Boston May 29, 2002 Most companies are mismanaging their supply chains despite widespread recognition of the supply chain's importance for cost control, risk reduction and nimble performance, according to a survey out this week from a business consultancy.
The Bain & Co. survey of 162 senior executives charged with supply chain management, including supply chain and purchasing managers, revealed the chasm between the acknowledged significance of the supply chain and the halting steps taken to realize its potential.
While 86 percent of the respondents rated supply chain performance as a priority, fully two-thirds of their companies fail to track the performance of their internal supply chains outside their corporations or divisions. Just 15 percent said they have full information on the performance of their company's supply chains, and only 3 percent reported that they have good data on the performance of their entire supply chains, including the activities of customers, suppliers and distributors.
Only 7 percent of their companies tracked the performance of their suppliers' and customers' activities, and many failed to collaborate outside the company on such critical areas as demand forecasting and production planning.
"Most companies are leaving lots of money on the table in their supply chains," said Miles Cook, Bain & Co. director and author of the survey. "A well-designed process, from procurement through manufacturing to arriving at the customer's doorstep, can unlock shocking costs and free up cash for other uses. Improvements to supply chain management can be the difference between a profitable and an unprofitable company. In today's environment, these savings can mean life or death for a business."
Cook added that companies that understand the value of supply chain management could use their supply chains to gain competitive advantage in their markets.
"Too many executives know they have a supply chain problem," explained Cook. "What they may not know is that the supply chain leaders in their respective industries are pulling farther away."
Cook pointed to companies such as Wal-Mart, Dell, Toyota and Home Depot as examples of enterprises that are spending less on their supply chains while achieve better results. "One study shows that those leaders spend about four percent of revenues on supply chain costs compared to almost 10 percent for average players," he said.
Companies lagging behind may need to look beyond just implementing new supply chain solutions. New technologies that allow real-time information sharing within and across enterprises make supply chain management possible, but management practices and incentive systems often fail to keep pace. In particular, incentives that reward a part of the process, rather than rewarding end-to-end value creation, prevent businesses from getting the best out of their supply chains.
"Transportation managers often get measured on delivery cost but not on velocity, which is a big problem," Cook noted. "By using the cheapest, slowest route, a fortune is lost in carrying costs, speed to market and lost inventory turns." Despite substantial investment in supply chain software and systems, most companies are no faster at turning their inventories today than they were a decade ago, Cook asserted.
Only two out of five respondents to the Bain survey said their companies use pay-for-performance incentives to motivate their supply chain executives. And even enlightened companies make the mistake of choosing the wrong compensation targets. "Companies that reward buyers when they avoid running out of stock, but don't offer anything when they improve inventory turns, are penny-wise and pound-foolish," said Cook.
Only 38 percent of managers have financial incentives hooked to supply chain performance, and 78 percent of those incentives fail to take into account customer feedback and supplier results, the Bain study found.
Despite the challenges, Cook said he believes it isn't difficult for companies to begin realizing better value from the supply chain. The key, he said, is not technology but management. "Businesses like Dell show how to do supply chain right. It does call for a rigorous 'data-driven' approach, but it's not rocket science, and it's not necessarily costly. Most businesses will be surprised at what they can achieve by tapping the systems and data they already have, but aren't using properly."
Cook laid out five fundamentals for supply chain success:
1. 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 they should hook their operations into those of suppliers and customers so the whole chain is competitive. In other words, they must get the entire supply chain strategy right before putting a technology face on it. Technology is an enabler, not a cure-all, Cook said.
2. Put your star players on the problem. Supply chain positions are rarely viewed as glamorous. But the supply chain maestros recruit top people who can save them millions of dollars with better forecasts, vendor strategies and execution. The best companies also work to align many departments under a senior executive whose job is to plan, measure and optimize the performance of the whole chain, both internally and externally.
3. Replace hunches with metrics. Not tracking performance performance of the whole supply chain means you are in the dark about how much your supply chain inefficiencies cost. Yet many companies are guessing when setting inventory targets. They don't know how much of their product will sell at a certain price and do not analyze what they have sold at different prices. They either leave money on the table or overpriced goods on shelves.
The retail sector is a prime example. Leaders like Wal-Mart and Home Depot are beginning to use their supply chain skills for sophisticated management of shelf placement and pricing. Rather than the typical approach of "art over science" in allocating product space, supply chain leaders can analyze what moves and moves profitably, and then assign space and set inventory based on product attractiveness.
4. Reach past your four walls. The best performers have already linked their operations with those of their customers, suppliers and logistics providers. They know their own performance metrics and those of all partners in the supply chain. They have visibility from the beginning to the end of their supply chains, and they can make cost and volume adjustments before it's too late.
5. Not all parts are created equal. A sure-fire sign that your supply chain is broken is when everything flows through it the same way: all suppliers deliver on the same terms; every item is stocked in every distribution center. Best practice means managing multiple supply chains and having options.
Concluded Cook: "The supply chain is a real source of competitive advantage. If the laggards don't take the problem seriously, the leaders will just keep widening the gap."