The Payoff Potential in Supply Chain Management

Now comes supply chain management -- a powerful business process that can lead to a sustainable competitive advantage.

Managers increasingly recognize the tremendous payoff potential in successful supply chain management. They read about Wal-Mart's leveraging of the chain to achieve a dominant position in the retail marketplace. They hear of companies like Dell Computer reconfiguring the supply chain to respond almost immediately to customized orders. They're intrigued by the bold measures taken by M&M Mars to virtually eliminate standing inventory from the pipeline.

The supply chain payoff can come in many forms. It might reduce transaction costs by eliminating unnecessary steps in moving product to market. It could enhance customer service through closer coordination among vendors upstream and carriers, distributors, and customers downstream. Or maybe it increases market share within better customer service or lower costs.

Figure 1.	The Supply Chain Advantage

Defining the Terms
What is the supply chain and why is supply chain management capturing so much attention these days? Simply stated, the supply chain encompasses all of those activities associated with moving goods from the raw-materials stage through to the end user. This includes sourcing and procurement, production scheduling, order processing, inventory management, transportation, warehousing, and customer service. The information systems needed to monitor all of these activities are a critical part of the mix.

Successful supply chain management, then, coordinates and integrates all of these activities into a seamless process. It embraces and links all of the partners in the chain. In addition to the key functional areas within the organization, these partners include vendors, carriers, third-party logistics companies, and information systems providers.

The best supply chain management programs display certain common characteristics. For one, they focus intensely on actual customer demand. Instead of forcing into the market product that may or may not sell quickly (and thereby inviting high warehousing and inventory-carrying costs), they react to actual customer demand. And by doing so, the supply-chain leaders are able to minimize the flow of raw materials, finished product, and packaging materials at every point in the pipeline. Accenture has encapsulated these qualities in what it terms the "Seven Principles" of supply chain management. (See accompanying sidebar.)

To respond more accurately to actual customer demand and keep inventory to a minimum, leading companies have adopted a number of speed-to-market management techniques. The names by now have become part of the supply chain vernacular...Just in Time (JIT) manufacturing and distribution; efficient consumer response (ECR); vendor managed inventory (VMI); collaborative planning, forecasting, and replenishment (CPFR); cross docking; and more. These are the tools that help build a comprehensive supply chain structure.

Lining Up the Team
How do companies get to be supply chain leaders? An essential first step is to integrate the key internal organizational functions that are involved in moving product to market. But advancing from a highly segmented structure to a cross-functional team orientation can be a formidable challenge; people are inherently resistant to change. But as the industry leaders have demonstrated, making that essential transition pays handsome dividends in terms of cost reduction, operational efficiency, and customer satisfaction.

Determining exactly who should be on the supply chain team is a top priority. And while every organization and industry has its unique requirements, certain key functions must be represented on any supply chain team. These include logistics (inbound and outbound transportation, distribution, and warehousing); supply-management functions such as sourcing, vendor evaluation, and purchasing; and manufacturing-related activities such as production planning, scheduling, and packaging.

Inventory management and customer service must be represented on the team, too. Most successful teams also count information systems as a core member, underscoring the notion that information technology is a key enabler for achieving the desired communication, coordination, and cooperation across the supply chain.

Depending on the industry and the individual company, however, other members of the organization should be included on the supply-chain team. In a heavily promotion-oriented industry, for example, sales and marketing people should be represented. R&D should be considered for inclusion in fast-changing high-tech sectors like medical equipment or computers.

To achieve any measure of success, the supply chain team -- like any organization -- must set specific goals and objectives. It must clearly articulate what needs to be accomplished across the key metrics of order-cycle time, fill rates, inventory turns, on-time delivery performance, and so forth. Are there major purchasing or sourcing objectives to be met and what role will each of the team members play in helping achieve them? How will information technology solutions be evaluated and selected?

Though the potential advantages of building an integrated supply-chain team are abundant, there are some pitfalls. Applying a cross-functional team approach to streamlining product flow represents a radical change for most organizations. Not surprisingly, a change of this magnitude usually encounters resistance. In the typical company, functional barriers have built up over the years. These barriers, made more often of brick than of straw, are hard to bring down.

The main reason why functional silos persevere can be traced to the rewards system, says management consultant David G. Frentzel of Northeast Logistics who has worked extensively in this area. Managers traditionally have been measured and rewarded on what they have achieved within their department or functional area, he says. Not surprisingly, then, the notion of sub-optimizing their numbers for some larger goal is an unwelcome one.

"The first step in breaking down these barriers," says Frentzel, "is for management leadership to make people understand that they may have to make decisions that may not be optimal for their particular functional area, but are advantageous from the standpoint of the company's overall supply chain." This process can be facilitated, he adds, by linking objectives and incentives to overall supply-chain goals.

The Implementation Challenge
Once the internal integration is underway companies can set their sights on the next challenge--executing the supply chain strategy and building the bridges to the external partners. This is not an easy task, even for the best-run organizations. It takes a dedicated effort and committed people who know the meaning of persistence.

The consulting firm of A.T. Kearney has developed an instructive framework for setting--and then implementing--a strategic supply chain agenda. The consultants recommend that a supply chain assessment team be created to spearhead the effort. Under the team's guidance, the agenda-setting process would proceed along four steps.

1. Assess the organization's supply-chain competitiveness.
The evaluation begins by comparing business objectives to existing capabilities and performance. This exercise typically reveals where the existing supply chain can achieve immediate competitive advantage (the "low-hanging" fruit) and where inefficiencies may be leaving the company vulnerable to the competition.

2. Create a vision of the desired supply chain.
Through a series of "visioneering" sessions that include key customers and suppliers, the team considers how such trends as globalization, channel shifts, and new technology will affect the desired supply chain configuration. It addresses such questions as, What supply chain factors and performance levels drive customer buying decisions? What would make one supply chain a winner over others?

3. Define those actions required to close the gap between tomorrow's vision and today's reality.
The team identifies possible re-engineering, restructuring, or other actions that could help narrow any gaps. At this stage, the team also works closely with management to assess the organization's readiness to pursue needed changes.

4. Prioritize the action items identified and then commit the appropriate resources.
The end result of this task should be a unified commitment to a supply chain strategy and a clear agenda to achieve that strategy.

Subsequent actions to implement the supply-chain agenda typically fall into these broad categories:

• Designing the long-term supply chain structure to position the company in the right roles in the right supply chains with the right customers and suppliers.
• Re-engineering supply chain processes to streamline product, information, and funds flow internally and externally.
• Reinforcing the supply chain's functional foundation by improving quality and productivity within operational areas such as warehousing, transportation, and fleet management.

Ultimately, successful execution of this strategy will depend upon how effectively companies can integrate their operations with supply chain partners both upstream and downstream. As consultant James T. Morehouse of A.T. Kearney has pointed out in his writings and speeches, in tomorrow's market arena it will be supply chain vs. supply chain as opposed to company against company.

Given the extensive time, effort, and commitment of resources involved, is design and execution of a comprehensive supply-chain strategy really worth it all? The bottom-line numbers give the answer. According to A.T. Kearney's research, supply chain inefficiencies can waste up to 25 percent of a company's operating costs. With profit margins of only 3 to 4 percent, then, even a 5-percent reduction in supply-chain waste can double a company's profitability.

Quantifying the Paybacks
Numbers like these offer a compelling argument for effective supply chain management. But the task of quantifying the benefits of this business approach can be difficult. "This is really one of the biggest challenges facing supply chain professionals today," says Peter J. Metz, deputy director of the Center for Transportation Studies at the Massachusetts Institute of Technology. "And yet they need this kind of quantification to get management to invest in the development of supply chain resources."

Based on his experience with companies participating in MIT's Integrated Supply Chain Management Program, Metz has identified certain commonly reported bottom-line benefits. These center on cost reductions in such areas as inventory management, transportation and warehousing, and packaging; improved service through techniques like time-based delivery and make-to-order; and enhanced revenues, which result from higher product availability and greater product customization.

There are other payoffs as well. For example, the supply chain technique of optimizing the distribution network--that is, determining the best location for each facility, setting the proper system configuration, and selecting the right carriers--can bring immediate cost advantages of 20 to 30 percent. That's the number determined by IBM's Wholesale Distribution Industry Segment, based on consulting engagements in a wide range of industries. "This typically breaks down into transportation savings of 15 to 25 percent and improvements in inventory-carrying costs of 10 to 15 percent," says Mark Wheeler, national solutions manager for the IBM consulting unit.

Another supply chain technique with proven payback potential is cross docking--the practice of receiving and processing goods for reshipment in the shortest time possible and with minimum handling. According to Maurice A. Trebuchon, a partner with PricewaterhouseCoopers, cross docking can produce savings of 25 percent or more over conventional warehousing. In a presentation made at the annual Council of Logistics Management meeting, Trebuchon cited one manufacturer that used cross docking to realize a net savings of $0.84 per ton of freight processed. The savings resulted from the elimination of putaway, picking, and storage costs. (see Figure 2).

Figure 2.	Cost Savings through Cross Docking

On a broader scale, research conducted by Mercer Management Consulting reveals that organizations with the best supply chains typically excel across key performance metrics. Specifically, they outperform their counterparts in reducing operating costs, improving asset productivity, and compressing order-cycle time. In a separate study, Mercer found that close to half of all senior executives surveyed had specific supply-chain improvement projects among their top 10 corporate initiatives. This is a resounding affirmation at management's highest levels of the supply-chain's competitive potential.

Finally, the PRTM study cited earlier documented the powerful advantages of successful supply-chain management. The leading companies, for example, enjoyed a cash-to-order cycle time that was fully one-half of the median companies'. Similarly, their inventory days of supply turned out to be 50 percent less than the median. The best-in-class companies, moreover, met their promised delivery dates 17 percent more often than the rest of the pack.

Toward the Next Millennium
As we approach the 21st century, one thing becomes strikingly clear: Supply-chain management is not just the wave of the future. It's a tsunami that will engulf everything in its path that resists...every attempt to stockpile inventory, to blithely push product into the market, to respond haltingly to changing customer demands, to handle business transactions on paper.

For professionals working in this field, the issue is not so much whether to become expert in the art and science of supply-chain management, but rather how fast. This means becoming intimately familiar with the corporate mission and figuring out how supply chain processes can help achieve that mission. It means becoming an evangelist of the supply chain word--preaching both within the organization and externally to customers, suppliers, carriers, and third-party logistics providers.

CONCLUSION
For those companies that act quickly and decisively to capitalize on supply chain opportunities, the long-term, bottom line benefits are there for the taking. Just look at the acknowledged supply chain leaders--from Wal-Mart on down.

As for those organizations that choose the business-as-usual approach to moving their products to market, keep in mind this admonition from Damon Runyon: The race does not always go to swiftest or the strongest, but that's the way to bet.

About The Author
Francis J. Quinn currently serves in the dual capacity of chief editor of Supply Chain Management Review and Editor-at-Large of Logistics. Both of these magazines are published by Cahners Business Information, headquartered in Newton, Massachusetts.

Frank has been covering the transportation and logistics scene for close to two decades, having served for many years as editor of Traffic Management Magazine. He also has written a special supplement on logistics for Business Week and was a principal contributor to the book Supply Chain Directions for a New North America, prepared for the Council of Logistics Management by Accenture.

Frank holds an undergraduate degree from Boston College and a masters degree from the University of Missouri School of Journalism. His service experience in the U.S. Army includes tours of duty as a magazine editor in Washington D.C. and a military intelligence officer in Saigon, Vietnam.