Article

Five New Year's Resolutions to Shape Up Supply Chains

Businesses haven't got much to cheer about this holiday season. But they can take steps to roll back inefficiencies and capture savings.

By Miles Cook, Philippe Hauguel, and Roman Zeller

First published on diciembre 15, 2001
min read


Businesses seeking cheer this season should look to untapped value in their supply chains. Independent research shows the average company spends almost 10% on its supply chains-the sequence of activities that bring materials to manufacturers, take finished goods to retailers and move inventory onto shelves. And that's more than twice the outlay of the top supply-chain performers. To roll back inefficiencies and capture savings, company leaders should consider the following five New Year's resolutions: 1. Count the cost of inefficiency Failing to track performance fully means having little idea how much your supply-chain inefficiencies really cost. A Bain & Company survey of 300 global companies finds that 68% of managers think they have failed to optimize their supply chain savings. Yet 44% admit they have, at best, only basic information on their supply chains, and some have little or no supply-chain data. One large retailer we know had primarily tracked its out-of-stock rates. Within months of starting to log inventory turns, vendor performance, cash conversion cycles, and other indicators, the retailer was able to cut inventories substantially. The best performers—companies such as Wal-Mart, Ford Motor, and Dell Computer—quantify key performance indicators for their supply chains, setting targets that push them toward best-in-class status. And they report rapid payback—often in a matter of weeks. That payoff can be impressive. Dell keeps less than five days of inventory, compared to almost five times that at Compaq Computer, and that's not counting product held by Compaq's resellers. One result: Dell gets at least a five percent cost advantage from buying parts later, since prices of many of those parts fall steadily as technology improves. 2. Make supply chain a talent center Top supply chain managers also quantify the benefits of what they're doing in order to encourage their employees, build momentum, and attract resources for the supply-chain cause—including top talent. The top practitioners invest in three staffing areas: Individual talent levels. Supply chain isn't always seen as a glamorous area for an organization's stars. But the supply-chain maestros spend extra for A-level talent who can save them millions with better forecasts, vendor strategies, and execution. A global supply-chain director at Cisco Systems explains, "By putting our best talent into supply-chain leadership, we get the best results." Ford's new chief operating officer, Nick Scheele, once held senior purchasing positions. Executive-level leadership. The best companies appoint a supply-chain executive reporting to the CEO, and charged with developing end-to-end strategy, structure, metrics, incentives, and processes for the entire supply chain. Cross-functional alignment. The top performers work to align many departments-finance and marketing included. At one leading electronics retailer, line managers interact daily or weekly across logistics, merchandising, and other functions. 3. Link rewards to the right metrics In Bain's survey, barely 25% of managers link incentives for supply-chain personnel to supply-chain performance. Of those, almost all use only a few gauges, and few have rewards linked to performance outside the company, such as on-time deliveries from suppliers. Bain's consultants often find the wrong goals are in place. We have met buyers who get rewards for managing stockouts but not inventory turns, and senior supply-chain executives with no incentives against return on assets or cash conversion cycles. Pay is no substitute for clear metrics and goals, but once the right goals and metrics are in place, the right pay structure is critical to reinforce them. Incentives for executives need to lean towards enterprise-wide supply-chain metrics. For line managers, individual results are more important, but rewards for collaborating across functions count, too. Many high-performing companies also compensate staff who interact with suppliers and channel partners based on the success or failure of those third parties. 4. Put thought before technology Senior managers sometimes ask: "What software should we use to match the world-class players?" That's meaningless if, as in one real situation, the sales forecast is off by 50%, suppliers are late 40% of the time, and inventory reports are 10% inaccurate. These days, businesses are committing 10 cents of every IT dollar to supply-chain management software initiatives, hoping to shrink their warehouses, streamline logistics, sharpen forecasts, and pummel costs. Such spending is growing over 20% per year. Unfortunately, technology by itself is not the answer. Supply-chain software foul-ups have hurt some robust companies: in 1999, Whirlpool experienced big delays in appliance shipments; that same year, technology glitches at Hershey kept its candy off shelves at the worst possible time: Halloween. (The confectioner's board slashed top officers' bonuses a few months later.) Dell and Wal-Mart are avid users of IT, certainly, but their software doesn't differentiate their cost position. That distinction goes to their business processes, which harness technology. Moreover, research finds 80% of a company's supply-chain challenges can be met without new IT investments. 5. Look outside your four walls Few businesses are good at sharing information up the chain with their suppliers and down the chain with their distribution channels. When we surveyed three industry sectors-retail, manufacturing, and technology—we found that more than half fail to collaborate outside the company on areas as critical as production planning. Our study shows almost 80% of companies' efforts focus inside their own four walls. How can a supplier fine-tune its production schedules for the customer's benefit if the customer won't share detail on its own forecasts? An example of how sharing brings benefits: a large electronics manufacturer allocates more of a scarce product to the distributors that share timely sales and forecast data. Top performers also find benefits in actively managing the demand end of the supply chain. Instead of using the typical intuitive approach to allocate product space, retailers, for example, can use new analytical tools that reveal in real time what items move and move profitably, and then assign space and set inventory based on product attractiveness. One retailer found that a more systematic allocation of space offered the potential for as much as a 20% reduction in store inventory, while improving service levels to the customer. So are there reasons for cheer in 2002? Absolutely. But few can afford to renege on their resolutions when supply chains worldwide still lock up billions of dollars of shareholder value. Wall Street already distinguishes between the businesses that view supply chains strategically and those that don't. Just ask Dell, still riding high above the S&P500. Miles Cook and Roman Zeller co-direct Bain & Company's Supply Chain Management practice from Atlanta and Munich respectively. Philippe Hauguel leads Bain's European Technology& Telecom practice from the Paris office.

Businesses seeking cheer this season should look to untapped value in their supply chains.

Independent research shows the average company spends almost 10% on its supply chains-the sequence of activities that bring materials to manufacturers, take finished goods to retailers and move inventory onto shelves. And that's more than twice the outlay of the top supply-chain performers. To roll back inefficiencies and capture savings, company leaders should consider the following five New Year's resolutions:

1. Count the cost of inefficiency
Failing to track performance fully means having little idea how much your supply-chain inefficiencies really cost. A Bain & Company survey of 300 global companies finds that 68% of managers think they have failed to optimize their supply chain savings. Yet 44% admit they have, at best, only basic information on their supply chains, and some have little or no supply-chain data.

Loyalty Leader 5 year revenue growth

One large retailer we know had primarily tracked its out-of-stock rates. Within months of starting to log inventory turns, vendor performance, cash conversion cycles, and other indicators, the retailer was able to cut inventories substantially.

The best performers—companies such as Wal-Mart, Ford Motor, and Dell Computer—quantify key performance indicators for their supply chains, setting targets that push them toward best-in-class status. And they report rapid payback—often in a matter of weeks. That payoff can be impressive. Dell keeps less than five days of inventory, compared to almost five times that at Compaq Computer, and that's not counting product held by Compaq's resellers. One result: Dell gets at least a five percent cost advantage from buying parts later, since prices of many of those parts fall steadily as technology improves.

2. Make supply chain a talent center
Top supply chain managers also quantify the benefits of what they're doing in order to encourage their employees, build momentum, and attract resources for the supply-chain cause—including top talent. The top practitioners invest in three staffing areas:

Individual talent levels. Supply chain isn't always seen as a glamorous area for an organization's stars. But the supply-chain maestros spend extra for A-level talent who can save them millions with better forecasts, vendor strategies, and execution. A global supply-chain director at Cisco Systems explains, "By putting our best talent into supply-chain leadership, we get the best results." Ford's new chief operating officer, Nick Scheele, once held senior purchasing positions.
Executive-level leadership. The best companies appoint a supply-chain executive reporting to the CEO, and charged with developing end-to-end strategy, structure, metrics, incentives, and processes for the entire supply chain.
Cross-functional alignment. The top performers work to align many departments-finance and marketing included. At one leading electronics retailer, line managers interact daily or weekly across logistics, merchandising, and other functions.

3. Link rewards to the right metrics
In Bain's survey, barely 25% of managers link incentives for supply-chain personnel to supply-chain performance. Of those, almost all use only a few gauges, and few have rewards linked to performance outside the company, such as on-time deliveries from suppliers. Bain's consultants often find the wrong goals are in place. We have met buyers who get rewards for managing stockouts but not inventory turns, and senior supply-chain executives with no incentives against return on assets or cash conversion cycles. Pay is no substitute for clear metrics and goals, but once the right goals and metrics are in place, the right pay structure is critical to reinforce them.

Incentives for executives need to lean towards enterprise-wide supply-chain metrics. For line managers, individual results are more important, but rewards for collaborating across functions count, too. Many high-performing companies also compensate staff who interact with suppliers and channel partners based on the success or failure of those third parties.

4. Put thought before technology
Senior managers sometimes ask: "What software should we use to match the world-class players?" That's meaningless if, as in one real situation, the sales forecast is off by 50%, suppliers are late 40% of the time, and inventory reports are 10% inaccurate.

These days, businesses are committing 10 cents of every IT dollar to supply-chain management software initiatives, hoping to shrink their warehouses, streamline logistics, sharpen forecasts, and pummel costs. Such spending is growing over 20% per year.

Unfortunately, technology by itself is not the answer. Supply-chain software foul-ups have hurt some robust companies: in 1999, Whirlpool experienced big delays in appliance shipments; that same year, technology glitches at Hershey kept its candy off shelves at the worst possible time: Halloween. (The confectioner's board slashed top officers' bonuses a few months later.)

Dell and Wal-Mart are avid users of IT, certainly, but their software doesn't differentiate their cost position. That distinction goes to their business processes, which harness technology. Moreover, research finds 80% of a company's supply-chain challenges can be met without new IT investments.

5. Look outside your four walls
Few businesses are good at sharing information up the chain with their suppliers and down the chain with their distribution channels. When we surveyed three industry sectors-retail, manufacturing, and technology—we found that more than half fail to collaborate outside the company on areas as critical as production planning. Our study shows almost 80% of companies' efforts focus inside their own four walls. How can a supplier fine-tune its production schedules for the customer's benefit if the customer won't share detail on its own forecasts?

An example of how sharing brings benefits: a large electronics manufacturer allocates more of a scarce product to the distributors that share timely sales and forecast data.

Top performers also find benefits in actively managing the demand end of the supply chain. Instead of using the typical intuitive approach to allocate product space, retailers, for example, can use new analytical tools that reveal in real time what items move and move profitably, and then assign space and set inventory based on product attractiveness. One retailer found that a more systematic allocation of space offered the potential for as much as a 20% reduction in store inventory, while improving service levels to the customer.

So are there reasons for cheer in 2002? Absolutely. But few can afford to renege on their resolutions when supply chains worldwide still lock up billions of dollars of shareholder value. Wall Street already distinguishes between the businesses that view supply chains strategically and those that don't. Just ask Dell, still riding high above the S&P500.

Miles Cook and Roman Zeller co-direct Bain & Company's Supply Chain Management practice from Atlanta and Munich respectively. Philippe Hauguel leads Bain's European Technology& Telecom practice from the Paris office.