One mistake enterprise owners make is to use the wrong supply chain strategy for their products. The effects can be costly.
The following are some true-to-life cases:
- A large steel manufacturer hires an executive who formerly worked for a multinational beverage corporation. The executive identifies 120 best-selling finished product items based on historic demand and sets inventory targets for each. Sales managers focus their efforts on the 120 items while supply chain managers produce and build inventories correspondingly. The result? Massive overstocking of all 120 items as customer demand does not materialize. The new executive didn’t realize that past demand for each of the 120 items were mostly one-time purchases for building projects. Inventories pile up resulting in depletion of the manufacturer’s working capital;
- A leading fast-food chain hires executives from the consumer goods industry. The executives initiate a cost reduction program that insists on cheaper ingredients and condiments for all fast-food products. They also cut back service crew head-counts and utility expenses at each fast-food branch. The results? Customers complain about poor quality food and service at branches given lack of servers and hot surroundings due to reduced air-conditioning. The fast-food’s revenue stagnates and loses market share to competitors;
- A manufacturer of snack foods signs partnership agreements with distributors to sell the manufacturer’s products to rural areas. The snack foods manufacturer’s products are light but bulky and are priced significantly low. The distributors complain that profit margins aren’t enough to cover the high freight expenses to transport the snack foods products. The result? Distributors limit deliveries of the snack food products to few but large customers to maximize delivery truck loads to save on expenses. The snack foods manufacturer’s market reach remains very limited to urban areas;
- A large food corporation sells frozen meat packages to supermarkets, grocery stores, and large restaurant chains around the country. Five-star hotels express interest to buy from the food corporation but want products delivered in single packs and not in full cases. The hotels want their orders delivered in three (3) days or they’ll cancel. The corporation’s president instructs the company’s supply chain to accommodate the hotels. The result? Freight expenses soar as the logistics department assigns exclusive less-than-truckload (LTL) special deliveries for the hotels’ orders. Supply chain planners break scheduled production runs to allocate manpower to repack products for the hotels to beat the delivery deadlines. Operating expenses increase as a result and so does waste from discarded packaging materials;
- An importer buys large lot sizes of vitamin products to take advantage of volume discounts on landed cost. But despite the importer’s offering of lower prices, vitamin product sales stay steady and do not grow. The importer realizes regular consumers won’t buy more than they consume, which they base on the recommended dosage per vitamin type. The result? Vitamin inventories build up and some are scrapped as their shelf-lives approached expiration.
Many enterprise owners hire executives or engage consultants that have no knowledge or experience about the products they will work with. In many cases, the executives or consultants force their own perspectives from their previous jobs into the companies or clients they engage with. The results can be disastrous as in what happened to the steel producer in the first example mentioned above.
If they don’t hire outsiders, some companies try to imitate the supply chain strategies of their competitors or of big multinationals. The snack foods manufacturer in the above example was attempting to mimic its biggest competitor who employs large distributors. The snack foods manufacturer didn’t realize that its rival’s distributors delivers not only snack foods products but also all other lines of the competitor’s consumer items as well. This allowed for frequently full delivery loads and higher cumulative profits for the distributors, which was something the snack foods manufacturer could not offer.
And in some instances, enterprises just try to force their supply chain strategies to accommodate new customers. The large food corporation in the example above did not realize that the products it sold to hotels were no longer identical to the ones sold to supermarkets and grocery stores. The products it traditionally sells are frozen foods packed in cases. The hotels wanted products in single packs. Though the frozen food item is still the same, the product for the hotels is now different due to the change in packaging. The change in packaging meant stark differences in production and logistics operations which in turn led to higher operating costs.
The case was similar for the vitamin products importer. He tried to force a change in the supply chain strategy into his marketing strategy. He thought having cheaper vitamins would spur sales. But it didn’t happen because his regular customers would naturally not buy more than what they needed, which is their regular daily dosage. The importer later realized that a promotion of his vitamin products had to go hand in hand with expanding his market, i.e., to places beyond where he was selling. His business has continued to grow as he adds more stores in new markets. He still has to realize, however, that he would need to invest more in supply chain resources in order to assure continued supply for his vitamin business.
The character of a product goes beyond its physical make-up. How a product is marketed, sold, and delivered can and does matter as much as its physical design and function. Hence, it is important enterprise owners to not only put much thought on their product’s specifications but also to place weight in the process of supplying and delivering the product.
As much as there may be experts out there who can help or there are other organizations who manage their supply chains well, it would be best not to copy but to reapply what would best fit in one’s product’s supply chain.
It always is better to buy something that is tailor-made that would fit perfectly than to get something that is ready-made but doesn’t come out well.
Ellery's Essays 