How can I fine tune my business model and the 5-STAR network continually as the circumstances change? What have other companies in my industry and region done as customer preferences evolve, newer suppliers become available, newer technologies come to the market and competitors change their strategies?
Introduction
Businesses are constantly striving to find ways to gain a competitive edge and stay ahead of the game. One of the most effective ways to achieve this is through the implementation of a 5-star business network. This cutting-edge strategy can help to optimize your business in a multitude of ways, from improving innovation and product phasing to increasing profitability and cash flow efficiency
Table of Contents
Content
To optimise your business using 5-Star business network, you first need to understand the ‘5 -cornerstones’ of this model. Five key cornerstones of a super networked business are:
o Fire-Aim-Ready Innovation
o $eed-to-$tore Efficiency
o Transaction Optimization Profitability
o Advanced Product Phasing
o Results-oriented Outsourcing and Modularization
We will explore each of this concept in detail here. If you want more deeper grasp on such topics, I highly recommend you to read my book on – ‘The 5-Star Business network by Vivek Sood’
Fire-Aim-Ready Innovation
Innovation is one of the 5 stars of 5 Star Business Network which is essential for organizations to achieve and sustain a competitive advantage in today’s business environment. With the advent of new technologies and the increasing complexity of global supply chains, innovation in SCM has become more critical than ever. SCM 3.0 is the latest evolution of supply chain management that emphasizes innovation, collaboration, and digitalization to optimize the entire supply chain. The maturity model is characterized by a traditional, siloed approach to supply chain management, which represents a fully integrated, collaborative, and optimized supply chain.
Some of the key areas of innovation in SCM 3.0 include:
- Digitalization: Digitalization is the foundation of SCM 3.0 and involves the use of digital technologies to automate and streamline supply chain processes. This includes the use of sensors, RFID, and other IoT technologies to track and monitor inventory levels, shipments, and other key metrics in real-time.
- Advanced Analytics: Advanced analytics involves the use of big data and predictive analytics to gain insights into supply chain performance and identify areas for improvement. This includes the use of machine learning algorithms to analyse large data sets and identify patterns and trends that can help improve forecasting accuracy and reduce lead times.
- Collaboration: Collaboration is a key aspect of SCM 3.0 and involves the use of digital platforms and other tools to facilitate communication and collaboration between suppliers, customers, and other stakeholders. This can help to improve visibility, reduce risk, and enhance overall supply chain performance.
- Sustainability: Sustainability is an important aspect of SCM 3.0 and involves the adoption of environmentally friendly practices and the use of sustainable materials and processes throughout the supply chain. This can help organizations to reduce their carbon footprint, improve their reputation, and comply with regulations.
- Innovation culture: An innovation culture is critical to success in SCM 3.0. This involves creating an environment that encourages experimentation, risk-taking, and continuous learning. It also involves a focus on developing a workforce with the necessary skills and capabilities to drive innovation and effectively leverage emerging technologies.
Based on the above factors, we developed the following matrix to help your business
Red Box
When innovation is only incremental and customer demand is uncertain, large investments in customer education and supply network building are necessary. This is because potential suppliers see the situation as high risk and require monetary incentives to cooperate. However, many innovative efforts fail due to a lack of financial resources and the difficulty of fighting on two fronts simultaneously. In this situation, a basic supply chain is the only possibility, where the organization must build demand and supply simultaneously. The lesson for players in this situation is to have deep pockets or find a niche market with pent-up demand, or create a product that surpasses anything else in the market. If these options are not possible, consider scrapping the idea altogether.
Light green box
When a company faces a situation of massive innovation but uncertain customer demand due to competing technologies, it can suffer from a chicken and egg situation where customers do not buy due to uncertainty and the company cannot invest in production unless the demand is certain. To overcome this, the company can work with the supply network on a conditional basis, promising and delivering massive returns as demand materializes. This requires finding the right suppliers with superior capability and flexible capacity who can understand and work in the situation. Flexible product design and customer education can also help reduce demand uncertainty. An adaptive supply chain that is flexible and adaptable to demand buildup through education and events is essential.
Dark green box
To explain this here is an example I used in my book “The 5 star business network”-In the pharmaceutical industry, demand for cures for diseases like cancer is already present and growing. However, the research and development needed to create these cures is primarily done in the labs of large pharmaceutical companies and their partners, which can be restricted by patent laws. Collaboration is key to gaining a first mover advantage in creating blockbuster products, but an adaptive supply chain is necessary for effective and efficient innovation at a lower cost. Holding demand in supply chains until supply is available, and selling limited quantities to early adopters under limited conditions, is a successful strategy in this industry. The rare scenario where demand is highly certain and innovation is
$eed to $tore efficiency
Supply Chain 3.0 relies on the Speed-to-Store Efficiency metric, which measures the time from initial order to retail delivery, ensuring the right product, quantity, and timing known as the “four Rs.” This is particularly important for logistics professionals, emphasizing the need to streamline processes, reduce lead times, and increase revenue/profitability.
The ultimate goal of Speed-to-Store Efficiency is to improve cash flow by reducing inventory carrying costs and getting products to market faster. The Cash-to-Cash Cycle is a financial metric reflecting the time taken to convert raw materials into cash. It helps identify areas of inefficiency in inventory management, sales, and collections processes, improving overall financial performance.
To calculate the Cash-to-Cash Cycle, businesses need to determine Days Inventory Outstanding, Days Sales Outstanding, and Days Payable Outstanding. This provides valuable insight into the effectiveness of inventory management, sales, and collection processes, ultimately improving supply chain efficiency.
Cash-to-Cash Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
Relation of PE ratio
and $eed to $tore cycle
As depicted in Figure 9.3 above, as of writing this section, Amazon’s market price is almost 200 times its annual earnings, while Wal-Mart’s market price is nearly 15 times its annual earnings. This disparity reflects the market’s perception of each company’s growth potential, which heavily weighs on their ability to efficiently utilize their assets to generate cash flow.
it is apparent that Amazon has achieved its startling growth figures previously noted by sacrificing margins to keep attracting more and more customers to its business model. Walmart on the other hand, appears to be enjoying a comfortable margin – a situation which may not last very long if Amazon has its way. It remains to be seen how this battle pans out in the next decade. Barnes and Noble appears to be barely hanging in there but Borders future seems sealed.
Transaction Optimization Profitability
Businesses use TOP to understand their performance, which measures their ability to minimize costs and maximize revenues on every transaction. Achieving TOP requires focusing on customer intimacy, which involves understanding and anticipating customer needs and providing customized solutions. Building strong relationships with customers and delivering exceptional customer service can improve transactional efficiency, enhance brand reputation, and increase customer loyalty. Customer intimacy delivers exceptional value to customers, leading to increased revenue, profitability, and long-term success.
Before the advent of advanced technology, decision-making relied on human brainpower or limited computing power. This resulted in outdated information and a reliance on experienced decision-makers who still needed luck for routine decisions. This was comparable to navigating a wooden ship without modern electronic navigation aids. The introduction of new technology has improved decision-making.
Advanced product phasing
APP, or the ability to develop and release new products in a timely and strategic manner, is crucial for companies to maintain their competitive edge. The process involves ideation, where companies generate new ideas for products or services through market research, customer feedback, and competitor analysis. Product development then follows, where the product is prototyped, tested, and refined until it is ready for launch. Finally, the product is launched through a marketing strategy, distribution network, and ongoing performance monitoring. Balancing speed and quality is key to success in this process.
Result- focused Modularized Outsourcing (ROM)
ROM is a strategic outsourcing model that enables companies to outsource specific business functions or processes to third-party vendors in a modular fashion, with a focus on achieving measurable results. By breaking down their business processes into smaller, more manageable components, companies can outsource each module to specialized service providers who can deliver high-quality outcomes and cost savings. ROM allows companies to maintain control over their core business functions while leveraging the expertise of external service providers. This approach is particularly useful for companies who want to focus on their core competencies and outsource non-core activities to external partners who can provide greater expertise and economies of scale.
Benefits of ROM
- Flexibility: ROM allows companies to adapt quickly to changing business conditions by outsourcing specific modules to external service providers. This enables companies to scale up or down their operations based on their business needs, without having to invest in additional resources or infrastructure.
- Efficiency: By outsourcing specific business functions to specialized service providers, companies can benefit from the provider’s expertise and economies of scale, resulting in improved efficiency and cost savings.
- Focus on core competencies: Outsourcing non-core activities to external partners allows companies to focus on their core competencies and strategic priorities. This can help improve overall performance and competitiveness in the market.
- Access to new technologies and expertise: ROM can provide companies with access to new technologies, best practices, and specialized expertise that they may not have in-house. This can help improve their operations and drive innovation.
- Measurable results: ROM allows companies to focus on achieving specific outcomes and measurable results, which can help improve accountability and performance.
Despite the long history of outsourcing, sometimes it provide unacceptable result
- About one-quarter of outsourcing contracts fail within 1 year
- Nearly 40% to as high as 70% of outsourcing contracts are regarded as failures by one of the two parties.
- If more rigorous tests – such as whether the initial objectives were met – even a higher proportion of contracts would be considered as failures.
The following is an example of how Zara utilized the aforementioned foundational elements to become a frontrunner in the fast fashion industry.
Zara is a Spanish fashion retailer that has become a leader in the fast fashion industry. Their success can be attributed to their innovative supply chain management practices. They are able to take a design from conception to the store shelf in just a few weeks, while other retailers can take months.
One of Zara’s key supply chain strategies is their Cash to Cash efficiency. They are able to reduce the amount of time it takes for a product to be designed, produced, and sold. This allows them to have a faster turnaround time and reduce inventory costs. They also use Transaction Optimization Profitability (TOP) to minimize costs and maximize revenues on every transaction. This focus on efficiency has allowed them to maintain high profitability while offering affordable fashion to customers.
Another important factor in Zara’s success is their product phasing strategy. They release small batches of new products frequently, allowing them to test new styles and trends without committing to large quantities. This helps them reduce the risk of unsold inventory and allows them to respond quickly to changes in consumer preferences.
Zara also utilizes outsourcing to lower costs and improve efficiency. They outsource the production of their clothing to third-party manufacturers, allowing them to focus on design and marketing. However, they maintain tight control over their supply chain by owning their own distribution centres and transportation network. This allows them to quickly move products from their factories to their stores.
How to fine tune Your business by using 5-star business network
- Innovation: Innovation is a crucial aspect of supply chain management. By staying abreast of the latest technological advances and market trends, you can develop new products and services that meet the evolving needs of your customers. This can help you differentiate your brand, stay ahead of competitors, and drive growth.
- Cash-to-Cash Efficiency: Cash-to-cash efficiency refers to the amount of time it takes for a company to convert its investments in inventory and other assets into cash. By improving cash-to-cash efficiency, you can reduce the amount of working capital tied up in inventory, improve cash flow, and increase profitability. To achieve this, you may need to optimize your production processes, improve forecasting accuracy, and reduce lead times.
- Transaction Optimization: Transaction optimization involves streamlining your business processes to reduce transaction costs and increase efficiency. This includes optimizing your procurement processes, managing your inventory effectively, and optimizing your logistics and transportation operations. By optimizing your transactions, you can reduce costs, increase productivity, and improve customer satisfaction.
- Profitability: Profitability is the ultimate goal of any business, and supply chain management can play a critical role in achieving it. By optimizing your supply chain operations, you can reduce costs, increase efficiency, and improve the overall profitability of your business. This may involve optimizing your sourcing strategy, improving your manufacturing processes, and reducing waste and inefficiency.
- Product Phasing: Product phasing refers to the process of introducing new products to the market in a strategic and timely manner. By developing a pipeline of new products, you can sustain your market leadership and maintain a competitive edge over your rivals. To achieve this, you may need to conduct market research, gather customer feedback, and analyze the competitive landscape to identify new opportunities.
- Outsourcing: Outsourcing can be an effective way to reduce costs and improve efficiency in your supply chain operations. By outsourcing non-core activities such as logistics and transportation, you can focus on your core competencies and improve your overall performance. However, outsourcing should be approached with caution, as it can also introduce new risks and challenges to your business.
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
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