Working with logistics there has always been a logical approach to find what brings you most money. I remember a matrix from Martin Christopher’s book on the supply chain where a matrix explains how to get the most competitive cost advantage. The formula is really simple: Maximize the value advantage and the cost advantage and you will have superior customer value at less cost. No rocket science here. Looking at the picture I almost thought it naïve, but thinking a little longer I realize that this is key from a total business perspective. You won’t succeed with all articles, but there needs to be a plan for all articles what direction you want them to take and that the weight of your total offer should land in the top right hand box.
The pitfall in supply chain driven companies is that the value advantage is set aside for the cost advantage. There can only be ONE priority. In most cases this is a simple way to manage companies because this is how you secure your margin without increasing the price of your product/service:
Again, not rocket science. The problem is that this impacts the customers’ perception or experience of the product and will have an impact on price and volume. This graph then looks a bit different due to needs to invest:
The risk is that the customers true need and behavior is missed out and that volume is driven up to meet the efficiency gains in the supply chain and at one point in time the stock start building up at a high rate, sales have no way to handle the volume because of declining interest from the customers and you end up discontinuing the article outside the plan with big write off and scrapping costs:
What you get is a projected margin of possibly 20% and land at 5% in reality over the product life cycle.
I would claim that most companies are cost driven, not customer driven. Sure you are aware that there is a customer and you need to attract them in order to sell, but are you meeting their true needs? Are you solving their problems or your own?
This is a complicated problem and the complexity increases with the size of the company. I would claim that small companies take care of this naturally because they live and breathe their customers’ wellbeing, at some point this is lost as the company grows, more people take part in decisions, the distance between the management group and the customer increases, communication becomes…complicated.
By making your company process driven, by implementing S&OP and driving a customer oriented Demand Plan you can get back to balancing the matrix. This will also enable your organization to work better with the mix of articles and services that your customers require.