Recently I read a report entitled "Developing Supply Chain Strategy: balancing shareholder and customer value – A Management Guide". This report was released by the Cranfield School of Management, Cranfield University (UK). Here is what the forward had to say about the publication:
The Guide has been developed through 7 [sic] years of practical engagement with over 70 firms striving to achieve supply chain excellence. We acknowledge the importance of the insights we have gained from those we have worked with, many of which form the basis for the cases and illustrations we use….
I quote the forward in order assure you that the illustrations used in this article stem from real-life situations. And, likely, not from an isolated incident or two, but from an array of firms involved in the seven year study.
Typical Strategic Objectives
The accompanying table is taken from the study and is for a FMCG (fast-moving consumer goods) company.
|Revenue||Global growth: +10%||Global growth: +10%||Global growth: +15%|
|Profit (IBT)||Global: +$5bn (10%)||Global: +$1bn (12%)||+$100m (6%)|
|Cost Savings||Global: +$500m (20%)||Global: +$200m (20%)||+$20m (10%)|
|ROI||Maintain 15%||Maintain 15%||Maintain 10%|
|Cash Flow||Global: +$150bn||Global: +$60bn||+$2bn|
|Share||From 40% to 50%||From 35% to 45%||From 30% to 40%|
|Product||+10 new products||+8 new products||+5 new products|
|Competition||Hold #1 position||Grow to match #1 in market||Grow to be #2 in market|
|Satisfaction||Global: 98%||Grow from 90% to 98%||Grow from 90% to 98%|
|Retention||Enlarge key accounts by 20%||Enlarge key accounts by 20%||Add one new key account|
|Integration||Global: processes and organization||Global: processes and organization||Global: processes|
|Competence||Global: supply chain management||Global: supply chain management||Global: supply chain management|
|Other||Global: IT||Global: IT||Global: IT|
These are certainly worthwhile objectives for any firm. Although, we might ask a rational question regarding the "cost savings" portion of the strategic objectives: if the firm truly believes they can squeeze half-a-billion dollars of cost out of their firm, why is this a "strategic objective"? After all, one should rationally assume that if the $500m is in the strategic plan, they must have some idea where this large some is presently being wasted; and, if they do, why wait for some strategic future to take care of it?
Waste, if it is present, should be stopped today, not at some "strategic" time in the future. This is especially true of it means adding $500m to the bottom-line.
Next, we will talk about a more troubling matter in this report: trade-offs.
So-called shareholder and customer value trade-offs
The following table indicates how management at the various levels in this FMCG company feel about what they feel are necessary "trade-offs" to be address during strategic and tactical execution.
|Shareholder value (SHV) versus customer value (CV)||Balance SHV and CV||Balance SHV and CV||Balance SHV and CV|
|Sales growth (SG) versus cost reduction (CR)||Balance SG and CR||Balance SG and CR||Place emphasis on SG over CR when in conflict|
I emphasize that the concepts laid out in this "trade-offs" table are troubling because, I am convinced that the assumption that these so-called trade-offs even need to be made is incorrect at its core. And, I'm not alone in this belief.
Toyota, which is without doubt one of the most successful corporations in the world today by any number of measures, would never accept the rationale that these trade-offs need to be made. Toyota, for example, holds as a core value that if the value delivered to the customer is constantly increased, so, too, is the value for the shareholder. Toyota—and companies like it—never sacrifice long-term gains in delivering both customer and, thus, shareholder value to short-term interests that might appear to increase shareholder value at the expense of the value delivered to the customer.
Similarly, no company—to my knowledge—ever became a leader in its market by cutting costs. They became market leaders by focusing on increasing Throughput. And, whether these firms would necessarily articulate it precisely as we do here, such for-profit organizations generally view Throughput as the rate at which the company is achieving more of its goal, where the goal is making more money tomorrow than they are making it today.
While costs are certainly not immaterial, and firms certainly need to be cognizant of cost incurred in producing Throughput, a consuming focus on costs (we call it "cost-world thinking") will ultimately eat away at a company's ability to compete and survive. Indeed, in the 1980s—the heyday of cost-cutting and right-sizing—many of the Fortune 500 firms that were self-described "cost-cutter" were no longer among those in the Fortune 500 a decade later.
We believe that companies and supply chains need to be focused on increasing Throughput and, while managing costs, not focusing on cost-cutting. Certainly, they should never "balance" sales growth opportunities with cost-cutting. After all, the math is simple:
∆P = ∆T - ∆OE
where ∆P = change in Profit, ∆T = change in Throughput, and ∆OE = change in Operating Expenses;
and T is defined at Revenues less Truly Variable Costs (TVC);
and TVC is limited to only those costs that vary directly and incrementally with changes in incremental Revenues
(no allocated expenses)
Dangerous trade-off paradigm
The danger of the paradigm that induces companies to believe they must make the kinds of trade-offs indicated in the study (i.e., shareholder value v. customer value; sales growth v. cost reduction) is that the underlying assumptions lead to management decisions that, in turn, lead to mediocre performance by most companies. After all, it is a statistical fact that most companies will be mediocre.
Our experience in working with small to mid-sized business enterprises and their supply chains tells us that we can supply the tools to help management become clear on matters that can lead to far better than mediocre performance. We will talk more about those tools and methods in future articles. Come back to find them soon.
In the meantime, we would be delighted to hear your comments regarding the thoughts presented here. Just leave your comments below. Thanks.