Why Strategy Matters

I’ve been flying around the country during May talking to distribution and manufacturing executives about the results in the new Facing the Forces of Change®: Lead the Way in the Supply Chain report.

All too often, I hear the presidents and CEOs of wholesaler-distributors complain that they “don’t have time for strategy.” Running their businesses keeps them fully occupied, so they do not have the time or inclination to think about how their supply chain is evolving. This appears to be especially true when the changes are somewhat gradual.

Reinvent or Die

Did I describe your attitude? Then read Reinvent or Die, an excellent profile of D&D Tool & Supply from Progressive Distributor magazine.

The article describes how a small family business looked at its changing markets, built a plan of action, and successfully grew the company under the leadership of Georgia Dutro, a new President from the family. Key parts of the story:

“The entire manufacturing market in the U.S. was shrinking, but what would be left in Southern California? Likely survivors included aerospace, ship manufacturing and other metal fabrication companies, along with the military, which required a variety of MRO supplies. Wood manufacturing continued moving into northern Baja California, Mexico. Dutro advised her brothers to expand in two ways: geographically into all of Southern California and Mexico, and then to diversify into other types of manufacturing markets. This required D&D to open operations in the border areas of Mexico to serve the wood industries, and to diversify into the machine shop and metal fabrication markets, which meant learning new markets, vendors and applications.”

In other words, the company stepped back from day-to-day operations and saw a market that was going through a fundamental change.

Know your future

Part Two of Lead the Way in the Supply Chain examines the major markets in which wholesaler-distributors operate. Here is a sampling of factoids from the report about evolving trends that signal fundamental change:

• The national market share of the top 10 home builders has doubled to 21% of closings in the past decade, with a few builders having even greater share in regional markets.
• The U.S. Bureau of Labor Statistics forecasts that total employment in many contractor occupations will grow faster in the next decade than the overall U.S. employment growth of 13% over the same period. (See Exhibit 6-1.)
• The period from 1998 to 2004 saw a net loss of 27,000 manufacturing plants and more than 3 million domestic manufacturing jobs. (See Exhibit 7-1.)
• About 90% of manufacturing executives indicate a moderate to severe shortage of qualified, skilled production employees.
• Real (inflation-adjusted) revenues of grocery wholesalers have been essentially flat since 2001. In contrast, sales at restaurants and bars continue to grow faster than grocery sales, reflecting a long-term shift away from home cooking.

These points illustrate long-term trends that will change wholesale distribution in the respective industries, even if these trends are not directly changing your business today.

Don't close your eyes to the market and forget to build a long-term vision for your company. The future is more predictable than you think, even if hardly anyone bothers to predict it.

Leads Searching for You

Last week, Microsoft announced the $6 billion acquisition of aQuantitative, an online ad specialist. Microsoft’s move is very consistent with the findings from Chapter Four of the new Facing the Forces of Change®: Lead the Way in the Supply Chain report (see pages 76-78, in particular). Customers will increasingly use the Internet as a primary way to gather information and find new suppliers even if they never buy anything online.

For more insights, I recommend you download the 2007 Distributor Buying Trends Survey Results. The survey was sponsored by GlobalSpec, a vertical search engine and online database. (Note: You will have to register to get the pdf document. I am not personally familiar with GlobalSpec, but their privacy policy indicates that registration info will be used only for their own marketing and not sold to a third-party.)

The survey included engineers, technical buyers, scientific professionals and others in the engineering, industrial and technical communities. Two-thirds of buyers sourced from 7 or more distributors, so the sample is a good one for understanding the typical (industrial) wholesale distribution customer. There was also a good diversity of products and services specified by the respondents, including chemicals, electrical components, material handling, fluid power components, and many others.

Here are two results that caught my attention:

• Almost 8 out of 10 buyers go online first when searching for a new distributor, either to search engine or an online industrial directory.
• The top two reasons that buyers contact new distribution sources were: (1) Current distributors do not offer product needed (45%), and (2) To make price comparisons and negotiate better pricing (37%).

These results point to today’s tough reality: The Internet makes comparing options very easy, so buyers may wander even if service levels are fine. Bill Gates is putting $6 billion behind this idea to catch up with Google. You must make sure that your company can be found online because search is now the #1 way for new customers to find you.

Checking up on RFID

Over the past few years, Radio frequency identification (RFID) technology generated a lot of excitement and press as a way to track products and radically change the entire supply chain. At a trade association meeting in 2005, I heard a speaker even claim that wholesaler-distributors had no choice but to embrace RFID.

However, the early projections have turned out be overblown. As I cautioned in The Road to Opportunity, the 2004 edition of Facing the Forces of Change: “Wholesale distribution executives should consider RFID when planning future technology investments, yet be wary of inflated claims, overblown projections and unrealistic expectations.”

The new Facing the Forces of Change: Lead the Way in the Supply Chain finds that one in ten wholesaler-distributors is using RFID in some way. RFID is improving internal processes at a distributor, such as eliminating the need to scan shipments in the warehouse receiving area and enabling more effective inventory management at a customer’s location.

As I discuss in Chapter Five of the new Facing the Forces of Change, the most effective applications to date have been inside individual companies on specific projects. For example, professors at the University of Arkansas found that RFID reduces stock-outs by 30% in Wal-Mart stores by improving shelf replenishment from the backroom.

Here are two good assessments that expand on the technology topics in the new report.

A SOBER LOOK

The RFID Revolution Starts... Soon? is a nice overview article from Industry Week with a sober look at the real-world benefits from RFID. Key quotes:

• “RFID remains a niche technology, whose broader deployment has been stymied by the usual suspects: high equipment costs, low return-on-investment and a workforce skills shortage.”
• “RFID remains a finicky technology that can behave differently based on any number of factors, such as the orientation of the RFID tag on the box, carton or pallet; the type of products being tagged; and the environment in which the tagged product is stored.”
• “The bottom line for RFID is that it's all about process change and the business case. In the end, business owners, and not the IT department, will be the decision-makers when it comes to adopting RFID.”

WHAT ABOUT DRUGS?

Many people point to the pharmaceutical industry to make the case for RFID as a supply chain security solution, especially in light of wholesaler announcements from that industry.

Unfortunately, there is a lot of misinformation out there. A good antidote is RFID as an Answer to Pharmaceutical Drug Counterfeiting. Sarah Scalet, a senior editor at CSO, took the time to analyze how RFID technology might actually be used in the pharmaceutical industry. Here is a quick summary of the five myths she exposes about RFID in the pharma industry along with some of my own editorial commentary.

Myth 1: RFID tags are anti-counterfeiting devices. Nope, they are inventory control devices. There is no supply chain security benefit unless everyone adopts and uses the tags, which is not happening.

Myth 2: RFID technology is necessary to track the movement of drugs. Not true. The key to supply chain is authentication at the point of dispensing, which can be done using older technology such as 2D bar codes.

Myth 3: RFID technology can be used to mark pills, tablets, and elixirs themselves. Again, not true. I recently learned how nanotechnology can be used to encrypt individual pills and tablets. Very cool! Of course, this technology still has the exact same authentication challenges facing every labeling/packaging/tagging solution, including RFID.

Myth 4: RFID technology will let consumers verify that they have purchased legitimate products. Not even close to reality for many, many years, if ever. Besides, 1 out of 9 U.S. adults has ordered drugs from another country to save money despite the known risk of counterfeit drugs, so at least some consumers do not actually care about validation.

Myth 5: The pharmaceutical industry is this close to widespread adoption. Alas, this is also not really true, despite the fervent hopes and occasional misrepresentations of RFID technology vendors. The Prescription Drug Marketing Act, which is the Federal law governing drug distribution, is completely technology agnostic -- both paper and electronic documents and signatures can be used to meet FDA requirements. RFID is also not required or mandatory to comply with California’s drug tracking law, which is due to be implemented in 2009. California will only require electronic track-and-trace using a “standardized nonproprietary data format and architecture.

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Bottom line: RFID technology is an incredibly powerful tool. RFID enables cost-reductions or improvements to existing ways of doing business, but it does not fundamentally change the basic structure, functioning, or purpose of a supply chain.

P.S. I've written about RFID in the pharmaceutical industry on my Drug Channels blog.

Near-Shoring Private Labels

I am on the road almost non-stop this month talking with distributors and manufacturers about the new Facing the Forces of Change®: Lead the Way in the Supply Chain report, giving me real-time insight into how executives are responding and interpreting the results.

Discordant Trends?

Here’s a really thoughtful question that I got recently: “Doesn’t the Private Label trend counteract the Demand-Driven Channels trend?”

The short answer: Maybe. (I said it was a thoughtful question, not an easy one!)

The Demand-Driven Channels trend describes how to build a lean supply chain and reduce inventories through closer relationships with suppliers. In contrast, the Private Label trend describes how wholesaler-distributors are taking over more functions and risks from suppliers.

I mention this trade-off very briefly on page 29 of Lead the Way in the Supply Chain when I write: “Geographic distance makes planning more difficult because lead times are much longer and more uncertain, thereby inflating inventories in the supply chain. Ironically, global sourcing strategies by wholesaler-distributors represent a trend opposed to the demand-driven channel trend.”

Demand-Driven Private Labels

To better understand this trade-off, I suggest that you check out a very useful article called Revisiting LCCS in a Demand-Driven World from the new Supply Chain Management Review.

(In case you are wondering, LCCS stands for “low-cost country sourcing.” Hey, it wouldn’t be a real supply chain article without some MUFLAs -- Made-Up Four Letter Acronyms!)

As I note in Chapter One of Lead the Way, the lower costs and ready availability of overseas sourcing opportunities makes it easier for wholesaler-distributors to get their own private label products manufactured. Nearly 2/3 of distributors with private labels are using LCCS from an overseas plant.

However, the article advocates a reevaluation of “near-shoring,” such as sourcing in Mexico for goods destined for the U.S. and Canadian markets. Key points:

• “While offshoring provides clear reductions in the product cost, the associated overhead and processes required don’t always sustain the value.”
• “Near shoring may not yield production costs as low as the offshoring sites, but it can provide less cost and process fluctuation in the value chain.”
• “Companies that have products with variable demand, require low inventory, have bulky but labor-intensive products, and require significant buyer-led supplier development or engineering support are good candidates for the near-shoring option.”

Read this article to better understand the supply chain burdens of a longer inbound supply chain.

Growth Strategies Around the World

I want to let you know about a new report that I just completed called Growth Strategies in Wholesale Distribution.

This research project was graciously sponsored by Lawson Software, who is also making my new report available for free online here. (Full disclosure: you will have to register to download the report.)

The report compares how wholesale distribution executives in the U.S, Europe, and Australia/New Zealand plan to maintain growth at their companies. I was attracted to the project because there is almost no published research on global trends in our industry.

Here’s one surprising result: Distributors in European countries identify fee-based services as a much more important factor in their revenue growth plans than North American executives.

You heard me right. Believe it or not, European executives are more optimistic about their ability to charge customers for new services rather than giving away value-added services for free and hoping to recoup the costs with product margins. In contrast, U.S. executives are much more focused on increasing sales of their current product categories.

For example, I found that 7% of North American industrial distribution executives were expecting fee-based services to drive growth compared to 14% of European industrial distribution executives. (The results for other product sectors are in Exhibit 2 of the new global report.)

This new report demonstrates that wholesaler-distributors are innovating around the world, providing a global perspective on the New Profit Models trend described in Facing the Forces of Change®: Lead the Way in the Supply Chain. (For examples, see Exhibit 3-7 on page 62 or see Capturing New Profits from Services from last month.)

I hope this new research gives you fresh insights for benchmarking your own company’s growth strategy.

P.S. Be sure to check out Managing fee-based services by Ben Zoghi and Rafay Ishfaq, Texas A&M University. Great article! (It was the lead article in last Friday's NAW SmartBrief.)