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 Large manufacturing companies seeking to increase their profitability
often turn to value chain management to find ways to increase their revenue, reduce
costs, gain efficiencies, and alike. A critical
pre-requisite for optimizing value chain management involves analyzing the materials,
processes and capabilities of key suppliers.
Gaining an in depth understanding of your suppliers' business strategies,
decision making processes and competitors allows you to evaluate their potential
impact on your profitability and develop strategies and relationships to achieve
financial success.
This much more
sophisticated approach to optimizing value chain management, combined with increasingly
global suppliers, has led many companies to incorporate strategic intelligence into
techniques for evaluating supplier impact on profitability. Not surprisingly, gaining an understanding of
your supplier's business strategy often leads to unexpected revelations as the following case
studies illustrate.
Case #1
- The executive management of a global
consumer foods company sought to increase their market share and improve pricing
by reducing costs associated with their premier condiment line. They believed this could be achieved by:
1) aggressively managing the suppliers of a key vegetable ingredient, and
2) farming the vegetable themselves. What they subsequently found out truly
shocked management. Over a century
earlier, a major competitor had quietly purchased an agricultural company
that had subsequently become the premier seed source for the key vegetable
ingredient. Further, all of their suppliers were sourcing their seeds from
this competitor, and no other seed source could produce the high yield
seeds required to make farming economically viable. Imagine how disconcerting
it was when executive management found out they were inadvertently subsidizing
their competitor's success due to their dominant position in the seed
market! The global consumer foods
company used this intelligence to develop a more advantageous strategy to reduce
packaging costs.
Case #2
- A high-tech manufacturer required a reliable
supply of a rare chemical that cost several thousand dollars per kilogram.
The manufacturer guaranteed their supply by establishing long-term
contracts with major suppliers. As
their contracts were about to expire, the suppliers informed the
manufacturer that hey wanted to renegotiate a higher fixed price based on projections
of increased demand by the pharmaceuticals and plastic industries. Before committing to their offer, the manufacturing
company hired an intelligence consultant to substantiate their suppliers' projections.
The consultant confirmed the projections
and more importantly, two additional pieces of information that were strategically
relevant to the manufacturer's buying decision. First, a major competitor
had changed their manufacturing process allowing them to recycle significant
amounts of waste and reduce usage of the rare chemical. Secondly, companies
in China and the old Soviet states had begun
producing the rare chemical in significant quantities which created an
unexpected source of future supply. Executive management used this intelligence
to refine their suppliers' projections and ultimately revealed that there
would be a modest surplus of the chemical for the next three to five
years. The result? Armed with this knowledge, executive
management renegotiated a long-term, fixed price for the chemical that was
20% less than their previous contract.
Both of
these cases demonstrate the benefits of incorporating strategic intelligence into
value chain management. By so doing, the
two companies in question avoided unnecessary commitment of resources and
attendant adverse economic consequences.
Our thank you goes to Den Taylor for providing this article. Den Taylor is Managing Partner of Strategic Insights,
a global intelligence consulting firm located in Stamford, CT. (203) 563-0001.
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