One of the most popular articles ever published by Supply Chain Management Review is “The 7 Principles of Supply Chain Management” by David Anderson, Frank Britt, and Donavon Favre. It was published more than ten years ago, but it is still a good read. I recently reread the article and I was struck by how difficult it is to accomplish the second principle: Customize the logistics network to the service requirements and profitability of customer segments.
According to the authors, “Companies have traditionally taken a monolithic approach to logistics network design in organizing their inventory, warehouse, and transportation activities to meet a single standard. For some, the logistics network has been designed to meet the average service requirements of all customers; for others, to satisfy the toughest requirements of a single customer segment. Neither approach can achieve superior asset utilization or accommodate the segment-specific logistics necessary for excellent supply chain management.”
In the consumer goods supply chain, retailers (especially the large ones) often require manufacturers to meet a host of requirements, such as using company-specific packaging, submitting ASNs, shipping full truckloads, using RFID tags, and supporting green packaging initiatives. Manufacturers that can’t comply with these requirements typically face onerous charge backs. It is important for manufacturers to understand the cost of these services and the profitability of individual customers. Nonetheless, it is difficult for manufacturers to avoid treating a demanding retailer as a “customer segment of one” when they account for more than 20 percent of the manufacturer’s revenues.
For some manufacturers, particularly those that can’t ship full truck loads, meeting the service requirements of demanding retailers like Walmart is best accomplished by shipping less-than-truckload shipments to 3PLs like CaseStack that have made the investments in people, technology, and assets to specifically meet these retailer requirements. 3PLs often provide retail-specific fulfillment services cheaper and better than a manufacturer could accomplish itself because their network investment is amortized over many customers with the same needs. Similarly, there are 3PLs that specialize in spare parts fulfillment (e.g., UPS Supply Chain Solutions) and reverse logistics (e.g., GENCO Supply Chain Solutions).
Companies that try to manage reverse logistics and outbound shipments from the same warehouse often find that the latter takes priority. Whenever companies get behind with outbound shipments, they usually pull workers from the returns section of the warehouse. Consequently, it is difficult for companies to operate an efficient returns program in a shared environment. The infrastructure, IT, and skills needed for the outbound delivery supply chain is very different from what is required in returns, maintenance, or merchandizing supply chains.
The other thing that strikes me as I think about this principle is that designing efficient logistics networks is integrally connected to a company’s core strategy. A company should not try to be all things to all customers. If there is a segment of customers that values quick shipments and is willing to pay a premium for it, then there is a logistics design that fits those needs. If there are customers that want the lowest prices, a different network applies. Small companies have to decide who they want to be when they grow up. Larger companies that want to play in multiple customer segments need to approach this with separate divisions, each with their own profit and loss statement, and with different infrastructures. Some cross-divisional synergies may be possible, but they probably won’t be particularly significant.
Finally, logistics programs can help a company grow its revenues and stand out from the competition. Take vendor managed inventory (VMI) as an example. If a company can create a standard VMI program, with consistent processes across multiple customers, it can execute VMI in a cost-efficient manner. However, if they have to establish unique VMI programs for each retailer, each with different process requirements, then VMI will not be as cost-effective or productive. In past research focused on Collaborative Planning Forecasting and Replenishment (CPFR), I found that manufacturers doing CPFR at the behest of retail demands were significantly less satisfied than manufacturers that initiated these programs for particular customer segments.