Product-Plus Strategies: Adding Real Value to Your Business

This sobering, pervasive business reality is providing a wake-up call to companies everywhere. The result is a fundamental paradigm shift from product-focused strategies to product-plus strategies that emphasize good products plus value added services. This shift, in turn, has created unprecedented pressures to achieve Operations Excellence ­ meeting stringent customer service requirements, minimizing the cost of manufacturing and distributing products, and attaining the fullest possible return on assets such as inventory.

A crucial factor in meeting this challenge is better operations planning. Good operations result from actions based on effective management decisions. A new generation of decision support technology is taking a number of companies to unparalleled levels of sophistication in operations planning, and is providing them with fundamental competitive advantage in the effort to establish product-plus strategies.

A Commitment to Operations Excellence
Adjusting to today's business realities requires a fundamental commitment to Operations Excellence in supply-chain management. Operations Excellence begins by recognizing that supply-chain operations -- the processes by which you transform materials into products, distribute them, and eventually place them in the hands of your customers -- are an increasingly important part of the "product" you sell. Operations Excellence is founded on the observation that customers directly experience operations quality and increasingly factor such quality into their perceptions of vendors and their buying preferences.

Computer hardware companies, for instance, used to reap healthy margins from propriety technology that stifled competition and created captive customers. The microcomputer revolution changed all that. Computer hardware, the traditional product, is now a commodity, because there is often little real difference between vendors' offerings. Therefore, on the basis of traditional products alone, customers often have no compelling reason to stay loyal to any one vendor. Hardware vendors must then depend on value pricing and superior customer service for competitive differentiation.

Similarly, many major brand-name manufacturers of packaged consumer goods (food, beverages, household products, health & beauty aids) have seen brand loyalty erode, along with margins, and currently face stiff competition from low-cost generic products. Savvy, time-strapped consumers are less responsive to brand (product) advertising, see less reasons to remain loyal to traditional, higher-cost brand products, and have shifted to what they perceive to be higher-value generic products. The brand-name manufacturers have been forced to respond with product-plus strategies such as everyday low pricing.

Operations Excellence recognizes the essential implication of the current business climate: The shift to product-plus strategies requires companies to be very good at providing superior customer service and minimizing their operating costs. This represents a new and daunting set of rules for many firms. Until recently, companies could rely on establishing a foothold within a market niche -- either as a high-service firm that charged more for its superior service, or as a low-priced commodity firm that could undersell competitors but that was not particularly tolerant of specialized customer needs. Consequently, it was not so long ago that being superior at either customer service or operational efficiency was sufficient. Such "either/or" strategies are no longer tenable. The power shift from manufacturers to retailers and demanding customers has raised the customer service ante considerably for everyone. And sustaining "every-day low pricing", clearly requires "every-day low operating costs."

Competitive Advantage through Operations Planning
Achieving exemplary customer service and minimum operating costs is a relatively easy goal to state, but it is notoriously difficult to achieve. If this were not so, everyone would already be doing it; but the evidence clearly indicates otherwise.

However, a challenge is also an opportunity, and sustainable competitive advantage can be achieved through Operations Excellence precisely because it is difficult. Those who overcome the difficulty and achieve excellence will have established a formidable vantage point in a competitive world.

Experience has shown that a critical success factor on the road to Operations Excellence is better operations planning. Operations processes are actions based on management decisions. Therefore, operations quality is directly tied to the quality of operations planning. Although the current business climate has created unprecedented headaches in operations planning, the good news is that there have been equally dramatic advances in information technology to support operations planning.

A number of companies have achieved notable success by adopting leading-edge operations planning technology. Such decision support software helps decision-makers create "actionable" operating plans that deliver superior service at minimum operating costs. This new generation of decision-support technology is based on the advances in computer hardware, software, and mathematical algorithms achieved over the last twenty years. The traditional, functionally obsolete MRP/DRP mentality that has long dominated operations planning has been discarded. So have software design limitations based on technical barriers that no longer exist, but which are built into the legacy decision-support technology still widely in use today.

With this new approach to operations planning, decision-makers receive detailed, expert guidance on the actions that have the greatest impact on costs and service. For successful adopters, operations planning technology is a cornerstone of Operations Excellence, because it has proven itself to be uniquely capable of providing answers to the challenges created by today's business environment.

Better operations planning is consistently rational.
Supported by powerful technology, better operations planning finds, among many candidates, the better alternative. The technology is designed to simultaneously comprehend customer service, cost, and capacity issues in large-scale operations environments. It is built from the ground up to address the tradeoffs, the domino and ripple effects that pervade operations planning. The output is "actionable" plans -- plans that can be successfully implemented to achieve desired results.

Better operations planning is flexible.
The only constant in today's world is change. Better operations planning and its supporting technology are engineered around a "plan to replan" mentality. Planning is performed frequently to respond to change. Moreover, the decision support technology is designed to be run frequently and to respond flexibly to changes in the operating environment.

An example is flexible deployment, a leading-edge concept that makes the best use of current finished goods inventory. Operations planners employ powerful software tools to determine how finished-goods inventories should be optimally deployed day-to-day to fill immediate customer orders, maintain inventory targets, and minimize operating costs. This operating philosophy allows companies to rescue service at the last minute by exploiting their last chance to make things right with customers. Flexible deployment means you do the best you can now with what you have, because you have the planning intelligence to manage supply/demand mismatches, "turn on a dime" in response to the latest information, and create new plans daily with precision.

Better operations planning is productive.
Operations Excellence is found in the details. Therefore, leading-edge operations planning technology is precise. It comprehends detailed requirements and creates specific, daily plans that are ready for immediate implementation.

This focus on precision and details is important, because one of the increasingly scarce assets in today's operations planning world is operations planners. With corporate downsizing, there are fewer people available to perform increasingly important and complex tasks. It is imperative that we automate whatever we can, so that operations planners can manage rather than fight fires. Today's decision support technology handles many of the details that traditionally required human intervention, thereby allowing operations planners to concentrate on management. Without such technology, the challenges of the current business climate will keep critical human resources fighting ever more fires while being consumed in the details of an increasingly complex environment.

"Win/Win" Results
A moment's reflection makes one fully understand why Operations Excellence is such a challenge. Typically, superior customer service and lower operating costs cannot be attained simultaneously. Higher service levels, for instance, commonly require more inventory or premium freight costs. This inherent service/cost tradeoff goes a long way towards explaining why Operations Excellence has been notoriously difficult to achieve.

This tradeoff holds if one strives for Operations Excellence within traditional operations planning frameworks that are not supported by leading-edge operations planning technology. Within a traditional framework you can achieve better service with increased costs, or lower costs with lower service, but you cannot achieve "win/win" levels of improvement along both dimensions simultaneously, no matter how much time, energy, and money is expended.

However, with superior operations planning, there is consistent evidence that companies can achieve significant improvements in service and cost simultaneously. There is, in essence, a paradigm shift that allows significantly higher levels of service and cost to be achieved.

A case in point is a major food and beverage company that has adopted leading-edge operations planning technology. The company faces a chronic operations challenge during the summer holiday season: demand peaks to a level that is beyond the company's manufacturing capacity, so product must be manufactured and inventoried before the peak season. However, there is limited storage capacity for storing pre-season inventory, and there is also a significant financial incentive to carry as little finished goods inventory as possible.

After implementing leading-edge decision support technology, case fill rates for the company improved to over 99 percent while finished goods inventories decreased by over 20 percent. Perhaps more impressive is the fact that the sales organization felt compelled to write a letter to operations, congratulating them on their unprecedented success in having product available to fill customer orders during the peak summer season. The world can certainly use more of these good-will gestures between sales and operations organizations!

Adding Real Value to Products
The product-plus challenge, a crossroads event in business, has substantial implications. It creates truly difficult operations problems, and its challenges are not going away any time soon. But good companies have always turned difficulties into opportunities. With the product-plus challenge, competitive advantage can be derived by those companies achieving unprecedented levels of Operations Excellence. And a critical factor in Operations Excellence is superior operations planning supported by leading-edge decision-support technology. You now have the means to add real value to your products.

About the Author
Dr. Paul T. Chapman
Vice President, Technology Development
i2 Technologies, Inc.

Dr. Chapman specializes in the application of decision support systems to managing supply chains. He has fifteen years of experience in supply-chain consulting and twenty years experience in commercial software development.