Gary Cokins, CPIM

The SAS Institute

Who Benefits from Supply Chain Management?

Suppliers, Customers or Shareholders?

One thing is for sure about the impact of the Internet. It is shifting power from sellers to buyers – irreversibly. This one time event is highlighted by purchasers who are equipped with powerful search engines to access data and seek alternative supplier bids. Meanwhile, perhaps to their detriment, suppliers are exposing to buyers more information on their host websites than they ever have before – terms, conditions, prices – it is all there.

Immense Pressure on Prices – How Will Suppliers Counter?

A major consequence of the powershift to buyers is that tremendous pressure is placed upon supplier prices. Suppliers will no longer be capable of protecting a niche market or of enjoying as large or long lasting profit margins as they have in the past. Suppliers must now quickly react.

How can suppliers counter this power shift? One option is for suppliers to alter their customers’ behavior in a profit-positive. Suppliers can influence customers with varying levels of service options priced in harmony with their internal cost structure. In addition, all trading partners along a specific supply chain can mutually measure and remove the unnecessary and redundant costs that they create amongst each other. Each trading partner can also gain much better insight into the true and relevant costs for their products, SKUs, service lines, freight, channels, and customers that has been made possible from major advances in profit contribution reporting and analysis and margin management.

Who Benefits From the Cost Savings?

When cost savings are indeed generated and realized, who benefits and pockets the money? How are the cost savings to be shared? This will always be a thorny problem. Collaboration has become one of the buzzwords of supply chain management. Why? It is now recognized that it is no longer sufficient for a supplier to be agile and lean; they are dependent on their trading partners – their suppliers and customers – to also be agile and lean. It has become supply chains competing against supply chains. Fostering collaboration between buyers and sellers will take a mindshift because for the last ten thousand years of mankind, this has been an adversarial relationship spiced with greed and aggression. Fact-based data will be essential to discuss how to share the newly generated savings.
 

From a supplier’s perspective, there are three potential beneficiaries from mutual improvements and cost savings: (1) the supplier themselves, (2) the supplier’s direct customer, and (3) that customer’s customers all the way through to the chain’s end-consumers. The last beneficiary could potentially be you or me in the form of a consumer benefiting from a lower retail price. In practice, this incremental “savings pie” from productivity improvements is split amongst the chain’s trading partners – but no one really knows who is receiving the greater portion.
 

Predictably, the profit motive of each trading partner will make the sharing of cost savings an awkward experience. By having true cost data, not flawed allocation-based data, debates can be minimized. The more proficient each trading partner is with their cost and performance measurement systems, the more practical these discussions can be. This explains some of the popularity in activity-based cost management (ABC/M) and balanced scorecard systems.

The Rise in Shareholder Value Analysis

Despite the emphasis in all of the supply chain literature about how critical maximizing customer satisfaction is, most decisions inwardly consider the impact on the supplier’s own bottom line. Will it create or destroy shareholder wealth? But investors have been expressing concerns that traditional methods to evaluate companies and to compensate managers are not adequately linked to changes in the economic value and wealth creation of the company. A better alignment of company performance and valuation measures has been recently addressed by increasing attention on value based management (VBM).

Initially VBM measurements were targeted for executive compensation plans. VBM is superior to traditional profit and loss financial statements because it further includes the cost of capital charge not recognized by the accountants. After all, investors’ money is a resource too, just like fuel, supplies, equipment, and employee salaries. Investors might gain higher financial returns elsewhere. In short, VBM also considers the balance sheet and cash flow to evaluate decisions to redeploy capital back into the business. VBM demonstrates that beyond after-tax profit is the bedrock called economic profit – the most meaningful measure to investors.

Companies practicing VBM then began linking their economic profit metrics to their ABC/M and balanced scorecard tools to link the data at the boardroom level to the daily work of the frontline employees. ABC/M traces the paths for how all resources are consumed through work caused by outputs, products, services, channels, customers, and senior management. The true cost of outputs and segmented profit contribution margins is made widely visible. ABC/M places a reflecting mirror for an organization to see how and where it is burning through its resources. Now employees have a line-of-sight that connects the impact of decisions to the boardroom. They also have reliable benchmarking data cleansed of the apples-and-Oreos inconsistencies from over- and under-inclusion amongst the measurement contributors. The supply chain becomes viewed as a value chain.

Activity Based Cost Management for Supply Chain Decisions

One of the eye-opening shocks that organizations receive when they first turn on their ABC/M system is how much they have underestimated how unprofitable various products, services, channels, markets, and customers truly are. Raising prices is usually not a practical solution. In reaction, some products and customers can be eliminated, but most require improving the situation. Equipped with the ABC/M data, employee teams can better focus and know where to look.

A substantial amount of opportunity is located at the seller-buyer interface. Much of it is in the distribution legs of the supply chain. In addition to waste, inefficiency, and redundancy, there are options to shift functions between trading partners, or to outsource, based on skill competencies and economies. Collaboration amongst trading partners is facilitated when all employee teams have fact-based financial data. Equipped with ABC/M data, decisions can be made that can mutually benefit customers, shareholders, a supplier’s suppliers, and a supplier’s employees.

Gary Cokins is with The SAS Institute (Formerly ABC Technologies), the world leader in ABC/M software. You can contact Gary at 503-617-7100 ext. 328 or gary.cokins@sas.com.