Mature Planning Practices Yield More Profits

Well-developed supply chain planning processes critical to achieving a competitive advantage, benchmarking study finds

Well-developed supply chain planning processes critical to achieving a competitive advantage, benchmarking study finds

Chicago — October 6, 2003 — Well-developed supply chain planning processes are critical to achieving a competitive advantage, with top performers seeing higher profits, lower inventory levels and better delivery performance, according to the results of a supply chain benchmarking study conducted by The Performance Measurement Group.

The study, co-sponsored by enterprise software provider SAP, revealed that companies with mature planning practices were 38 percent more profitable than average companies. Additionally, these top performers had 22 percent lower levels of inventory and 10 percent greater delivery performance.

Companies that combined mature planning processes with advanced planning systems gained added performance improvements, including 27 percent greater profitability, the study reported.

"Planning drives the supply chain," noted Jakub Wawszczak, a director in Global Supply Chain Practice at PRTM, parent firm of The Performance Measurement Group. "It orchestrates the flow of materials and resources, getting them to the right location at the right time, in the right sequence."

Effective planning balances demand and supply, internal and external objectives, all in a constantly changing environment, Wawszczak said. "Mastering supply chain planning can provide a major competitive advantage," he added.

More than 60 companies provided data on 75 supply chains for the 2002-2003 study. The study participants ranged in size from less than $500 million to over $2 billion in supply chain revenue, and they represented a range of industries, geographies (including North America, Europe, and Asia), and manufacturing strategies (including make-to-stock, make-to-order and configure-to-order).

Participants provided quantitative data on supply chain and financial performance and qualitative data on their level of planning process capability based on PRTM's Supply Chain Maturity Model. Adapted for this study, the four-stage model evaluates an organization's level of operational and IT maturity in each of the planning areas — plan, source, make, deliver — defined by the Supply-Chain Council's Supply Chain Operations Reference-model (SCOR). Participants also provided data on their planning system maturity. Overall, the study compares planning practice and system maturity with business performance to draw conclusions about the impact of supply chain planning on business performance.

The study classifies companies' stages of maturity into two groupings, mature and immature, based on their total average maturity scores. There are four stages of planning maturity:

  • Stage 1 — Functional Focus: Functionally oriented planning processes and limited or stand-alone planning systems.

  • Stage 2 — Internal Integration: Cross-functional integration of planning processes and systems, yielding desired enterprise-wide performance.

  • Stage 3 — External Integration: Point-to-point planning integration within the extended enterprise. Integrated supply chain planning systems are in place.

  • Stage 4 — Cross-Enterprise Collaboration: Cross-enterprise planning, collaboration, and optimization, characterized by many-to-many relationships.

The study results showed that most companies have just entered the mature planning practice stage, and that 37 percent have maturity levels between 2.0 and 2.5. These companies have a formalized demand-supply balancing process involving all participants.

Twenty percent of study participants have moved beyond stage 2.5 and have started actively involving suppliers and customers in the planning process. Almost 40 percent still have immature, functionally focused planning processes.

Immature Planning Systems

On the systems side, companies with best-in-class planning systems had a 5 percent to 40 percent advantage in supply chain performance, according to the study. However, most companies are still using immature planning systems solutions. More than 65 percent of participants still rely on functionally oriented legacy planning systems and stand-alone material requirements planning (MRP) and, in some cases, spreadsheet applications like Excel.

Others are using enterprise resource planning (ERP) systems that were implemented as point solutions and lack overall planning data visibility. Only 35 percent of participants use more mature planning systems, such as the advanced planning and scheduling (APS) solutions offered by companies such as SAP, i2 and Manugistics.

"A key finding of the study is that systems adoption is lagging practice maturity," said Wawszczak. "The majority of companies are operating mature planning processes with immature systems and relying on spreadsheets and manpower to make the planning processes work. In the short term, reliance on manual processes can work, but in the longer term it can constrain business performance."

Lower Inventory Levels

Companies with mature planning outperformed their peers in inventory performance, according to the study. They had 22 percent lower inventory days of supply. The companies with best-in-class planning systems had an additional 6 percent inventory performance advantage. Additionally, companies with mature planning practices had a 28 percent inventory cost advantage, and those with mature systems had an additional 35 percent cost advantage.

Analysis shows that the main driver of better inventory performance is lower inventory obsolescence costs. Companies with mature planning practices had 44 percent lower obsolescence for raw materials, work-in-progress and finished goods. Advanced planning systems could reduce obsolescence costs by another 40 percent.

Better Delivery Performance

Finally, the study showed that companies with mature planning practices have 6 percent higher delivery performance to committed delivery date and 11 percent higher delivery performance to requested delivery date. Companies with mature planning systems gained an additional 5 percent advantage in deliver to request.

"These improvements in delivery performance are the result of robust, collaborative forecasting processes and systems, combined with sophisticated inventory planning that includes an efficient inventory replenishment model," said Wawszczak. "Our research finds a strong correlation between improved delivery performance and top-line revenue growth."

Order fulfillment lead times were 14 percent shorter for companies with mature planning processes. Companies with mature practices combined with advanced planning systems had a further 18 percent reduction in order fulfillment lead times.

"Although planning systems can lead to best-in-class performance, they must be applied with the right processes in place to deliver results," Wawszczak said.

Many companies install the latest software for supply chain planning without rethinking their underlying processes, Wawszczak noted. As a result, these investments rarely deliver the intended benefits. "Technology is only an enabler of supply chain excellence — mature supply chain processes are critical to a successful planning system. Companies that operate state-of-the-art planning software without solid processes in place risk hurting their planning performance overall."

Companies in this article