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Supply chain transformation can lead to new revenue streams

For most companies the supply chain is a necessary expenditure to get their products reliably to their customers. Once the primary goal of service to the customer is met, focus tends to shift to the cost of the supply chain. Which is why it is not surprising that XAct Solutions is usually engaged to assist in making supply chains more cost effective.

However, there are companies where the normal rules don’t necessarily apply. These are the companies that have the opportunity to turn things on its head. These businesses instead look at their supply chain as a source of new business opportunities – in effect turning a cost centre into a profit centre. If supply chain management is done well, there can even be an opportunity to add real value to the customer relationship.

What qualifies a company to look at their supply chain in this way?

The first qualification is that the company in question has a business need for a supply chain of considerable scale and complexity in their own right. Examples of this can be a company that supplies its products in large volumes to a very large number of customers directly or a company that supplies a very large number of different products (Stock Keeping Units). Scale and complexity provide a basis to start looking at the supply chain as something more than a business requirement. With sufficient scale and complexity we can consider if the supply chain can become the product.

Business considerations

  • There are a number of fundamental questions that need to be considered before a company can develop its supply chain capability into a new business opportunity.
  • To what extent does the supply chain provide a competitive advantage to the owner?
  • What in-house capabilities are required to turn the supply chain into a business?
  • Are there any natural partners who can bring capability or further scale?
  • Should competitors be able to access the new supply chain business?
  • What processes and systems are required to create synergy between the owner of the supply chain and the new customers?
  • How does the Return on Investment (RoI) of the new supply chain business compare with the core business?

What are examples of commercialised supply chains?

The Bevchain joint venture between Lion Nathan and Linfox, originally sought to use the large scale in terms of volume and customer base that Lion Nathan had in the beer market to develop a new distribution business.

Lion looked to their joint venture partner Linfox to provide the logistics management capability while Lion’s main contribution was the volume and customer base. In order to increase the volume distributed by Bevchain, the model was opened up to other beverage companies.

The Bevchain joint venture facilitated the joint use of distribution centre and transport assets across multiple beverage companies thereby delivering a lower overall fixed cost. Another important efficiency and customer service opportunity could come from combined deliveries across multiple beverage suppliers into pubs, bottle shops and restaurants. This could significantly reduce kilometres and, importantly, driver hours, one of the biggest cost drivers in route delivery, and would also provide efficiency opportunities for the end-customer in terms of receiving time and costs. In order to achieve this there would need to be effective cross company coordination to align order delivery days and times. However, in the Bevchain set up, customer order management, including the determination of delivery days and times remained with the individual beverage companies using the service, making it difficult to achieve the full potential efficiency gains.

In 2017, Lion sold its 50% share to Linfox, announcing that it wanted to focus on its core beer business. Linfox on the other hand, believes it will be better able to attract other beverage customers now that it is independent from Lion. As is often the case, synergy and competition are as important as scale and capability when considering partnerships of this nature.

Another example is Woolworths’ Primary Freight business. In 2004, Woolworths decided to develop a transport business as part of their major supply chain transformation program known as “Mercury”.

This new business offered in-bound transport services to its suppliers and in competition with 3rd party logistics providers. Most of the actual transport capability is provided by 3rd party logistics providers, but Woolworths has always maintained firm control over the planning of the deliveries, facilitating a major improvement in efficiency compared to each supplier organising their own transport. This improved planning of in-bound transport has been crucial for the success of Woolworths Primary Freight.

On a weekly basis this means that there are thousands fewer trucks arriving at Woolworths distribution centres, saving transport costs as well as receiving labour and reducing waiting times. The efficiency was further improved by using some store delivery fleet vehicles to pick up from suppliers. All this allows Woolworths to charge a very competitive freight cost to its suppliers while also making a profit that helps subsidise its overall supply chain cost.

In conclusion, commercialisation of the supply chain is not for every company and there are many potential pitfalls, however there are also great potential upsides if your business has sufficient scale and complexity – and the boldness to look at new strategic options!

Several of the senior team at XAct have direct experience of initiatives such as those listed above, and can help you navigate the options. If you are interested in exploring potential further, please get in touch.

Eric Willemse is a Director with XAct Solutions. He was responsible for the development of Woolworths Primary Freight business, turning it into one of the most successful in-bound freight businesses of any grocery retailer in the world.