Hyper-competition
Competition is also increasing for both manufacturers andretailers. For manufacturers, this is seen in the advent of global competition. In thepast, when markets were localised, a company only had to be as competitive as those in thelocality. If a potential competitor with a better way of doing things existed elsewhere,it did not present a challenge. This has now changed. Obviously if a company is choosingto export into a foreign market it must be competitive compared to its domestic rivals. Itis equally true for a domestic concern; while it may not have international aspirations,its customers will receive the attentions of foreign companies who do. In thesecircumstances only world-class performance will suffice. However retailers are also facingincreased competition. There is a blurring of distribution channels (perhaps bestsymbolised by petrol stations turning into supermarkets and supermarkets selling petrol)leading to enhanced competition. Furthermore in developed countries they face a stablepopulation and the entry of alternative retailing methods (e.g. electronic home-basedmethods) which could subtract market share from existingparticipants. The pressures on retailers are in turn passed backwards up to manufacturers.
Technological change
Improvements in technology can appear to be a blessing,though, in a competitive environment, if the technology is not properly managed theorganisation will be at risk from better equipped competitors. Changes in producttechnology shorten product life-cycles and this demands adaptability and speed of responsefrom the supply chain. In addition there are changes in process technology, especiallyInformation Technology (IT).
IT can provide incremental benefits, which arise from doingthe same work more efficiently. More radically, they allow an entirely new approach to betaken to a current task or even make a task feasible, where previously it was impossible.Traditionally IT has been used to eliminate clerical labour from tasks thereby reducingstaff costs, or for computation and analysis. However when combined with advances incommunication, new opportunities present themselves:
- Better scheduling and monitoring – it now becomes possible to plan and track the position of an item in far closer detail, perhaps through a factory or a distribution network
- Removal of middle-men – rapidity of communication can remove entire stages of a process, threatening those who have created brokerage positions
- Reduction of lead time – in the past the transmission of information was time consuming, especially over large distances. Transmission time need not now be a major obstacle to transacting business
- Artificial intelligence – this is the most recent opportunity offered by IT, in the form of expert systems and neural networks
Most of these opportunities have already been exploited inthe supply chain. Indeed the possession of information on product performance is becomingone of the major determinants on power within the supply chain.
Paradoxically, the retailers are in a better position tomonitor performance than the manufacturer of the product itself and information such asthis is power.
Integrated Supply Chain
Neither retailers nor manufacturers can effectively respondto the new competitive environment on their own. In future whole supply chains willcompete to deliver the best performance in terms of cost, timeliness, quality, customerservice and innovation.
In recognition of the need of considering the integratedsupply chain, approaches such as the recent Efficient Consumer Response (ECR) or theearlier Quick Response (QR) have been proposed. ECR, for example, advocates fourstrategies:
- Replenishment – the replenishment of goods is of course the most fundamental function of the supply chain but one which is not carried out with uniform efficiency
- New product introduction – it is reported that most new product introductions fail; for example in the groceries market it has been estimated that over three quarters of new products introduced do not obtain a significant presence. The inherent loss is enormous, both as regards the wasted effort in attempting to introduce the failed products and in the lost potential sales
- Promotions – lack of co-ordination on product promotions within the supply chain can lead to raised inventory and misdirected incentives
- Store assortments – the joint planning of displays and layouts has been shown to boost sales, providing joint benefits to both manufacturer and retailer. The manufacturer enjoys higher product sales while the retailer has the joint benefit of increased direct sales and the multiplier effect of ancillary sales arising from the customers’ presence in the store
While the strategies of ECR are concerned with co-operatingin the fields of logistics and marketing to improve both the supply of goods and thecreation of demand respectively, the strength of the method lies in its systematic nature.In particular the use of value chain analysis, essentially the application ofactivity-based management principles to the entire supply chain, in order to reduce wasteand design performance measures that encourage constructive behaviour.
CTS systems are one aspect of these performance measurementsystems and they are important because without them the manufacturer cannot be sure it isreceiving its appropriate share of the mutual gains arising from the partnership.
Complexity
In discussing the changed trading environment the themethat has emerged is that the world has not only got more competitive but also morecomplicated. In future, competing does not mean being more adversarial but being clevererat spotting opportunities for mutual gain on both a strategic and tactical level.
This in turn demands better information systems, capablenot only of providing the information for the strategic and tactical decision making butalso capable of dealing with the complexities that are the reality of the modern supplychain, these include:
- a broadening product range as manufacturers continually refine market segments to maintain market share and take on special packaging to tailor their goods to specific markets
- a proliferation and blurring of distribution channels
- more complex scheduling as companies adopt the techniques listed previously in the section Optimising the Trading Interface
This is the context in which CTS must operate. Fortunatelythe technology behind CTS is now well advanced so the task is soluble.
The practicalities of CTS
Money can buy…
We now consider what has to be done to create a CTS system. Fortunately much of the blackart has now gone and has been replaced with off-the-shelf solutions.
There are many specialised ABC packages now available fromIT vendors that remove the need to develop bespoke software; the cost of these packages isa small fraction of developing a tailor-made solution and, more importantly, they areavailable immediately and do not consume scarce resources in development.
There are also standard activity libraries available. Thesehave to be used with care however: it would be wrong to shoehorn a company’soperations into a standard model if special activities occur. The way round this is to usea standard model to start with and modify it as required. If the modification can be in aform that adds in detail but allows the costs to be summed back to the standard model thenthis has the advantage of allowing a benchmarking exercise to take place.
Also, the skills needed to build a model (which areconsiderable) are available on the market from consultancies. The issue here is cost butgiven the importance of the decisions to be made, then a do-it-yourself approach is likelyto be a false economy.
Money cannot buy…
There are some things which cannot be bought, the most important of which is the time ofthe company’s managers to work with the CTS project team and ensure that the modelaccurately reflects the operations of the company.
The garbage-in-garbage-out rule firmly applies. If the CTSproject team spend relatively little time with the company’s management then:
- the data within the system will not be accurate
- the information needs of the management will not have been captured
- the managers will feel little affinity towards the system and are therefore less likely to use it
For this reason, in the summary of how to build a modelgiven below, interviews between the CTS team and the company’s management figure veryprominently.
Building a CTS model
Building a CTS model will require a dedicated project team(whose size can vary but a team of five is typical) with assistance from the financedepartment and under expert guidance. The first stage project, leading to the calculationof account profitability, may take up to three months, assuming bespoke softwaredevelopment is not required; if it is necessary to embed the system in the managementinformation systems of the company, then this will take longer.
The major steps required are:
1. Agree the objectives of the CTS system (i.e.which decisions it is required to support). Form a management steering group to review theoutput of the team periodically. Announce the project to the company
2. Form a project team, with a broad composition,e.g. marketing, production, finance. Choose a leader of the team from the main usercommunity, as opposed to the finance function, who must, however, facilitate and guide
3. Arrange the preliminary briefing interviews withthe senior management to discuss their information needs and the issues facing thebusiness which the CTS system should clarify
4. Identify the activity centres, namely collectionsof cost centres whose costs will be allocated to activities through interviews withmanagers in charge of each area
5. Define the activity library during a first roundof interviews with the activity centre managers (using a standard library as the initialtemplate)
6. Choose an accounting period for the analysis andagree on the cost base (i.e. total cost incurred within the boundaries of the analysis).Allocate the costs to the activity centres
7. Load the cost base, the activity centres and theactivity library into the ABC model
8. Calculate activity costs, using a secondinterview with the activity centre managers to allocate the activity centre costs to theactivities defined earlier
9. Confirm the market/customer segmentation and loadinto the model as cost objects. Collect information on the notional sales value for eachsegment, the various discounts awarded and enter the net revenue for each segment into themodel
10. Identify training factors, using a thirdinterview to discuss the factors to use to trace the activity costs out to cost objects(e.g. no. of orders, no. of customer calls etc.)
11. Collect information on the tracing factors andinput into the ABC model
12. Calculate the cost-to-serve each segment andhence the CAP
These steps can obviously be embellished to include theexamination of cost drivers, the definition of performance measures and the calculation ofproduct costs.
Presenting the process in 12 steps may give the impressionthat the process is straightforward; however, in practice considerable skill is requiredto create a working model. In particular it is quite feasible to come up with the wronganswers, for example by classifying an activity as product-dependent and allocating itscosts to a segment on the basis of product-mix as opposed to classifying it ascustomer-dependent and tracing it directly (or indeed, vice versa).
Learning on the job can be hazardous, and therefore atleast one person in the team needs to have been involved in a previous implementation.
