In benchmarking the Supply Chain Management (SCM) practices of hundreds of companies, we have learned that many companies achieve competitive advantage by leveraging the management of their supply chains. In this and the next two issues of PARCEL, we will explore the most powerful of these SCM competitive advantage principles. The most important, and the one we present here, is embodied in the following statements:
>> Stick to your core competencies, and outsource non-core competencies.
>> Coordinate these functions across supply chain partners.
What is a core competency? The answer I hear from many executives is, It is what we do well. My response is, What if you are really good at running the company cafeteria? This may be well done, but it does not help the company make money or achieve advantage over the competition. A better answer to this question is, Core competencies are the things we have to do well to achieve competitive advantage. This may include superior R&D, superior production, superior marketing, or you guessed it superior supply chain management. World class companies follow a process of identifying what their company has to do well, and at the same time, identifying what their supply chain partners have to do well so the overall supply chain is successful.
Figure It Out
To do this, I encourage companies to go through a simple, yet often insightful, exercise. Think about one of your supply chain partners and create a two-by-two table with the first column labeled, What Our Company Does Well and the second column labeled, What Our Company Does Not Do Well. Label the first row, What Our Supply Chain Partner Does Well, and label the second row, What Our Supply Chain Partner Does Not Do Well. I have done this exercise with dozens of companies to identify what their core competencies (that they should never let someone else do for them) are and what the core competencies of their supply chain partners are.
We are looking for two things here. The first are functions the supply chain partner does not do well, but are your core competencies. These are functions you can do for your partners that will tie them more closely to you as either a supplier or a customer (both of which are sources of competitive advantage). In the case of parcel delivery companies, this answer is often that your clients see you as just that parcel delivery companies and nothing more. What if your core competencies extend to order management, distribution center operations or greater parcel delivery management than your clients are presently utilizing? The core competencies of parcel delivery companies are often precisely what their clients are NOT good at doing prime candidates for functions to outsource. The challenge is to convey to your clients the opportunities FOR THEM of outsourcing these activities.
The second are functions the supply chain partner does well, but your company does not. These are functions you should let your supply chain partner do for you, which will get the function done better and at less cost to you (again, a source of competitive advantage). Of course, all these combinations require close coordination with the supply chain partner to ensure optimal performance of the functions and elimination of duplication of effort.
A Hands On Example
Lets take a moment to explore these, since they are particularly applicable to parcel delivery companies. A direct sales company with which we worked shipped over 20,000 parcels a month from each of three different distribution centers to customers homes in the
Their supply chain partner, a parcel delivery company, did a great job of picking up parcels every day from the distribution centers and delivering them to customers but had no involvement in the day-to-day operations of the distribution centers. Investigation from this two-by-two exercise led the company to discover that the parcel delivery partner had an entire division devoted to managing distribution center operations for clients. The result after a three-month transition period in which distribution center operations were turned over from the company to their parcel delivery partner was a reduction in capital invested in the centers of over $1,000,000; reduction in capital invested in inventory of over six percent; and reduction in distribution center unit operating costs for the first year after the completion of the transition of over three percent. This was all accomplished with no disruption in the level of delivery service to customers. Of course, from the parcel delivery companys point of view, this is a great example of the first of the two points taking over distribution center operations for their client (i.e., bringing their core competency to bear on the relationship) ties the client more closely to them. For the client, it is a great example of the second point let someone else manage activities that are not your core competencies.
From this example, we see a manufacturer achieving greater profitability (the same delivery quality with lower capital invested and lower operating costs), while the parcel company picks up a greater share of their clients business sources of supply chain management competitive advantage for both companies. All achieved because both companies know their core competencies and outsource non-core competencies to their supply chain partners.
John T. Mentzer, Ph.D. is a Distinguished Professor of Business, Department of Marketing and Logistics at the
