June 14, 2017
For decades after WWII, the military approach to supply chain management and sourcing served private industry perfectly well. Now, however, it does not. Across a wide spectrum of industries, once-potent companies are in trouble: Walmart, IBM, Procter & Gamble, Pfizer, HP. The business model of these companies is static, relying primarily on product differentiation and global expansion. As product differentiation and market expansion opportunities continue to be reduced, they are finding themselves at a competitive disadvantage.
This problem cannot be addressed by spending more money on advertising or buying other businesses. It is in operational areas such as supply chain and sourcing that a competitive edge can be found.
We are entering a time of testing for business leaders: Those who can evolve will survive; those who can’t won’t. In an era when management will need to exploit every competitive advantage it can find, leaders who continue to think of supply chains and sourcing only in terms of cost reduction will be at a serious disadvantage. Success will come to leaders who learn to see them as potential drivers of revenue growth, innovation, and risk reduction.
The contrast could not be more clear between companies that have turned sourcing and supply chains into competitive weapons and those that have not.
At a time when many major retailers are closing stores and seeing profits fade—Macy’s, Best Buy, Radio Shack, the Gap, Nordstrom, and Sears, to name but a few—evolutionary retailer Zara—with 6,777 stores in 88 countries—is thriving.
Compare Zara to, say, the Gap: By some estimates, it takes the Gap 9 to 12 months to get a new clothing design into its stores. Imagine trying to predict fashion trends far in advance, then having to procure the fabric and do the manufacturing. Zara estimates it needs only 10 to 15 days—a feat it credits to having a highly responsive, demand-driven supply chain.
Zara defies conventional wisdom about how a supply chain should be run. It keeps almost half of its production in-house, leaves room for extra capacity, and manufactures and distributes products in small batches. The company manages design, warehousing, distribution, and logistics functions in-house. Zara offers a large variety of the latest designs quickly and in limited quantities, which allows them to command a higher fraction of the full retail ticket price (an estimated 85%) compared to the industry average (60% to 70%).
Its supply chain—that boring thing most CEOs cannot be bothered to think about—makes Zara the most valued company in the retail space with a market cap of $90 billion. Its founder, Amancio Ortega, is now the richest man in Europe. Ortega’s view on clothes? They are perishable commodities like fruit: People change styles frequently, depending on their whim or some fashion trend. Accordingly, Ortega designed his supply chain to allow Zara to get a new design to customers in as little as a week or two.
The TJX Companies, with a market valuation of close to $50 billion, owns brands including T.J. Maxx, Marshalls, and Home Goods. Its shareholders have benefited from 18 consecutive years of earnings-per-share growth. Sourcing, that other boring area, makes TJX a company other big retailers envy.
Bernard Cammarata, who founded TJX in 1976, uses a unique approach to sourcing: TJX buys its products from major brands at a discount and then sells them in its stores. What’s available in the store last week may not be available this week. It is always a treasure hunt. This has created a loyal group of customers who keep coming back to see what’s new.
TJX University trains the company’s buyers in the art of deal making. They are empowered to make millions of dollars in deals that in other companies would require approval from top management. They have turned traditional retail sourcing on its head and have thereby created value.
Other companies have achieved equally impressive results. In every case, management possessed two virtues: first, the imagination to see that supply chain and sourcing, if managed right, could deliver greater benefits than the cost savings traditionally expected of them; and second, the courage to enact change.
Excerpted, with permission of the publisher, from The Supply Chain Revolution: Innovative Sourcing and Logistics for a Fiercely Competitive World by Suman Sarkar. Copyright 2017, Suman Sarkar. Published by AMACOM.