Operational Excellence and the Art of Balancing Value Disciplines

180404 April cover

What does your company do better than anyone else? This is the key question discussed in the 1997 book called The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market, by Michael Treacy and Fred Wiersema.

The central thesis is that companies can’t be all things to all people, and therefore must concentrate on one of three value disciplines:

  • Product leadership
  • Customer service leadership
  • Price leadership

In the book, operational excellence is defined as the approach to achieve price leadership by providing reasonable quality at a very low price. It is meant to drive costs out of core processes to deliver the price competitiveness that customers are looking for.

For many CSCOs of today, this book was the first exposure to operational excellence. Back then, supply chain was seen purely as a cost center or support function, designed to achieve hyper efficiency and reduction of total supply chain costs.

Operational Excellence is Finding the Balance

A lot has changed since the 90s. Today’s demanding customers are in the driver’s seat. They want a continuous flow of innovative products developed and launched with no delays. They want the greatest purchasing experience – one that makes it easier to deal with suppliers. They are picky, impatient and expect customized products at affordable prices, to be delivered quickly.180404 April 1 WebHyper efficiency as the sole driver of supply chain cannot respond adequately to the changes companies are facing today. Today’s marketplace is too complex, interconnected, and fast-paced for organizations to achieve excellence simply by cutting costs. Organizations have spent years squeezing costs out of their supply chains, and many are now at the point where further cost cuts will only lead to reduced flexibility and poor customer experience.

Achieving Operational Excellence Today

The traditional approach to operational excellence – just focused on price leadership – is a relic. Customer demand for excellence in all three value disciplines, and the model to narrow the focus to just one no longer applies today. In the SCM World report Innovation Success Rate, we introduced the notion of Design for Profitability as the modern approach to operational excellence that finds the best possible balance across all three value disciplines: highest quality products, best services, and lowest possible prices.

Among the leading organizations approaching operational excellence holistically:

  • Mondelez was created as spin off of Kraft Foods’ global food and snack business. It was an opportunity to reinvent the supply chain into an end-to-end organization. The guiding principles is end-to-end platforming to create standardization and modularity, which supports both efficiency and flexibility. For example, creating a global production equipment standard is one of the key success factors, along with establishing a “global menu card,” which identifies standards for product formats, packaging, and raw materials. For its Oreo line, the company reduced capital costs by more than 30% and increased asset output up to three times.
  • General Mills has extended the learnings of its operational excellence best practice to its customers and suppliers through the General Mills End-to-End Solutions (GEOS), a supply chain capability and consulting organization designed to drive growth through joint operational excellence initiatives with trading partners in transportation, warehousing, inventory and store-level operations. The company attributed to GEOS over $50M annual benefits (combination of savings and revenue growth), while one customer measures inventory reduction benefits in the hundreds of millions.
  • BASF and 3M joined forces to create operational excellence along their interweaved supply chain. The traditional siloed approach to planning and execution processes between BASF and 3M supply chains led to frequent areas of friction. BASF and 3M integrated and standardized supply chains by using a common, cloud-based digital environment which connects the information flow with the physical product flow to ultimately satisfy customer demand and bring mutual benefits.

Leading CSCOs are developing operational excellence along all three value disciplines. They work in cross-functional teams to create company standards and platforms for products and production equipment. They work with trading partners to expand operational excellence across the end to end supply chain. And they implement digital supply chain strategies to make sure cross-functional and trading partner collaboration is founded on a solid base of common data and standard processes.

Author Pierfrancesco Manenti

More posts by Pierfrancesco Manenti