Diagnosing Greatness: Competencies of Leading Supply Chain Companies

1. Diagnosing Greatness: Competencies of Leading Supply Chain Companies Morgan L. Swink Professor, Operations & Supply Chain Mgmt Broad Graduate School of Management Michigan State University 517.432.6327 swink@bus.msu.edu Charles C. Poirier, CSC Consulting Frank J. Quinn, Supply Chain Management Review

2. Overview • A new approach was taken to document what constitutes true supply chain value. • The 2007 survey confirms companies continue steady progress in terms of supply chain competence. • There still remain high levels of variance in how SC operations are defined, strategic integration of SC activities, and planning effectiveness • Using eight dimensions of competence, there are sizeable gaps between leaders and the rest of the field in terms of priorities, investments and performance • These gaps indicate the steps that laggards need to take in order to catch up with leaders

3. 2007 Survey — Methodology • Survey sent to supply chain professionals around the world. • Names were drawn from CSC’s client base, readers of Supply Chain Management Review, and a special mailing from Michigan State University. • A total of 179 respondents — majority from North America, mainly theUnited States. • Twenty-one industries are represented. • Organizationally: 51 percent corporations; 28 percent wholly-owned subsidiaries or strategic business units; and 21 percent groups or multiple divisions.

4. Eight Dimensions of Supply Chain Competence • Business Strategy Alignment – We have clear SCM goals that are aligned with corporate strategy, and the corporate strategy leverages our unique supply chain capabilities while recognizing our constraints. • Strategic Customer Integration – We are constantly pursuing relationships with customers that go beyond sales transactions in order to explore ways to meet individual customer requirements. • Strategic Supplier Integration – We exchange operational information and synchronize activities with suppliers in order to make the most of their unique capabilities. • Cross-functional Integration – We have reorganized our internal functional groups around core processes in ways that facilitate operational information sharing, cross-functional planning, and seamless execution.

5. Eight Dimensions of Supply Chain Competence • Supply Chain Responsiveness – We have reduced lead-times and improved responsiveness to the point that most of our operational activities are triggered by customer orders rather than by schedules which are based on forecasts. • Supply Chain Rationalization/Segmentation – We have developed separate pricing, service, and inventory policies along with dedicated channels for meeting demands for different product/market segments in the overall portfolio. • Planning/Execution Process and Technology – We use formalized, disciplined planning processes in most supply chain areas, which include variance analysis and what-if scenario planning. • Risk Management – We anticipate and analyze potential root causes for failures and disruptions in the supply chain, and develop contingency plans accordingly.

6. Leaders, Followers, and Laggards • The companies tend to fall into one of three major groups based on their scores across the eight dimensions of supply chain competence. • Leaders outscored all other companies in every dimension of competence. • Followers outscored all laggards in every dimension of competence. • Further comparisons showed strong differences across the groups in terms of their priorities, investments, and levels of performance. 27% 33% 39% • Leaders • Followers • Laggards

7. Quick Comparison:Leaders, Followers, and Laggards • Leaders • Have an executive in charge of SCM • Develop a SC plan as part of a business plan • Spread best practices across the network • Involve external advisors to enhance processes • Use metrics that are customer-centric • Bring global aspect to supply chain • Laggards • Assign supply chain to sourcing or logistics • Chase cost improvement and call it supply chain • Don’t document best practices • Believe that seeking external advice is a weakness • Metrics support a “push” system stuck in “local” perspective • Getting internal ops under control • Followers • Assign responsibility to a willing manager • Build SC initiatives into meeting business objectives • Keep best practices within four walls • Resist sharing data externally • Base metrics on volume and throughput • Still working on an enterprise view

8. Major Topics Addressed in the Survey • Supply Chain Management Scope and Spend • Supply Chain Top Management Involvement • Supply Chain Continuity • Investments and Performance • Tools and Initiatives • Performance: Fulfillment, Quality, Asset Utilization, Flexibility, Cost We will summarize the findings in each area in the light of SCM competencies and point out differences across leaders, followers, and laggards.

9. 1. Defining the Scope of SCM: Still Quite Narrow • Procurement, Logistics, Planning,Inventory Management, and Software/Technology Investment are the categories most commonly included in supply chain spend. • Surprisingly, only about 35% of manufacturing firms include Manufacturingin their supply chain spend definition. • Leaders are more likely to include Marketing and Sales activities as well as Product Design and Engineering activities in their scope of supply chain spend. What costs are included in supply chain spend? % Firms that Include Category in Spend

10. 2. Senior Management Involvement • How often does the organization review the supply chain strategic plan? Only as business conditions dictate! • Does your firm have an officer managing all supply chain functions? 61% negative, 39% positive. • Current level of involvement of financial managers — only 24% characterize as “high”. • Leaders had significantly higher top manager involvement in supply chain efforts. Conclusion: Still not enough senior executive endorsement and involvement

11. 3. Supply Chain Continuity and Protection • Risk and vulnerability are critical supply chain issues. • Survey responses do not reflect appropriate level of attention. • Only 46% said planning efforts identify contingencies with risk analysis and scenario evaluations. • 50% indicated the firm has sufficient executive visibility and accountability for supply chain continuity. Organization Pays Sufficient Attention to Supply Chain Vulnerability and Risk Mitigation • Ranking of Supply Chain Continuity Concerns • Inventory Planning and Inventory Level Strategy • Lengthening Global Supply Chain • Critical Trading Partner Vulnerabilities • Unstable Global Sourcing Points • Visibility of Trading Partner Shipments • Potential Security Breaches or Terrorist Attack • New Import and Customs Regulations • Changing European Union Conditions • Strongly Disagree • Disagree • Neutral • Agree • Strongly Agree

12. 4. Investment and Supply Chain Competence % of Total Investment on: • Major supply chain investments • Soft technologies such as planning and decision support • Hard technologies like RFID and material handling equipment • Training and workforce development • Other to be specified • Differences across firms of differing maturity: • Leaders put a greater percentage of total investment in soft technologies than laggards do. • Followers put a greater percentage of total investment in training than Leaders or Laggards do.

13. Investment Motivations • Primary reason for supply chain investments? Cost reduction! • Leaders listed • Faster, more accurate, personalized order fulfillment • Profitable sales growth • Streamlining fulfillment across multiple channels • Followers listed • Minimize supply-demand imbalances • Laggards listed • Lower supply chain operating costs Primary Drivers of Supply Chain Investments 4% 7% • Lower Supply Chain Operating Costs • Faster, More Accurate, More Personalized Order Fulfillment • Profitable Sales Growth • Minimize Supply-Demand Imbalances • Manage Longer and More Variable Supply Lines • Streamline Fulfillment Across Multiple Channels • Other 6% 22% 13% 16% 16%

14. 5. Tools and Technologies • Leaders excel at • Execution systems (WMS, TMS, and ERP) • Relationship management (CPFR, CRM, SRM) • Strategic planning (business and supply intelligence) • Supply Chain network solutions (distributed order management, RFID) • Followers were more heavy users (than laggards) of planning systems, including demand, inventory and production planning.

15. 6. Performance: Is SCM Money Spent Wisely? • Reported revenue increases vary from 1% to 20% or more, with most firms in the 1% to 10% area. • Reported cost savings range from 1% to 20% or more of supply chain costs, with most firms in the 1% to 10% area. 3 year impact of SC initiatives Cost Savings Revenue Increase 4% • No Impact • Reduced 1-5% • Reduced 6-10% • Reduced 11-20% • Reduced 21-25% • Reduced Other • Increased Other • Don’t Know/Not Sure • No Impact • Increased 1-5% • Increased 6-10% • Increased 11-15% • Increased Other • Decreased Other • Don’t Know/Not Sure 1% 15% 17% 19% 1% 5% 29% 4% 6% 11% 29% 11% 29% 19%

16. Differences in Financial Performance • Leaders outperformed followers and laggards 3-year revenue gain from SC initiatives. • Leaders and followers outperform laggards in 3-year cost improvement from SC initiatives. • Comparison across groups for a small subset (N=32) on six SC financial performance metrics from annual reports showed one significant difference: Return on Sales • Leaders and followers on-average scored 3% above their industry median scores • Laggards on-average scored 3% below their industry median scores

17. Operational Performance Levels • Ratings on 17 performance metrics corresponding to SCOR categories, plus product quality • Most respondents positive about delivery and quality performance. • Only 22% were positive on sales forecast accuracy. • Higher performing firms are using S&OP, segmentation strategy, greater collaboration with suppliers and customers, and greater enterprise interaction to build higher forecast reliability.

18. Stages in Operational Performance Improvement • Leaders outperformed laggards in all categories of supply chain performance except product design quality. • Early competence growth is associated with gains in efficiency, accuracy, and reliability. • More mature competence growth is associated with even better efficiencies plus improved customer service. Leaders Forecast accuracy Fill rate Total cost Productivity Asset turns Followers Order lead time Perfect order Inventory days Cash-to-cash Asset turns Laggards

19. Key Performance Drivers Competencies SC Performance Technologies • Certain competencies and technology investments were strongly correlated with each area of supply chain performance. Fulfillment Strategic Alignment SC Network Integration Tactical Planning Customer Integration Product Quality Internal Integration Strategic Planning Asset Utilization Relationship Management Supplier Integration Flexible Response Execution Systems Supply Chain Segmentation Cost Management Planning Process

20. Competency / Performance Relationships Customer Integration • Relationships beyond sales transactions • Planning for individual customer requirements • Synchronizing activities with customers • Continuously exploring new working relationships Better Fulfillment Performance • Delivery to promise • Fill rate • Perfect order fulfillment Internal Integration • X-functional awareness of responsibilities • Common prioritization of customers • Common product roadmaps • Sharing of operational information • Performance metrics that promote cost / service trade-offs SC Network Integration Technology • Dist order management • Event management • Enterprise app integration • RFID

21. Competency / Performance Relationships Supplier Integration • Developing relationships to build on key supplier capabilities • Exchanging operational information • Synchronizing activities with suppliers • Continuously exploring new working relationships Internal Integration • X-functional awareness of responsibilities • Common prioritization of customers • Common product roadmaps • Sharing of operational information • Performance metrics that promote cost / service trade-offs Better Product Quality • Product conformance • Product design (performance and features) • Product reliability

22. Competency / Performance Relationships Supply Chain Segmentation • Continuously updating customer segmentation strategy • Segmenting products based on profit contributions and lifecycle stage Strategic Planning Technology • Bus & SC intelligence • PLM • Network optimization Planning Effectiveness • Formalized, disciplined processes addressing both long and short term planning • Contingency and risk analysis with scenario evaluations • Feedback loops addressing variances • Vulnerability and continuity planning Tactical Planning Technology • S&OP • APS • Distribution planning Better Asset Utilization • Cash-to-cash cycle • Inventory days of supply • Asset turns • Forecast accuracy SC Network Integration Technology • Dist order management • Event management • Enterprise app integration • RFID Supplier Integration • Developing relationships to build on key supplier capabilities • Exchanging operational information • Synchronizing activities with suppliers • Continuously exploring new working relationships

23. Competency / Performance Relationships Strategic Alignment • Clear SC goals and objectives driven by business strategy • Business strategy exploits SC capabilities and constraints • Strategies communicated to all employees Better Flexibility • Order fulfillment lead time • Supply chain response time • Production flexibility Supplier Integration • Developing relationships to build on key supplier capabilities • Exchanging operational information • Synchronizing activities with suppliers • Continuously exploring new working relationships Relationship Management Technology • CPFR • CRM • SRM • Supplier Performance Planning Effectiveness • Formalized, disciplined processes addressing both long and short term planning • Contingency and risk analysis with scenario evaluations • Feedback loops addressing variances • Vulnerability and continuity planning

24. Competency / Performance Relationships Customer Integration • Relationships beyond sales transactions • Planning for individual customer requirements • Synchronizing activities with customers • Continuously exploring new working relationships Better Cost Performance • Supply chain cost • COGS • Warranty & returns processing cost Internal Integration • X-functional awareness of responsibilities • Common prioritization of customers • Common product roadmaps • Sharing of operational information • Performance metrics that promote cost / service trade-offs Execution Systems Technology • WMS • TMS • ERP • eProcurement • JIT/Kanban Planning Effectiveness • Formalized, disciplined processes addressing both long and short term planning • Contingency and risk analysis with scenario evaluations • Feedback loops addressing variances • Vulnerability and continuity planning

25. Who are perceived as the Best-in-Class Companies?

26. Steps Going Forward – Lessons from the Leaders • Work to make SCM an integral part of the overall business strategy. • Put someone in charge—a chief supply chain officer reporting to the CEO. • Take down any remaining stovepipes that are hindering your supply chain advancement. • Intensify the focus on customer needs. Move your system from “push” to “pull” to “on-demand” (if can be effective). • Use S&OP effectively to better match supply with demand and reduce reliance on forecasts. • Establish an economic target for supply chain improvement—work to capture that 5-8 points of new profit! • Create a plan for including trusted business allies in building the innovative supply chain model – share the risk! Key messages: Partner. Trust. Emphasize core competencies. And share the risk

27. Questions for Future Research • How do we account/control for differences in how firms define and conceptualize their supply chain management activities? • Are strategic alignment and top management involvement drivers of SCM competence, or necessary preconditions? • Do firms integrate with customers and suppliers easier than achieving internal integration? • What organizational structures are needed to facilitate internal integration? • How can we measure internal integration? • Growth in SCM competence seems to be reflected in a shift from cost improvement to top line growth. • Is this progression normative? • Is top-line, customer focus a good proxy for SCM maturity?

28. Questions for Future Research • How should risks associated with globally extended supply chains be categorized and managed? • What roles do soft and hard technologies play in the evolution toward supply chain management maturity? How is the integration of IT and SCM functions best managed? • Which competencies and technologies are most strongly associated with each dimension of performance? • What theory perspectives should guide our expectations?

29. QUESTIONS? COMMENTS?