The Challenges of Supply Chain Complexity

Deloitte survey: Market pressures forcing manufacturers to extend supply chains, but few prepared for heightened complexity

New York — June 4, 2003 — Intense pressure to reduce costs and expand into new markets has manufacturers worldwide shifting production and spreading out supply chain and other operations well beyond their home geography, but few companies are prepared to face the complexity that these extended supply chains entail, according to initial results of global manufacturing benchmark survey released this week by consultancy Deloitte & Touche.

The study, "The Challenge of Complexity in Global Manufacturing — Trends in Supply Chain Management," examines the increasingly complex and fragmented supply chain environment, the implications of these complexities on manufacturers and the resulting managerial challenges.

The preliminary data from Deloitte & Touche's survey identified several key complexity drivers for global manufacturers:

  • Pressure to reduce costs — 61 percent of manufacturers have moved production to lower-cost geographies. The study found that 59 percent of companies closed production facilities burdened with excess capacity, while 58 percent outsourced some manufacturing and distribution activities.

    In fact, 15 percent of North American firms and 29 percent of European companies do not manufacture products in their home markets. Even the engineering departments - the crown jewels of a manufacturer - are being outsourced to save costs. 62 percent of manufacturers polled outsourced some engineering activities.

  • Pursuit of new markets — The majority of manufacturers have spread supply chain and other operations worldwide, in some cases leaving them with more assets in foreign lands than in their own countries and further stretching the supply chain.

  • Product innovation — Manufacturers are counting on increased revenue streams driven by new products. Out of seven factors for increasing revenue over the next three years, launching new products and services ranked highest by a large margin. Manufacturers are counting on increased revenue streams driven by new products, and Deloitte characterizes the implications for increasing complexity as "staggering."

"These elements will continue to create an increasingly fragmented network as companies' engineering and manufacturing activities become more dispersed," said Dick Gabrys, Deloitte & Touche's global manufacturing leader.

The report uncovered five emerging paradoxes as a result of supply chain complexity:

  • Despite globalization, most supply chain optimization is local and focused on individual functions, facilities (such as plants and warehouses), services and countries. In fact, only 50 percent of companies surveyed have a senior or board level executive in charge of global end-to-end supply chain processes.

  • Despite accelerating innovation, supply chains are not fully prepared to support the escalating pace of new product introductions; supply chain execs ranked this as the lowest priority. For example, Deloitte found that the majority of manufacturers do not use product lifecycle methodologies (55 percent) or the software that supports it (73 percent).

  • Although a key priority, flexibility is becoming more difficult to achieve in the face of trends such as shorter product cycles, increased customer demands, the pursuit of new markets and focus on unit cost reductions. Barriers to flexibility such as errors in demand forecasts, long supplier lead times and product proliferation are being heightened by key trends like shorter product cycles, increased customer demands, the pursuit of lower cost locations and the race to new markets.

  • While managing risk is a concern to the majority of survey participants, many companies are significantly increasing potential risks by fragmenting their supply chains.

  • While customer service is a top supply chain priority, fewer than 8 percent of companies report high levels of collaboration with customers on key initiatives.

"These paradoxes strongly suggest that leading manufacturers are genuinely struggling to synchronize the pieces of their increasingly fragmented and global networks," says Philip Johnson, Deloitte & Touche's manufacturing practice leader in the United Kingdom. "Our study aims to identify the specific measures and solutions that manufacturers are undertaking to address these challenges as they work to make complex supply chains more efficient, flexible and responsive in a progressively competitive marketplace."

Deloitte says that to date more than 500 companies from North America and Europe have participated in the study, with a second phase report scheduled for the fall. Industries represented in the study include aerospace and defense, automotive, life sciences, manufactured consumer products, process and chemicals, high technology and telecommunications, as well as other general manufacturing segments such as metal fabrication, industrial machinery and equipment.

The complete results of Deloitte & Touche's global manufacturing industry benchmark survey will be released in September and will include detailed analysis, case studies and in-depth knowledge focused on how manufacturers will manage these issues as they disperse more and more engineering, sourcing, manufacturing and marketing resources across the globe.