Optimizing Value Added Services

Building Sustainable Growth Strategies Through Innovation

Overview and Need

The supply chain has been in a state of flux since the introduction of Just in Time (JIT) principles in the 1980s. JIT put the customer in charge of the supply chain allowing them to drive all activity. This created a greater dependency on the distributor since the supplier’s fixed resources had difficulty responding in a JIT fashion and at attractive prices simultaneously. The distributor soon had to carry larger inventories as supplier lead times lengthened.
The customer wanted more, however. Product differentiation became the next pressure point. The customer wanted new, improved versions of what they bought (innovation) or wanted a wider selection (differentiation). As suppliers struggled to respond, the distributor came under pressure from suppliers to quickly move these new products up the Product Lifecycle (from introduction, to growth, to maturity) so they could again capture economies scale.

Value Add Services

Distributors rapidly started adopting new services to please a demanding customer base. In addition to inventory services like Vendor Managed Inventory (VMI), Integrated Supply (I/S), repair, design, insurance, engineering services, enhanced transportation, programming, and value add manufacturing were only a few of the offerings. Blending these services and others will prove to be most significant. New distribution models will and are emerging. Understanding how to grow, manage, and sustain profitability and return on investment will prove challenging under the new models.

Small and large distributors were working on new value add activities. Some focused on highly technical engineered projects where distributor expertise could be applied to achieve more efficient operations or more innovative solutions. Others reached deeper into the customer with more advanced supply chain services.

Distribution services seem limited only by imagination and cost. The former distributors have in abundance. The latter is more restrictive. Distributors have always been effective in shifting working capital between different forms of inventory. Shifting between assets (inventory) and expenses (services) is clearly more complicated.

Distributors need to reorganize and focus on a different set of goals and metrics. These strategies need to be defined, classified, and tied to shareholder value. Best practices need to be identified and codified. New ideas need to measured and compared across customers and channels to capture innovation.

The proliferation of services has taken distributors into areas beyond their core competencies, however. How can a distribution firm be a part time manufacturer and part time service firm (repair, insurance, design, VMI, I/S) and remain efficient? Many distributors have started investigating manufacturing efficiency models and consulting techniques to understand how to optimize these value-adding services.

The distributor is treading into the customer’s space (something manufacturers rarely do) and into the manufacturer’s space at the same time. Many realize they could end up fighting or competing with their suppliers and lose more than just efficiency. Value added services needs to be studied from a customer standpoint of what services are needed, who should provide them, and what the return on investment should be to the distributor. Further, the relationship with suppliers and how the supply chain will function with these services in place needs to be addressed. Finally, the distributor needs to know how to optimally sell, deploy, measure, and control these investments.

Objectives

The key objective of this consortium is to bring cutting edge distributors and their partners to study and develop:

  • A comprehensive documentation of potential value add services distributors from different channels are offering.
  • Process mapping for those services as they operate under common, good, and best practices.
  • A descriptive analysis of the different levels of practice and their potential impact on shareholder value and customer service.
  • Effective measurement techniques for value add service processes.
  • Processes to best determine what value add services the Customer wants. Customer Surveys? Sales Force Feedback? etc.
  • Processes to develop business plans for launching new value add services. Required investment, format, and methodology.
  • Innovation, best processes to produce something truly revolutionary.
  • A value proposition analysis of the services to determine their impact on customer and supplier financial success.
  • An assessment tool for value added services performance.
  • Solution Approach

    The research methodology will be to:

  • Conduct consortium meetings to bring together researchers and consortium members to discuss value add service trends and customer expectations.
  • Process mapping of consortium members’ value add service processes to document current practice.
  • Investigate best practices in existing research and through interviews with firms recognized for expertise in these services. This process would include investigating specialists that may not be distributors. Solution Approach Objectives3 Established techniques in six sigma, lean, and other best practice arenas will be tested and adapted for use in distribution environments.
  • Determine the impact on ROI in moving from one level of best practice to another on identified service areas.
  • Developing value proposition analytics for justifying distributor services to customers and suppliers.
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    Methodology

    A research team from Texas A&M University will analyze growth opportunities with consortium members to determine how to optimize ROI in value add services. Supply Chain impacting factors will be included in the analysis along with best practices in Supply Chain Management to determine the ROI impact of differing strategies.

    The consortium meetings will provide an opportunity to discuss initial findings from the various cases. These meetings will also allow for a discussion regarding the key benefits of growth opportunities, supply chain best practices, and technology solutions and how these benefits can be quantitatively assessed and monetized. The implications for these benefits on ROI will also be discussed.

    Value to Members

    Consortium members will be able to guide the research study and specify which alternatives, best practices, technologies, and services are of interest to them. These studies will focus on return on investment for the firm on a specified timeframe.

  • Each member will have their value add services process mapped and codified.
  • Each member will receive an assessment of their status on common, good, and best practices. Improvement and growth recommendations will be made based on ROI.
  • Each member will receive the comprehensive report on best practices along with analysis as to which practices could present growth opportunities if adopted.
  • Each member will receive a value proposition analysis for customers and/or suppliers (as relevant) on existing and potential value add service offerings.
  • All tools (calculators, process mapping, value proposition builders) will be turned over to consortium members with instructions on their future use taken from examples in the study.
  • For more information or to Join the Research Consortium please contact:

    F. Barry Lawrence, Ph.D.
    Leonard and Valerie Bruce Leadership Chair
    Professor in Industrial Distribution,
    Program Coordinator, Industrial Distribution Program,
    Director, Thomas & Joan Read Center for
    Distribution Research and Education,
    Director, Global Supply Chain Laboratory

    3367 TAMU, Texas A&M University
    College Station, TX 77843-3367
    Office : (979) 845-1463
    Mobile : (979) 574-4178
    Fax : (979) 845-4980
    E-Mail : barry.lawrence@tamu.edu