Better collaboration in supply chain drives improvement and innovation

28 September 2018

For years now, collaboration between partners in the supply chain ecosystem has been high on the agenda of supply chain executives. Together, partners that join forces or co-create can better drive continuous improvement and innovation. However, in practice, a significant share of such partnerships struggle to reap the benefit. Steven Bowen, CEO of operations consultancy Maine Pointe, and Kate Vitasek, a faculty member at the University of Tennessee, reflect below on how taking a more novel approach to supply chain collaboration can bolster value-added.

Today’s supply chain practitioners are under constant pressure to bring value to their organizations. Two of the biggest supply chain challenges are exponential growth in complexity of the supply chain and cost savings fatigue driven by a relentless and unsustainable pursuit of achieving bottom-line growth by constantly cutting costs.

Companies are responding to these challenges with a renewed approach to their supply chains. A University of Tennessee white paper, ‘End-to-end Supply Chain Collaboration Best Practices,’ shows a highly collaborative end-to-end focus on supply chain, which enables organizations to achieve greater levels of optimization as supply chain partners collaborate to drive continuous improvement and innovations.

But end-to-end optimization is not easy. It demands that supply chain partners shift from traditional transactional business models with the focus on cost savings to models that shift the focus to value creation. To make the shift organizations must first understand the fundamental differences in value extraction, value exchange and value creation.

A fundamental shift

Value extraction occurs when an enterprise attempts to shift value from one player in the supply chain to itself (classic win-lose scenario), extracting profit and value from one member of the supply chain and transferring that value to a leading player. This is often done using highly competitive bids and power-based negotiations approaches. Value exchange is better, but still falls short. In a fair and balanced value exchange, organizations check their power at the door and instead focus on getting to a fair price versus value tradeoff (such as quality/service). While definitely better than value extraction, value exchange still falls short because the parties’ focus is to optimize within their own four walls.

The winners of today’s supply chains have made the shift to focusing on value creation, enabled by true end-to-end collaboration and win-win pricing models. By working as true partners with a more transparent, win-win mindset, parties can identify opportunities that they simply cannot see by working within their four walls. The longer-term strategic focus, coupled with transparency and a win-win approach, motivates suppliers to invest in solutions they likely would not feel comfortable with.Strategic Sourcing Best Practices Driving Collaboration

Strategic sourcing best practices

Collaboration is a key to unlocking supply chain optimization. Unfortunately, far too many organizations rely on conventional arms-length procurement methods and commercial models that disincentivize true collaboration and value creation. Traditional buy decisions tend to be based on transactional models, which at its most basic level, rely on a competitive environment to drive lower costs and creates an arms-length buyer-supplier relationship.

Progressive companies are shifting along a sourcing continuum to more sophisticated and collaborative sourcing business models that are purpose built for making the shift to towards value creation (see figure above). As suggested by the diagram, transactional contracts work best to drive general market improvements. Market-based improvements are typically incremental in nature as suppliers seek to improved products or services and lower prices to beat out their competitors.

Organizations seeking productivity driven improvements should shift to a preferred provider model or a performance-based/managed services model. When an organization shifts along the sourcing continuum to a preferred provider model or performance-based model they are making a commitment to the supplier who then commits to driving productivity improvements. Often these productivity improvements come from working in a collaborative manner and investing in continuous improvement programs.

As organizations move even further along the sourcing continuum they shift from a mindset of buyer-supplier relationship to one of a highly strategic partner. A Vested business model and investment-based model encourages investment in innovation because there is equal partnership between buyer and seller. Structured properly, a Vested model and investment-based models rely on win-win economics where all parties ‘win’ when improvements are made.

Win-Win economics makes sense when you think about an equity partnership (e.g., a joint venture) because both parties are investing with the hope to drive value for the partnership. A Vested business operates in a similar manner as an equity partnership – but unlike an equity partnership a Vested model uses a buyer-supplier relational contract instead of shareholders agreement.

A Vested model – like investment-based models - works because it creates a win-win outcome-based economic model that aligns the interest of the buyer and supplier partners. In short, the parties shift from a buyer-supplier to one of a mindset of strategic business partners focused on a common end in mind – to drive business outcomes that will create value for both the buyer and the supplier.Total Value Optimization

Total Value Optimization

A second enabler for success outlined in the University of Tennessee white paper is a focus on end-to-end total value creation that focuses on breaking through silos and building value from across the supply base, through the four walls of the organization right through to the customer’s customer.

The Total Value Optimization (TVO) approach from Maine Pointe is a best practice method for value optimization that allows an organization to dynamically anticipate and meet demand by synchronizing its buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors, while still achieving lowest costs to the business.

Senior executives are universally interested in meaningful tools to help communicate where and how opportunities can be realized in their business to achieve high performance and competitive advantage. TVO is an easily communicated maturity scale of how any firm is performing in the critical buy-make-move-fulfill supply chain across the critical dimensions of Procurement, Logistics, Operations, Data Analytics, Leadership and Organization.

Using the methods outlined in Total Value Optimization, it becomes more realistic to add a true level of competitive differentiation through the supply chain – ultimately transforming the supply chain into a competitive weapon. The Total Value Optimization approach looks beyond the basic metrics such as cost of ownership and purchase price variance, and adds an increased focus on the total added-value characteristics of the relationship with each supplier.

Total Value Optimization ranks that added value in a maturity scale of zero to five, with the higher levels incorporating that value-added consideration and allowing a firm a more sustainable process that permits themselves as well as their supply chain to continue to grow and improve. The bottom line? It is the bottom line. Creating an end-to-end collaboration culture is never easy, and it takes considerable time and resources.


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Maine Pointe examines seven supply chain challenges facing CPG firms

05 April 2019

From trade wars to sustainability demands and operational challenges, consumer packaged goods companies will see their supply chains pressured by a number of factors in the coming period.

Consumer packaged goods (CPG) firms are facing a wide variety of challenges as technology and changing consumer preferences converge. Dining out, meal kits, and food delivery services are siphoning dollars, especially from the pockets of younger consumers. Increased online shopping is also making life more difficult for the large CPG firms that control the customer experience within grocery stores, but have less influence on e-commerce sites.

The rise of dollar retailers, deep discounters, and retailer private label brands are as well squeezing CPG margins. Increasing consumer concerns around health and wellness, and preferences for “small” brands and “local” products is a worrying trend for large CPG firms, products from which are sometimes seen as processed and unnatural.

In addition to these challenges, CPG firms are facing a wave of supply chain-related issues. According to a recent report from global supply chain and operations consultancy Maine Pointe, there are seven major factors that will force CPG execs to institute tough changes: trade wars, globalization, transportation and logistics challenges, digitization and Industry 4.0, supply chain complexity, innovation, and sustainability.Seven supply chain challenges facing CPG firms in 2019With the US-China tariff and trade war under ongoing negotiation, uncertainty still hangs over the free trade system that global supply chains rely on. Maine Pointe recommends CPG firms examine new opportunities with new partners in emerging markets to increase their odds of success.

Because of those globalized supply chains, companies will have to remake intricate networks to compensate for shifting trade relationships. That includes reevaluating existing partnerships or using new acquisitions to reach more consumers, while gaining access to new sources of raw materials.

Transportation challenges will also impact companies, as new regulations and a shortage of over-the-road drivers impact logistics operations. If firms find new sources of raw materials, they’ll also have to negotiate new transportation deals.

Digitization and Industry 4.0 hold great promise, while also offering challenges in implementation. According to Maine Pointe, effective Industry 4.0 strategies can help CPG firms achieve growth through faster and more accurate order fulfillment. Data and analytics can also help optimize customer engagement and better influence customer purchasing.

“CPG companies will need to gain a deeper understanding of the consumer (their customers' customers) and leverage data analytics to get a handle on the rapidly changing demands of those consumers,” Rex Clothier, vice president and industry partner of CPG at Maine Pointe, said.

Upheaval in the supply chain will furthermore lead to greater complexity. Firms should seek to simplify their "buy-make-move-fulfill" supply chain to create greater value, according to the consulting firm. “Companies will need to find more ways to create value and reduce complexity in their value chains without having to pass the additional costs on to price-sensitive consumers,” Clothier said.

The company also sees innovation as a better approach to achieving growth than simple cost-cutting. Maine Pointe expects many CPG firms to take an agile approach to the development, testing, and iteration of innovative ideas.

The demand of consumers, especially Gen Z and millennials, for sustainable products and packaging is adding pressure on the CPG sector. Packaging can account for 60% of the bill of materials for CPG, while also playing a large part in its success. Firms will have to balance the functional, aesthetic, and branding requirements of their packaging with consumer demand for eco-friendly design.

In addition to the seven supply chain factors, Maine Pointe expects CPG firms will have to also battle rising raw material costs, stalled demand, declining profits, retail pricing pressure, and shifting consumer preferences. 

“Being prepared, despite challenges and obstacles, is key. Stress-testing the supply chain will help ensure that companies are able to withstand these challenges and take advantage of new opportunities,” Clothier said. “By asking the right questions, CPG executives can transform their biggest supply chain challenges into opportunities.”

Related: Rex Clothier to lead consumer packaged goods arm of Maine Pointe.