Supply Chain Frontiers issue #39
Supply chain needs to step up to the plate and take a more proactive role in increasing the profitability of businesses, according to MIT Senior Lecturer Jonathan Byrnes in his new book, Islands of Profit in a Sea of Red Ink: Why 40% of Your Business Is Unprofitable and How to Fix It (Portfolio/Penguin, 2010). Byrnes is a popular teacher at the MIT Center for Transportation & Logistics (MIT CTL), and has a regular slot in the center’s Executive Education courses (the next one is scheduled for January 2011).
Companies that use supply chain know-how to select the right customers to partner with “are picking up market share like we have not seen in decades,” Byrnes says. “The rest are like deer in the headlights; they are frozen trying to cut costs across the board.”
In most companies, customer segmentation is a passive exercise that is dominated by sales and marketing, explains Byrnes. The role of supply chain is largely to fulfill the orders that the sales force generates, regardless of the profitability of that business. Savvier companies marshal their resources according to which buyers contribute the most to the bottom line, while the traditional enterprise does not target these “sweet spot” customers. “The problem is that supply chain people are not getting involved in defining and building these relationships,” Byrnes says.
To a great extent these shortcomings are a vestige of the mass market age, he believes. In this outdated paradigm, the overriding objective was to achieve economies of scale and minimize unit costs by distributing product as widely as possible through arms-length relationships with markets. “So you didn’t have to worry about customer integration or customer-specific costs, and more revenues equaled more profits,” says Byrnes. He adds, “All that has changed today.”
In today’s business environment, customization and tightly integrated supply chains are the new best practices, and enlightened companies carefully define their customer relationships and align them with profitability goals. Supply chain should play a central role in this process, and it is up to the sales department to support the effort by selling into these predefined relationships.
In fact, “supply chain should be the tip of the spear” by being involved in relationship-building early on, maintains Byrnes. Cross-functional teams should drive interactions with customers and jointly develop business cases. “Companies that do this see sales grow by over 35%, even in highly penetrated accounts.”
An argument often made to explain why supply chain is subordinated in this way is that operations folks are not well versed in the language of finance. Byrnes disagrees, and points out that another carryover from the mass market mentality is that finance relies on outmoded information. Management information systems are still geared to providing total costs, and although the data is accurate, it is no good for figuring out which specific products and customers are the most profitable, and exactly which actions will improve profitability for specific customers.
This level of granularity is essential if enterprises are to achieve profit increases of 30% to 40%. “Finance does not go down to this level and there is no reason why supply chain can’t do it,” says Byrnes. The key is that all departments need to learn the language of supply chain productivity. Byrnes’ book shows companies how to do this by using different processes such as profit maps.
For more information on Islands of Profit in a Sea of Red Ink: Why 40% of Your Business Is Unprofitable and How to Fix It, see www.islandsofprofit.com, or contact Jonathan Byrnes. For more information on MIT CTL’s January 2011 Executive Education course, contact the center’s Deputy Director, Jim Rice.