August 27, 2008

Managing a Global Supply Chain

Excerpts from The Mckinsey Quarterly

Supply chains are increasingly global and complex, as companies aspire to support a variety of strategies, such as entering new markets, increasing speed to customers, and lowering costs. In this survey, The Mckinsey Quarterly asked operations and other senior executives from around the world about their companies’ supply chain strategies, the factors that influence those strategies, and the ways their companies act on these factors. They also explored how well executives think their companies are meeting their goals, how they manage their supply chains, and the challenges involved in running a global supply chain.

The results show that supply chain risk is rising sharply. Executives point to the greater complexity of products and services, higher energy prices, and increasing financial volatility as top factors influencing their supply chain strategies. Relatively few respondents, however, say that their companies are translating the importance they place on these factors into corporate action.

Nor do executives express confidence that their companies are meeting the top strategic goals: reducing costs, improving customer service, and getting products to market faster. In addition, for all the public attention paid to environmental concerns, including global warming, executives report that such issues have little influence on supply chain strategies.

Note:The McKinsey Quarterly conducted the survey in June 2008 and received responses from 273 executives from around the world. All data are weighted by the GDPs of the constituent countries to adjust for differences in response rates.

Forces at work

More than three-quarters of the respondents say the degree of supply chain risk their companies face has increased in the past five years, up from almost two-thirds two years ago. Executives in general-management positions are slightly less likely to say it had increased than executives in operational roles (74 percent compared with 86 percent), perhaps because operations executives are closer to supply chain processes and the day-to-day challenges of managing them.

The increasing complexity of products and services tops the list of global factors that executives say most influence their supply chain strategies (See Table 1). That focus seems persistent: seven in ten respondents who choose this factor say it was also important five years ago. By contrast, among the global executives who say that the rising price of energy is one of the most influential factors today, fully three-quarters indicate that it wasn’t five years ago—hardly surprising, given the recent spike in oil prices.

Despite the importance respondents place on these trends, relatively few say that their companies are acting on them. For example, only 35 and 16 percent of the executives say that their companies have acted in response to the increasing complexity of products and services and to rising energy prices, respectively (See Table 1).

The most common responses to the trends influencing supply chain strategies are increasing the efficiency of supply chain processes (71 percent of executives), actively managing risks along the supply chain (56 percent), and sourcing more inputs from low-cost countries (47 percent). The degree of attention paid to supply chain processes seems prudent, as process improvements are an effective way to manage increasing complexity.

Supply chain priorities

When setting strategic goals for supply chains, the respondents’ companies focus first on reducing costs and then on improving customer service and getting new products or services to market faster (See Table 2).

Reducing costs is even more important for companies in developing markets; perhaps companies in countries such as China are trying to anticipate the effect of rising costs (including labor costs and appreciating currencies) on the competitive advantages they currently enjoy as low-cost manufacturers.

Respondents in areas other than operations are upward of twice as likely as operations executives to say that getting new products to market faster is a top priority. The disparity may reflect functional differences between executives such as marketers, who tend to focus on targets like margins and market share (where speed to market is essential), and operations executives, who generally stress costs and customer service.

Executives, whatever the goals of their companies, say that those companies aren’t meeting them well (See Table 3). Indeed, fewer than half of the executives in our survey indicate that their companies completely or almost completely meet any strategic goal involving supply chains.

How companies manage global supply chains

When executives are asked to reflect on the greatest management challenge their companies face as supply chains become more global, they highlight the total resources required, followed by the recruitment and retention of sufficient local talent and the integration of the IT systems of companies and their vendors (See Table 4). Such challenges reflect perennial concerns; talent, for example, was the top supply chain risk two years ago. Creating transparency across a company’s supply chain involves thorny challenges as well, both technological (multiple vendors processing a single transaction, for example) and risk based (such as trade-offs in how much visibility a company’s vendors should have into proprietary IT systems that may represent a source of its competitive advantage).

Looking ahead

Against a backdrop of sharply rising supply chain risk, including the prospect of higher energy prices, companies are likely to take a harder look at their manufacturing and supply footprints. In some cases, companies could even consider localizing elements of their operations now managed in remote—including offshore—locations.

Moreover, our experience suggests that successful cross-functional collaboration will increasingly differentiate companies that meet the full range of their strategic goals from those that don’t. Companies that can ensure closer partnerships between operations and groups such as sales and marketing, for example, will be able to respond more quickly to changing trends and will have the edge in turning strategic trade-offs (say, speed versus cost) into sources of advantage.

Finally, while environmental concerns, particularly a company’s carbon footprint, are of increasing interest to consumers and executives, they are not yet major strategic considerations for supply chains. That will probably change. Trade-offs between emissions and profitability may lead companies to explore new kinds of supplier relationships, including the transfer of best practices to supply chain partners.

Managing your supply chain with IDEA

IDEA was created in 1998 to help the electrical industry cost costs from the supply chain. We will always remain dedicated to this purpose in 2008 and beyond. Our eCommerce products and services are designed to save your company time and money, help you improve customer service and get your products to market more efficiently. This can be done by:

  • Following standard guidelines released by the IDEA Standards Committee (ISC)
  • Synchronizing your data via Industry Data Warehouse, Industry Retail Database (IRD)
  • Conducting eCommerce with trading partners via Industry Data Exchange (IDX)

IDEA also offers value-added services to ensure the proper use of our eCommerce tools. Our number one goal is to help you reach yours.

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