Guide to Supply Chain Management

by David Jacoby

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  Table 12.1 Supply chain metrics maturity model

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  Source: Boston Strategies International

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  Stage 4 comes as companies reach a size where they exert such influence that their actions affect the public at a national or international level. It engages with stakeholders on labour agreements and public–private partnerships. It measures and manages risk because of the potential for loss not only to itself but also to its customers. For example, Wal-Mart’s store locations affect hundreds of millions of consumers, many of whom feel emotional about the company’s presence. Because of its dominant position, it exerts supply chain leadership, and so invests in information systems to allow it to have extended visibility across the chain, measuring its supply chain performance from one end of the supply chain to the other. Its momentum in NPD leads Wal-Mart to introduce more products more rapidly than most of its competitors.

  In stage 5, the CEO – for instance of companies such as Dell, Wal-Mart and HP – recognises the value of SCM as a competitive weapon and as a lever for moulding a new and innovative business model. Countries also recognise the value of SCM as a competitive weapon. The Saudi Arabian General Investment Agency defined “economic cities”, of which one (Hail) is a logistics hub. The hub plan is an innovative way to make Saudi Arabia worth more than the sum of its parts by connecting the cities inside the country to each other, by linking Saudi Arabia to Jordan and Iraq, and by potentially diverting some east-west traffic from the Suez Canal.

  Companies – and countries – in stage 5 use supply chain metrics and tools to decide when to accept profitable work and when to turn down loss-making business; when to add capacity for specific customers and when to stretch with the existing capacity; and how much to collect as a premium for customer-specific value-added services.

  Qatar Fuel: supply chain excellence by the numbers

  Qatar Fuel, based in Doha, Qatar, distributes and sells fuels including diesel, petrol (gasoline) and aviation fuel in Qatar. Rated one of the country’s top ten companies, Qatar Fuel strives to integrate supply chain excellence in everything it does. As a result, it is a leader in customer and employee satisfaction as well as shareholder earnings. This produces high levels of cost accountability, reliability, customer service and innovation.

  In Boston Strategies International’s 2008 benchmark study, which received 500 responses from around the world to a questionnaire, Qatar Fuel came top in 15 different supply chain metrics. Measures of its operational success covering the range of supply chain strategies include the following:

  Rationalisation >95% first pass yield

  5.6% cost of order fulfilment as % of order value

  >99% stock accuracy

  Synchronisation >97.6% uptime

  Six Sigma order and delivery cycle time reliability

  >99% of orders delivered by the time committed to

  Customisation >99% orders delivered by time customer requests

  Innovation >95% of items introduced in the last 12 months

  >95% of sales from new products or services

  Its supply chain is an important contributor to its outstanding financial performance. In 2007 the company earned a 58% return on capital employed (ROCE) and a 46% return on net assets.

  BASF’s balanced supply chain scorecard

  For BASF, the North American arm of a German chemicals manufacturer, measurement is a process rather than a set of numbers.8 It has outlined a nine-step process to ensure organisational alignment, facilitate a cross-functional view, motivate the organisation towards continuous improvement, and provide a means to link individual and organisation performance to reward systems.

  BASF follows a nine-step process for measurement that it continues to roll out throughout its business units as the company grows:

  Develop a project plan.

  Form the team and kick off the project.

  Provide performance measurement education on SCOR and balanced scorecards.

  Identify and assess existing key performance indicators (KPIs).

  Design a balanced scorecard.

  Develop and document the SCOR level 1 and supporting KPIs.

  Develop and document roles and responsibilities for formulating and assembling the metrics.

  Establish targets and tolerances for each KPI.

  Incorporate the use of metrics in business planning and control processes. Using the SCOR framework, BASF tracks:

  delivery reliability, including on-time delivery, fill rates and perfect order fulfilment;

  responsiveness, as measured by order fulfilment lead time;

  flexibility, as measured by supply chain response time and production flexibility;

  costs, including distribution and transportation, manufacturing and supply chain costs as a percentage of revenue;

  asset management, including inventory days of supply, capacity utilisation and cash-to-cash cycle time;

  financial indicators, including revenue, profitability and cash flow;

  status of enablers such as new processes and technologies, knowledge sharing and suggestions, as leading indicators of the ability to successfully implement the metrics, and to identify and troubleshoot problems.

  BASF uses a detailed profile for each KPI to ensure thorough and internally consistent metric development. The characteristics include:

  business process category that specifies which business process is being measured (customer service, inventory management, forecasting, production planning, warehousing, distribution, freight, training, procurement, etc);

  name of the owner of the metric, which specifies who is accountable for the result of the KPI;

  name of the data co-ordinator, which specifies who is responsible for gathering the data for the KPI;

  source of the data (financial systems, controller’s book, etc);

  purpose of the metric;

  frequency of measuring (hourly, daily, monthly, quarterly, annually, etc);

  level of detail available (product, project group, business, business group, country, customer, customer segment, supplier, location, etc);

  calculation method, that is, the formula and any special methods for calculating the figure, including averaging method, which elements to count, how much mean absolute deviation is acceptable, etc);

  what year, month, or other time period is used as the baseline;

  performance targets, including the timeframe by which these are expected to be achieved, as well as the source of the target (demonstrated historical performance level, business plan target, benchmark, etc);

  tolerance for error in measuring the metric;

  frequency of updating the source data and the metric value.

  L’Oréal’s supply chain cockpit

  L’Oréal, a French cosmetics company, established a “supply chain cockpit” of KPIs and targets after it standardised its packaging and raw material supply processes in Europe. The cockpit was part of a supply chain information system that linked production planning information among 13 European plants, and then extended its inventory visibility by linking to over 100 suppliers via both a web portal and direct data exchange from the suppliers’ ERP systems to its own.9

  13 Challenges for the future

  Supply chain management is in a golden age of its history. Globalisation, fast product cycles and choosy consumers have made supply chains more complex, and those same pressures have simultaneously increased the cost of failure. While for many years theory outpaced the practical implementation of many concepts, that theory is being called upon today to solve the most complex and challenging operations management problems. Companies are consuming all the applied theory that academics, consultants and software providers can deliver in order to enhance their competitive positions.

  Is SCM past its prime?

  However, some might argue that SCM – or even the movement of goods – is becoming irrelevant as manufacturing shrin
ks from 27% to 10% of developed economies such as that of the United States, and services overwhelmingly replace products in the global economy. Are tools such as materials requirements planning, design for maintainability, design for operability and profit life-cycle management for bills of material becoming marginalised as financial services, health care and other services become today’s growth engine?

  Some concepts have already been largely implemented by most companies. For instance, over two-thirds of companies already outsource their major logistics activities, and manufacturing and procurement are not far behind.1 Small and large companies alike have consolidated their supply bases by 50% or more; many are now single-sourcing. Lean methodology has become more or less ubiquitous since Japanese automakers demonstrated the beauty of the Toyota production system after the second world war. The popularity of Six Sigma has waned as the recent volatility in raw material and energy markets and sharp growth in Asia have made statistical variability reduction less urgent.

  The savings from some of the more mature SCM techniques are diminishing as well. Companies’ savings from RFX – requests for information (RFI), quotes (RFQ) and proposals (RFP), collectively called RFX for short – dropped from over 6% in 2005 to slightly over 4% in 2007, as the technique’s popularity made it less effective for stimulating competition among suppliers.2 The value of techniques to reduce inventory has also diminished as declining interest rates have reduced inventory carrying costs. Product simplification has been increasingly implemented since the days when automakers blazed trails by de-contenting their vehicles (engineering them to cut out any excess weight and complexity) to save costs.

  As well as becoming fully implemented, many of the process improvements have been built into enterprise resource planning (ERP) systems, best-of-breed applications or internal information systems. ERP systems have embedded SCM, product life-cycle management (PLM), customer relationship management (CRM) and supplier relationship management (SRM) modules. Transportation and warehouse management systems (TMS and WMS) have downscaled to the point where most are available at a price that can be afforded by even small companies. Applications have migrated from the costly in-house or legacy architecture to internet-based processing and even software as a service (saas) for “pay-as-you-go” on-demand intelligence.

  Where will SCM ultimately settle in the body of knowledge? Will it be subsumed by a grander movement, or will it last for 150 years, like the Industrial Revolution?

  So far we are halfway through the life-cycle of SCM and it has contributed potential for a 33% increase in EVA. Between 2008 and 2015, it will provide another 12% potential improvement to EVA for companies that ship goods or provide services with supporting goods.

  New conditions will provide fertile ground for the continued expansion of SCM. These include the Asian retailing boom, increasing trade and global sourcing, better customer analytics, increased availability of event management data, more standard data transfer protocols, green initiatives, and the extension of operations management principles and best practices to service industries.

  The Asian retailing boom

  As western-style retailing spreads throughout Asia and Chinese personal wealth accumulates, Asian retailers and western retailers based in Asia will transform Asian business with SCM. Metropolises like Kuala Lumpur, Shanghai and Ho Chi Minh will provide a model for smaller, more rural areas, providing the fuel for the trend to continue for many years. This will extend the product life-cycle of SCM considerably.

  The expansion towards Asia is happening vigorously. M&C Specialties, a mid-sized American company, set up a plant in China 12 years ago and it is working at fever pitch to produce mobile phone components for Motorola, Nokia and Ericsson. A third-party logistics (3PL) provider, DB Schenker, is developing tools for calculating the cost of inland transportation in developing economies. In addition, “the whole oil industry is moving eastward – both production and consumption,” says a product manager at Baker Petrolite, a maker of oil and gas production chemicals.3 Electrical manufacturers are rushing eastwards. For example, an electrical equipment giant, Schneider, is making a massive investment in China, Caterpillar opened a new generator plant in China, and Siemens’ Lighting division added capacity in Malaysia.

  The Middle East is also booming. HP is manufacturing in Riyadh, Saudi Arabia, and local companies like Saudi Advanced Electronics Company (AEC) are partnering with major western companies.4

  Increasing trade and global sourcing

  Continued globalisation will increase the need for collaborative inventory management and global sourcing. US imports and imports as a percentage of GDP doubled (from 17% to 35%) between 1990 and 2008. Moreover, Chinese and other Asian sources are increasingly making goods of a quality that is acceptable to western companies. Although the Asian sourcing boom has decelerated because of the exchange rate and the economic downturn that started in 2008, the quality of Asian goods is nearing that of western products and the simple volume of trade will keep Asia the focus of sourcing efforts.

  Better customer analytics

  With the pervasive availability of data gathered everywhere from credit card transactions to bank loans to grocery stores, enormous amounts are accumulating. The opportunity is not lost on data mining specialists, who are developing methods and technology that will allow better customer analytics and pricing. The data should provide the basis for far better targeted marketing campaigns and the ability to establish direct one-to-one relationships with customers. The trends towards more customer power over the supply chain will make value analysis more important, furthering the state of the art in yet another dimension of data mining and analysis.

  Enhanced data capture and transfer capabilities

  Advances in wireless communication, especially RFID, will generate more data about supply chain events and product life-cycles than can be absorbed. For high-value shipments, it will support event management: the capture, monitoring and management of the status of production steps or shipments throughout the value chain from order to delivery. The internet enabled what had previously been uneconomical, since creating virtual private networks between companies before 1995 was expensive and risky. Moving forward, increasing acceptance of standards such as XML will facilitate more collaboration, which will in turn reduce the bullwhip effect. In addition, post-sale opt-in value-added features involving the RFID chip may offer customers and sellers valuable benefits such as customised shopping experiences based on the tags embedded in what they are carrying or wearing. Penetration along both vertical (at various points along the value chain) and horizontal (across industries like credit cards and convenience stores) lines will give RFID the capability to generate volumes of data, thereby accelerating the pace of data-mining tools.

  Green initiatives

  The strong basis of waste reduction in the science of SCM will allow companies to mitigate the wasteful use of natural resources. They can use SCM practices to reduce air and water pollution, trash (through smarter packaging), electrical consumption (through better conservation techniques for lighting and energy consumption in buildings) and junk (through the “four Rs” – return, repair, reuse and recycle). For example, ink-toner companies use this technique by establishing green rules for returns.

  Product-services

  Services have dominated goods-producing industries for decades. In the United States, wholesale, retail and government employment grew from 75% to 86% of total employment between 1940 and 2000, and will reach approximately 96% of the total in 2020.

  The importance of the service sector does not only apply to the West; it also applies to a large number of economies that are generally considered to be based in manufacturing. For example, China’s tertiary (service) sector grew from 24% to nearly 40% of GDP between 1978 and 2007.5 In other countries, the tertiary sector represents between 28% of GDP (Nigeria) and 91% (Hong Kong), as shown in Table 13.1 overleaf.

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  Table 13.1 Tertiary sector as percenta
ge of GDP

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  Source: CIA Factbook, various years: 2006 basis except India (2005) and World (2004)

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  As the shift towards more make-to-order manufacturing, distribution and reselling occurs, more companies will offer value-added services to complement their products and to increase their customer mindshare. These will increase the connection with customers, which will encourage the adoption of customisation and innovation strategies that minimise the commoditisation of their products and services.

  As supply chains shift their focus towards the customer, distribution companies will jockey for position to own the customer relationship. Port Said in Egypt is offering value-added logistics services so as to become more important to ocean shipping lines and their customers. The list includes, for example, stripping/stuffing, bulk storage, general and conditioned warehousing, truck maintenance and repair, container repair and maintenance, cleaning, tanking, quality control, repacking, assembly, trailer renting and leasing, information and communication services, safety and security services, and hotels, restaurants and shops.

  They will also bundle and integrate services across the channel of distribution in their quest to increase sales and customer mindshare. Even in traditional manufacturing and industrial markets like that for compressors, companies that had been selling through value-added resellers that packaged the units together with air exchangers, engines, pumps and electrical circuitry, are starting to package the units themselves since this saves time and money, and also engages them in a direct relationship with the end-customer. Industry leaders are focusing on service agreements to hedge against downturns in the new equipment market. For example, Dresser Rand, a supplier of heavy industrial equipment, earns over half its revenues from the aftermarket.