Supply chain linked to business performance

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Companies with best-in-class supply chains generally outperform their rival in terms of business and financial performance, according to a survey by Massachusetts Institute of Technology and TruEconomy Consulting.

The study, Supply chain management and the executive agenda 2010, focused on identifying the links between the executive agenda and supply chain strategy, and looking at if supply chain excellence leads to better financial and business performance.

The results indicated not only a link between the executive agenda and supply chain strategies but also that business and financial performance go hand in hand with supply chain performance. The business and financial performance of most of the best-in-class supply chains in the survey outperform that of the remaining companies.

The researchers identified the 30 best-in-class companies and examined if there was a difference within those 30 companies between those who focus on cost efficiency and those who focus on responsiveness.

It found that there is a difference between cost-efficient and responsive supply chain strategies.

Professor David Simchi-Levi of the Massachusetts Institute of Technology, presented the results at the Sustainability Gala 2010 in Noordwijk, the Netherlands. “From forecast accuracy and profit margin view there is no difference. The difference is exposed in inventory turn and in supply chain cost, where cost efficient companies dominate. Responsive companies dominate in customer order fill rate and lead-time,” he said.

Most of the companies in the survey focus on flexibility, the survey found and there is an increasing drive towards flexible response strategies driven by continuous increase of volatility in both demand and supply.

Prof Simchi-Levi defined flexibility as the ability to respond to change. “When we talk about flexibility we focus on many different KPIs. There are many ways to achieve flexibility; by product design, by process design and by system design.

“The amazing thing about flexibility is that a small investment in flexibility provides you with almost all the benefits of full flexibility and make a significant impact on supply chain performance.”

The professor pointed to a case study of Pepsi Bottling Group, who reported an additional 12.3 million cases available to be sold due to reduction in warehouse out-of-stock levels. “This is the power of flexibility,” he said.

Different brands, channels and product characteristics might require different supply chain strategies, said Professor Levy.

“For instance, if you have functional products, because of the low profit margin, high forecast accuracy and long product lifecycle the focus is on efficiency and therefore a push based supply chain strategy. On the other hand, when you have innovative products, because of the high profit margin, the poor forecast accuracy and the short product lifecycle, the focus is on a responsive a pull based supply chain strategy.”

A strong link was been found between supply chain strategies and business and financial performance. One of rules that the best-in-class companies apply, is that their operations strategy must be centred on the value proposition the firm provides its customers, the survey found. 

The survey consisted of three sections. It contained questions to the CEO focused on the executive agenda, questions to the CFO focused on business performance and questions to the supply chain executive focused on supply chain strategies deployed. Approximately 200 companies participated. A total of 82 companies completed all three sections of the survey.


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