Earlier this year, IBM’s SCM Institute for Business Value, in partnership with Logistics Europe, surveyed a cross-section of senior readers around Europe for the 2005 Value Chain Survey.
This was part of a continuing programme, which has seen similar surveys in the US in 2003, and France (with L’Usine Nouvelle) last year. A follow-up survey is also being carried out in the US this year, and similar activity is under way in Japan.
The purpose of these Surveys is to both assess the current level of operational performance and also to identify, track and if possible quantify the extent to which ‘leading’ practices are being adopted in five core areas of Supply Chain operation, namely: Supply Chain Planning; Logistics and Distribution; Customer Order Management; New Product Development; and Procurement.
The survey sample, which has been analysed in the main by site, not by organisation, covered almost all industrial and commercial sectors; although not all of the core subject areas were relevant to all respondents. The 401 respondents therefore were directed towards the core activities relevant to their principal functions: so whereas 144 respondents could discuss Logistics in detail, 92 were heavily involved in Customer Order Management Activities, 79 in Supply Chain Planning, 49 were involved in Procurement activities and only 37 had a large exposure to New Product Development.
Respondents came from quite a wide spectrum of industrial sectors, but Consumer Products typically formed a little over a third of each sample, followed by pure Distribution, High-Tech, and Industrial Products, each with between ten and twenty per cent of the sample weighting. The Service sector was also represented by around one tenth of the sample, and there were a few returns from Energy companies and the Retail/Wholesale sector.
This allowed us to identify the extent to which industrial sector influenced the responses, and on the whole our data analysis has shown responses to be quite consistent across the sectors.
Respondents were all working at European sites, with 109 being based in the UK, 91 in the Netherlands, 58 in the Nordic countries and the remainder located across continental Europe. Looked at by ownership, 73 per cent of respondents were working at sites owned by Western European companies, 17 per cent at sites owned by North American parents, and fewer than 10 per cent at sites owned by Asian or Eastern European firms. We sought to analyse any significant difference that might arise from a site’s location, or the nationality of the parent company, but again our analysis found results to be quite consistent despite these variables.
So with a few exceptions that are highlighted later in this article, trends, developments and rates of adoption of leading practices were fairly uniform across industrial sectors, geographies and ownerships, suggesting that ‘best’ Supply Chain practices may well be, as their protagonists have long claimed, fairly independent of the local circumstances of particular industries.
Supply Chain Management has emerged as a discipline to support all the objectives of a company, be they short-term/operational, or long-term/strategic. Building and managing a ‘fit for purpose’ supply chain is therefore important in delivering to the company’s objectives.
So we asked survey participants to tell us what were the ‘top three drivers’ of their companies. 62 per cent mentioned ‘increased profitability’, 53 per cent cited ‘increased customer responsiveness/service’, and 43 per cent said ‘reduced cost’. Other possible responses, such as ‘increased revenue’, ‘reduced cycle time’, ‘improved quality’, ‘innovation’, or increased unit volume’, although significant, and of serious importance for some players, were overall not in the first rank of priorities.
This tells us that supply chain practitioners now not only have to manage the traditional trade-offs between cost-to-serve and service levels, but also manage supply chains positively to increase profitability.
Given those demographics and priorities, how did our sample assess themselves in the five core areas of supply chain operation that we were analysing? Where do they think they are, and where do they think they are going.
Supply chain planning
Supply Chain Planning is about using market information to forecast the demand, plan for deliveries through the distribution network, plan for capacity utilisation, and schedule production on a short-term basis. SCP is aimed at mastering demanddriven synchronisation to eliminate supply chain waste – of time, inventory, effort, or money.
Effective Supply Chain Planning benefits from, or even depends on, close collaboration with customers. We identified five leading practices that were critical in this area: continuous replenishment programmes for customers; shared real-time demand/inventory data; returns management/reverse logistics; management of inventory at customer site (VMI); and customer interaction with production employees.
With the exception of the last named, each of these techniques was being implemented to some extent by at least half of our sample (note: that doesn’t imply that half the sample were necessarily implementing all of the techniques examined, and the others none). Continuous replenishment is extensively practised by 21 per cent of the sample, real-time data sharing and reverse logistics by 16 per cent and VMI by just 12 per cent; but the later three have a greater number of pilot or small-scale exposures. These four practices can be said to be gaining momentum. By contrast, developing interaction between customers and production employees is as yet a minority sport – only three per cent of the survey do this extensively, although another 28 per cent have tried it.
To ask whether these techniques are effective, in terms of realising supply chain benefits, is to reveal a subtly different picture. Electronic real-time sharing of data is clearly a good place to start – of those that have implemented this, at least to some extent, 43 per cent regard it as extremely effective, and the same percentage as somewhat effective. Returns management/ reverse logistics also scores highly.
By contrast, continuous replenishment programmes, and VMI, have been found not to be effective by over a fifth of those who have tried them, and customer/employee interaction has been found to be really useful by only 16 per cent of those that have tried, while 36 per cent claim to have found no benefit. It is a fairly safe inference that there are cultural, educational and other people factors that need to be addressed if this sort of interaction is to have a significant effect on supply chain performance.
Responses to the more general questions revealed that companies are progressively adopting new approaches to managing their supply chains. These include practices that can enable a supply chain to respond to changing demand cost-effectively and are able to ‘sense’ beyond the ‘four walls’ of the individual enterprise. 80 per cent of the sample claim to achieve, at least to some extent, ‘rapid response’ to changing market conditions, and 73 per cent believe they have a degree of real time information transparency both inside and outside the organisation, which is encouraging if true.
However, little over half the sample claimed to share risk across the network (rather than it all falling on a single enterprise), and similarly only 58 per cent claimed to be able to align variable supply chain costs with revenues (and even of these, the practice was widely adopted by just 17 and 16 per cent respectively). This suggests remaining difficulties and weaknesses in commercial and financial relationships, and also that there is major room for improvement in delivering all the possible supply chain benefits.
As to how collaborative supply chain planning practices are being implemented, Web or Internetbased technology is already the leader in most cases, certainly as regards sharing inventory/demand visibility with customers and suppliers, and in collaborative planning with suppliers. Continuous replenishment arrangements, with customers or suppliers, are still as likely to be based on conventional EDI, suggesting perhaps that these arrangements are longer-established and are operating satisfactorily on well-tested lines. This is particularly true for bigger sites and the sites of bigger companies. Collaborative planning with customers, which appears as a minority activity anyway (69 per cent of the sample aren’t doing it) is a relatively technology-free arena, only four per cent using the Internet, and a further nine per cent using conventional EDI. It should be noted that in all these categories, between 10 and 18 per cent of firms are carrying out these activities without any apparent reliance on Information Technology! Even if IT is a key enabler for supply chain planning, the adoption of collaborative practices goes beyond this.
For all this, supply chain planning clearly has room for improvement. A median figure for production schedule attainment over a given planning period is 95 per cent; but overall only 57 per cent of respondents were claiming a schedule attainment better that 90 per cent (and over a quarter of the sample were not even reaching 85 per cent). This
means that the costs of supply chain inefficiency must be very significant and that lost sales are probably severely impacting profits.
‘Supply Chain Planning technologies are now mature’, comments Marc Bourdé (IBM SCM Institute for Business Value). ‘They are not constraining the ability of organisations to deliver business benefits. Demand-driven synchronisation of both supply chain planning and execution activities is paramount to meet the new profitability and performance objectives. This now requires a strong integration with both internal and external partners, be they 3PLs, suppliers, contract manufacturers or customers. Implementing robust planning processes and accelerating the development of SCP people is now the next frontier for supply chain excellence’.
Logistics and distribution
Logistics processes are about moving (transportation) and storing (warehousing) goods. Site by site, over a third of respondents said they had a full implementation of a formal distribution strategy (38 per cent), of a formal returns/reverse logistics system (37 per cent), of supply chain visibility for managing exceptions (36 per cent), and of collaboration and integration among service providers (33 per cent), while only around one fifth of respondents have not implemented these practices at all.
Slightly less widely adopted is the concept of differentiated logistics services (31 per cent fully, 46 per cent partially).
Two practices that have yet to make a significant breakthrough are collaborative carrier management; and cross-docking or flow through – in both cases only a fifth of respondents have fully implemented these concepts. Both, of course, are intrinsically difficult to implement while carrying on business as usual.
As to how effective these techniques are, however, the results are compelling. Almost half (47 per cent) of users have found logistics service differentiation ‘extremely effective’ in helping meet the site’s top three objectives (whichever they may be: linked to growth, cost-cutting, or increased profitability), while formal distribution strategies and cross-docking/flow through have been extremely effective for 37 per cent of those who have tried them. However, for both cross-docking, and collaborative carrier management, a quarter of those who have implemented these practices claim not to have found them effective. In the case of cross-docking, one might speculate about Return on Investment, or perhaps that the nature of the flows involved does not readily suit the concept in some cases; as regards collaborative carrier management, there is no doubt that collaborative arrangements generally are for most firms untried territory.
Less readily explicable are the 12 per cent of respondents who don’t regard their formal distribution strategies as being at all effective. Could these be ‘strategies’ that are inappropriate, have been wrongly implemented, or do not take into account local circumstances?
Nonetheless, the logistics best practices identified in the survey have been effective to some extent in over three quarters of the situations where they have been implemented, which should give some confidence to those firms that are still hanging back.
RFID is one of the year’s ‘hot topics’ in logistics. The survey found, however, that this has yet to transfer to a coherent picture on the ground – 63 per cent of sites surveyed seem content to sit the development phase out, and have no formal RFID strategy as such. 15 per cent are ‘slapping and shipping’ merely to comply with customer requirements, another four per cent find themselves having to maintain separate inventories of tagged and untagged items, and just another four per cent are in the happy situation where all products are tagged during manufacturing. Clearly it could be a while before the true impact of RFID, and a consensus on how this technology can be used for supply chainimprovement, emerges.
As with the Planning cycle, the performance metrics for Logistics are distinctly variable. 14 per centof sites gave a ‘complete order fill’ rate of better than 99 per cent, but over a quarter can’t even manage 90 per cent (the median was 95 per cent). Just seven per cent of the sample achieve on-time delivery better than 99 per cent of the time, and again 24 per cent cannot achieve 90 per cent on time (median 96 per cent). Stock availability figures are alarming – 19 per cent, almost one in five, of the sites surveyed lose more than five per cent of their sales orders through non-availability. While a quarter of the survey has stock issues on less than 0.5 per cent of orders, that still means that across the sample there is an annual mean of 4.6 per cent (median of two per cent) orders going unfulfilled, which represents a prodigious amount of lost sales and/or downstream supply chain disruption.
‘All the feedback is that firms understand the strategic importance of Logistics’, comments Jan Bowen, leader of IBM’s consulting group for the UK industrial sector, ‘but only a small percentage of companies are differentiating themselves and their services. On issues such as RFID, the challenge is to differentiate what the cost and service drivers are and to search for where the value lies.
‘A further challenge is to integrate logistics management across a supply chain that the firm doesn’t necessarily own’.
Customer order management
Customer Order Management processes cover both the Order Fulfilment processes and the Customer Relationship Management processes.
The good news is that over 70 per cent of survey respondents do use some formal customer classification. The slightly less good news is that only 19 per cent use profitability as the principal classifier – nine per cent just use unit volume, and 43 per cent go on sales value.
It is perhaps unsurprising then that allegedly wellestablished Customer Relationship Management practices are relatively rare in our survey.
The concept of market segmentation leading to price or service differentiation is the best-established practice – even so, it has been extensively used by only 28 per cent or the survey, with another 45 per cent having partially implemented. It works, though – a third of those who have tried this say it has been extremely effective and another 54 per cent say it has had some beneficial impact.
The use of Customer Focus Groups has also been well-trialled, over a fifth of firms have used them extensively and 46 per cent have some experience. A quarter of those who have tried focus groups think they are very effective, and 58 per cent feel they have yielded some benefit.
Web or phone-based customer self-service has been tried by 57 per cent of the sample, 12 per cent of whom use it extensively, but almost a quarter of users don’t rate self-service as effective in helping meet their objectives. 18 per cent of sites have tried outsourcing aspects of order management, but two thirds of those don’t believe it to have been effective. Automated cross-selling or up-selling is very much a minority activity.
It is generally accepted that it is much cheaper to retain an existing customer than to attract a new one. How is our sample doing? Well, a quarter of them have retained over 95 per cent of their customer base over the past three years which is a highly commendable performance: on the other hand, 30 per cent of those surveyed have lost a fifth or more of the customers they had three years ago.
A satisfied customer is less likely to move, so how are we measuring customer satisfaction? For almost half the survey, on-time delivery is the primary measure. Since it is not uncommon for the customer’smeasure of ‘on-time’ to be at variance with that of the supplier (let alone that of the carrier) it is understandable that 42 per cent of the sample use some sort of customer survey. Other satisfaction metrics include ‘shipped complete’ (33 per cent), ‘damage-free’ (24 per cent) and a handful of cases where ‘ease of information exchange’ is a prime measure.
We asked which if any customer order management functions enjoyed ‘real-time’ (defined as less than three hours) capability.
Almost half of respondents (46 per cent) could accept real time order entry from customers, and over a third offered real time inventory reservation, and customer order tracking. Less well adopted is real time order configuration/pricing, and payment processing (only a quarter of respondents, which is surprising given the very obvious commercial advantages of banking the cash as quickly as possible). Just 11 per cent offered customers the ability to reserve manufacturing capacity in real time.
Simon Terry, leader of IBM’s UK distribution supply chain management practice leader, suggests that while ‘There is a much greater move to outsourcing aspects of customer order management, and the technologies including automation are available, firms don’t see investment in this important interface, inhouse or outsourced, as giving them a huge strategic advantage.
‘They need to distinguish the purely transactional stuff – where EDI or web-based solutions are quick and efficient – from the other, human or relationship aspects’.
New product development
New Product Development (NPD) is about designing and launching new products or services, rejuvenating existing ones and managing the entire lifecycle of products, going beyond the pure PLM processes to take into account interactions with Logistics, Procurement and other SCM processes.
Product life cycles are diminishing in all industrial sectors. The rate of technological (and other) development is accelerating. Managing the introduction of new products (or services) effectively has therefore become one of the most challenging priorities for supply chain management.
It is interesting to look at what our respondents regard as the primary strategy for new product development and introduction. Almost half (44 per cent) see the prime imperative as achieving a ‘best fit’ to customer requirements, but 38 per cent see the innovative features of the product or service itself as being the key. One might characterise these as organisations that are, on the one hand, seeking to better serve an existing market, or on the other, seeking to lead or crate a new market. Just nine per cent of the sample see ‘low cost’ as the primary driver of new products, and a handful see being first to market as the most important criterion.
Whichever, three quarters measure the success of a new product development in terms of sales or profit contribution, but 24 per cent see ‘on-time launch’ as the measure of success in itself.
New product development and introduction is rarely straightforward – unsurprisingly over half the sample regard the need to ‘stay competitive’ as among the most significant challenge NPD poses for management (57 per cent) followed by 43 per cent citing ‘correct identification of customer needs’. Reducing time-to-market, and increasing product innovation, are also major concerns for around a quarter of the sample, but fewer are overly worried about managing overall project costs, or about proper allocation of project resources.
The top ranking for ‘staying competitive’ may be a reflection of the disruption that any NPD inevitably causes to a supply chain. Time to market is a more direct measure of NPD effectiveness, and those surveyed were asked to suggest which strategies might have the most significant impact on reducing time-to-market.
Almost half (45 per cent) suggest reallocation of resources in favour of key products – that could suggest that the Supply Chain functions and requirements are not being considered early enough or fully enough when new product launches are planned, despite the fact that this analysis only considers sites where New Product development or launch is in their own assessment a significant activity. But just over a quarter of respondents see closer collaboration with customers and suppliers as having most potential significance. There was minority support for the introduction of formal product/service processes (presumably in those firms who currently lack them) and for a shift to more platform-based products/services, which probably has validity in only some industrial and commercial sectors.
None the less, we found clear evidence that new product development and introduction is becoming ever slicker. Mean time to market (from the start of the design process to ready-for-sale) has dropped from 299 days to 221, or by 26 per cent (bearing in mind that this is an average across a wide range of industries with very different product development cycles). Being specific, whereas a quarter of firms reckoned they could have got a new product to market in less than 100 days three years ago, over a third (37 per cent) are achieving that on average now, whilst the proportion for whom the process would take over 300 days, 42 per cent three years ago, is now just 18 per cent.
On the face of it, that is a major improvement, but coming at the NPD question a different way, the results are less reassuring. We found that while the ‘best’ 21 per cent of companies were getting over 80 per cent of their new products to market on time, there are 39 per cent, that is two in five, that cannot launch even 40 per cent of their new developments within the planned timescale – and overall that means that only half (mean 52 per cent, median 50 per cent) of new products are actually hitting the market when they should. In budget terms, the situation is not a lot better – the best 39 per cent of companies bring 80 per cent or more of their developments to market on budget, while those in the worst quartile complete fewer than 40 per cent of product launches to budget (given the difference between mean ‘on-budget’, 65 per cent, and median, 77 per cent, this suggests that there is a significant number of new product developments spinning wildly out of control, rather than a majority of ‘near misses’).
IBM’s Jan Bowen says: ‘New Product introduction touches perhaps 70 per cent of business activity, so the low level of engagement recorded in this survey suggests we are not managing NPD effectively, not just in terms of cost-to-market, but also in designed-in life cycle cost.
‘Companies are focusing on ‘on-time’ product launch (although a lot are failing in that) but they are not engaging the supply chain and the supplier base sufficiently in the launch and life cycle phases. The failure to deliver on-time is often related to the lack of appropriate information, especially change management information, across an increasingly complex product design organisation. This is true of consumer packaged goods, and even more so in the industrial sector’.
Procurement is about sourcing goods and services, and buying them. Only around a third of our respondents were extensively involved in Procurement activities. Nonethe-less, some interesting insights emerge.
For example, we found that, although 72 per cent of respondents have implemented supplier scorecard systems in some way, and 53 per cent for all key suppliers, just a further 15 per cent use the techniquefor all ‘active’ suppliers, and just four per cent for all suppliers whether active or not. .
Whether such techniques have been effective is moot. Although seven times as many suppliers have improved leadtimes as have become worse (and a quarter have shrunk their lead times by 25 per cent or more), 40 per cent haven’t changed at all in the last three years. Delivery to the original request date also shows only marginal improvement – the median has risen over three years from 80 to 85 per cent, which still leaves a lot of late supply in the system.
Meanwhile, between 10 (median) and 20 (mean) per cent of purchases (by value) are still made from non-certified vendors (that is, suppliers who don’t have a pre-existing agreement with the relevant business unit). Although the difference between mean and median suggests as expected that a lot of this is low-value purchasing, that still represents a lot of poorly regulated spend.
Key to any understanding of current supply chain performance is the impact of global diversification of the supply base. We asked our sample to report on the extent to which their sites’ direct inputs are sourced from Eastern Europe and/or Asia, compared with three years ago. The increases are significant – firms now buy 35 per cent of inputs from outside Western Europe (27 per cent three years ago); Eastern Europe (mostly the new EU accession countries) has a 13 per cent share, up from nine per cent, and Asia is up from 10 to 14 per cent.
This does suggest that many supply chains are becoming significantly extended with all the additional risk factors and time penalties that that implies – this should be borne in mind when reviewing the analysis in this article. Although undoubtedly supply chains have considerable scope for improvement, it can equally be argued that they are coping surprisingly well, and continuing to show progressive improvement, in rapidly changing circumstances.
‘Procurement officers are no longer expected just to negotiate the best price’, says IBM’s Simon Terry, ‘but to deliver lasting value by juggling supplier relation-ships, internal needs and long-term costs.
‘Capabilities to support simple order placement are no longer sufficient – with procurement expected to deliver value, companies are finding they don’t have people with the right skills, and those skills are in short supply’.
Life is becoming more difficult for supply chain teams. The never-ending quest for cost reduction and the emergence of both Asian (China, India…) and Eastern European suppliers is continuously redefining the supply chain landscape. Integration with both internal subsidiaries and with external partners such as contract manufacturers and suppliers is now becoming a critical issue. Focusing on global efficiency requires supply chain leaders to get the foundations right before addressing this new challenge. In general, most of our survey respondents are quite conscious that there is still a significant room for improvement to deliver increased profitability. But lots of companies are not performing the basics adequately, and therefore are not delivering all the benefits that should accrue from proper Supply Chain Management.
n If you are interested in attending a briefing on the full results in London on 8th November, please register your interest by emailing firstname.lastname@example.org