Peter Drucker, an influential writer and self-proclaimed “social ecologist”, famously said: “The purpose of any business is to create a customer.” First-principles thinkers are sometimes baffling in the simplicity of their thought expression; sometimes to the point where you ask “is that a ‘duh’ statement, or is there more to it?” In this case, there is much, much more to it. Taken at face value, this statement could be vigorously debated, since the shareholder value mantra of modern management doctrine has been heavily promulgated by business schools for the past 40 years.
Should your supply chain be shareholder-focused or customer-focused? I have been thinking about this for the past few years, in part as a result of having the good fortune to work at JDA Software. Given our unique portfolio of customers and products split between retailers and manufacturers, this has given me the opportunity to see how each side views the world. In general, retailers are more customer-focused in their language, while manufacturers are more shareholder-focused in theirs (more on what they can learn from each other in a future blog).
A few years ago in the Financial Times, Jack Welch said that shareholder value as a strategy “is the dumbest idea in the world.” He meant that shareholder value is an outcome of a strategy, not a strategy unto itself. Nonetheless, most major business decisions reported in the press are explained by management and boards as “enhancing shareholder value.”
Supply chain management is about managing resources: plants, warehouses, trucks, ships, planes, and associated people to profitably deliver the right product at the right price to the right customer at the right time. My colleague, Mike Grey, an early evangelist of all things supply chain, was always able to explain our role in a concise and entertaining way. His presentations were always effective at explaining the criticality of supply chain management to shareholder value, particularly in its role in cash creation.
I have been part of many supply chain projects in the past 30 years, almost all of which were driven from a shareholder mindset. We in the field were instrumental in bringing this discipline to project initiation – smart people with business backgrounds who entered the field brought a shareholder value framework to all investments and decision making. I personally drove this thinking using the DuPont model and RONA equation as the foundation (see picture below). Once put in this context, it was easy to link supply chain activities to things that would positively affect shareholder value: increase sales, reduce cost of goods sold, and increase fixed asset and working capital turnover. This thinking was critical to elevating supply chain management to C-suite discussions, to the point now that the earnings calls of many manufacturers include a discussion of the positive or negative impact of the supply chain on quarterly results.
I am now suggesting we modify this thinking.
Supply chains today must focus on customer-centricity, while at the same time managing costs and assets in the context of shareholder value. The reason for this is that while the focus on shareholder value and its linkage to supply chain management remain important, it promotes inside-out thinking, and to some extent a push mentality. One can argue that sales is a critical part of the ROI equation and this is the linkage to the customer, however, the linkage is not explicit. A customer-centric supply chain drives everything from the customer in and then drags shareholder value along with it, as opposed to focusing everything on shareholder value and then dragging the customer along. This may sound academic, but it is a fundamental shift in thinking and one that JDA is seeing across the value chain from retailers to distributors to manufacturers. It is also a primary reason we are seeing renewed interest in the topic of customer and supply chain segmentation (see my earlier blog, Segmentation: Shift from One-Size-Fits-All Supply Chain.)
So, the recommendation here is to focus everything on the customer and then make decisions throughout the supply chain in the context of shareholder value. This has implications for both retailers and manufacturers. As I stated earlier, retailers are typically more customer-focused in their language while manufacturers are more shareholder value-focused in theirs. The implication of a balance between the two driven from customer centricity means that manufacturers must move more toward driving everything from the customer and retailers must attach more shareholder thinking to their customer centricity. For retailers, this means elevating the supply chain to the board room and for manufacturers it means elevating the customer to the board room.
From a supply chain management perspective, this means manufacturers must focus more attention to customer segmentation and real demand, while retailers must focus more on demand management and fulfillment. My colleague, Wayne Usie, is leading a retail revolution at JDA to bring this thinking to retailers globally (see some of Wayne’s thoughts on the revolution in his blog, Retailers: Welcome to a Brave New World – Now What?)
I will focus more on the solution implications of this trend in future blogs. For now, however, I’m wondering what you think. Is your supply chain customer-focused or shareholder-focused?