Why are manufacturers and retailers more efficient than services companies?

The former win or die based on the efficiency of their supply chains

Supplychain

Photo: raffacama (Some rights reserved)

1. We can divide all industries into two broad categories

An executive friend of mine (who I will not name for reasons that will soon become clear) recently moved from a global energy company to a global services company. This executive was shocked that the services company's operations and procurement processes lack focus and are very ad-hoc. This lack of operational (and procurement) focus is in stark contrast to the executive's previous experience at the energy company.

This prompted a great discussion that I think is worth sharing with you.

Have you noticed that the car industry, large shopping centres, and transport companies have incredibly sophisticated operational (and procurement) processes, but global services companies often do not? This is because all industries can be split into one of two groups:

  • organisations that either win or die based on the efficiency of their supply chains; and
  • organisations that do not, and therefore focus (hopefully relentlessly) on the cost and quality of their people and technology.

Table 1 - Cost and efficiency focus by industry
Industry (NAICS designation) [1] Industry type (NAICS designation) [2] Focus
Natural Resources and Mining Goods producing Supply chain
Construction Goods producing Supply chain
Manufacturing Goods producing Supply chain
Trade, Transportation, and Utilities Service providing Supply chain
Information Service providing People and technology
Financial Activities Service providing People and technology
Professional and Business Services Service providing People and technology
Education and Health Services Service providing People and technology
Leisure and Hospitality Service providing People and technology
Other Services (except Public Administration) Service providing People and technology

2. Organisations with a supply chain focus are usually incredibly sophisticated

The car industry is famous for the sophistication of its supply chain and procurement methodologies. But the car industry is not alone – all organisations in industries, that live or die based on the efficiency of their supply chains, only survive if they have world class operations, and world class procurement functions.

That is why companies that focus on supply chains constantly and continuously improve their operations and procurement processes. These companies relentlessly focus on reducing their supply chain costs and increasing their supply chain efficiency.

And the process often begins when a CEO (or CFO or COO) tells her 2IC to reduce the company's supply chain costs by 10% while (of course) increasing operational efficiencies.

Then the fun begins.

3. Organisations with a people and technology focus are often not quite so sophisticated

This is why executives (such as my friend) are surprised when they move from companies in industries that are supply chain focused to companies in industries that are not (i.e. when they move to companies in industries that are instead focused on improving their processes in relation to people and technology). These executives are surprised by their new company's (often total) lack of operational and procurement sophistication.

Therefore, if our business is in an industry that does not live or die based on supply chain efficiencies, then our business will tend to have much less sophisticated operations and procurement groups (and processes) than businesses in industries that do win or die based on the efficiency of their supply chains.

And focusing on people and technology (rather than the supply chain) requires a nuanced industry and company specific approach. There is something to be said for the simplicity of simply being required to squeeze supply chains. Even if the process of actually squeezing these supply chains is extremely hard to do well.

4. How to build your business

So my friend's task is to build world-class operational and procurement processes for a business, that is in an industry, that does not win or die based on the efficiency of its supply chains.

And while all companies are (obviously) different, we can use one (or more) of the innumerable established business process improvement methodologies when we focus on improving supply chains.

But industries that instead focus on improvements in relation to their people and technology (and do not win or die based on the efficiency of their supply chains) require a different approach. And possibly (and definitely arguably) a more nuanced approach.

"So it's easy." I said. And the executive laughed.


Footnotes

[1] North American Industry Classification System (NAICS) industries and industry groups listed on the the United States Bureau of Labor Statistics website.

[2] Ibid.

This post originally appeared at iainmclaren.com. These opinions are mine. They are not necessarily those of my employer.