The Financial Times

Weakest links in the supply chain

Weakest links in the supply chain

Managing an inventory is about more than selecting the right software.

  • min read


Weakest links in the supply chain

Managing an inventory is about more than selecting the right software.

Businesses every-where have been trying to streamline their supply chains, turning to information technology to do so. They are putting 10 cents of every IT dollar into "supplychain management" software initiatives, hoping to shrink their warehouses, streamline logistics, sharpen forecasts and pummel costs. Such spending is growing by more than 20 per cent a year.

They are on the wrong track. The average company runs supply chains that are only half as efficient as the industry's best. Overall, inventory turns have barely changed in a decade.

Supply-chain software problems have clipped some sturdy companies. More worrying is that since September 11 there has been talk of padding inventories to keep supply lines open. Yet trucks are still rolling and aircraft are still flying cargo. This is hardly the time to ease up on just-in-time practices: supply chains still lock up too much value; they cannot afford to lose efficiency.

So why, when a survey by Bain shows that supply-chain management is a priority for 68 per cent of executives, are so many making so little headway?

There are clues in the operations of supply-chain exemplars such as Wal-Mart, Dell and Toyota. Dell says its few days of inventory, compared with more than a month for competitors, adds 5 percentage points on its margin. The personal computer maker and its peers are also deft users of IT. But that is not the secret. Everybody can buy the same software and, anyway, 80 per cent of a company's supply-chain challenges can be met without new IT investments.

The top performers instead stick to taut supply-chain disciplines they know are vital to contain costs. Collectively, they spend only 4.2 per cent of revenue on their supply chains, compared with almost 10 per cent for the average company. And knowing that growth is what boosts value these days, they use those guidelines to help drive revenues. Their stock prices prove the point.

They share these five disciplines:

* Get the strategy right first. Most managers are unclear about which supply-chain improvements can drive real advantage, which service enhancements customers will value and how to hook their operations into those of suppliers and customers so the whole chain is competitive. Compaq could execute flawlessly and its costs would still be 10 per cent higher than Dell's. Nokia's edge comes from product designs that share parts and make vendors' jobs easier while its competitors struggle with complexity.

* Get your best people on the problem. Supply chain is rarely viewed as a glamour job. But supply chain maestros such as Wal-Mart prize the role. They recruit top people who can save them millions with better forecasts, vendor strategies and execution. They certainly treasured their A players after September 11.

The best companies also work to align many departments under a senior executive whose job is to plan, measure and optimise the performance of the whole chain. Cross-functional collaboration is rewarded. Yet in Bain's survey, barely 25 per cent of respondents linked incentives to supply-chain performance.

* Replace hunches with metrics. Supply-chain management cannot be run by gut feelings. Yet many companies use rules of thumb to set inventory targets. They do not know how much of their product would sell at a certain price and do not analyse what they have sold at different prices. They leave money on the table - or overpriced goods on shelves.

Not tracking performance means seldom knowing how much your supply-chain inefficiencies cost. Fewer than 25 per cent of 300 executives polled have full information on their supply chains. One client recently found it was suffering from bad forecasts and sloppy vendor performance that it could not measure. The problems were propping up several hundred million dollars' worth of excess stocks.

* Reach past your four walls. Of those running supply-chain initiatives, fewer than 10 per cent reach out across their network of leading suppliers. Bain found almost 80 per cent of companies' efforts were focused inside their own four walls. How can a supplier fine-tune its production schedules for the customer's benefit if the customer will not share detail on its own forecasts?

The best performers have already linked their operations with those of their customers, suppliers and logistics providers. Dell's transparent supply chain - extending to customers - let it react very fast a few years ago when it spotted a surge in orders for two-gigabyte disk drives. The PC maker immediately switched from the 1GB drives it had been buying. The supplier then offered a fat discount on the surplus 1GB drives to a Dell competitor that used conventional six-week demand forecasts. By the time the rival got the product to market, nobody wanted 1GB drives. The result was a hefty write-off.

* Not all parts are created equal. A sure-fire sign that your supply chain is unhooked is when everything flows through it the same way: all vendors deliver on the same terms; every item is stocked in every distribution centre. Best practice means managing multiple supply chains. Wal-Mart uses direct deliveries for products with rapid obsolescence and time-to-market pressure, putting other products through traditional distribution centres when velocity matters less than cost. For a fee, Dell will compromise its build-to-order approach and carry inventory of pre-built machines for customers who want to get the product fast.

With growth so elusive nowadays, the supply chain is a great place to look for gains. But executives would do well to skip the IT briefings until they get the big issues under control.

Miles Cook is co-director of Bain & Company's supply-chain management practice. Nick Jackson is a vice-president in Bain's London office.


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