CATEGORY STRATEGIES AND

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1 LEADERSHIP VALUE INTEGRATION STEWARDSHIP READINESS CATEGORY STRATEGIES AND SUPPLIER MANAGEMENT Jim Frazier 24 S u p p ly C h a i n M a n a g e M e n t R e v i e w SepteMbeR 7

2 Prediction is very diffi cult, especially about the future. Niels Bohr, Danish physicist Much can change in a decade s time. In 1997, there were no ipods. The Euro had not been introduced. Business process outsourcing to India was still in its infancy. Dot.com boom and bust hadn t entered the vocabulary. Terrorism was a remote possibility in most of the developed world. Yet, in ten short years, each of these changes deeply affected how businesses and industries operate. In turn, they affected how companies manage supply what they buy, where they source from, how they work with suppliers, which tools and organizational models they use. What could change in the decade ahead and how might those changes affect the future of supply management? CAPS Research, A.T. Kearney, and the Institute for Supply Management (ISM) have just released a research study entitled Succeeding in a Dynamic World: Supply Management in the Decade Ahead that provides some answers. (See sidebar for study background.) The study found that over the next ten years, business will be buffeted by strong forces of change including globalization, new demographics, natural resource constraints, heightened environment concerns, shifting consumption patterns, regulation and activism, technology and innovation, and the possibility of high-impact disruptive events. Business models and strategies will change as companies pursue new revenue streams, further squeeze costs, lean-out their asset base, and reshape their capital structures to meet the opportunities and threats that lie ahead. In turn, CEOs will ask supply to take on a broader, more strategic mission, to embrace a more comprehensive set of goals, and to deliver a higher level of performance. Supply management will be expected to deliver more innovation from suppliers, contribute more broadly to revenue generation, anticipate and monitor supply risk to ensure business continuity and sustainability, and expand the breadth and What s in store for supply management and supply management professionals in the decade ahead? An in-depth study conducted by CAPS Research, the Institute for Supply Management, and A.T. Kearney tackled this question head on. In this first of a three-part series, we present the findings on two key areas of the research: category strategies and supplier management. By Robert M. Monczka and William J. Markham Dr. Robert M. Monczka is a research professor at the W. P. Carey School of Business at Arizona State University and director of sourcing and supply chain strategy research at CAPS Research. William J. Markham is a Fellow Emeritus of A.T. Kearney, Inc. impact of cost management efforts. The study concluded that success will be based on how well supply executives plan and execute in seven critical areas: 1. Developing forward-looking category strategies. 2. Engaging, developing and managing key suppliers. 3. Designing and operating multiple supply networks. 4. Leveraging technology enablers.. Collaborating internally and externally. 6. Attracting and retaining supply management talent. 7. Managing and enabling the future supply organization globally. This is the first of a three-part series of articles in Supply Chain Management Review that will explore the study s findings in these areas. It covers category strategies and managing key suppliers. The next article will discuss supply networks, technology enablers, and collaboration. The final article will address organization and talent management. Developing Category Strategies In the decade ahead, firms will think differently about category strategies. The essence of a category strategy is to create the most value for the company by leveraging external resources and capabilities. Changes in business models, industry structures, technologies, customer demands, environmental regulations, and other factors will change both how value is defined, and how external resources can help deliver that value. As a result, traditional ways of thinking about categories must change as well. Exhibit 1 presents a model of how this might take place. Until the mid 199s many companies took a traditional approach to category strategy development. They bought the same components, products, and services that they had always bought, sourcing from the same markets and suppliers. Supply management was charged primarily with securing the best price and assuring supply. With the advent of strategic sourcing circa 199, many companies started to aggressively challenge the status quo. They broadened their view to S u p p ly C h a i n M a n a g e M e n t R e v i e w S e p t e M b e R 2 7

3 Supply Future EXHIBIT 1 Creating More Value by Thinking Differently About Categories Greater Organizational Reach to Create Value Networks/ Ecosystems Extended Enterprise Total Enterprise Supply Management Traditional Sourcing Components, Products, and Services Strategic Sourcing Function Performance Value-Based Sourcing Discrete Capabilities for Value Creation New Business Opportunities Broader Definitions of Categories that Create Value Source: Succeeding in a Dynamic World: Supply Management in the Decade Ahead, CAPS Research, A.T. Kearney, Inc. Institute for Supply Management consider functionality as well as form, and tapped non-traditional markets. Purchase price gave way to total cost of ownership (TCO). Supply management teamed with internal experts and user communities in the joint pursuit of more value. About the Study CAPS Research, A.T. Kearney, and the Institute for Supply Management (ISM) recently released a research study entitled Succeeding in a Dynamic World: Supply Management in the Decade Ahead. The study updates and expands the 1998 research by these organizations. The current research probed three key areas: What external forces will have the greatest effect on business over the next ten years? How will business models change as a result of these forces? How will the mission, goals, performance expectations, and strategies for supply management change to support these new business models? More than 26 companies representing,, Latin America, and Asia/Pacific participated in the research. This included involvement by 113 supply management executives who participated in meetings and teleconferences with the research team, and 18 company responses to the e- survey (many companies participated in both). About two-thirds of the participating companies came from manufacturing industries, while the rest were from service industries. A high-level view of the study findings and A.T. Kearney s perspectives on them are available at A separate, comprehensive study report from CAPS Research will also be made available at in fall 7. Today, companies are looking beyond the goods and services they currently source from external parties, and defining strategies for whole new categories. The most common form of this occurs when companies look at options to outsource business processes and activities to reduce costs. This results in new categories appearing on the sourcing list such as contract manufacturing, facilities management, and logistics. However, some companies are going even further. Their goal is to find suppliers with discrete capabilities that can add new types of value. Often these new categories relate to unrecognized and untapped competencies and knowledge already in the supply base. For example, one food manufacturer used a flavoring supplier s knowledge and expertise to rationalize its own ingredient base into flavor and additive modules providing specific taste or texture. This created significant savings for the manufacturer and additional sales for the supplier. Most importantly, it also allowed the manufacturer to reduce time to market significantly, a key to competitive advantage in their segment. We predict that companies will increasingly use this value-based sourcing approach to leverage the full capabilities of its extended enterprise (whether just one supplier or group of suppliers) to gain competitive advantage for categories with high business impact. At the extreme, leading companies will seek to gain access to and leverage each other s value chains as a way to enter into new business segments. For example, household appliances manufacturer Philips DAP and consumer products manufacturer Sara Lee combined elements of their value chains to create Senseo, a unique cup-by-cup coffee maker. Sara Lee differentiated its new coffee offering, while Philips created a kitchen appliance that rode the marketing introduction wave of a premium fast-moving consumer product. Neither party could have achieved such success on its own. Category strategies will become more robust and focus on the total alignment of customers and suppliers to meet competitive objectives across the end-to-end supply chain. Critical enablers will continue to build a foundation for effective category strategy development achieved through a systematic process as illustrated in Exhibit 2 and discussed below. Executives will have to be engaged with development and execution of strategies for critical items as the strategies will become increasingly cross-enterprise. One supply executive characterized the challenge as follows: How can we develop our category strategy so that we will best be able to obtain leading-edge innovation, capabilities and performance today and tomorrow while blocking/ delaying our competitors from achieving the same results? Value Chain Leverage Strategies 26 S u p p ly C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r 2 7

4 Critical Enablers EXHIBIT 2 Developing and Executing a Category Strategy Effective Cross-Functional Teams Executive Engagement Robust Category Strategy Development Process Spend Analysis and Analytics Global Contracting Process Source: Succeeding in a Dynamic World: Supply Management in the Decade Ahead, CAPS Research, A.T. Kearney, Inc. Institute for Supply Management The Strategy Development Process A robust category strategy development process begins with clear category strategy objectives focused on creating value. For key categories, strategies will need to explicitly address how companies will speed new product development and obtain supplier technology innovations; how they will implement and achieve the best theoretical price for a category worldwide; how they can stimulate the creation of new products and services with the support of suppliers; how the category can become the source of new revenues. As part of this process, organizations will better define value and will increasingly apply total cost and value decision-tools to assist in sourcing decisions. Breadth and scope of strategies will expand going forward. Supply base reduction and global sourcing, especially from emerging markets, will continue to play an important role, as can be seen in Exhibit 3. However, in the next decade, strategies will focus more intensely on total cost and value creation related to supply and supplier contributions. This will be accomplished through product/service design and complexity reduction, supplier improvement initiatives, design for supply chain effectiveness, and enhanced collaboration between suppliers to improve performance. Strategies will focus on ways to increase supplier integration. Elements will include alignment of buying company objectives and strategies with that of Tier 1 and Tier 2 suppliers, joint innovation efforts, and engagement of Tier 1, 2, and 3 suppliers in new product/service development and collaboration. Integration of suppliers into the customer fulfillment process will need to be tighter as companies continue to outsource both manufacturing and business processes. This will require suppliers and buying Supply Network Focus companies to change processes to improve working relationships, while developing incentives to collaborate for value creation and enhanced performance. The time horizon for strategies will extend beyond three years and may approach five to ten. For many purchase categories, multiple years will be required to achieve meaningful strategy change and results. The following efforts, for example, all require longer term efforts: moving production parts from mature to low-cost countries; developing performance and capabilities knowledge about best-in-class suppliers; developing supplier relationships and establishing on-the-ground supply-market and government regulation information; developing logistics capabilities, including the ability to manage extended supply chains; and managing risks. Effective risk identification, mitigation, and contingency planning also play a key role in category strategies. Risk to revenue, continuity of supply, and customer service will have to be evaluated on a predictive basis with appropriate risk mitigation. Change management will be key to developing and imple- Total Cost Analysis Benchmarking/ Supply Market Understanding 1 1 EXHIBIT 3 Rapid Growth Seen for China, India and Eastern as Source Markets 2.4x China Eastern 2.1x 1.6x 2.1x Source: Succeeding in a Dynamic World: Supply Management in the Decade Ahead, CAPS Research, A.T. Kearney, Inc. Institute for Supply Management x 1.4x India Brazil 2.7x 2.2x S u p p ly C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r

5 Supply Future menting innovative category strategies. More stakeholders will be affected thereby increasing the potential of resistance. Category strategies also will need to be more clearly understood and presented as a means to achieve customer requirements. Written documentation of the strategy and its action plans that lay out detailed responsibilities, accountabilities, and timeline will provide a playbook to help everyone understand the what and why of the strategy. Knowledge management tools will enable review and learning from prior strategy successes or failures. A robust category strategy development process begins with clear category strategy objectives focused on creating value. Measurement and learning will involve all elements of value and application of a balanced scorecard approach with detailed and ongoing finance review and validation. As firms increase their attention to value, they will work to directly link value performance to the firm s income statement and balance sheet. Enablers of the Strategy Development Process Executive engagement will become more important in the next decade. Top-level executives will increasingly play a key role in the success or failure of the critical category strategies by providing executive guidance, approval, and ensuring that key functions are aligned. They also will commit necessary resources to support the strategy. As one CPO commented, Category strategies will become integrated with the business, technology and operations/manufacturing strategies to maximize overall financial performance. A supply network focus (vs. focus on an individual supplier) for category strategy development will become critical. To support end-customer demand for goods and services, companies will need strategies that leverage the interdependent, complementary capabilities within a network of Tier 1, 2 and 3 suppliers. Competing more effectively in the fast-changing future where speed to implement strategy innovations and reaction to market shifts are critically important will require category strategies aligning, linking, and achieving collaborative efforts throughout the supply network. Effective cross-functional teams are among the key enablers of a robust category strategy development process. This effort should encompass core and ad-hoc team members that will be held accountable for results. Functional, business unit, and corporate executives will need to assign the appropriate people from various disciplines to critical category teams, some on a full-time basis to meet aggressive performance goals. High quality spend analysis and analytics will couple accurate historical spend by purchase category as well as by line item by suppliers and using locations. The analysis also will address anticipated future requirements by category and purchase items. Insights to future demand will be critical to establishing the most effective strategies. A global contracting process will not only address purely legal considerations but also process considerations about how firms will work together to improve working relationships and productivity. Company-wide terms and conditions will be adapted to local regions and countries. Important legal considerations will be included as in the past. Total cost analysis, benchmarking, and supply market understanding will take on greater importance. Detailed information about the industry, competitive forces, cost structures, suppliers, and products/services will be required. Supply chain information identifying technology leaders, potential bottlenecks, and major risks also will be necessary. Predictive insights as well as historical data are needed in this regard. Companies must be able to look several tiers upstream to identify and anticipate supply choke points and complex interactions among markets. They will invest in supply research experts who can collect meaningful data worldwide and synthesize it into those factors most critical to developing category strategies Overall, category strategy development focused on value and with executive engagement will be critical to the firm s future success. In addition, development of supplier and supply network strategies as part of the category strategies will include strategic approaches to structuring the supply base, improving working relationships with key suppliers, and further developing supplier capabilities. Suppliers: Key to Value Creation As firms think differently about their category strategies, so will they think differently about their supplier strategies. Going forward, engaging, developing, and managing suppliers will be key to value creation. Based upon our research, three dominant themes emerge for the decade ahead: Structuring the supply base to support the business model and category strategies. Improving working relationships with suppliers. Developing the capabilities of suppliers to meet future needs. Structuring the Supply Base Structuring a world class supply base to meet specific company needs will assume more and more importance going 28 S u p p ly C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r 2 7

6 Boeing s Flight Plan In designing and building its 787 Dreamliner, Boeing is well on it way toward applying many of the future supply management approaches identified in this research. Driven by market demand for a more fuel efficient aircraft, and by competitive pressures to shorten development time, keep initial investment low and manufacture aircraft economically and quickly, Boeing set aside tradition and thought differently about how to use a global partner network of key suppliers to optimize the overall business. For the 787, Boeing moved strongly to an outsourcing model to speed development and help keep costs low. The company structured agreements with its partners to share investment risk and revenue rewards. It defined new purchase categories that provided new sources of value; for example, with the assistance of its partners Boeing developed and applied carbon-fiber composites technology in fuselage construction, decreasing the weight of the aircraft and increasing its interior space. Partners were given lead responsibilities for detailed design that leveraged their expertise areas, with Boeing providing broad design direction. Boeing teamed with more than international system suppliers to develop design concepts and technologies. Major sub-systems of the plane were sourced with suppliers in China and worldwide to achieve quality, cost, and delivery requirements. Suppliers work together directly, with Boeing acting as referee to resolve conflicts. Boeing and its partners share demand, scheduling, order, and engineering change information via collaborative IT tools. Although the first delivery of the 787 will not take place until May 8, the marketplace is impressed with what the Dreamliner offers. As of June 7, Boeing has well over 6 orders for the aircraft. forward. Finding, working with, and developing the best suppliers will be critical not finding more suppliers! To most effectively structure the best supply base, firms must more carefully and strategically answer the following questions for each of their purchase category families: 1. How many suppliers do we want for this category and what role should each play? 2. What current and future capabilities are required and where in the world should the supplier(s) be located? 3. Which suppliers do we want and why? 4. Do we want to lead and/or manage supplier networks at the Tier 2 and 3 levels?. Which suppliers do we want to collaborate with each other and why, and how can we influence this collaboration? Having the correct number of suppliers to support business requirements worldwide and establishing specific supplier roles will grow in importance. To illustrate, having many suppliers that can provide lower prices from emerging regions but that cannot support product or process technology advancements will not be acceptable. Similarly, having too many suppliers in high cost regions when cost reduction is the primary competitive driver will also lead to inadequate competitive performance. The question of what supplier capabilities will be required also will become more important because of broad-based trends taking place. Examples include the emergence of green products/services and the changing requirements of specific customer segments across industries for example, lower priced/cost goods in India, more fuel-efficient automobiles in the U.S., lighter weight and strong materials in the aerospace industry, and greater product innovations in the consumer packaged goods industry. Also of growing importance are the decisions by buying companies about whether they want to lead or actually manage supply networks and influence supplier collaboration. Given widespread outsourcing and the fact that Tier 2 and 3 suppliers can be located anywhere in the world, the potential risk to supply continuity and financial performance can only increase in the future. These issues are clearly evident when sourcing to contract manufacturers and to suppliers in emerging regions. Buying companies may want to exert increasing control over Tier 2 suppliers for key materials or components, or with suppliers where technology is being developed. Overall, firms will ask how their category and supply network strategies can be better aligned with their business models. For example, one firm asked a set of integrated suppliers that normally don t work together to focus on a particular manufacturing line and look for improvements. The results were significant cost savings generated by packaging equipment manufacturers, the packaging companies, ingredient suppliers and company engineers, R&D, and purchasing personnel. Improving Supplier Working Relationships The research results show that high importance is placed on supplier working relationships. The future requires improvement in these relationships with strategic suppliers, improved allocation of management attention and resources to the key supplier portfolio, growing purchase volume from strategic suppliers, and collaboration with important suppliers on cost management, risk/reward sharing, and joint improvement efforts. Reasons for improving strategic supplier relationships include: Gaining access to the best ideas and technologies of the most capable suppliers in support of innovation, growth, and top-line revenues. Driving additional cost savings and waste elimination through joint efforts beyond volume concentration and price squeezing. 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7 Supply Future Protecting strong relationships to maintain preferential treatment and gain additional value while demonstrating a commitment to improve poor relationships. To enhance future working relationships with important suppliers, two important approaches will be taken: initiative driven and institutionalized. The initiative-driven approach establishes a leadership team that will drive the firm to further rationalize the supply base, enhance supplier segmentation and identify preferred or strategic suppliers, improve supplier performance scorecards, create or further develop current/future supplier capability matrices, modify performance-driven sourcing behaviors to truly identify and reward best performers, and implement a company change program on improving supplier working relationships. Although the institutionalized approach has many of these same components, it differs in one key way. Instead of viewing improved working relationships with suppliers as a project to be worked on, the institutionalized approach represents a fundamentally different way of doing business with suppliers. To move from an initiative-driven effort to an institutionalized state the firm must begin to view key suppliers as a strategic resource for the company. The goal of the supplier relationship must be focused on improved value creation along multiple dimensions including innovation, revenue enhancement, business continuity and total cost. In other words, the focus needs to extend beyond just driving out cost to reduce prices. In addition, the transition to institutionalized relationships will require significant and sustainable change in people, processes, and systems. Critical areas for improvement include: 1. Company culture and trust. 2. Extensive supplier strategy, predictability, consistency, and cost and financial knowledge. 3. Collaboration fostered in the supply chain. 4. Mutual value created between companies.. Behavioral and system change to promote selective information exchange. 6. Supplier development capabilities. 7. External customer-focused metrics. Developing Suppliers As the supply bases are being restructured and relocated with improved working relationships, supplier development will likely increase. In particular, outsourcing, globalization, and establishment of a best supply base for strategic purchases will require investment in supplier development. Over the past ten years large firms have practiced supplier development to some degree and in various forms. Elements of such efforts have included quarterly business reviews, training of suppliers, joint improvement efforts, joint investment, third party investment, (that is, private equity firms), and so forth. Our research, in fact, found numerous current and planned supplier development examples of the above. These types of initiatives will likely become more important as a means to accelerate performance and capability improvement with strategic/preferred suppliers. Open twoway dialog will be applied to drive improvement in processes and performance at both suppliers and buying company to integrate more effectively and reduce waste across extended supply chains. As more firms establish suppliers in emerging markets, finding and developing new (and existing) supplier capabilities will assume added importance. Finally, as firms better understand the risks they are taking with less well-known suppliers worldwide, they will increase investments in understanding supplier capabilities. In addition, they will be forced to take on supplier development activities of both a reactive (problem solving) and proactive (value adding) nature at different tiers of the supply chain. Toward Value Creation Tomorrow s category strategies will be all about value creation. They will be more robust and forward-looking. And they will be more agile, allowing them to be quickly reconfigured as conditions change. Strategy development opportunities will be examined across categories where synergies are possible for example, packaging and specific product designs. Strategies will increasingly aim to block competition and influence supply markets. In addition, totally new purchase categories will be developed because of changing business models and technological advances. Finally, strategy development for critical categories will require higher levels of executive engagement not only from multiple functions but across enterprises. In turn, supplier strategies will focus on developing a worldwide competitive supply base and suppliers who, more collaboratively, help create value in support of the buying company s business models. This will be driven by global competition, continuous outsourcing, and the need to develop supply chains for innovative products and services to meet unique customer requirements worldwide. In addition, given the increasing availability of information about the forces affecting industry supply and demand, cost structures, and supplier capabilities, we may be entering into an era where firms look for ways to strategically leverage key supplier/buyer capabilities for innovation and enlarging the pie. This as opposed to playing the zero sum game where one firm s gain may be at the expense of the other. The importance of strategic partners both buyers and sellers will likely increase, as will joint efforts focused on improving capabilities and performance. jjj Coming in Part 2: A look at how multiple supply networks, technology enablers, and internal and external collaboration will help shape the future of supply management. 3 S u p p ly C h a i n M a n a g e m e n t R e v i e w S e p t e m b e r 2 7