Supply Chain Execution Can Be a Sustainable Source of Competitive Advantage

July 20, 2018 Mark Michaud

Supply chain execution for some firms is an increasingly critical dimension of marketing, differentiation, and defensible competitive advantage.

Supply chain execution for some firms is an increasingly critical dimension of marketing, differentiation, and defensible competitive advantage. As an example, consider Home Depot’s recent decision to invest $1.2 billion in its supply chain for their two thousand-plus stores as well as their growing e-commerce business.

We think of the digital and user interface aspects of ecommerce as difficult. And they are. But the execution of the supply chain required to make ecommerce real and to keep the brick-and-mortar experience competitive with the online experience is even more complex and demanding. 

Yet there seems to be an extreme focus on the digital realm, which is one-dimensionally complex. Managing an entire supply chain involves:

  • Interface with ecommerce
  • Management of supply chain partners
  • Digital interfaces with all members of the supply chain that make every member’s actions transparent
  • Making the ecosystem appear seamless to the consumer
  • Inventory management and fulfillment
  • Process control and continuous improvement
  • Tracking and measurement of each aspect of the supply chain ecosystem
  • Key Account Management levels of communication 
  • People with relevant industry experience
  • …and ever lowering cost

Flawless execution of the supply chain process is so hard it becomes a sustainable source of differentiation and competitive advantage—much more difficult to imitate than the front-end digital part of ecommerce.

What will Home Depot get for their $1.2 billion?

Meeting the consumer’s increasing expectations, for one thing.

Mark Holifield, Home Depot’s EVP of Supply Chain and Product Development observes, “Customers expect delivery to be timely and free. Sometimes they want it fast and are willing to pay for that. Sometimes they want it free, and they’re willing to wait for it. We need to offer the right options.”

The strategy, ‘offer the right shipping options,’ is straightforward. Executing that strategy is anything but. Let’s look at why.

Any retailer (hereafter, “the master retailer”) that has both brick-and-mortar locations and ecommerce sites will offer a much broader selection of products online than they do in their stores—often thousands more SKUs online.  

They can offer the broader line because they have developed partnerships with thousands of vendors and each can drop-ship their respective products to customers when the customer orders them through the master retailer’s ecommerce site.

Supply chain management in this case is a very complex series of tasks:

  • Vendors must be vetted and selected, and contractual arrangements must be defined.
  • Vendors must submit the physical dimensions of each of their products (for calculating shipping costs) and the inventory levels at each of the vendor’s locations must be kept current in the master retailer’s database.
  • Rules must be established so that when the customer orders one of the vendors’ products on the ecommerce site, shipping costs can be instantly calculated and charged.
  • The customer’s decision about which speed and cost of shipping to use must be communicated to the vendor for proper fulfillment.
  • There must be a process to assure that the vendor complies with the customer’s choice of shipping and the rules about modes of transportation and costs.
  • The fulfillment process must be transparent to all members of the supply chain and appear seamless to the consumer.

Calculating and coordinating shipping

If the ecommerce site sells only parcel-sized products (e.g., books), the master retailer can set up an account with UPS or FedEx and require all vendors to use that account. When the customer orders a product, the master retailer knows exactly what shipping options are available in the UPS or FedEx account and how much to charge for each.

However, in the case of an office supply retailer for example, there are also large items like desks and chairs that need to be shipped LTL (less than truckload) rather than using the UPS or FedEx accounts. Vendors have relationships with different LTL shippers at different locations and receive preferred rates from each.

Knowing what shipping options are available and knowing what to charge for each is more difficult when the UPS or FedEx accounts can’t be used. The master retailer must be able to calculate the shipping charge based on the dimensions of the product, the physical location of the product, and predetermined rules for costing.

Once the customer choses a shipping option and the master retailer sets the price, the chosen shipping option including all the particulars of the shipment, must be communicated to the vendor and the vendor’s compliance must be monitored.

It’s critically important that the fulfillment process be transparent to all members of the supply chain and appear seamless to the consumer.

Here is an example of how Harte Hanks helped a retailer create and manage its supply chain

One of our clients turned to us for our sophisticated software, as well as our management team with extensive experience in managing complex supply chain ecosystems.

Implementation of the partner’s system was, in itself, an important key to success.

We worked with our client to rank its vendors in descending order of sales volume. Ranking in order of logistical complexity would have been better, but those data were not available and not easily created—so sales volume had to suffice.

We set up a process to add vendors to the system ten at a time starting with the largest. Each flight of ten vendors takes three weeks to bring onto the system:

  • Product information needs to be validated and pricing rules established.
  • Inventory by product and location needs to be validated.
  • Power users at each vendor need to be identified and trained on how to use the system.

The new system is a big change in how vendors operate. Typically, seven of the ten vendors in each flight welcome the system and invest the time needed to come up to speed. The other three out of ten vendors drag their feet. Leverage from our client needs to be applied.

Fortunately, the 80/20 rule applies, and the first 200 vendors who were brought on the system in the first year generate substantial operational benefits: 

  • Losses from incorrect pricing are slashed.
  • Tracking of shipments enables the identification of the few items that will not be delivered on time, which in turn has improved customer service by communicating with customers and expediting the problem deliveries.
  • Information about logistics activities is now available for our client to evaluate. Decisions can be made about which product to stock and fulfill themselves and which to fulfill through vendors.

Defensible competitive advantage

The operational benefits of superior supply chain management include better customer service and better financial performance. And these advantages are competitively defensible.

As valuable as the enabling software is, it is not the heart of the defensible competitive advantage. Much more difficult to imitate is the knowledge and skills of the thousands of vendor power users and the resulting coordination of vendor activities with the master retailer’s ecommerce site.

And even more difficult to imitate is the expertise of the supply chain management team.

Add the advantages of superior supply chain management to the hundreds of relationships with vendors that comprise the master retailer’s ecommerce ecosystem and these back-of-the-house capabilities create competitive advantages that are very hard to imitate.

This is not to say that the front-end programing and data analysis aspects of ecommerce are not important; they are critical and challenging. Rather, we are observing that the back-of-the-house supply chain management is every bit as critically important—and even more difficult to execute. Hence, they are a defensible source of competitive advantage.

How much is it worth? Home Depot thinks billions.

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