Supply Chain Management Benefits

The numerous benefits of marketing supply chain management practices, systems and technologies include:

  • Improved market knowledge.
  • The three Vs – Increase velocity, increased visibility, and reduced variability in the flows of goods and services, funds and information.
  • Integrated operations.
  • Improved management of risk.
  • Increased sustainability.

Improved Market Knowledge

  • With supply chain management in place, partners in the supply chain begin to share their knowledge about the market place and in particular about their customers.
  • Although, market intelligence can be purchase from outside sources, it’s most advantageous (and less expensive) to gather it from your partners.
  • There are a myriad of sources and documents containing valuable customer information that can be shared between supply chain partners, including transaction records, customer survey results, sales and service representative knowledge and information from distribution points such as retailers, internet sites or kiosks.
  • Purchased data may be more useful in acquiring new customers than in managing relationships with existing customers.

The Three Vs

  • Following are the key elements of a successful supply chain strategy:
    • Visibility
    • Velocity
    • Variability

Increased Visibility

(Definition) Visibility is the ability to view important information throughout a facility or supply chain no matter where in the facility or supply chain the information is located.

  • With better visibility, a supply chain manager or employee can see the results of activities occurring in the chain and is made aware of minor, incremental changes via technological processes.
  • Better visibility has resulted in greater velocity.

Increased Velocity

  • There are four types of flows in a supply chain:
  1. Physical materials and services
  2. Cash
  3. Information
  4. Returns (or reverse flow) of products for repair, recycling or disposal
  • Supply chain management impacts the velocity of these four flows in a positive manner.

(Definition) Velocity is a term used to indicate the relative speed of all transactions, collectively, within a supply chain community. A maximum velocity is most desirable because it indicates a higher asset turnover for stock holders and faster order-to-delivery response for customers.

  • Methods of increasing the velocity of transactions along the supply chain include the following:
    • Relying on more rapid modes of transportation (if there is a net benefit after the increase in transportation costs).
    • Reducing the time in which inventory is not moving by using Just-in-Time delivery and lean manufacturing (the less time inventory spends at rest, the less likely it is to suffer damage or spoilage. Increased velocity reduces the expenses involved in warehousing inventory).
    • Eliminating activities that do not add value, thus reducing the time required to accomplish supply chain activities.
    • Speeding up the flow of demand and cash as well as the velocity of inventory (the more rapidly payments are received from customers, the sooner the money can be put to work in the business or deposited at interest. Information about demand changes is crucial when the competitive strategy is responsiveness).

Reduced Variability

(Definition) Variability is the natural tendency of the results of all business activities to fluctuate above and below an average value, such as fluctuations around average time to completion, average number of defects, average daily sales, or average production yields.

  • Variability decreases with good supply chain management.
  • Supply chain management works to reduce variability in both supply and demands much as possible.
  • The traditional offset against variability is safety stock. If greater visibility along the chain results in greater velocity, supply chain managers should also be able to reduce the amounts of safety stock required to match supply to spikes in demand.
  • Supply chain management serves to reduce both demand and supply variability. Demand variability has many sources, but a primary source that can be controlled is bullwhip effects.
  • The bullwhip effect is an extreme change in the supply position upstream that is generated by a small change in demand downstream in the supply chain.

  • Supply variability typically increases in waves down the chain starting with small amounts at the resource extraction sites and culminating in the largest amounts at the retail end of the chain.

Two Additional Vs

Variety

Variety refers to the mix of products and services in a portfolio that must alter to meet changes in customer demand.

Volume

Volume is the amount of product being produced in a given time.

A supply chain must be flexible enough to expand and contract volume to meet changes in demand for mass customized products and services.

Integrated Operations

  • Supply chain management fosters integrated operations by requiring everyone in the supply chain to form partnerships with suppliers or customers.
  • Integrated networks, like intranets, extranets, and the internet, play an important role in forming these partnerships.
  • Supply chain management uses networks to tie together the various software applications associated with specific activities within supply chain processes.
  • Enterprise resources planning software packages enable companies around the globe to not only manage their operations in one plant but to facilitate enterprise wide integration and even cross-company functionality.

Improved Management of Risk

(Definition) Supply Chain Risk is based on decisions and activities that have outcomes that could negativity affect information or goods within a supply chain.

(Definition) Risk Management is the process of identifying risk, analyzing exposures to risk, and determining how to best handle those exposures.

An organization’s strategy to address supply chain risk includes a risk response plan and risk response planning.

(Definition) A Risk Response plan is a written document defining known risks, including description, cause, likelihood, costs, and proposed responses that also identifies the current status of each risk. This is also called a Business Continuity Planning.

(Definition) Risk Response Planning is the process of developing a plan to avoid risks and to mitigate the effect of those that cannot be avoided.

This type of proactive risk planning benefits the organization in a number of ways:

  • It helps keep the supply chain flexible so that it can continue functioning despite disruptive events, which in turn helps balance the costs of contingency planning against the potential economic, facility, resources, and inventory losses.
  • Risks are shared among supply chain partners who will be prepared to work in concert and play their parts responsibly.
  • It prepares the employee workforce and chain partners with valuable, actionable information and confidence to handle nearly any situation with a well-thought-out strategy based on substantiated risk data.

Increased Sustainability

Sustainability and Green are often used as synonyms in discussions of corporate obligations that go beyond the traditional emphasis on bottom-line profits. Both terms refer to the need for economic activity to operate within limits imposed by natural resources.

Qualitative Methods

  • When a product is new, however, or when data are lacking for one reasons, you have to rely on judgement and intuition. In such cases, you are best advised to find the most experienced, market-savy, objective person – or better yet, group of experts – and rely on them for a rough estimate of likely demand.
  • A dose of intuition from a reliable source can be helpful even when working with plentiful data.
  • Five major types of qualitative forecasting are discussed here:
    • Personal insight.
    • Sales force consensus estimate
    • Management estimate (panel discussion)
    • Market research
    • Delphi method

Personal Insight

Forecasts may sometimes be based upon insight of the most experienced, most knowledgeable, or most senior person available.

Sales Force Consensus Estimate

  • The sales and marketing area (or areas) brings special expertise to forecasting, because they maintain the closest contact with customers. While they may participate in gathering data for quantitative forecasts, their special contribution comes at the qualitative level. Even when there is a quantitative forecast, the sales force should be given a chance to review it to see if it is consistent with their knowledge of the marketplace.
  • Bringing the entire field sales force together to create a consensus forecast provides the firm – and, at least indirectly, its supply chain partners – a view of the whole market, including all sectors or geographic regions. Demand, obviously, can vary greatly in different market segments.
  • Like all functional areas, sales and marketing may bring a special bias to their demand forecasts, generally an optimistic – sometimes an overlay optimistic – one.

Management Estimate

The management estimate relies upon a consensus of panel members. Generally, the panel of management-level experts conducts a series of forecasting meetings, with the results of one meeting providing the basis for the next until the panel reaches a consensus. In the process, the panel may rely upon various techniques, including pyramid forecasting and forecasting by historical analogy.

  1. Pyramid Forecasting

    Pyramid forecasting, or rationalizing high- and low-level forecasts, enables management to review and adjust forecasts made at an aggregate level and keep lower-level forecasts balanced. In the process, item forecasts first are aggregated by product group. Management then makes a new forecast for the group. The value is then transferred to individual item forecasts so that they are consistent with the aggregate plan.

  2. Historical Analogy

    When there are no data on a new product or service, forecasters may instead study past patterns of demand for a similar product or service.

Market Research

  • Market research (also known as marketing research) is the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services. Such research may be undertaken by impartial agencies or by business firms or their agents.
  • Agent as one who acts on behalf of another (the principal) in dealing with a third party. Examples include a sales agent and purchasing agent.

Market research includes the following approaches:

  • Market analysis, including product potential studies, which seeks to determine the size, location, nature, and characteristics of a market.
  • Sales analysis, or sales research, which undertakes the systematic study and comparison of sales data.
  • Consumer research, such as motivational research, focus groups, questionnaires, and other methods used to discover and analyze consumer attitudes, reactions, and preferences.
  • Test marketing, which introduces a product or service in a limited pilot area.

Note that when collecting information with questionnaires or surveys the number of responses compared to the number of nonresponses or incomplete answers should also be tracked to determine if the data are statistically valid.

Delphi Method

  • The Delphi method, like sales force and management estimate forecasting, relies upon a panel of experts in the field being studied. Also like other panel based methods, it relies upon the experience, wisdom, insight, and even the intuition of disciplined observers acting in concert.
  • In Delphi method, questionnaires are generally submitted to the individual experts for their anonymous responses in successive rounds. After responding to the questions in one round, the experts comment on replies from the previous round. After hearing replies and responses, the experts have a chance to revise their own previous work. This iterative process aims to reduce differences in thinking as the answers of experts converge, round by round, upon an increasingly accurate consensus forecast.
  • A key feature of the Delphi method is the maintenance of anonymity throughout the process. Instead of meeting face to face, the experts submit their responses, comments, and revisions to a panel director, who is empowered to delete irrelevant information. This reduces the defensiveness that can cause group members to resist changing mistaken views when challenged in person. It also reduces or eliminates the opposite problem: the “groupthink” effect that can cause even a collection of independent thinkers to become emotionally committed to an unrealistic forecast. This is especially likely to happen when a charismatic, opinionated member takes over leadership of the group and steers it in a mistaken direction.
  • The Delphi method suffers the mixed results as it is based on human judgement (like other forecasting systems).
  • The Delphi method can be time-consuming and is best for long-term forecasts.

Ways to Segment Markets

Segmentation can be based on any number of criteria selected to suit a particular purpose, and each class may be segmented in more than one way.

Market segments can be defined by demographic characteristics such as gender, geography, age, occupation and wealth. Demographic categories can also be refined or customized.

Customers can also be segmented by attitude or psychological profiles, such as willingness to engage in social media or self-identification in a social group.

Historic Segmentation vs Customer-Driven Segmentation

  • Historically, market segments were based, in the worst case, on preconceptions about the behaviors or desires of certain groups or, in the best case, on research into small “representative” groups of customers.
  • Predictive segmentation can be inaccurate.
  • Today, segments can be defined by customers’ actual buying behaviors, and the result is more accurate segmentation.
  • Three different ways of segmentation might occur in a customer-driven strategy:
    • Segmentation by customer value to the business
    • Segmentation by customer needs
    • Segmentation by preferred contact channel

Segmentation by Customer Value

  • The greater the customer’s value, the better the treatment the customer receives.
  • Leading-edge organizations aim to acquire and retain profitable customers and get them to spend more.
  • Generally, a small percentage of the customer base – about 20% or less – provides a significantly higher percentage of revenues or profits. This relationship is known as the Pareto Principle.
  • The diagram below depicts how a small number of customers can generate a disproportionately large amount of profit:

Segmentation by Customer Needs

  • When we begin to discuss what services or product features profitable customer’s desire, we are moving into the second form of segmentation – segmentation by customer needs.
  • These needs may refer to specific product or service features, contact channels, or logistics channels (time and placement).
  • It is important for businesses to understand what customer want, why and how much. This is called a Value Profile.
  • Once the value profile has been created, a value proposition can then be drafted that details how each segment’s perception of value will b fulfilled by the product or service.
  • The value proposition is a key part of the promotional strategy and customer relationship.

Segmentation by Preferred Channel

  • Because of potential savings, some business sectors have chosen to reward customers that use technology channels, such as a discount for setting up automated bill payment.
  • Another option is to educate customers on the benefits of a particular channel. For example, automated call answering systems usually refer callers to Web sites for faster service and a chance to avoid a lengthy wait in a phone queue.

Reasons to Identify and Understand Market Segments

  • The primary reason to identify and understand market segments is to increase the organization’s profits (or its equivalent) over the long term.
  • (Definition) Customer Segmentation is the practice of dividing a customer base into groups of individuals that are similar in specific ways relevant to marketing. Traditional segmentation focuses on identifying customer groups based on demographics and attributes such as attitude and psychological profiles.
  • When discussing market segments in supply chain, there may be more than one perspective of who the customer is: For example:
    • Intermediate customers are those customers that are not at the end of the supply chain.
    • Ultimate customers are the final recipients of the products or services.
  • Successful business strategy is customer driven, and customer-driven marketing typically requires identifying and understanding market segments.

Customer Driven Marketing

  • (Definition) Customer-Driven is defined as a company’s consideration of customer wants and desires in deciding what is produced and its quality.
  • Customer-driven marketing is based on several fundamental marketing concepts:
    • Customer requirements must drive product and service design.
    • All products and services have more than one market segment.
    • Logistics and marketing strategy must focus on customer segments.
    • Profitability is more important than sales volume.

What has driven the change to a Customer-Driven business environment?

  • Business need to understand customer segments, to improve two-way communication with customers, and to fulfill customer segment needs because today’s customer is harder and more expensive to win and to keep.
  • Meeting those expectations raises the cost of design and production.
  • As customers begin to assume that products and services will be of high quality, the competitive differentiator becomes price or value.
  • (Definition) Cross-Selling is imperative. It occurs when customers by additional products or services after the initial purchase.
  • Turning one-time customers into “customers for life” has become a critical business goal. Reaching that goal requires understanding and then satisfying customer segment expectations and delivering greater perceived value than the competition.

Benefits of Segmentation

  • Words like “niche” and “customization” reflect the fact that customers increasingly expect the market to come to them rather than for them to go to the market.
  • The marketplace is more segmented every day, which could be seen as a drawback due to its complexity. However, customer relationship management (CRM) philosophies and technology systems, exist to help manage that segmentation.
  • Segmentation also benefits organization. Lifetime customer relationships are more likely when customers feel that business is meeting their unique needs. This is a mutual dependency/mutual gain relationship.
  • Customer-driven business have the opportunity to learn more about their individual customers and to use that information to increase sales and profit.
  • Segmentation also helps business to get better return on their promotional budgets.