Article

Shaping up Your Supply Chain

By Miles Cook, Philippe Hauguel and Roman Zeller

Published on March 01, 2002
min read


Independent research reveals that the average company spends nearly 10% on its supply chain-the sequence of activities that bring materials to manufacturers, take finished goods to retailers, and move inventory onto shelves. Ironically, this is more than twice what top supply chain performers spend. To banish inefficiencies company leaders should abide by the following 5 guidelines. 1. Count the cost of inefficiency According to a Bain & Company survey of 300 global companies, 68% of managers think they have failed to optimise their supply chain savings. The ones who do-Wal-Mart, Ford Motor, Dell Computer-all quantify performance indicators for their supply chains by setting targets that push them toward best-in-class status. And they report impressive payback, often in a matter of weeks. Dell keeps less than 5 days of inventory, compared to almost 5 times that of Compaq Computer, and enjoys a 5% cost advantage from buying parts later, since prices of these parts fall steadily as technology improves. 2. Make supply chain a talent centre Top supply chain managers quantify the benefits of what they are doing in order to encourage their employees, build momentum, and attract top talent to the supply chain cause. Top performers invest in 3 staffing areas: Individual talent levels: by spending more for top level talent who can save them millions with better forecasts, vendor strategies, and execution. Executive level leadership: by appointing a supply chain executive, reporting to the CEO, to develop end-to-end strategy, structure, metrics, and processes for the entire supply chain. Cross-functional alignment: by aligning many departments, finance and marketing included. At one leading electronics retailer, line managers interact daily across logistics, merchandising and other functions. 3. Link rewards to the right metrics Barely 25% of managers surveyed link incentives for supply chain personnel to supply chain performance. Of those, only a few offer rewards linked to performance outside the company, such as on-time delivery from suppliers. Some buyers get rewards for managing stockouts but not inventory turns, and some supply chain executives receive no incentives against return on assets or cash conversion cycles. The bottom line: 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. 4. Put thought before technology Businesses regularly commit 10 cents of every IT dollar to supply chain management software initiatives, hoping to shrink their warehouses, streamline logistics, sharpen forecasts, and trim costs. Interestingly, research proves that 80% of a company's supply chain challenges can be met without new IT investments. Technology alone is not the answer. Supply chain software errors have hurt some robust companies. In 1999, technology glitches at Hershey kept candy off supermarket shelves at the worst possible time: Halloween. 5. Look outside your four walls Within the industry sectors Bain surveyed over half the companies failed to collaborate outside their organisation on areas as critical as production planning. How can a supplier fine-tune its production schedules for the customer's benefit if the customer will not share details on its own forecasts? Top supply chain performers also find benefits in actively managing the demand end of the chain. Instead of relying on an intuitive approach to allocate product space, retailers can, for example, use analytical tools that reveal what items move and move profitably, and set inventory based on product attractiveness. At a time when supply chains worldwide still lock up billions of euros of shareholder value, ironing out inefficiencies is becoming a requirement. Wall Street already distinguishes between businesses that view supply chains strategically, and those that don't.

Independent research reveals that the average company spends nearly 10% on its supply chain-the sequence of activities that bring materials to manufacturers, take finished goods to retailers, and move inventory onto shelves. Ironically, this is more than twice what top supply chain performers spend. To banish inefficiencies company leaders should abide by the following 5 guidelines.

1. Count the cost of inefficiency
According to a Bain & Company survey of 300 global companies, 68% of managers think they have failed to optimise their supply chain savings. The ones who do-Wal-Mart, Ford Motor, Dell Computer-all quantify performance indicators for their supply chains by setting targets that push them toward best-in-class status. And they report impressive payback, often in a matter of weeks. Dell keeps less than 5 days of inventory, compared to almost 5 times that of Compaq Computer, and enjoys a 5% cost advantage from buying parts later, since prices of these parts fall steadily as technology improves.

2. Make supply chain a talent centre
Top supply chain managers quantify the benefits of what they are doing in order to encourage their employees, build momentum, and attract top talent to the supply chain cause. Top performers invest in 3 staffing areas:
Individual talent levels: by spending more for top level talent who can save them millions with better forecasts, vendor strategies, and execution.
Executive level leadership: by appointing a supply chain executive, reporting to the CEO, to develop end-to-end strategy, structure, metrics, and processes for the entire supply chain.
Cross-functional alignment: by aligning many departments, finance and marketing included. At one leading electronics retailer, line managers interact daily across logistics, merchandising and other functions.

3. Link rewards to the right metrics
Barely 25% of managers surveyed link incentives for supply chain personnel to supply chain performance. Of those, only a few offer rewards linked to performance outside the company, such as on-time delivery from suppliers. Some buyers get rewards for managing stockouts but not inventory turns, and some supply chain executives receive no incentives against return on assets or cash conversion cycles. The bottom line: 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.

4. Put thought before technology
Businesses regularly commit 10 cents of every IT dollar to supply chain management software initiatives, hoping to shrink their warehouses, streamline logistics, sharpen forecasts, and trim costs. Interestingly, research proves that 80% of a company's supply chain challenges can be met without new IT investments.

Technology alone is not the answer. Supply chain software errors have hurt some robust companies. In 1999, technology glitches at Hershey kept candy off supermarket shelves at the worst possible time: Halloween.

5. Look outside your four walls
Within the industry sectors Bain surveyed over half the companies failed to collaborate outside their organisation on areas as critical as production planning. How can a supplier fine-tune its production schedules for the customer's benefit if the customer will not share details on its own forecasts?

Top supply chain performers also find benefits in actively managing the demand end of the chain. Instead of relying on an intuitive approach to allocate product space, retailers can, for example, use analytical tools that reveal what items move and move profitably, and set inventory based on product attractiveness.

At a time when supply chains worldwide still lock up billions of euros of shareholder value, ironing out inefficiencies is becoming a requirement. Wall Street already distinguishes between businesses that view supply chains strategically, and those that don't.