John Gattorna: ‘The most successful supply chain approach is outside-in’

An outside-in approach is essential for an effective supply chain, according to John Gattorna. The Australian supply chain management expert and author of various respected books spoke during a webinar organized exclusively for members of the Supply Chain Excellence Leadership Platform (SCELP) in late 2018. One of his key messages was that supply chain managers need to better understand customer expectations and align their strategy accordingly. How? By segmenting both customers and suppliers based on various archetypes.

An outside-in approach starts with market segmentation: a crucial and complex exercise that revolves around customer expectations. Gattorna: “Conventional market segmentation methods are absolutely useless for designing supply chains. Customer surveys such as the Net Promoter Score (NPS) only measure customer opinions and feelings at a certain point in time. In our supply chains, we have to get right down to the bottom of what customers’ ongoing expectations are.”

Companies that want to gain a thorough understanding of the market will have to force their customers to explicitly make the inevitable trade-offs. “Otherwise they will say they want everything. We can support the research into these trade-offs with analytics, such as order and demand patterns. Some customers might be looking for long-term relationships and predictability, while others will prefer cost-effectiveness or quick response,” said Gattorna, who is a global thought leader in supply chain management.

Archetypes

“Over the past decades we’ve been led to believe that we only need one supply chain for all our customers, but ‘one size doesn’t fit all’,” he continued. According to Gattorna, customers can be classified based on sixteen different archetypes, although in practice that can generally be reduced to just four, each of which require a different supply chain setup: a collaborative supply chain, a lean supply chain, an agile supply chain or a fully flexible supply chain. Between them, these four archetypes cover approximately 80 percent of the market, he said.

Once this has been defined, the company can develop various value propositions supported by relevant supply chain strategies and then design its supply chains so that they optimally meet the needs of the different customer types. Gattorna likened it to having conveyor belts running horizontally through the business, from front to back. “At the front end we have customers that maybe want the same product. But one customer is willing to pay the full price for the genuine article with the full options, whereas another customer would rather have a cheaper version without the logo and the packaging and so on. The conveyor belts are running in parallel, but at different speeds.”

Customer archetype can change

The matter is complicated by the fact that customer behaviour can alter over time, which changes their archetype. A customer that is generally very loyal can be forced to choose the lowest-cost solution without all the extras in the case of an emergency situation. Gattorna estimated around 30 to 40 percent of the business to be regular and predictable. In other words, the segmentation of the market based on the different archetypes is not static and will therefore need to be reviewed regularly.

Gattorna’s vision is well aligned with the approach that has been developed within SCELP over recent years: an effective supply chain is derived from customer needs, and the supply chain is designed horizontally around those needs. However, the fact that many companies are still structured vertically around functions such as purchasing, production and sales is preventing the implementation of this approach, explained Gattorna: “The vertical functions with the biggest budgets tend to win, which makes it difficult to get the horizontal flows working cross-functionally.” In his view, segmentation offers a solution to this challenge. “Segmentation enables us to take the necessary measures to drive the horizontal flows of the supply chain while keeping the verticals all the time.”

Supplier segmentation

Gattorna added that, ideally, companies should not only segment their customers but also their suppliers, and that there can be significant differences between the inbound and outbound supply chains. Combining the customer archetypes and supplier archetypes provides a clear starting point for supply chain design. Three combinations are most common: lean on the back end, lean on the front end; lean on the back end, agile on the front end; and lean on the back end, collaborative on the front end.

According to Prof Dr Jack van der Veen, professor of supply chain management at Nyenrode Business Universiteit and one of the co-founders of SCELP, Gattorna’s presentation confirmed 90 percent of the insights gained by the platform for supply chain professionals in recent years. Based on those insights, SCELP has developed various tools that help companies to make the right trade-offs from the outside-in, both internally and throughout the entire supply chain including customers and suppliers. “Gattorna’s presentation once again underlines the importance of what we’re developing within SCELP,” stated Van der Veen.