“When are we ever going to make a profit?” May 24th, 2013

-Dean Cantrill

When we read about business strategy and company growth, we think of the magical combination of Business Development, Marketing and Engineering working together to link customer needs with technology which when done correctly, yields growth. The outcome often varies due to the knowledge and skill of those involved. It also helps if the company has a proven process, the cash to invest in the product and market development, and a little luck. Unfortunately, like with most things, there’s no guaranties that this will always be a winning combination or that the assembled team has the proven strategic process and experiences to turn all these good ideas and technologies into the illusive revenue growth that becomes the lifeblood of the company. Its hard work and requires discipline. There’s one attribute that rarely gets included early in the strategic planning stage, the Operation’s and Supply Chain (O&SC) strategy.   Without it, many good ideas fail to deliver. The creation of an operation’s and supply chain strategy, as part of, the overall strategic planning process can be key to delivering a new product in the time required to satisfy the customer and create an entry barrier for the competition.

 

Imagine for a moment how critical Apple’s O&SC strategy is when they announce a new iPhone is ready for release. Their first challenge is to maintain sales of the current product while rumors fly that something new and better is on the horizon. Then, they need to produce a significant amount of inventory to satisfy the early serge of orders that comes from the pre-release hype. Then, depending on the initial serge, they need to balance their future supply capacity to the anticipated demand right up to the next new product release. Luckily for them, they have a significant success rate for introducing new products and the knowledge and manufacturing capacity to move mountains. But, we’re all not Apple. We may be small business with a great new idea, or a product line in a mid-sized company competing for company capital and engineering resources. How will you operationalize your new product with no sales or manufacturing history to support your need for cash to purchase capital and inventory?

 

I’d like to share an experience from my past that helps illustrate the concept of O&SC strategy. It’s an interesting story of a product line that at one time was almost cancelled, but later became a major contributor for growth within a mid-size company. The technology was leading edge, but fairly mature in small quantities. The demand was growing but limited due to the high cost and long lead-times associated with manufacturing the product. For several years, the marketing guys were predicting sales growth due to increasing market demands, but the product line failed to realize sustainable growth. Turns out, some of the competition was selling well below market value because they had a lower expectation of profit for this product in their product portfolio. The turning point for this company materialized when Business Development started to hold strategy meetings with Operations, Engineering and Marketing. It was the first time this group would meet on a regular basis looking at the relationship of product design, manufacturing process and equipment, and market potential. The outcome was a strategy to incorporate a series of design changes to the product, eliminating costly processes in manufacturing. In parallel, the company was investing in capital equipment that incrementally lowered manufacturing costs and reducing lead-times. It took more than a year, but both Engineering and Operations executed their product and cost improvement projects, which drastically lowered manufacturing costs and lead-times. The result of executing an O&SC strategy, sales of the product increased due to their ability to compete on price, and lead-times dropped dramatically, making them more responsive to customer needs while improving cash flow. All this success bootstrapped to higher volumes, more design for manufacturing changes, increased capital spend, and higher sales, and so on.

 

Regardless of company size, you can see how incorporating an O&SC strategy is an integral part of the company-wide growth strategy. Failing to consider O&SC can lead to several new product introduction pitfalls. In some cases, mishandling O&SC can do significant damage to the company’s financial health. Some companies experience runaway inventory levels that consume all of their cash before they recognize what’s causing the problem. Others experience long lead times and/or higher than expected pricing which can open the door for the competition.

 

I’ve prided a list of questions that can help you build an O&SC strategy. It’s not a complete list due to the diversity of most companies but might provoke some questions of your own that will be more meaningful to support your growth strategy.

• Have you developed a cost/quantity relationship for the product based on labor and material estimates? (This will be used to help predict what the financial impact the product will have on your company during all phases of the product life cycle and can be used to help support pricing.)
• Have you developed a supply chain strategy that protects your intellectual property? (Suppliers can become competitors if your “value add” is something less than your supply chain’s.)
• Is the cost of your product quantity sensitive and can your supply chain support your market entry strategy? (How will you minimize your cash investment to get product out to the market at an attractive price?)
• Does you business have enough cash to support the capital expenses needed to produce your product at quantity? (This can be done incrementally in some cases as a product gains market share. To slow and you miss out on market potential. Too fast and you consume all the companies cash reserves.)
• Have you compared your O&SC strategy to others from adjacent markets? (Sometimes it pays to learn from others, both from their mistakes and their successes.)

 

Use this short list to provoke more O&SC questions (and answers) that support your growth strategy. Don’t be consumed with surprises that can damage your company’s brand and image. Hold the entire team accountable to produce a strategic plan with all the necessary elements to support the company’s vision of growth. Learn from your own past experiences, as well as, from others in the market place. It’s easy to say “that’s Operation’s problem”, but it can become everyone’s problem if the lack of O&SC strategy causes the business to stumble.