First among Equals: Marketing or Supply chain

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For any company involved in manufacturing and selling of tangible products, both marketing and supply chain forms an essential aspect of business.

A good marketing strategy involves the correct product placement, branding, promotions, advertising etc. Without such initiatives the product may not appeal or become known to the target segment. So it is natural for companies to allocate millions of dollars towards marketing budget every year. The attempt is to increase the share of mind for the product among the customers, which would subsequently lead to increase in demand thereby increasing the probability of sales. The success of the marketing strategy depends on the quality and precision with which it has been executed. In most cases, companies are able to incite curiosity and interest in the minds of the customer as a result of well-conceived marketing campaigns. For example, the most recent edition of the Indian Premier League (IPL) was all about new brands of mobile handsets like Vivo and Oppo. BMW’s association with Mission Impossible movies is another instance of such a high investment product placement. Choosing widely recognised personalities and celebrities as brand ambassadors is another strategy that companies rely on from time to time. So marketing is in a big way associated with creating the desired perception in the market about the product. In short, marketing can be anything and everything that tries to make the product desirable to the outside world.

Supply chain, on the other hand is everything associated with making the product available to the market- making the right product available at the right place and at the right time for a customer to buy it. The aim is to never turn away a customer empty handed or dissatisfied due to product unavailability or long waiting times. Raw material suppliers, the manufacturing plant, the distribution network, the retailers all form essential cogs of the supply chain; they add value and play their part in making the product available to the customer.

While there is no doubt that both marketing and supply chain play vital roles, companies tend to have completely opposing attitudes towards the two. While companies invest a lot of money to develop marketing strategies, to run marketing campaigns and to build a brand, they feel the only way supply chain can help in increasing profits is if it becomes more efficient and lean. So each node of the supply chain works to achieve its local optima, i.e take decisions that lower cost. Unfortunately, measures that companies tend to adopt to cut supply chain costs also weaken it. Consequently, while marketing strategies tend to increase mind share and subsequently demand, the tendency to control costs leads to actions that can widen the gap between supply and demand!

A few steps taken by the company to reduce supply chain costs and their negative ramifications are listed below-

a) Deciding a Minimum batch size – Manufacturing department takes a decision to increase/maintain a minimum batch size in manufacturing or plans for long campaign cycles in production. This reduces setups and increases production, thereby reducing unit cost of manufacturing. However, as a result of such batching decisions, pulling ahead or pushing back of similar orders is done (so that a reasonable batch size for production is formed). This leads to production of goods which are not immediately required while those in immediate demand are delayed.

b) Reducing raw material costs – Renegotiation of prices with suppliers, looking for cheaper suppliers are steps companies take to reduce raw material costs. However, suppliers are also in the business of making money, so they resort to actions like using inferior quality products and giving supply preference to other customers who are providing better margins etc. So such actions can jeopardize the timely availability of quality raw material supplies to companies.

c) Deciding a cap on inventory – In order to reduce inventory holding costs, companies sometimes put a cap on target inventory to be held at various stocking locations. But because of such a cap, even products, which are selling in good numbers and are immediately required in the market, do not reach the required locations on time, thereby causing sales loss for companies.

d) Reduction in distribution costs – Reduction in logistics or distribution costs is another need of companies. Logistics teams take batching decisions to fill up trucks to their maximum capacity and to prevent frequent dispatches. This definitely reduces transportation costs. However, because of this, from time to time, products which are in high demand in the market reach the desired location late thereby leading to sales loss for companies.

So these steps, that logically seem to increase profits when viewed on their own, actually have disastrous effects when viewed in totality. (This is where I realise that the fundamentals of business strategy taught in B-schools are extremely flawed; increasing sales and controlling costs are taught as two separate strategies that tend to affect the bottom line in a positive way independently but in reality both are connected.)
As a consequence of such short sighted decisions companies have misaligned supply chains. And, even if the company successfully increases demand, this will not bear as big a fruit as desired. When products are unavailable, it can create a bad image for the company in some cases, and if the customer is not very loyal, can instead end up being beneficial for the competitors!

Here’s an example. Imagine that X, a company that makes Air conditioners (AC), launches a huge marketing campaign to boost sales that have been stagnant in the last two-quarters. The campaign uses a prominent movie star as the brand ambassador. After launch, the campaign manages to create a buzz in the market. Demand shoots up. Each retail outlet that sells air conditioners begins to get enquiries for this particular brand of AC. Project companies place bulk orders for upcoming projects. Things start looking up from the demand point of view. But wait, this was just the demand side of the story. From the supply side, the focus is on reducing the overall cost of the supply chain. The company takes some or all of the steps mentioned above to reduce their supply chain costs. Soon, the company starts realising that the particular models of ACs which are in high demand are frequently stocked out in all of the stocking locations of the company- at the branch warehouses, at the distributors and at the retail outlets. On the other hand, in the same locations, there are models whose stock is present in plenty but not getting sold, thus blocking the capital of the distributor and preventing him from placing further orders of the high selling models. Customers are flocking the retail outlets trying to catch hold of this brand but the model they want to buy is nowhere to be found. They get disappointed and switchover to some other brand which has a decent availability. They tell friends and relatives – potential customers – about how X’s products are unavailable. Also, the bulk project orders are all mostly delayed. Now, customers are threatening to cancel the orders. So finally, even though there was a significant demand jump in the market after the hugely successful marketing campaign, the sales jump was nowhere close to expectation.

The paradigm shift that companies need to undergo in their thinking and decision making is to acknowledge that supply chain is an enabler to increase sales. (It is interesting to note that many companies and brands like Starbucks, 7/11 and Haldiram’s have successfully generated demand with local, minimal or no marketing/ advertising by just focussing on the supply chain). So companies striving to grow and compete in the market should first put in place a supply chain that is flexible enough to adjust itself to changing market demand and dynamics in such a way that sales loss for the company can be prevented and all reasonable sales opportunities can be catered to. Only once that stage is reached, should the company focus on demand generation initiatives.

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