A Wake-up Call for CEOs: Get "Back to Basics"

Study shows that supply chain efficiency improves when CEOs roll up their sleeves and get involved

Study shows that supply chain efficiency improves when CEOs roll up their sleeves and get involved

New York — January 7, 2004 — Businesses globally invest over $19 billion annually on information technology systems solutions to improve their supply chain performance, yet nearly half of these companies are disappointed with the results, a new study by management consulting firm Booz Allen Hamilton found.

The study indicated that most efforts to improve supply chain efficiency fall short because they do not challenge the fundamental structure of the supply chain, but instead attempt to improve performance within existing limitations, often by installing expensive new technology. However, CEOs can play a key role in improving the supply chain: The study found that greater CEO involvement in designing the supply chain strategy brought improved performance.

Booz Allen said it received nearly 200 survey responses from manufacturing and industrial companies with assets or annual sales over $1 billion in North America, Europe, Asia and Latin America. Respondents included chief operating officers, chief financial officers, chief administrative officers, manufacturing/operations vice presidents, and directors and logistical/shipping directors.

The study noted widespread unhappiness in IT-focused efforts to improve supply chain effectiveness. Despite a $19 billion worldwide market for supply chain systems solutions, nearly half (45 percent) of the respondents were dissatisfied with the level of performance of their IT systems against expectations. The most common reason for expectations not being met given by respondents was an inability to forecast effectively (56 percent). Other reasons include implementation issues and delays (48 percent), and unrealistic expectations about the impact of technology (44 percent).

"Despite major advances in technology, supply chains still cost more than they should and tie up more inventory, and the underlying reasons haven't changed in 20 years," said Booz Allen Vice President Dermot Shorten. "The message is clear: Companies looking for improvements must break the mold, not just polish the mold."

According to the study, companies were able to achieve a higher level of supply chain efficiency when they were willing to break the constraints limiting performance, by relocating factories, outsourcing non-core functions or making other fundamental changes. Efforts to improve performance within existing constraints, such as installing a new IT system, were less effective.

Enterprise resource planning (ERP) software is the most popular systems investment choice at 71 percent, followed by systems for inventory and warehouse management (54 percent) and order management (40 percent). The most frequently-cited benefits companies expect from IT systems solutions are not lower costs, but rather lower inventory levels (80 percent), increased customer satisfaction (71 percent) and better delivery reliability (69 percent).

CEO participation helps unlock supply chain improvement, the study found. Companies that treat supply chain management as a CEO-level item achieved annual savings improvements of 8.0 percent in their cost to serve customers, nearly double the 4.4 percent savings of firms where responsibility for the supply chain resided lower in the organization. In addition, purchasing savings improved significantly (5.9 percent vs. 5.0 percent) for companies at which the CEO is personally engaged in setting the supply chain agenda.

"This is a wake-up call for CEOs to go 'back to basics' and pay closer attention to operations," said Shorten. "Supply chain efficiency improves when CEOs roll up their sleeves and get involved."

Other themes consistently emerged among the companies that were most successful in improving supply chain performance. Lessons from the strongest performers included: involve purchasing, sales, engineering, manufacturing and top management in supply chain decisions; track well-defined metrics; make explicit delivery promises to customers; and share forecasts with suppliers.

For example, Pfizer recently has significantly improved its forecasting accuracy by developing new tools to evaluate the results of promotion events on consumption, and then using this information to improve shipping effectiveness. As a result, Pfizer's consumer health care division is an industry leader in forecast accuracy.

Companies making the biggest financial commitment to improving their supply chain management were most likely to feel they received the best return on their investment. Twenty-one percent of companies spending $25 million or more on supply chain improvements reported that the results exceeded expectations, compared to only 5 percent for companies who reported spending $1 million or less.

Booz Allen initiated this study of supply chain practices at companies around the globe to mark the 20th anniversary of the company's coining the term "supply chain management." In 1982, Keith Oliver, a vice president in Booz Allen's London office, developed a process to identify the trade-offs necessary to achieve his clients' desired inventory management and customer service goals. Oliver, now senior vice president in charge of global operations, called his innovation "supply chain management." The concept stuck; so did the name.