Tuesday, December 20, 2011

The Power of the Process

imageEarlier this year, coming out of my book on supply chain strategy, I was highly focused on exploring what constitutes competitive advantage? How do companies build it and how do they sustain it? I believe superior processes lie at the heart of creating such advantages: Because a superior “process” not only creates a capability with a competitive advantage, but it is also what makes it repeatable and sustainable in the long run.  

While such capabilities may exist in all areas, for example, in manufacturing processes or packaging, but in today’s information-based economy, a large number of these capabilities routinely look like business processes enabled through technology. Take the demand forecasting process – the difference in the quality of the forecast can create a competitive advantage for you in several ways, from directly increasing your revenues by reducing the stock-outs, to improving your cash-flow by reducing the inventory. This can further result into increased customer satisfaction and allow you to create cost advantages by having to carry less inventory while maintaining the customer-service levels.

But what does having a better demand forecasting process mean? How does one create a better demand forecasting process? It depends on the industry: For a retailer, it may mean having a better process to collect real-time demand data from the POS systems, having the capability to aggregate these across all demand points, across all channels, across all supply chain echelons, having a better process to account for the impact on demand due to stock-outs, promotions, prices, and weather. It also means having a better process to track the forecasts to continuously update the forecasts as changes in demand patterns occur and finally, having a process to leverage the forecasts into the sub-sequent planning processes to optimize inventory, prices, and promotions. The last step is important, no matter how well your forecast is, it does not create any returns unless you also build the capabilities to execute on the forecast, to respond as the demand changes, and do so quickly enough to be effective.

Having all these processes creates a business capability – capability to forecast demand and act on it. Any capability can create competitive advantages if it is superior to the capability of your competitors. What makes a capability superior? A superior processes. And what makes a process superior?  A process is superior if it creates any one of the following advantages:

  • Time Advantage: Time advantage is created when one of the business processes is faster than the other in achieving the same result. It is best exemplified with the time to market examples. Time advantage is typically created through careful analysis of all the activities supporting a process and elimination of those that don’t add any value to the process, but only add lead time.
  • Cost Advantage: Cost advantage is created when the superior business process is cheaper to operate than the inferior other. Cost advantage can be created through elimination of waste from the process, but also by optimizing the process within the process constraints.
  • Efficiency Advantage: Efficiency advantage is created when the superior business processes provide higher throughput. Throughput measures the output of a process per unit time. The efficiency advantage can be created by automating, simplifying, or expediting a process.
  • Quality Advantage: Quality advantage is created when the superior business process creates fewer defects than the inferior one. Quality advantage is generally a result of standardizing, automating, or simplifying a process.

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Want to know more about supply chain processes and supply chain strategy? Check out my books on Supply Chain Management at Amazon.

© Vivek Sehgal, 2011, All Rights Reserved.

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