Three Steps to Achieving a Profit-Centric Supply Chain
Focusing the supply chain on profit enables organizations to align around common goals.
by Harshad Khatri, February 2011
In most companies today, moving goods, with financial results being secondary outcomes, drives traditional supply chain processes. Financial metrics such as revenues, margins and inventories are implicitly impacted by supply chain decisions, but they are most often not the key drivers of executive decision-making.
Profit-centric supply chain execution involves focusing on optimizing key financial measures, such as profits, working capital and costs, with the traditional supply chain focus of moving goods being secondary factors. This is a logical evolution of the supply chain, and involves strategic scenario analyses and optimization to enhance the financial and strategic position of the company and its products.
For a global manufacturer, capturing the benefits of a profit-centric supply chain requires balancing three levers:
Local market dynamics
Products lifecycles: Most products exhibit the classic life-cycle characteristics: Introduction, growth, maturity and decline. The profit contribution of products is small or negative in the introduction phase, increases during the growth phase, and is highest in the mature phase, followed by a drop in the decline phase. The goal is to maximize the lifetime financial contribution of the product or product family.
Market lifecycles: For markets that have unique life-cycles, when times are good, companies need to manage pricing, promotions, and product strategies to achieve strategic objectives (market share, corporate, and brand positioning) while at the same time optimizing financial objectives such as profitability and working capital. During cyclical downturns, companies need to adjust pricing, capacity, and production to drive revenue to meet variable costs.
Local market dynamics: All markets are local. They have their own characteristics — local market and product preferences, laws, market structure, distribution channels, and unique pricing structures.
Capturing the Potential
Capturing the promise of profit-centric supply chains involves judiciously optimizing these three levers:
Step 1: Begin with optimizing the local profitability of the most important product in the largest market. Use strategic levers such as pricing, promotion, supply chain, and distribution to position the product and product family to meet strategic and financial goals. For this market, continue to add additional products on a prioritized basis to encompass the entire product portfolio.
Step 2: Initiate a phased rollout of this and other products to other markets while working on globally optimizing the supply chain for profits. Maximizing profits will require balancing the costs of moving products across markets with their profits, without violating local regulation.
Step 3: As time progresses, the global supply chain needs continual fine-tuning and it must be balanced to proactively drive and respond to changes in the global market. This process requires that manufacturers stay ahead of the local market with market leading innovations and products. Enterprise-wide visibility will further drive globally fine-tuned production, pricing, promotions, and product movements to achieve financial and strategic goals.
Such strategies are common in the automotive industry. Market leaders such as Toyota have globally optimized their supply chains to further their strategic and financial goals — market share and profits. Products designed for a large market, typically Japan or the US, are gradually rolled out to other markets, initially via exports and later as variants through local assembly.
The successful execution of a profit-centric supply chain strategy has significant benefits for global companies.
Growth: By managing the business as a global entity, companies can profitability position the right products in the right markets to drive growth. Additionally, knowledge gained from local markets can be leveraged globally, as can product design.
Profitability: A global profit-centric supply chain allows corporate decision makers to define and execute on strategic and financial goals.
Risk Management: Managing globally, as opposed to locally, allows for effective management of business risks. Global visibility and control of the supply chain vastly improves response to changes in local markets, disruptions caused by acts of nature, and supply outages. Most importantly, managing and optimizing the supply chain on a global basis allows for aligning the entire organization around common goals and metrics, management development, and global growth.
Harshad Khatri is a senior director for Industry Strategy and Insight at Oracle.