November 7, 2007

Supply Chain Evolution

“Five Levels of Supply Chain Evolution.” (Exhibit 1) range from enterprise integration (level 1) to full network connectivity (level 5). At levels 1 and 2, supply chain optimization efforts are basically limited to within the four walls of the company. Level 3 denotes the beginning of external collaboration, which is typically accompanied by process improvements. Levels 4 and 5 denote true connectivity between the supply chain partners.


A high percentage of companies have moved through the third level and are purposely working to collaborate with external supply chain partners. The supply chain management not only is alive and well in the business arena but also is progressing nicely toward the concept of full network connectivity—the collaborative sharing of data and knowledge online among business partners resulting in significant cost reduction and revenue improvements.


Five Key Hypotheses


1) Companies and industries will vary widely in terms of their evolution against the supply chain framework. High technology, retail, chemicals, and aerospace and defense have made the most movement toward the advanced supply chain levels (and government, process manufacturing, and utilities still tend to lag somewhat). But the gap between the most and least advanced has narrowed. A significant number of companies are moving into the advanced levels in all of the key supply chain application areas. As more documentation is received from our research as well as from studies conducted by other organizations, we expect this hypothesis will become increasingly disproven. The underlying message here: supply chain improvement is for any company in any industry.


2) Supply chain initiatives will have a significant and well-documented impact, particularly with regard to cost savings and revenue improvements. This hypothesis continues to be confirmed. A trend established in the early 2000’s accelerated in 2005 and beyond with improvements to supply chain costs from 1 percent to more than 20 percent. While the magnitude of increase for revenue growth was not as great as with the cost reductions, the results continue to improve. In 2005 – 2006 firms that implemented supply chain initiatives had revenue increases from 1 to 20 percent or more—solid confirmation of what a supply chain initiative can do for business performance. Companies can add as much as 8 points of new profit to a financial statement through supply chain improvements.


3) Companies will adopt technology solutions before improving their related processes, thereby foreclosing on the technology’s full benefits. Companies still rely heavily on software and technology to achieve their intended supply chain results. Factors that are considered most important to supply chain progress are typically technology enablers. Many companies are clearly making a huge bet on supply chain technology to carry them forward.

At the same time, we remain concerned that companies are placing so much emphasis on technology rather than first making necessary business process changes. Companies installing software without rethinking or making necessary changes to underlying processes believing that the software will solve a company’s root-cause problems as well as enhance performance is a weak hope at best.


4) Inter-enterprise collaboration will be a mark of the advanced firms. There appears to be some solid movement toward collaboration across the network. But true collaboration remains a difficult concept for many to accept, especially when it comes to sharing what’s perceived to be sacrosanct internal information with external business allies. More than half of the respondents this year said that they needed to work on supplier and customer collaboration. It’s revealing that only about 40 percent say that their organization has the ability to allow key suppliers and customers to view order status online—a capability that differentiates the supply chain leaders from the rest of the pack. More and more firms have, in fact, scaled the cultural wall between levels 2 and 3 that inhibits business partnering. That’s good, but in all too many cases, sharing still remains more of an ideal than a reality.


5) Customers are the driving force behind supply chain initiatives. Companies have a greater appreciation of the connection between making improvements to their supply chain—greater visibility, shorter lead times, more flexibility, and so forth—and generating new revenues as a result. Some companies do make an investment in services and technologies related to customer demands but by now we would have expected a clearer and more comprehensive understanding of the connection between customer satisfaction and supply chain competency. In spite of rhetoric around the importance of customer satisfaction, very few companies are truly collaborating with key customers.


What’s the Financial Impact?

Supply chain investments and initiatives should prove instrumental in bringing new benefits to a business as well as to its suppliers and customers in an extended supply chain network. Lower costs and increased revenues are the two leading indicators of success in that regard.

To achieve these cost reductions and revenue enhancements, it’s necessary to make the right investments in people, processes, and technology. Accordingly, the survey asked several questions to determine precisely where and why the responding firms were investing.


The top three investment areas are logistics, transportation, and warehousing; forecasting, planning, and scheduling; and purchasing and sourcing. Competitive advantage is far and away the biggest driver behind investments.


Organization and Other Issues

To whom does your organization’s most senior supply chain executive report? The number reporting to what we see as the preferred position, the chief executive officer. In parallel, there is an increase in the number of top supply chain execs reporting to a vice president/senior vice president of operations position. This shift perhaps suggests that the impetus for supply chain advancement is being carried forward on a business unit basis, rather than across the entire organization. If true, this creates an element of risk; with the top supply chain executive reporting to a relatively lower position in the organization, the potential for supply chain management to drive enterprise-wide improvement is diminished.


On another organization dimension, there appears to be a trend toward greater collaboration between supply chain leadership and IT leadership within the enterprise.


Even with the progress being made in key areas like the supply chain-IT relationship, much work remains to be done including understanding the relationships between business and technology, data sharing/collaboration and teamwork.


Where Do We Go from Here?

So what is the call for action for supply chain professionals? Start by carefully calibrating your business on the maturity model. If the organization as a whole—or any business unit within it—is still languishing in levels 1 or 2, sound the alarm. Your business is at serious risk of falling behind and allowing more advanced competitors to build a sizable performance gap.

Next, take a hard look at just how much new revenue and profit have appeared on the profit and loss (P&L) statement and how much inventory has been reduced on the balance sheet as a result of your supply chain efforts. You should be seeing one to three points of new profit for a typical three-year supply chain effort. For initiatives stretching out over a longer period, the number should be approaching five to eight points.


In terms of specific recommendations, we again advise re-examining the end-to-end supply chain process steps, which connect the enterprise. Determine if value is being added at each step, especially at the points of hand-off. Only when value is created across the full enterprise will the business and its closest supply chain partners reach their full potential. When a careful process assessment is done, we invariably see unnecessary or redundant steps eliminated and certain activities transferred to the partners most capable of executing them. We also see cycle times shortened and responsiveness increased with less inventory and safety stock. These solid processes are simply the ingredients of the emerging business model that says you must be part of a value-managed enterprise or risk falling behind more capable networks.


We see little need for new tools but simply a more dedicated and intense investigation of the significant improvements that can be realized through a collaborative effort. Focus first on improved process steps and then on enabling technology. This means focusing intensely on value-adding processes and then collaborating with carefully selected and trusted business allies. This is the new road to higher revenues, lower costs, and greater customer satisfaction.


Control of the best customers is still up for grabs. It requires a dedication first to enterprise-wide supply chain improvement, and then a commitment to use those improvements to distinguish the network in the eyes of the most coveted customers. When that happens, the best customers will turn to no other business system but yours to satisfy their needs.


IDX, IDW, IRD, DAC and IeC tools that can help your company grow revenues, lower costs and increases customer satisfaction. Contact IDEA today to learn more about how we can help bolster your bottom line. For more information email IDEA at  



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