Because 86% of executives say supply chain management is a priority, yet only 33% measure it correctly, many businesses are losing out on cost control and profit, according to a report by Bain & Company.
The research reveals that the supply chain, a much talked-about source of cost control, risk reduction and performance efficiency, is mismanaged by most companies. The survey of 162 senior executives charged with supply chain management, including supply chain and purchasing managers, reveals the vast difference between the acknowledged importance of the supply chain and the steps being taken to realise its full potential.
While 86% of respondents rated supply chain performance a priority, two thirds of their companies fail to track the performance of their internal supply chains outside their corporations or divisions. In addition:
- Only 15% say they have full information on the performance of their company's supply chains, and only 3% report that they've got good data on the performance of their entire supply chains, which includes the activities of customers, vendors and distributors.
- And only 7% of their companies track the performance of their suppliers' and customers' activities, and many fail to collaborate outside the company on critical areas such as demand forecasting and production planning.
"Most companies are leaving lots of money on the table in their supply chains," said Miles Cook, the author of the survey. He explains, "A well-designed process, from procurement through manufacturing to arriving at the customer's doorstep, can unlock shocking costs and free up cash for other uses. And improvements to supply chain management can be the difference between a profitable and an unprofitable company. In today's environment, these savings can mean life or death for a business."
A leadership gap
According to the report, leading companies understand the value of supply chain management and are moving to increase their lead - with top performers such as Wal-Mart, Dell, Toyota and Home Depot working twice as efficiently than before, spending half as much money on their supply chains, and getting better results. Cook says that those leaders spend around 4% of revenues on supply chain costs compared to almost 10% for other companies.
New technologies that allow real-time information sharing throughout the enterprise make supply chain management possible but management practices and incentive systems often fail to keep pace. In particular, incentives that reward a part of the process, rather than rewarding end-to-end value creation, often prevent businesses from getting the best out of their supply chains.
"Transportation managers often get measured on delivery cost but not on velocity, which is a big problem," notes Cook. "By using the cheapest, slowest route, a fortune is lost in carrying costs, speed to market, and lost inventory turns. Despite substantial investment in supply chain software and systems, most companies are no faster at turning their inventories today than they were a decade ago."
Only 40% of the survey's respondents said their companies use performance incentives to motivate supply chain executives. And even enlightened companies make the mistake of choosing the wrong compensation targets: "Companies that reward buyers when they avoid running out of stock but don't offer anything when they improve inventory turns, are penny-wise and pound-foolish," explains Cook. Only 38% of managers have financial incentives linked to supply chain performance, and 78% of those incentives fail to take into account customer feedback and vendor results.
Five ways to improve
According to the report, it isn't difficult to get better value from the supply chain. The key is not technology but management. It does call for a rigorous data-driven approach but it is not necessarily costly. The report's five fundamentals of supply chain management are:
- Get the strategy right first: Most managers are unclear about which supply chain improvements will deliver a real advantage, which service enhancements customers will value the most, and how they should link their operations into those of suppliers and customers so the whole chain is competitive. In other words, they must get the entire supply chain strategy right before deciding on the technology for it.
- Put your star players on the problem: Supply chain positions are rarely viewed as glamorous. But the supply chain leaders recruit top people who save them millions of dollars with better forecasts, execution and vendor strategies. Those leaders also align many departments under a single senior executive whose job is to plan, measure and optimise the performance of the whole chain - both internally and externally.
- Replace hunches with metrics: Not tracking the performance of the whole supply chain means your organisation is in the dark about how much your supply chain inefficiencies cost. Yet many companies are just guessing when they set inventory targets - not knowing how much of their product will sell at a certain price and not analysing what they have sold at different prices. Leaders like Wal-Mart and Home Depot are beginning to use their supply chain skills for sophisticated management of shelf placement and pricing: they analyse what moves (and moves profitably), then assign space and set inventory accordingly.
- Reach past your four walls: The best performers have already linked their operations with those of their customers, suppliers and logistics providers. They know their own performance metrics, and those of all the partners in their supply chain. They can see right from the beginning to the end of the chain, and can make cost and volume adjustments before it's too late.
- Not all parts are created equal: A certain sign that your supply chain is broken is when everything flows through it the same way: all vendors deliver on the same terms and every item is stocked in every distribution centre. Best practice means managing multiple supply chains, and having plenty of options.
"With real growth so elusive nowadays, the supply chain is an absolutely essential place to look for gains," explains Cook. "The supply chain is a real source of competitive advantage. If the laggards don't take the problem seriously, the leaders will just keep widening the gap."