Creating a Value Chain

You know that your competitive advantages and meaningful differentiation have eroded when your sales people ask for price reduction or when you have to compete on price. In the B2B sector, you may find that the purchase department exerts so much pressure that you just want to make a sale and forget about your brand advantages, and in some cases, the margins too! The influence of purchasing managers run pretty high in most industries today and they can threaten you with blacklisting and market inaccessibility in some cases.

This situation stems from a wider transformation of how companies and end-users buy products and services, which affect all brands. This is more so for the second-tier brands that have fewer resources and weaker market positions. The current market is driven by the following four changes, all of them working together:

1. Buyers are becoming more concentrated within each industry.

2. Purchasing functions are becoming more centralised within organisations.

3. Buyers are reducing the number of suppliers to improve their supply chain efficiency.

4. The Internet increases a purchasing manager's sourcing options by making it easier to find suppliers and prices worldwide.

In addition, some retailers have turned to new merchandising strategies that put more pressure on suppliers, including store brands and category killers. MORE retail chain from Aditya Birla Group and Big Bazaar are leading the way. They rely on contract manufacturers to produce for their store brands rather than pay premium prices for big brands. Meanwhile, category killers such as the hypermarkets try to dominate one segment of the market. They are more sophisticated buyers than the smaller, more fragmented organisations they have displaced.

Suppliers can no longer able to control the channels through which customers buy. Customers have more options, and the prices for these options are known. As a result, many suppliers are seeing their margins decline. These changes have occurred with a rapidity that is unprecedented, and companies must make major strategic course corrections. Different companies already have employed different strategies: Some have attacked the cost side of the business, reducing headcount and inventory and cutting expenses. But dressing up the numbers through financial engineering is a temporary fix at best.

For most companies, the greatest potential lies in modifying the supply chain and distribution channels for their products and services. The supply chain means more than just interaction with the suppliers; it starts with raw material processing through sourcing, manufacturing, packaging, selling and distribution, and ends when the finished product or service is delivered to the end user.

The following five proven ways can help companies change their supply chain or channel: Revising the supply chain to better serve the end-user; reallocating the value services in the supply chain; eliminating layers in the existing channel as some FMCG companies have done with wholesalers; and focussing on narrow segments of the existing channel and creating a new channel.

To find opportunities like these in your own supply chain, prepare a supply chain value analysis for the company's products and services, beginning with the end user and working backward. Determine the value that your customers are trying to offer their customers and end users. (Remember that value often is measured in intangibles, such as ease-of-purchasing, on-time delivery, insurance and information). Look for ways your company can provide more value, or different values, to your customers or the end users: For example, could some steps in the process be shifted from you to someone else, or from someone else to you?

Revising the supply chain requires both operational and organisational changes as well as working with supply chain partners to find efficiencies. Your strategy will depend in part on the relationships within the supply chain and the relative power of each partner. If each partner is dependent on another, there is more likely to be a balance of power within the supply chain.

While these ideas are straightforward, their execution and implementation are not. Consultants are usually called in when board members are frustrated by senior management's failure to deal with these issues. In turn, we find that senior management generally has a set of excuses that sound legitimate to them. For example, they say they cannot compete because competitors have a lower cost structure, or they argue that it has been tried before and does not work or that it does not work in their industry, or that the consultants do not understand their industry.

The speed of change will be rapid in future and the question is not whether an organisation should change, but how. To minimise price competition, senior management must continually redefine how it creates value for customers and the end user. After that, adding value requires close collaboration among all organisational functions and employees.

(The writer is CEO & MD, CustomerLab Solutions)

Columnist: 
M Muneer