visibility on demand to the supply chain’s performance
•    Key performance measurements—to work in harmony to help drive the right behavior and improve supply chain processes
•    Education and training—which is vital in creating a highly skilled, educated and customer-focused workforce
•    Supply chain collaboration—to enable players to work in harmony, so customers can receive better service

Achieve Benefits

When you create disruptive innovation with high-performance supply chains, the competitive advantages that result can provide large and systemic business gains.   

Order-of-magnitude business benefits and economic gains that result from disruptive innovation generally exceed those achieved by executive performance-gain mandates, which are typically short term and unable to create the systemic changes many businesses need to win the war.  

Today’s battles must be fought from one end of the supply chain to the other, with close attention paid to both the consolidation strategies of competitors and the ever-changing demands of customers and untapped new markets.   

Bruce E. Jacobs is a principal with BKD, LLP (www.bkd.com), one of the 10 largest CPA and advisory firms in the country, and a member of BKD Manufacturing & Distribution Group, providing solutions for the management and financial needs of medical device businesses. Bruce has more than 26 years of experience in manufacturing and distribution business strategies, including significant experience developing worldwide supply chain networks and manufacturing operations improvements. Contact the author at [email protected].