Does your supply chain know how the commercial team intends to succeed in the marketplace? If not, how can it adequately support the commercial strategy?
In my experience as a commercial leader working in S&OP, I have observed that many supply chain/planning practitioners are highly motivated to grasp the commercial strategy. And that’s great because they have at their disposal several tools to support it. However, they tend to have difficulty in understanding what the commercial strategy is, often because they don’t know how to start the discussion with their colleagues in Sales and Marketing, or they’re unsure how to frame the questions which will give them the insight they need.
As somebody involved in S&OP but coming more from a commercial, not a supply chain background, I intend for this article to help professionals in supply chain, planning and S&OP better understand commercial strategy and priorities, so the S&OP process is not only balancing supply and demand, but also delivering on key company-wide objectives.
In order to meet this challenge, I suggest anybody involved in the S&OP process invest time in exploring the following three questions:
1) Where do we need to win?
I have found that this is often a better question than “What are the commercial priorities?” because the commercial reality is never one-dimensional, and it is rarely as simple as saying one business area is more important than another. Different revenue streams are often complementary. For example, it might be equally important to maximize profit on mature products in the portfolio as it is to drive new product launches, because the return from the former enables the latter.
A cohesive commercial strategy will have specific and differentiated commercial strategies for each business area. The original Boston Matrix is a simple and effective tool to help categorize and understand the dynamics involved.
In addition to this interplay of different business opportunities, the commercial strategy is also likely to have various short, medium and long-term dimensions. Understanding how these play out is also a critical enabler for the supply chain to develop proactive, commercially-aligned proposals.
This fundamental understanding of the commercial strategy is a crucial enabler for a Supply Chain team wishing to work closely with the Commercial function as it enables a much more focused and proactive partnership to drive business value. Leveraging this understanding, however, requires two further questions to be discussed, as outlined below.
2) How do we win?
The textbooks call this ‘key drivers of competitive advantage’. This is what it will take for the organization to win in its target market. Again, there are various tools which are used by marketing teams to develop their strategies in this area. One of the best known is Porter’s Generic Strategies which describes 3 generic strategies to achieve competitive advantage. In short, these are based on:
Cost Leadership: Minimizing costs relative to your competitors’.
Differentiation: Encompassing product/service characteristics, branding, distribution and promotion.
Focus: Concentrating the business in one or few market segments only.
Understanding how the Commercial team’s plan to win in each of its markets is essential as this strongly shapes the supply chain requirements of the business. For example, a premium product applying a Differentiation strategy will more often focus on product quality enhancements and service levels and would not unduly risk these in order to reduce costs. However, a more mature product in a commoditized market drives a greater requirement for continuously reducing costs.
3) How can we work together to ensure we win?
Having understood these key elements of the commercial strategy, the Supply Chain function is then able to drive targeted and relevant discussions with the Commercial team to create business value. The Supply Chain has many opportunities to influence the costs, working capital and product/service characteristics which ultimately shape the offerings made to customers.
However, many commercial stakeholders have limited experience and understanding of the supply chain. This means that when Supply Chain provides the Commercial team with initiatives to support overall business objectives, there is little understanding about how it could work. Supply chain/planning professionals should relate supply chain/planning initiatives to the commercial strategy. This allows both parties to anchor the discussion in the fundamental commercial requirements and this helps create the energy and engagement to support cross-functional partnership.
Examples of such initiatives and their associated commercial impact include:
- Supply chain segmentation
- Adapts the supply chain configuration to align with the key business drivers (how do we win) for each key business area and hence optimize costs, service and working capital for each commercial strategy element.
- COGS reduction
- This may be delivered by various routes including procurement, portfolio rationalization or process reconfiguration. When carried out in collaboration with the commercial team and focused on the relevant marketing strategy, these are supported and championed by the commercial team.
Using the three questions above as the basis to build better understanding of the commercial strategy and its requirements is a very practical approach to building improved collaboration between the Commercial & Supply Chain teams. Reviewing some basic standard tools (such as the Boston Matrix or Porter’s Competitive Strategy model) as outlined above can help prepare the Supply Chain team for a productive engagement with the Commercial function which drives useful insights into the commercial outlook and strategy.
These discussions are a critical enabler for driving mature S&OP discussions and decision-making which extends beyond demand and supply balancing and directly enhances a business’s competitive advantage.