As businesses scour the globe for low-cost sources of supply, results from a recent Europe wide survey on fulfilment reveal the key priorities of leading supply chain executives. SERGIO NOGUEIRA discusses the results and uncovers the issues associated with centralising, offshoring and outsourcing supply chain operations.
Most executives acknowledge that global markets, sources and competitors have changed the way their companies must do
business. But knowing the best way, or ways, to change is another story.
Take fulfilment, a critical process whose very nature has been altered by a shifting locus of customers and supply sources. A recent Accenture survey of nearly 300 supply chain executives from across Europe (70 per cent were supply chain or procurement directors, with three-quarters representing companies whose annual revenues exceed £100 million) shows strong
support for centralising activities and relocating facilities to venues that are lower-cost or more proximate to emerging markets and engaging one or several third parties to help manage global supply chain operations.
Clearly, all approaches – centralising, offshoring and outsourcing – have merit. In fact, some of the most innovative companies are doing more of all three. For example, they might concurrently develop a ‘global control tower,’ move certain operations closer to suppliers, and leverage third parties to accelerate the development of local capabilities and relationships. As always, the key is making informed choices and successfully weaving them into a global operating strategy and model.
‘Core’ supply chain capabilities
Fulfilment, or how a company responds to its sales orders, is amongst the most ‘core’ of all supply chain capabilities. In fact, mastering the basics – warehouse management, distribution network design, packaging and transportation – is virtually synonymous with mastering fulfilment. Yet in recent years, many events have changed fulfilment’s nature and mission: Global markets have complicated order management and delivery. New sources for parts, materials and components have added layers of complexity to procurement, pricing and logistics. And technology breakthroughs such as customer segmentation algorithms, order-visibility tools, advanced planning applications, RFID and so forth, have made fulfilment more of a competitive leverage point. The net effect is that, for better or worse, fulfilment has become a marketplace differentiator. And it’s not just because of the function’s impact on service quality: Exceptional fulfilment capabilities can also reduce price points and thus give innovative companies a cost advantage.
This dichotomy, the potential for fulfilment excellence to improve service and lower costs, was reflected in the survey results. Asked to identify their top five fulfilment priorities, survey respondents were slightly more likely to focus on service than on costs. But the gap between their views of fulfilment as a service enhancer and fulfilment as a cost reducer is minor.
Through its survey, Accenture also sought to put fulfilment in a larger context, to see if the priorities executives assign to fulfilment also apply to supply chain management in general. The twin mantras of cost and service were again seen as the main change drivers. This is important to note because it confirms that supply chain management has largely shed its reputation as a cost centre. Companies know that their supply chain behaviours can win (or lose) customers.
The responses from those surveyed also remind us that, when it comes to attracting customers and building revenues, fulfilment is the nucleus of supply chain management. On a global playing field teeming with razor-thin margins and price-driven commodities, the game is often decided by a company’s ability to excel in fulfilment.
Supply-chain-savvy companies won’t find the above conclusions surprising: Fulfilment excellence is a key ingredient in most leaders’ quest for high performance (the ability to outpace competitors over time and across business cycles). And as shown in the survey results, a great many are willing to undergo fundamental changes to make it happen.
Supply chain transformation is a complex subject, far broader than the scope of this survey. Here, Accenture’s mission was narrower: highlight executive’s views on the business value of fulfilment, the drivers of change as they pertain to fulfilment, and the changes they’re considering to ensure continuous improvement.
Supply chain executives were asked about the approaches they would likely use to improve global fulfilment performance. Centralising supply chain activities within Europe was the most frequent response, followed by outsourcing and offshoring. These priorities are very consistent with the transformation sequence that high performing companies often follow: Simplification and centralisation, followed by outsourcing, followed by offshoring.
Accenture research has shown that centralising key business functions and creating a ‘shared services’ organisation, can
reduce costs by up to 50 per cent. As noted above, this is often an early-stage transformation initiative. Of the three, it may also be the most lucrative. Moreover, centralisation is particularly critical (and rewarding) for fulfilment, a function that, in many companies, has often grown haphazardly in response to the opening or expansion of new markets and supply sources. Plus, as supply chains continue to expand, the more critical it is that the knowledge and skills needed to
manage those operations not be overly disbursed. This imperative – centralised, concentrated intelligence – is the
philosophical foundation of ‘centres of excellence.’ Typical results include increased labour savings, reduced infrastructure costs, new opportunities to leverage specialty skills, creation of a ‘culture of continuous improvement,’ more-effective processes through standardisation, accelerated adoption of new technologies, and improved ability to rapidly assimilate acquisitions.
It’s important to note that ‘centralised fulfilment’ does not necessarily mean fewer fulfilment centres. More often, it implies shared services approaches to areas such as planning, forecasting and procurement that produce fulfilment-related rewards. A good example, is ‘taxoptimised’ supply chains, where value-added functions are performed in a low-tax environment.
Shared services decision points
Shared services is a simple concept. But balancing all the factors that contribute to a shared services decision is not at all simple. The following checklist contains characteristics that Accenture researchers found to be typical of organisations likely to benefit from a shared services capability: Multiple operations or business units utilising independent support
organisations; above-average costs for transaction processing; large volumes of transactions; high management-to-staff ratio in multiple markets; numerous employees located in high-cost areas; intent to grow through acquisitions, joint ventures or alliances; significant investments needed to enhance systems and support processes; specialised skills that are duplicated across multiple business units or geographies; and inconsistent service across businesses and/or markets.
Almost 20 per cent of respondents in this survey said they were displeased with the level of control they have over supply chain operations, particularly with respect to organisation-wide visibility and responsiveness. This is why many are thinking more about transferring responsibility for functions such as fulfilment to third parties. Accenture’s view is that outsourcing is more important and widespread than ever, but that several prerequisites are essential. First among these is a
crystal-clear business case that focuses on long-term ‘win-win’ partnerships. Survey respondents agree: About 75 per cent have developed a business case for outsourcing.
With respect to fulfilment, it is also vital that companies ‘think outside the package’, leveraging third parties in ways that increase efficiency and enhance competitive differentiation. A good example is not just linking third party services to a global operating model, but actually making outsourcing part of the model’s fabric – true business partnerships with shared risks and rewards; agreed-upon performance and financial goals; inter-organisational visibility; and extensive metrics
that are developed collaboratively. The most successful relationships are always those where client and services provider have compatible cultures and aligned strategies.
End-to-end supply chain
Another way to think about fulfilment and outsourcing is (ironically) to not think about outsourcing fulfilment specifically. The idea is to build a single, end-to-end supply chain outsourcing relationship that is handled by a ‘managed supply chain services provider.’ This entity is basically a highlyspecialised supply chain hub assigned to set up the appropriate infrastructure; establish and meet service levels; optimise the contributions of multiple third parties; and deliver against tightly defined costs and service metrics. Managed supply chain services providers can also be counted on to work with clients on a service model that balances operational excellence and continuous improvement (typically using financial measures).
Using managed supply chain services is not an approach that has hit the mainstream. However, its benefits are significant. And precisely because it hasn’t reached the mainstream, it may offer just the kind of competitive advantage that companies need, such as: Unified delivery of supply chain services; integrated planning and forecasting (eg across supply chain disciplines); assured supply-chain-wide results, based on agreed-upon metrics; and high levels of technology specialisation.
Companies are increasingly working on a more globalised basis. A strong percentage are doing more business outside their home markets. And an even higher number are working with a truly global cadre of part, component and material suppliers.
Offshoring, or relocating manufacturing and/or distribution operations, is a natural response to a more-global business environment. Worldwide competition increases the need to reduce expenses by working in lowercost venues. And it’s just good business for companies to get closer to key supply sources and emerging markets.
Seventy three per cent of our survey respondents have offshored logistics operations, particularly to Eastern Europe and Asia. And 75 per cent plan further offshore operations over the next three years. However, most are not particularly satisfied. Less than 25 per cent view offshoring performance as outstanding or very good in terms of reliability, quality, lead times and customer service. Only 17 per cent indicated that their company has achieved savings greater than 10 per
This contradiction – strong support for offshoring combined with sketchy offshoring results – is tricky. Accenture’s view is that, for many companies, offshoring is the only logical response to a truly global business climate. However, it’s likely that some companies have underestimated the cost and complexity associated with offshoring manufacturing and distribution
operations. The most obvious example is longer supply lines that can reduce reliability and increase inventories. But companies must also have a plan for dealing with visibility problems; conflicting cultures and political systems; less access to skilled resources; forecasting/planning complexities; lack of technology sophistication; and even currency fluctuations. Without such a plan, negative outcomes may be unavoidable. Yet a full one third of our survey respondents said they haven’t built a business case for offshore operations.
Drivers of value
Surveys of this kind always produce a certain amount of ambiguity, although this often contributes to their value by highlighting areas of inconsistency or uncertainty. Still, several conclusions are very clear. One is that centralisation, outsourcing and offshoring (in any combination) are significant drivers of supply chain value – widely practiced responses to a far-more-global world of sourcing and marketmaking.
A second, largely inescapable conclusion is that these are tough moves to make, and that many companies still have far to go. As a result, huge opportunities await those entities whose supply chain performance sets them apart. Excellence in fulfilment is a great example, given its unique potential to simultaneously improve service and reduce costs.
Sergio Nogueira is head UK/I fulfilment practice, partner, Accenture. For a copy of the global fulfilment survey findings, please visit www.accenture.com/supplychain