LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work


March 2005

Supply chain management (SCM) executives struggle with what their responsibility and role is. SCM crosses the organization. It is both strategic and tactical. It serves both cost and service mandates. It can be global in scope and reach. Success requires process, technology and people. Given that, how do you distinguish your supply chain to satisfy both internal and external requirements? How do you create branding to position and build competitive advantage?

3PLs and 4PLs struggle with what their responsibility and role is. They are chosen to service a tactical need that can evolve and expand in scope and need. They must present a viable, low cost option while dealing with increasing service demands. They try to move beyond and not regress into being a commodity service where price is the key definer of who you are. Given that, how do you distinguish your 3PL service to satisfy internal and external requirements? How do you create branding and to position and build competitive advantage?

Branding is a way to position your organization. It is your organization's identity; it is who you are. Branding should be dynamic and innovative. Branding can maximize organization value to its customers, whether internal customers or external. It should be more than just an image; it should have substance to create the value. It should reflect reality, not perception, and have depth to be viable and to have longevity. Branding should be executable for supply chain management.

For supply chain management, the branding should reflect and embody a value proposition. Value here is not a financial figure, such as sales, profits, or assets. Value, for the value proposition, should be something that matters to customers. It should be tangible and should define the benefit and solution that customers will gain with you. It presents why customers should do business with you, rather than with competitors.

Sometimes the value proposition is based on fundamentals, such as low price. This proposition ignores both the service, cycle time and inventory impact of supply chain management and reduces SCM and 3PLs to a commodity service where price is the determining factor. Branding and a value proposition based on low cost may be tactically viable, but is weak strategically. Costs can only be lowered to some limit. Competitors can do lower prices too. It can make customers wait for even lower prices rather than acting now. A low cost proposition can create a somewhat negative image about the supply chain service and its value. And pursuing lowest cost can divert the supply chain organization from its primary purpose with both short-term and long-term impact.

For purposes of this article, the value proposition goes deeper into the needs of customers. With consumer goods being a dominant part of the economy and of supply chain management for both logistics executives and for 3PLs, the value proposition should be directed at a critical supply chain need and one that is may be difficult to recognize and to address.

Having a value proposition of increased yield management is unique. Yield management is often associated with the airline and hotel industries where reservation-based companies attempt to maximize revenue from fixed supply or capacity, seats on a flight or rooms in a hotel. The analysis can involve operations research tools, such as linear programming and simulations, to determine a pricing model at the micro level. It recognizes that price or revenue creating ability of the item in supply decreases with time.

Yield management is applicable in supply chain management when inventory is viewed as the supply whose yield is to be maximized. Inventory is key to success for manufacturers, wholesalers, distributors and retailers. Having the right inventory is also difficult and challenging. Insufficient inventory means lost sales opportunities. Too much inventory means markdowns-and reduced profits--to sell it. Firms working on thin margins especially feel such pain.

Ocean carriers practice a form of yield management balancing the timing and value from the service contract signing period through peak season when space may be at a premium regardless of pricing and into slack season where price reductions are given to freight forwarders to fill ships.

Many items, as retailers know, enjoy a short shelf life relative to demand to the price customers are willing to pay. Sales promotions, discounts and markdowns are almost common practices to draw customers. Firms that are in dynamic, volatile businesses, such as fashion and related, know the impact of short product life cycles and pricing decisions on the bottom line.

The operations research approach determines the "optimal" markdown(s). But this is somewhat of an after-the-fact approach. It does not address the underlying problem of demand planning and uncertainty and how to mitigate it. The length of the inbound supply chains has increased significantly with global sourcing. Longer chains have also meant longer times to produce and deliver products from suppliers.

This yield management value proposition realizes inventory velocity with its focus on supplying product and not on placing it at customers or in stores. It puts the focus where it belongs, at the beginning of the supply chain where product originates. Firms can better turn inventory from purchase orders into cash. Inventory that is in a long transit, inventory that sits in warehouses and inventory that sits on store shelves and floors does not increase in value with age. Inventory goes stale and loses value. It loses the sales window of opportunity. The only solution then left is price reduction.

Traditional procurement approaches focus on product price as does traditional logistics approaches that focus on freight price. The result of these pricing efficiency approaches is to place prices before inventory requirements by treating the product supply as two discrete events. They create discord in the development of an effective supply chain that can minimize time, inventory and cost while maximizing service and profits. The dual-price approach hinders the development of inventory management at suppliers to create yield management as a benefit of supply chain management by focusing on having the right inventory at the right quantity at the right place and at the right time. And the place to implement that is at the supply origins with suppliers.

Product and freight pricing emphases do not recognize yield management. They do not take yield management from being an analytical tool to being part of the supply chain practice and process. The impact is to trade-off product and freight prices for markdowns and lower profits.

Developing a value proposition by incorporating yield maximization of inventory beginning at the supplier level converts an operations research tool into a supply chain operations paradigm to manage the product and its flow. It expands the supply chain focus supplier management. It creates substantial benefit and competitive advantage. Yield management success requires supplier management in order to bridge between supply chain planning and supply chain execution.

Supplier management is controlling supplier performance. It looks at the timing of product, the quantities, how and where delivered, product mix and more. The intent is to maximize yield.

Effective supplier management is based on technology, process and people. Technology is how purchase orders are placed on supplier, via the Internet, EDI or other. It is supply chain execution. More importantly it is how purchase orders and suppliers and managed with event management and exception management. The technology enables revising orders, their priorities, their style and other mixes, their timing, quantities and more. Technology gives visibility to directing and controlling supplier performance and what is in the supply chain, including what is happening with transport and other logistics service providers.

Process takes purchase orders from being transactions to being part of a process that flows through the organization. That process enables the linking of all parts of the supply chain, the integration within the company and between trading partners. It gives the dynamics to controlling product flow and inventory positioning. That control is key to placing the right inventory, right as to quantity and timing and location, so as to achieve higher price yield.

People are logistics personnel positioned in China, India or wherever your suppliers are located. They speak the same language and are in the same time zone as suppliers. They are the day-to-day operational spears that make process and technology work. Global supply chains cannot be managed with emails. Managing suppliers takes people.

Value proposition is needed for C-level supply chain executives and for 3PLs and 4PLs. It must bring significant bottom line benefit within the company and to its customers. A value proposition built on yield management and supplier management is unique, creates competitive advantage and drives increased profits. The challenge is to move beyond traditional functions and tasks.