SCMR - Supply Chain - 2009 - N533

SEPTEMBER 2 0 0 9
FEATURES
14 From Guru to GM:
Developing Tomorrows
Leaders
By Pamela Culpepper and Terra Winston
20 Vested Outsourcing:
A Better Way to Outsource
By Kate Vitasek and Mike Ledyard
28 Is Supply Chain the Cure
for Rising Healthcare Costs?
By Mike Duffy
36 An Update on the State of
Supply Chain Education
By Stanley E. Fawcett
43 Is SaaS Right for You?
By Sean A. Murphy
COMMENTARY
Insights ....................................... 4
Global Links ................................ 8
Technology ............................... 10
Profiles in Leadership .............. 12
SPECIAL SUPPLEMENT
S50 S&OP: Now More
Than Ever
By William Atkinson
SUPPLY MANAGMENT 54
www.scmr.com
FOCUS on the
FUTURE
SCM090901cov 00C1 9/1/2009 4:24:21 PM

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www.scmr.com Sup p ly Cha i n Ma na gement Rev i ew Sep t ember 2 0 0 9
4 From Guru to GM:

Developing Tomorrows Leaders
Traditional supply chain education has focused
on creating gurus, professionals that have
deep but narrow expertise in both the discipline
and industry. But in todays environment, that
approach no longer suffices. Pamela Culpepper
and Terra Winston tell why leaders like
PepsiCo are working to develop a new breed of
supply chain leaderthe general manager.

20 Vested Outsourcing: A
Better Way to Outsource
Why do so many outsourcing relationships
fail to achieve their true potential? One big
reason, say authors Kate Vitasek and Mike
Ledyard, is that they are based on a Whats
in it for me philosophy. Vested Outsourcing
changes all that. It encourages both parties
to act for mutual benefitand in the process
lays the foundation for sustained success.
28 Is Supply Chain the Cure
for Rising Healthcare Costs?
The cost of healthcare in the U.S. has been a white-
hot topic for some time now. But seldom in that
debate do we hear mention of the supply chain.
Thats too bad because a smarter approach to supply
chain management could hold the key to lowering
healthcare costs overall. Veteran supply chain exec-
utive Mike Duffy of Cardinal Health explains.
36 An Update on the State of
Supply Chain Education
Which are the top universities when it comes
to supply chain education? What role should
professional associations and publications play
in the development of the modern supply chain
professional? Find the answers in this article,
based on new research conducted by Dr. Stanley
E. Fawcett of Brigham Young University.
43 SaaS: Right for You?
Software as a Service, or SaaS, is finally start-
ing to catch on after a few false starts. More
and more users are finding benefit is sub-
scribing to technology on an as-needed basis
as opposed to building or buying it. SCMR
Associate Editor Sean Murphy tells how to
determine if SaaS is suited for your supply
chain operations.
SPECIAL SUPPLEMENT
S50 S&OP:
Now More than Ever
Sep t ember 2 0 0 9 Vol ume 13, Number 6
FEATURES
COMMENTARY
4 Insights:
Bursting the Other Peoples Bubble
By Larry Lapide
8 Global Links:
Fulfillment Masters
By Narendra Mulani
0 Technology:
Supply Chain and the CIO
By Kevin OMarah
2 Profiles in Leadership:
Long-term Perspective:
John Mascaritolo
By John Kerr
54 Spotlight on Supply Management:
Planning and the Process Industries
By Kish Khemani, Andrew Walberer and
Oliver Zeranski
C3 SCMR.com Online
To subscribe: Visit Supply Chain Management Review
online at www.scmr.com/sub or call
(888) 343-5567. (Outside of the U.S., call
(515) 247-2984). Email subscriber customer
service at SCNcustserv@cdsfulfillment.com.
Authors Guidelines: Interested in writing an article
for possible publication in Supply Chain Management
Review? See our Guidelines for Authors on www.scmr.
com.
Reprints: Reprints of articles from this issue and past
issues are available from The YGS Group. Contact
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marsh@theygsgroup.com
Editorial
Advisory Board
n
Karen alber
H.J.HeinzCo.
n
JacK T. ampuJa
NiagaraUniversity
n Joseph c. andrasKi
VICSAssociation
n donald J. bowersox
MichiganStateUniversity
n James r. byron
IBMConsulting
n John a. calTagirone
TheRevereGroup
n brian cargille
Hewlett-PackardCo.
n shoshanah a. cohen
PRTM
n roberT b. handfield
NorthCarolinaState
University
n James T. hinTlian, Jr.
Accenture
n nicholas J. lahowchic
LimitedDistribution
ServicesInc.
n hau l. lee
StanfordUniversity
n roberT c. lieb
NortheasternUniversity
n clifford f. lynch
C.F.Lynch&Associates
n edward J. marien
UniversityofWisconsin-
MadisonManagement
Institute
n John T. menTzer
UniversityofTennessee
n James b. rice, Jr.
MassachusettsInstitute
ofTechnology
n larry smiTh
WestMarine
Illustration by
Theo Rudnak
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2
Sup p l y Cha i n Ma na gement Rev i ew Sep t ember 2 0 0 9 www.scmr.com
Building Blocks for the Future
I N T H I S i S S U E
W
ith all of the business challenges of the past
18 months, its little wonder that everyone
seems to be looking to the future. This is-
sue of SCMR is no exception. In particular,
were assessing the future from three distinct, yet inter-
related, perspectives: people, process, and technology.
Lets take things in that order.
The underpinning of any progress going forward
is people. But where will that talent come from? The
universities are a big part of the answer and, as a
new study on supply chain eduction suggests, they
are doing their best to deliver. But they have to do
even better, concludes Dr. Stanley Fawcett in his
report on the State of Supply Chain Education, if
they are to meet the rapidly changing needs of a new
global economy.
Smart companies are not relying solely on the
educational institutions to keep the talent pipeline
flowing. Instead, they are assuming a large part of
the burden themselves. PepsiCo is a prime example.
As Pamela Culpepper, PepsiCos head of human
resources for supply chain management, writes in
her co-authored article, the company is aggressively
moving to nurture a cadre of future general man-
agersmoving beyond the traditional approach of
developing specialized gurus.
The processes that have worked adequately in the
past may not be well suited for the future, either.
Take the way in which supply chain and logistics
services have been outsourced, for example. In a
typical scenario, the buyer of these services viewed
the arrangement as a one-way
streeti.e., whatever direc-
tion was best for the buyer. This
was manifested in never-ending
requests to cut rates, micro man-
aging the providers operations,
or poorly defined performance
metrics.
But theres a better way to
outsource, insist Kate Vitasek
and Mike Ledyard in their fea-
ture article. Its called vested
outsourcing. And under that
concept, the focus shifts from a
whats in for me mentality (mainly on the buyers
part) to whats in it for we. The buyer and provid-
er of the services work in a collaborative manner to
achieve desired outcomes that extend beyond cost
cutting to include revenue enhancement, greater
operational efficiency, higher asset utilization, and
so forth. The authors make a convincing argument
for vested outsourcing as the preferred way to go for-
ward.
Finally, people and processes will be made more
productive by advances in technology. One of the
most promising is a technology known as Software
as a Service (SaaS). SCMR Associate Editor Sean
Murphy explains how SaaS works and tells why its
poised for rapid adoption in the supply chain space.
No predictions here, but we do hope this September
issue will help you prepare for whatever comes.
Frank Quinn, Editor
(781) 734-8652
fquinn@reedbusiness.com
Editorial Offices
225 Wyman St. Waltham, MA 02451, (781) 734-8000, scmr@reedbusiness.com
Francis J. Quinn
Editor
fquinn@reedbusiness.com
Sean A. Murphy
Associate Editor
sean.murphy@reedbusiness.com
John Kerr
Special Projects Editor
kerreditorial@comcast.net
Mike Roach
Senior Art Director
mroach@reedbusiness.com
Norm Graf
Creative Director
ngraf@reedbusiness.com
Kelly Jones
Production Manager
kelly.jones@reedbusiness.com
Charles Tanner
Director of Audience Marketing
ctanner@reedbusiness.com
Brian Ceraolo
Publisher
bceraolo@reedbusiness.com
William C. Copacino
Consulting Editor
A Division of Reed Elsevier
SCM090901editorial 2 9/1/2009 4:25:05 PM
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As I write this column, indicators are showing
some bright spots in the economy that portend
a recovery. This recession has been extremely
hard on supply chain managers because they
were charged with the responsibility to quickly
reduce their companies costs and inventories
to better align them with significantly reduced
revenues. Some of them also lost their jobs
in the process. However, whatever the future
economy looks likeand there are many that
believe it will be significantly different from
the past decadessupply chain managers will
be at the forefront in enabling the economy to
grow again globally. After all, no matter what
happens, goods and services are always needed
because the basic necessities of life and busi-
nesses require the movement of physical goods
such as food, shelter, and clothing.
The Other Peoples Bubble
During the Internet Bubble (when I was a soft-
ware analyst) I used to tell people that I was
going to stay focused on supply chain manage-
ment (SCM) because Id rather be involved in
moving physical goods than moving bits and
bytes around, since there was more job security
in doing that. Some thought me to be behind
the times because there was a new economy
coming and I was not going to be a part of it.
In the end that bubble burst and showed that
I had made the right decision. The so-called
new economy never materialized because it
was predicated on the bubble surviving indefi-
nitely. Its major premise of e-business merely
became an enabling part of the old economy
and SCM was still important.
The recent recession comes after a decade
that some people are calling the Credit Bubble
in which many overextended their debt to buy
things they could not really afford and finan-
cial firms took on more risk than they should
have to reap huge bonuses. It manifested itself
because the US was experiencing affluence and
displaying conspicuous-consumption patterns
that have never been seen throughout history.
However, I prefer to use another term for this
bubble, the Other Peoples Bubble (OPB).
During this bubble the financial indus-
try was taking big risks using other peoples
money and consumers where taking on more
debt assuming that when they sold their
houses future buyers would, in effect, help
pay it off. Supply chain managers were also
culpable during the OPB as companies over-
outsourced businesses and relied on other
peoples manufacturing and service opera-
tions, i.e., other peoples efforts.
This outsourcing trend has gotten to such
an extreme level that I just read an article sug-
gesting that we can save health care costs by
outsourcing medical services. Patients would
travel to other countries for procedures, since
their doctors get paid less or we would import
foreign doctors and pay them less; i.e., we
would use other peoples doctors. Thankfully,
we havent outsourced product innovation and
started living off other peoples minds, as well!
The Recovery Economy
The major changes we will see in the recov-
ery economy will be the result of a backlash
to the OBP, as well as an inflection point in
some of the long-term trends Ive discussed
in prior Insights columns. The recession has
been a drastic wakeup call for the U.S. to rely
less on other peoples efforts, and to recognize
I nS I GHT S
Bursting the Other
Peoples Bubble
Many of our current economic woes are caused by
dependence on others to solve financial problems for us.
B Y L ARRY L API DE
Dr. Lapide is a lecturer
at the University of
Massachusetts Boston
Campus and is an MIT
Research Affiliate.
He welcomes comments
on his columns at
llapide@mit.edu.
SCM090901_Insights 4 9/1/2009 10:24:55 PM
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S UP P LY C H A I N I N S I G H T S
and take advantage of the new global trading landscape.
Here are five aspects that I predict (or just wish) will
be part of the recovery economy:
1. Fewer of the best and brightest will gravitate to
the financial industry. During the OPB, exorbitant com-
pensation could be gotten by taking big risks with other
peoples money, so smart college graduates went where
the money was. Expect more of the best and brightest
to put their brains to work on productive things, such as
innovation, manufacturing and SCM.
2. Working in manufacturing and SCM will become
respectable. I went to a Managing Automation confer-
ence a couple of years ago and we discussed the fact that
the younger generation had little interest in manufactur-
ing. Boomer parents were not raising children to work
in it when more money could be made doing something
else. While the U.S. is still the largest manufacturing
country in the world, recent estimates forecast China to
catch up to the U.S. by 2015. This wont happen as soon
if this aspect is part of the recovery economy.
3. Being green, especially energy-efficient, will be in
vogue again. During the recession oil prices dropped dras-
tically from recent highs and many managers lost their
focus on energy efficiency to focus instead on reducing
costs and inventories. Oil prices will rise again as the
economy improves and being green will re-emerge.
4. U.S firms will learn to compete more effectively in
other countries. The economies of other countries out-
side the U.S. (and Western Europe) have been growing
faster, leading to a long-term trend of diminished U.S.
dominance in world trading. As the U.S. consumer con-
tinues to be more frugal, displaying less conspicuous
consumption, those U.S. companies that have come to
rely on the consumers thirst for goods will by necessity
learn to compete better for business in other countries.
5. SCM will get back on its evolutionary track toward
optimized demand management. Prior to the recession,
SCM was evolving toward becoming a competitive weapon
that businesses could use to compete better, including lever-
aging more profitable demand-shaping. When the economy
improves supply chain managers will be able to change their
focus from just holding down costs and inventories.
Many of these changes portend a brighter future
for SCM. Whether or not all of them happen, the very
fact that the recovery economy will be vastly different
from the OPB represents a marked change, and change
always bodes well for managers that are responsible for
making and moving goods.
Heres just a sample of the web events
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Procurement Skills Needed to Succeed
The webcasts typically run 60 minutes
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insights and information.
Visit www.scmr.com and just
click on the WEBCAST tab
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GLOBAL L I NkS
Fulfillment Masters
Enjoy Huge Advantage
Theleadersexcelaton-time,in-fulldeliverywithhalfthe
inventoryandathalfthetransportationcosts.
ByNarendraMulani
Narendra Mulani
heads Accentures
Supply Chain
Management
Service line. He
can be reached
at narendra.
p.mulani@
accenture.com
In a world where cus-
tomers can change
suppliers at the click
of a mouse, fulfll-
ment masterythe
ability to cost-eff-
ciently receive,
compile, and deliver
orders on time and in full (OTIF)has
become more vital than ever.
But what capabilities actually contribute most
directly to fulfillment mastery? And if a company
is able to build such a capability, what impact
does that have on its financial
performance? In short, is the gain
worth the pain?
To learn the answers, Accenture
recently surveyed 240 fulfillment
executives from around the world.
What we discovered is that compa-
nies fulfillment performance might
generally be termed good but not
great. On the receiving end, sur-
vey respondents get 90 percent of orders on time
and in full. Respondents performance on behalf
of their customers is slightly better: They deliver
95 percent of their customers orders in full and
on time. Days of supply for finished goods inven-
tory average 15 days.
Such accomplishments are decent to say the
least. However, they fall well short of the perfor-
mance levels attained by the roughly 10 percent
of companies Accenture defines as fulfillment
masters. According to our research, masters
achieve 98 percent on-time, in-full delivery. And
they do so with 50 percent less inventory and
outbound transportation costs that are less than
half that of the respondent population as a whole
(2 percent of total revenue versus 5 percent).
Bottom line: Masters enjoy higher service levels
for growing the business and lower costs for oper-
ating the business.
It should also be noted that masters dem-
onstrate high levels of sophistication in every
element of fulfillmentfrom fulfillment strat-
egy (how they design and adjust their fulfill-
ment operations), through operational excel-
lence (how well they execute the strategy),
and technology (how effectively they use IT to
improve operations). In the remainder of this
article, we examine the skills and capabilities
associated with mastering fulfillment strategy.
How masters create dynamic
fulfillment operations
One of the key distinctions between fulfllment
masters and laggards is the ability to build
dynamic and responsive supply chains that can
be adjusted rapidly to meet changing market
conditions (shifting customer demands and
Oneofthekeydistinctions
betweenfulfillmentmastersand
laggardsistheabilitytobuild
dynamicandresponsivesupply
chains.
SCM090901global 8 9/1/2009 10:55:00 PM
www.scmr.com Sup p l y Cha i n Ma na gement Rev i ew Sep t ember 2 0 0 9
GLOBAL L I NkS ( c o nt i nu e d)
competitive moves; changes in suppliers; fuctuations in
fuel prices and interest rates, and so on.).
Toward this end, masters design their supply chains by
continuously reassessing cost and service factors, adjusting
their fulfillment methods, regularly reviewing their chan-
nels to customers, emphasizing selectivity in their choice of
supply chain partners, and actively modeling and managing
their carbon footprint.
Consider flexibility as it relates to inbound flows:
Masters typically pay close attention to the capabilities of
transportation providers and supplier locations. As part of
their inbound flow analysis, every one of the masters we sur-
veyed regularly reviews both transportation firm capability
and supplier locations. By comparison, less than
half of the laggards evaluate supplier locations
and only 40 percent scrutinize transportation
providers. Masters are also more rigorous than
laggards about monitoring key elements of out-
bound flow. One hundred percent of surveyed
masters evaluate customer locations when ana-
lyzing their outbound flow, compared to only
half the laggards.
Fulfillment masters are also more likely to
actively manage cost to serve in each distribu-
tion channel (only a minority of laggards do
this). And half the masters we studied regularly
evaluate the tradeoff between cost to serve and
value achieved, compared to only one-third of
the laggards. In addition, masters are routinely
involved in the R&D processthus ensuring
that efficiencies, constraints, and available
value-adding activities are incorporated into
product design.
Lastly, we determined that masters more
fully leverage third party logistics firms. Some
80 percent said their 3PLs have boosted flex-
ibility, while a lower percentage of the lag-
gards63 percentsaid the same.
The case of a major elevator manufacturer
illustrates the payoff from possessing sophis-
ticated capabilities in fulfillment strategy. To
improve operating margins, the companys North
American division moved U.S. production to
Mexico, which forced a reassessment of its U.S.
distribution network. After evaluating the net-
work, the company designed a new supply chain
that cut the companys transportation costs by
13 percent. Total fulfillment savings reached
nearly $5 million while fulfillment service levels doubled.
Clearly, fulfillment masters have reached a higher plane
when it comes to strategy development. It is also evident
that a high level of enlightenment about cost and service
benefits has resulted.
Next month, we plan to explore how fulfillment masters
put their strategies to work, with operations and technolo-
gies of karmic proportions.
The authors column, Mulani on Excellence, regulary
appears in Logistic Management magazine (www.logis-
ticsmgmt.com). This article originally appeared in the
magazines June 2009 issue.
0% 20% 40% 60% 80% 100%
Focus on Customer Locations
in Outbound Flow Analysis
Review Transportation Provider
Capabilities in Inbound Flow Analysis
Review Supplier Locations
in Inbound Flow Analysis
Design Channels for Needs
of Products and Customers
Regularly Monitor and Measure
Cost to Serve in Each Channel
Regularly Evaluate Tradeoff Between
Cost to Serve and Value Achieved
Evaluate Outbound Flows
More Frequently than Quarterly
Evaluate Inbound Flows
More Frequently than Quarterly
Fulfillment Routinely Involved in R&D
Specific Focus on Product
Life Cycle and Inventory
Actively Model and
Manage Carbon Footprint
Masters
Laggards
EXHIBIT 1
Strategy Metrics Comparing
Fulfillment Masters and Laggards
SCM090901global 9 9/1/2009 10:55:11 PM
10
TEChNOLOGY
Supply Chain and the CIO
ITandthesupplychainfunctionsneedtogetintegrated
orevenbetterunitediftheorganizationwantstoenhance
itsbusinessperformance.
ByKevinOMarah
Kevin OMarah
is Chief
Strategy
Officer at AMR
Research.
The past 20 years have
seen a dramatic change
in the supply chain dis-
cipline from one essen-
tially serving as a low-
skill support function
for manufacturing to
something that mirrors
the entire operational
footprint of the business. Where once supply chain
meant simply purchasing to feed production or
shipping of finished goods from the plant, today it is
more likely to encompass everything from strategic
sourcing through customer fulfillment, inclusive of
manufacturing which increasingly reports to supply
chain rather than the other way around. Further, the
best supply chain organizations (Exhibit 1 shows
AMRs Top 25) also have some authority over new
product development and launch, and other strate-
gic functions like customer management and post-
sales support.
The drivers behind this expansion of
responsibility for supply chain include
the rise of a truly global supply chain,
especially manufacturing in China,
which relies more on third-party pro-
duction assets than company-owned
factories. Also contributing is the
shortening of product lifecycles across
industries, which has forced businesses
to think about engineering and prod-
uct development in terms of design-
for-supply chain. Even the increasing
power of customers has played a role as
consumer or market power has focused
operations to lean inventories up and
down the supply chain rather than sim-
ply within the plant.
The one common thread uniting
these drivers is information technol-
ogy. IT has given us scalable communication
with contract manufacturers in low-cost coun-
tries, automated engineering to sourcing integra-
tion, and downstream demand visibility. Without
enterprise information technology, there would
be no global supply chain function as we know
it today.
Yet, too often the office of the CIO seems out
of touch with the business requirements of day-
to-day users in the supply chain function. Why
is this and what can be done to fix it?
Whats Wrong With IT?
IT as a corporate function got its start as a data
processing role, essentially managing site-specific
computing equipment and the arcane program-
ming languages needed to automate basic trans-
actions and to query databases for reports. This
function developed an urgent need to understand
technology from the integrated circuit forward.
EXHIBIT 1
Top 25 vs. All Functional Supply Chain Stations
Deliver
78%
77%
1%
Plan
67%
68%
-1%
Customer
Management
67%
52%
29%
Source
67%
63%
6%
Make
56%
40%
40%
New Product
Design and Launch
44%
31%
42%
Top 25
All
Differential
Top 25 n=9, All n=198
Post Sales
Support
33%
25%
32%
SCM090901technology 10 9/1/2009 11:01:02 PM
11
TEChNOLOGY ( c o nt i nu e d)
In other words, corporate IT started life as a technology
push dynamic. Hot new minicomputers gave way to even
hotter client-server architectures and the CIOs mission
was to stay on top of these waves of innovation.
Things really got bad during the mid-1990s when a glo-
balizing business environment forced corporate strategists
in the developed U.S. and European markets to reengineer
their companies. This movement meant a total overhaul
of the information systems that had been set in place as
isolated applications serving local masters. The resulting
boom in Enterprise Resource Planning(ERP) deployments
essentially promised that, once the rollout was complete,
a new and radically more efficient system would reign.
Unfortunately, the rollout took too long, cost too much,
and largely missed the next wave of technology innovation,
which was the rise of web applications.
The state of affairs today is largely one of misalignment
at best, disillusionment at worst. IT departments are being
reduced with a combination of outsourcing and budget
cuts. The typical CIO in a supply chain intensive busi-
ness today struggles to keep up with rising maintenance
costs of existing systems. The CIO also feels pressure from
operational users to find and deliver new and better appli-
cations for critical processes. The heady days of leading
selection teams choosing between SAP and Oracle or i2
Technologies and Manugistics are long gone.
WhatCanBeDonetoFixit?
The first step in getting IT and the business realigned is
to recognize that IT is an essential ingredient to success
in supply chain. Consider the following typical IT inten-
sive processes and how well they could run without a solid
enterprise information architecture:
Order managementespecially in very high volume
cases like consumer packaged goods manufacturers who
may have millions of order lines every day with promo-
tions, charge-backs and other special considerations add-
ing complexity.
Inventory optimizationwhether this means simple
inventory visibility, or a more sophisticated planning tool,
companies sourcing, assembling and delivering hundreds
of thousands of units daily across potentially hundreds of
locations need to handle vast amounts of data.
Configuration managementcomplex rules that gov-
ern what can go with what, especially in engineering inten-
sive industries, calls for enormous intelligence and speed,
and generally with little margin for error.
These examples are but a few of the mission critical
supply chain functions that simply cannot work at scale
without well-designed and well-integrated enterprise infor-
mation systems. Tying these top and bottom-line business
processes to IT enablement is essential to general man-
agements understanding of such vital tasks as master data
management or business process modeling.
A second step most companies need to take reverses the
first: IT must appreciate the process needs of their busi-
ness users. Plenty of lip service is paid to this principle,
and yet, far too often the office of the CIO remains wed-
ded to its project go live commitments at the expense of
real business needs. This problem is especially bad when
the supply chain functionality demanded by the opera-
tional user is part of a future release or later rollout of the
dominant ERP backbone vendor. Faced with the choice to
wait for what could be years, and pay millions for the privi-
lege, or break standards and buy a specialty application in
a rogue project, many supply chain professionals struggle
to choose the lesser of these two evils.
IT can solve this problem by governing all investments
and projects according to the business process they are
committing to enable. Manual workarounds, best-of-breed
applications, and, increasingly web-based software-as-a-
service deployments may suit the supply chains process
needs faster, better, and cheaper than module X.X of your
ERP vendors suite.
In an ideal world business and IT are united rather than
just aligned. Increasingly we are seeing IT as a function
owned by the supply chain organization. The chemicals
industry in particular is one where many heads of sup-
ply chain also own most of IT. The logic makes sense, as
truly critical functions like the examples above become
ever more deeply ingrained in the competitive strategy
of the business while genuine back office functions like
payroll, telecommunications networks, and archiving lend
themselves to low cost outsourcing. Our survey data (see
Exhibit 2) shows that while a minority of companies overall
include technology enablement within the span of control
of supply chain, leaders are much more likely to unite IT
and operations as one. Looking ahead, one wonders if the
office of the CIO and the head of supply chain will eventu-
ally be behind the same door.
Strategy
and Change
Management
100%
64%
56%
Performance
Measurement
and Analytics
78%
69%
13%
Technology
Enablement
56%
41%
37%
Governance
33%
31%
6%
Top 25
All
Prop_Diff
EXHIBIT 2
Top 25 vs. All Enabling Supply Chain Stations
SCM090901technology 11 9/1/2009 11:01:16 PM
12
Sup p ly Cha i n Ma na gement Rev i ew Sep t ember 2 0 0 9 www.scmr.com
Long-term Perspective:
John Mascaritolo
By John Kerr
PROF I LES i n LEADERSHI P
John Kerr is a
special projects
editor for
Supply Chain
Management
Review
J
ohn Mascaritolo could never be accused of
short-termism or blamed for having a blinkered
world view. The former NCR executive, now a
college professor, has always kept an eye on tomor-
row. And he constantly coaches his students to see
the story behind the story.
One case in point: the class where he used the
analogy of the orchestra conductor to depict the role
of the supply chain leader. The
students, invited at the start of
the class to raise a hand when
they saw a connection between
Mascaritolos imagery and the
bigger picture he was describ-
ing, were attentive. And then
one girls hand shot up. It just
clicked for meyour example
of the orchestra conductor!
she declared.
The Clayton State University
professor is delighted to see his
protgs making those connec-
tions. A lot of students have told
me I look at trucks and airplanes
differently now. Thats really the
exciting thing, he says. From his
earliest days as a supply chain
educatorasked to speak to a
college economics class when he
was still a practicing industry executivehe would get
his students to explain the impact of a truck breakdown
or a dock strike on the rest of the supply chain. The
ones who ask questions are the sharp ones, he says.
A Lifetime of Connections
Mascaritolo has spent a lifetime looking for connec-
tions between big ideasand he is still seeing big-
picture patterns and possibilities beyond the status
quo. He now wears two hats in academiaas the
director of logistics practices and assistant professor
of supply chain at Clayton State in Morrow, Georgia,
and as the director of supply chain programs at
Atlanta Technical College. His views into two edu-
cational arenas allow him to see ways to forge links
between two-year and four-year schools and cor-
porations across Georgia, with the goal of helping
improve the economic well-being of the state.
How so? With the strong like-
lihood that Savannah becomes
the primary east coast port for
supercontainer ships once the
Panama Canal is open to those
vessels, the region will need a
very solid base of supply chain
expertise to support the trans-
portation and distribution net-
works required by that super
port. Specifically, Mascaritolo
is helping the states Workforce
Ready program at the two-year
college level, opening the eyes
of teens who have little concept
of the career possibilities within
the supply chain field, much less
an interest in how goods move
regionally or nationally.
Mascaritolo has seen his
own career as a series of inter-
connected goals. I always had that 20-25-year view
of what I wanted to be, he says. The exception:
leaving his first job out of college, interestingly as a
high-school music teacher. When state budget cuts
loomed, he left teaching and was hired in 1976 as
a temporary worker in the imports department at
consumer electronics company Sanyo Electric.
Hired permanently as an import coordinator soon
after, Mascaritolo soon saw a host of possibilities
for career growth in a logistics field that he found
When it comes to professional
development, John Mascaritolo
always looks beyond the short term.
SCM090901_Leadership 12 9/1/2009 11:02:31 PM
13
fascinating. He also made a promise
to himself. Before the word logistics
wasused,everythingwassegmented
warehousing, import, export. I had
specialized in music education, and
I vowed that I wouldnt specialize in
my career again. Deciding to develop
as well-rounded a career as he could,
Mascaritolo says he chose to become
expertintheoppositeofimports,and
hetookajobworkingasanexportcoor-
dinatoratTheMennenCo.
Three years later, he saw the next
link in his series of career goals: an
opportunitytogainexperienceintraffic
managementasassistanttrafficmanager
atDellPublishing.Andthreeyearsafter
that,anotherstep:amovetoC.R.Bard,
whereMascaritolobecamethemanager
ofdistributionservicesforthewarehous-
ing providers urological division. Later,
in1994,whentheOlympicswerehead-
edtoAtlanta,Mascaritoloknewhehad
to get involved. As a logistician, I said
Icantnotbepartofthiswhenitshere
in Atlanta, he recalls. Managing 175
peoplethrough10directreports,hewas
responsibleforthedesign,implementa-
tionandmanagementoflogisticalfunc-
tionsassociatedwiththedistributionof
assetsinthe1996OlympicGames.
Amongseveralotherachievements
as the program manager for facilities
and special projects, he designed and
implemented the logistics infrastruc-
ture for all 12 of the Games remote
venues across three states. One of
the most interestingand nerve-
wrackingtasks was the design and
management of the logistics network
that supported the yachting venue in
Savannah. Mascaritolo and his team
were on the hook for the security of
morethan$7.5millionworthofcom-
petitionboatsandsupportcraft.
With his Olympics accomplish-
ments, Mascaritolo had amassed an
enviable track record of leadership
experience.Buthesoonmovedagain,
to independent logistics provider
DSC Logistics, where he became the
south-east region general manager of
transportation. I knew I had to have
third-party exposure to round out my
experience,hesays.
By 1999, he had made the last big
move to a position that tapped into all
of his experiences and skills he had
built: heading the global transportation
andlogisticscommodityteamforNCR
Corp. Responsible for a global logistics
spend of $350 million, Mascaritolo
and his team
designed, imple-
mentedanddrove
corporate global
logistics processes
to ensure consis-
tency in solution
delivery, smooth
supply chain execution and enhanced
customer service using best-practice
andSix-Sigmamethodologies.
Return to Teaching
However, teaching was never far from
his heart. As a senior practitioner in
theAtlantaarea,hehadregularlybeen
invitedbylocalacademicstobeaguest
speaker in their classesand he had
alwaysenjoyedtheexperiences.When
a professor at DeVry University was
moving to another location, he asked
Mascaritolo to become an adjunct
professor of logistics and supply chain
management, a role the executive
retained alongside his NCR responsi-
bilitiesuntiltheDeVryprogramended
in2003.Thatwasmytestingground
doIstillwanttobeateacher,anddoI
really have the skills that other people
saytheyseeinme?hesays.
By mid-decade, John Mascaritolo
had enjoyed a full career in supply
chain,andhadachievedeverythinghe
had set out, years earlier, to achieve.
Sohesethimselfnewgoalsofgetting
hisMBAandswitchingintoacademia
to teach full-time. His extensive net-
workinbusinessandeducationworlds
brought him the position at Clayton
State,wherehedesignedandgrewthe
supplychainprogramfromtwocours-
estofiveandfrom35toover147stu-
dents.AtClaytonsSchoolofBusiness,
healsobuiltaminorcourseinsupply
chain management and established
the foundation and executive board
foraCenterofSupplyChainthere.
Mascaritolos broad perspective
makes him a believer in the power
of the whole to benefit the parts. As
such,heurgesseniorexecutivestonot
only have their managers participate
in local chapters of professional asso-
ciations but also to think more about
advancingthesupplychainprofession
andtheirowncompaniesoverthelong
haul.Recognizethattherearepeople
who are in the shoes you were in 10-
15yearsago,hesays.Healsoadvises
managers to open up their organiza-
tions to internships to give more stu-
dents more opportunities to exercise
what theyre being taught in school.
He notes that such internships often
exposehiringmanagerstogreattalent
inthemaking.
AndwithhisAtlantaTechnicalcap
inplace,hecautionsbusinessleaders
nottofallintothetrapofrecognizing
andforginglinkswithonlythename
schoolsa choice that he believes
hurtseveryoneinthelongrun.
So where to from here for John
Mascaritolo? Recently he was elected
as the director of education for the
WarehousingEducationandResearch
Council (WERC). Hes still the
education chairman for the Atlanta
RoundtableoftheCouncilforSupply
ChainManagementProfessionals.
But even that wont be enough to
keep him completely occupied. Its a
fairbetthathesconcoctinganewset
of stretch goals for himself right now.
Short-term just isnt in this mans
vocabulary.
PROF I LES i n LEADERSHI P ( c o nt i nu e d)
Mascaritolos broad
perspective makes him a
believer in the power of the
whole to benefit the parts.
SCM090901_Leadership 13 9/1/2009 11:02:38 PM
From Guru to GM:
Developing
Tomorrows
leaDers
By pamela Culpepper and Terra winston
Pamela Culpepper (Pamela_Culpepper@
quakeroats.com) is vice president of
Human Resources for Supply Chain
Management at PepsiCo. Terra Winston
(tshanelle@sbcglobal.net) is a principal at
inTerract Consulting.
Traditional supply chain
education has been focused on
creating gurus, professionals
that have deep but narrow
expertise in both discipline and
industry. Today, the world is
changing rapidly with customers
demanding increased flexibility,
more customization, and quicker
time to market for innovations.
pepsiCo has discovered
that succeeding in this new
environment requires a new
breed of supply chain leaders:
the general manager.
A
s long as supply chain management has been
studied as a discipline, the goals have been
fairly consistentproduce quality products
while minimizing costs. To do this, process-
es had to be established and continuously
improved to deliver consistent results and
reduce margins for error. In this environment
the best supply chain leaders spent years cultivating knowledge
and experiences in their chosen niche.
Refecting this environment, traditional supply chain educa-
tion has been focused on creating gurus; leaders that have deep
but narrow expertise in both discipline and industry. University
curriculum built students technical expertise but had few rigor-
ous requirements for expanding soft skills like infuencing oth-
ers and collaborating successfully. Once on the job, employee
development is often limited to a few days of in-class training
that could quickly be forgotten. The real learning is done on the
foor, where employees study at the feet of more senior leaders
who have spent years working on these same processes in the
same industries.
While gurus excel at building reliable processes and driving
effciencies, their siloed perspectives can result in rigid supply
chain organizations that only change in reaction to pressure from
the marketplace or the CEO. Without a broader understanding
of the needs of other stakeholders, they sometimes develop solu-
tions that work for their areas, but cause unintended impacts to
other parts of the organization. They may work tirelessly to fx
broken processes, but fail to proactively make the changes that
help the system become more adaptable to future needs.
14
managemenT mUTUaliTY response sKills TeCHnologY
SCM090901guru_ID 14 9/1/2009 11:00:40 PM
Today, the world is changing rapidly with custom-
ers demanding increased fexibility, more customization,
and quicker time to market for innovations. International
operations require the ability to provide locally relevant
products while still maintaining the economies of scale to
support the overall supply chain strategy. With fattened
organizational structures and rapid advances in technol-
ogy that have automated many tactical activities, strategic
decision-making is being pushed to lower levels. If the goal
is to greet these new organizational overtures with con-
fdence, the supply chain must move beyond quiet, cost
cutting function to a key player in achieving the companys
growth objectives.
Meeting this need requires a new breed of supply
chain leadersthe general manager. General managers
complement their technical know-how with broad cross-
discipline and cross-functional experience. They under-
stand end-to-end processes, can design comprehensive
solutions, and have the interpersonal skills to gain sup-
port for their ideas. They are willing to move around the
organization, even globally, to expand their knowledge
and are continuously learning.
Developing General Manager Skills
There is an abundance of developmental resources for
gurus, but those interested in supply chain general man-
ager careers may need to be more creative. Regardless
of where you are in your career, either student or experi-
enced employee, you can begin to build the skills, expe-
riences, and perspectives to move beyond guru status.
We discuss the strategies that you can implement to
encourage that development appropriate to your career
stagestudent, employee, manager.
Students: Broaden the Horizon
The quest to become a general manager can actually start
before you ever step on campus, by choosing the right
college or university. With the growing number of sup-
ply chain and logistics programs available at top institu-
tions, how do you decide which one will be best for you
and your long-term career? There are so many factors to
consider when choosing an undergraduate or graduate
school. While your peers are busy comparing published
rankings, looking for famous alumni, and perusing the
list of recruiters in the career center, take some time to
15
James Yang
SCM090901guru_ID 15 9/1/2009 11:00:48 PM
16
Guru
look beyond the list of classes being offered in the supply
chain or logistics department. Seek out forward-thinking
schools that augment traditional deep technical educa-
tion with more general engineering management cur-
riculum. Take the time to speak with current students
and learn how class work is done. As you make your fnal
decision, give priority to those programs that emphasize
teamwork, problem solving, and strong written and ver-
bal communications skills.
The next opportunity that you have to build general
manager skills is during registration. Your major/con-
centration may have a very structured list of required
courses, but you have the power to choose your electives
wisely. Look for programs with the fexibility to use your
elective hours to build knowledge in other areas like mar-
keting or fnance. You may not need to know the intricate
details of cost accounting, but your electives are a great
way to get a foundation in business basics. By taking an
introductory marketing, fnance, innovation, or general
business course you can begin to understand the com-
mon terms, concepts, and processes. A creative writing,
debate, or extemporaneous speaking class can help you
expand your communications skills. Even if your major
workload is too heavy to accommodate a full elective,
consider auditing a few interesting classes or getting a
copy of the syllabus and checking some of the books out
of the library. Take advantage of inter-disciplinary course
offerings that partner engineering and business students
to solve real world problems. This perspective and expe-
rience can make you signifcantly more impactful as a
future supply chain leader.
You may even fnd that some of your best lessons
occur outside of class. On-campus clubs can be excel-
lent resources for building your exposure to new per-
spectives. Be an extracurricular explorer and join a few
that are in the business department of your school. Pay
attention to the various activities being offered by orga-
nizations, even if you dont become a member. Many
groups host interesting speakers and sponsor feld trips
that are open to the general public. Dont underestimate
the value in even a short lecture. One engineering stu-
dent noticed a fyer for a CEO presentation being given
in the law school. By attending this event, not only did
she beneft from the CEOs point of view, but also after a
great conversation with him, she landed a prime intern-
ship offer.
There is no question that you should be seeking
internship opportunities every summer that you can.
These days, internships can be diffcult to get, so dont
worry if your best offers are very technically focused or
dont allow you to work across disciplines or functions.
Although these opportunities may seem better for build-
ing guru experience, you can still make the most of your
time working for companies. During your summer there
are plenty of ways that you can increase your knowl-
edge of different supply chain disciplines and functions.
Make friends with other interns, talk to them about their
projects and how they interact with the supply chain
organization. Speak with the full-time members of your
department and learn about what they do. In addition
to internships, many schools offer shorter work opportu-
nities through externships or job shadowing over spring
or winter breaks. These are wonderful opportunities to
get a taste of a marketing, sales, or fnance department.
One last word on work experiences. There is tremen-
dous value in having large, blue chip company names on
your resume. However, you may fnd that an internship
at a smaller organization may give you more chance to
experience a variety of departments or to impact a bigger
piece of the overall business.
By putting these core strategies into place, you will
design an educational experience that makes you unique
among your peer group. Not only will it give you an edge
in the interview process, but it will also provide you a
broader foundation upon which to build your career.
T
rying to quickly build comprehensive business knowl-
edge? Start with these popular and influential books.
Execution: The Discipline of Getting Things Done by
Larry Bossidy, Ram Charan, Charles Burck
Influence: The Psychology of Persuasion by Robert B.
Cialdini
The Five Dysfunctions of a Team: A Leadership Fable by
Patrick M. Lencioni
The 22 Immutable Laws of Marketing: Violate Them at
Your Own Risk! by Al Ries, Jack Trout
The Art of Innovation: Lessons in Creativity from IDEO,
Americas Leading Design Firm by Tom Kelley, Jonathan
Littman
Built to Last: Successful Habits of Visionary Companies
by Jim Collins, Jerry I. Porras
The Innovators Dilemma: The Revolutionary Book that
Will Change the Way You Do Business by Clayton M.
Christensen
Emotional Intelligence: Why It Can Matter More Than
IQ by Daniel Goleman
The Supply Chain
General Managers
Bookshelf
SCM090901guru_ID 16 9/1/2009 11:00:55 PM
Employees: Plan Your Moves
After being very hands-on in creating the right college
or graduate school experience to get the best job, many
people sit back, allowing their companies to decide what
further development they need. This is not the behavior
of a general manager! Even with a full plate of work,
there are things that you can do to continue growing.
The easiest strategy that you can implement is to keep
yourself well versed in the latest supply chain strategy,
leadership, and business thinking. Dust off your read-
ing glasses and dive into relevant magazines and books.
Interview some of your colleagues in other departments
to see what publications and websites
they frequent, and then invite them
to discuss an interesting article over
a cup of coffee. Listen to your senior
managers and note what sources they
tend to mention when sharing their
ideas. See the sidebar for a starter list
of books to expand your perspectives.
Another simple development strat-
egy is to fnd a mentor from another
discipline or function. Most people
who say they are interested in getting a
mentor are, in fact, in search of a spon-
sorsomeone of signifcant power who
can help them get promoted. While
there is no question that a sponsor is
a critical piece of your personal board
of directors, you need true mentors as
well. Mentors are individuals that can provide a perspec-
tive on the work that they are doing and give you coaching
about your work and/or career. Even if your company does
not have a formal mentoring program, you should take the
initiative to build these relationships. One such mentoring
relationship can be with an executive from another disci-
pline or function. Share with them your interest in learn-
ing about their area of expertise. Use your meetings to get
the procurement or marketing perspective on some of
your work and decisions. With your managers permission,
ask if you can help with a project or attend a certain meet-
ing, plant visit, or sales call with your mentor. Whether
guru or general manager, you will fnd that a mentor will
provide a huge beneft to your career.
PepsiCo has had tremendous success with both
informal and formal mentoring, with mentoring circles
being one of the more popular programs. In mentoring
circles, a leader provides guidance to a small group of
junior employees, either in person or virtually. The cir-
cles allow participants to gain insights across functions,
disciplines, and company departments. The structure
helps participants to get valuable knowledge from both
the mentor and fellow group members.
Although it may require more time commitment,
when possible, you should consider joining an employer-
sponsored extracurricular activity. Many large compa-
nies have internal interest groups that serve a variety of
purposes. Some help with recruitment and retention of
certain employee populations (woman, people of color,
millenials, single moms), some execute key corporate
responsibility related initiatives (such as environmental
sustainability, community service), while others support
culture and build employee morale (such as via employ-
ee-related event planning). Participation in any of
these groups will expose you to more people across
the organization, including key senior leaders. You
will gain experience tackling company-wide issues
that extend far past functional silos. As an added
beneft it will also give you the chance to demon-
strate and hone important leadership skills including
infuence, teaming, project management, strategic
thinking, and confict management.
For many PepsiCo employees, corporate-spon-
sored affnity groups are an excellent way to network,
socialize, and grow their careers in exciting ways. For
example, several years ago the PepsiCo Asian Network
(PAN), an enterprise-wide employee resource group,
decided to focus their energy on fnding ways to better
impact the companys bottom line. Through this initia-
tive, the group partnered with R&D to recommend new
favors that refect Indian and Asian heritage, as well as
with sales to suggest strategies to increase product avail-
ability in select markets. Their work brought high value
to PepsiCo while providing the members unique devel-
opment opportunities to get hands-on exposure to inno-
vation and the sales process.
Lastly, the most critical thing that you must do is
to creatively and strategically plan your career moves.
Everyone wants to move up the corporate ladder as
quickly as possible; however, this is not the ideal way
to build a general manager career. Instead, you should
expect and look to make a series of lateral moves into
other departments or teams to round out your experi-
ence. Are there roles in logistics that can get you working
17
While gurus excel at building reliable
processes and driving efficiencies, their siloed
perspectives can result in rigid supply chain
organizations.
SCM090901guru_ID 17 9/1/2009 11:01:03 PM
18
Guru
very closely with the sales team? What jobs involve par-
ticipation in cross-functional innovation teams? A little
creativity and ingenuity can go a long way in creating
the career that you want. For example, one procurement
specialist faced with dramatically increasing pricing for
certain supplies, partnered with the R&D team to brain-
storm how to integrate newer, cheaper products. When
she was ready to make her next career move, doors were
open in both R&D and marketing.
Managers: Take Responsibility
If you manage supply chain employees, you not only have
a responsibility for your own personal development but
also that of your team, and that may include building gen-
eral management skills. Thankfully, you can do so by mak-
ing small modifcations to your current management prac-
tices. First and foremost, take every opportunity to bring
new perspectives to your team. Set aside a regular time
in your team meetings on a monthly or quarterly basis
to bring in relevant articles or speak-
ers from other parts of the organiza-
tion. When company announcements
are made, have the group discuss not
only the direct impact on your team,
but also the implication for other
stakeholders. Use your team building
events to integrate some of these con-
cepts. For example, instead of taking
the team on a golf outing, conduct a
market tour of one of your customers
or let your employees go out with the
sales team for part of the day.
When you need to develop specif-
ic individuals, you should look to get
more mileage out of current assign-
ments. In todays economic environ-
ment, employee workloads are flled
to the brim after rounds of layoffs and
cost cutting initiatives. While everyone craves develop-
mental opportunities, there are few that would appreci-
ate more work, even if the purpose were to increase their
skills. Instead, fnd ways to build more learning opportu-
nities into current work assignments. Have your people
solicit input on their projects from stakeholders in a larger
variety of departments. Encourage them to collect best
practices from across the organization before fnalizing
solutions. Whenever possible, allow them to participate
in company-wide special teams. There is no education
like battling through a complex company issue on a cross-
functional taskforce. Even delegation can be an effective
tool.
PepsiCo views employee development as a key
responsibility of leaders at every level and has built this
expectation into leadership competencies, succession
planning, and performance management. Some supply
chain managers use delegation to increase team effcien-
cy and develop employee skills. The managers identify
the bottom third of their tasksthose routine activi-
ties that are critical to their jobs, but are no longer chal-
lenging or developmental. They can then delegate these
tasks. This simple process is powerful because work that
is routine to the manager can be exciting and extremely
developmental for the team members who aspire to one
day be managers themselves.
Lastly, you need to get more comfortable taking cal-
culated risks on talent. By far the best way to develop
your employees is to put them in roles where they can
learn on the job. Give your strong performers the chance
to take on new assignments even if they dont have the
traditional levels of experience that would be expected.
Once stretch assignments have been made, be sure
to provide adequate support and training to help the
employee be successful in this new role. In the end,
the improvement in the quality of your talent and the
better solutions brought by a fresh set of eyes will
more than make up for the risks. PepsiCo is commit-
ted to providing stretch assignments for key talent,
whether it is in-role or through new positions. As the
organization adjusts to address business needs, inte-
grate acquisitions, and develop new products, we pay
signifcant attention to how the new work can create
stretch assignments. However, PepsiCo recognizes that
the assignment alone is not enough. There must be an
honest understanding of the employees strengths and
weaknesses, and commitment from management to pro-
vide the coaching, training, and tools that the employee
will need to be successful.
Breaking Down the Silos
There are clearly lots of successful strategies that indi-
viduals and managers can use to develop general man-
agement skills, but what is the role of the corporation?
How does an organization balance the need for the
technical depth that gurus bring, while still encouraging
If you manage supply chain
employees, not only do you have to continue
your own personal development, you also have a
responsibility for developing your team.
SCM090901guru_ID 18 9/1/2009 11:01:13 PM
the next generation of supply chain general managers?
The key is to create an environment where people have
the opportunity to learn outside of their chosen areas of
expertise. Make sure that there are clear paths for career
progression for both gurus and general managers. During
staffng meetings and promotion decisions, senior lead-
ers and human resources should be vigilant to root out
biases and beliefs that make managers resistant to mov-
ing talent outside of disciplinary silos. (See the sidebar
to learn how PepsiCo has created a culture to develop
supply chain general managers.)
After considering your strengths and your career
goals, you may decide that you actually prefer the guru
track. If this is the case, dont worry; there will always
be a need for talented specialists that continue to move
supply chain disciplines forward. However, this does not
mean that you are entirely excused from learning more
about general management. Find ways to better under-
stand how your departments decisions impact your
stakeholders and the broader organization. Use some of
the strategies listed above to build your soft skillsto
strengthen your ability to infuence, motivate, and com-
municate. These skills are necessary for career suc-
cess regardless of your path. Most importantly, as you
climb the career ladder and become a leader yourself,
recognize that some of your employees may need to be
groomed as general managers. Be sure to provide them
the development that they need, even when it is outside
of your comfort zone.
But if you are interested in designing comprehensive
solutions that provide long-term beneft to the entire
enterprise, you must fnd ways to better collaborate
internally, across functions and disciplines, and exter-
nally with customers and suppliers. If you want to move
beyond cost cutting and start contributing to the strate-
gies that will drive growth, you must break down silos
and expand your knowledge of, and infuence on, rev-
enue generating processes. If you aspire to take on the
most senior roles in your company, you need to fnd ways
to hone and demonstrate your infuence skills, strategic
thinking, and focus on adding customer value. And if
you want to take the reigns of leadership and shape the
future of your company, general management is the only
path to take. jjj
19
P
epsiCohaslonghadareputationasanorganization
thatgrowsstrongleaders.WithinSupplyChain,we
haveimplementedanumberofinitiativestocreateastrong
poolofgeneralmanagersthatcanhelpusmeetourmost
criticalbusinessneeds.
Re-thinking Career Movement.Historically,wehave
movedpeoplethroughtheorganizationvertically,witha
focusonbuildingtheirtechnicalordisciplinedepth.Asa
result,wehadestablishedastrongandexperiencedleader-
shipteambuthadlimitedourabilityasanorganizationto
buildabenchofsupplychaintalentthatwastransferable
acrossthecorporation.Thereforeweupdatedourinternal
peopleplanningprocesstoincorporatemorecross-disci-
plineassignmentswithinsupplychain.Animportanttool
inthisprocessistheExperiencePlan,adocumentthat
identifiesthetypesofexperiencesthatastrongleaderwill
needtosuccessfullycontributeinanyrolewithinsupply
chain.Duringthisprocess,forselectemployees,wemap
outacareerplanthatencompassesasmanyas10years
and3-4roleswithacceleratedlearningastheobjective.
Wealsocreatedliaisonorintegrationrolesthatconnect
supplychaintosalesandmarketing,orprojectrolesthat
integratedR&Dandglobalprocurement.
Changing Mindsets. Werecognizedearlyonthatjust
adjustingtheplanningprocessonpapercouldnotcreate
thedeep-seatedchangethatweneeded.Weputtogether
aparallelcampaignfocusedonfacilitatingashiftinour
managersmindsaboutwhatcapabilitiesarerequiredin
SupplyChain.Untilthen,mosttenuredmanagersbelieved
thatdepthwasgoodandbreadthwasbad.Theirthought
wasthatifyoudidnotgrowupinthedisciplineorwitha
particularsetoftechnicalskills,therewasnowaythatyou
couldeffectivelymanageorleadateamwiththatresponsi-
bility.Tocombatthisthinking,weidentifiedandaredevel-
opingtransferableleadershipskillslikelearningagilityto
helpthosesamemanagersacceleratetheirlearningofnew
technicalskills.Gettingmanagerstotrustinthetalentthat
theyreceivedfromotherdisciplines,oneswhodidnothave
thetechnicaldepthbutstrongleadershipcompetencies,was
achallengebutwellworththeeffort.
Adjusting the Hiring Profile.Externally,ourhiring
philosophyhaschangedaswell.Nolongerareweonthe
huntfor23yearsofjuiceextractionexperience.Asbusiness
requirementsbeganshiftingandthepaceofchangeincreased,
weneededtobringinnewperspectivesandfreshthinking
tobolsterprocessandequipmentinnovationandtoavoid
becomingsluggishnessinourabilitytoadapt.Now,whenwe
gototheexternalmarket,weareseekingvaryingconsumer
productsexperience,timespentinmultipledisciplineswithin
supplychain,anddemonstratedleadershipskills.
How PepsiCo Builds Supply Chain Leaders
SCM090901guru_ID 19 9/1/2009 11:01:20 PM
Vested Outsourcing:
A Better WAy to
outsource
By Kate Vitasek and
Mike Ledyard
Kate Vitasek (kate@scvisions.
com) is on the faculty of the
University of Tennessees Center
for Executive Education and
is founder of Supply Chain
Visions. Mike Ledyard, a
co-founder of Supply Chain
Visions, is an author and
frequent speaker on process
measurement and improvement.
He can be reached at mike@
scvisions.com.
A
lmost all outsource
arrangementsregard-
less of what is being
o u t s o u r c e d h a v e
room for improvement.
Outsourcing as a large-
scale business practice
simply has not been around long enough
for companies to have worked out all
the kinks. Many companies jumped in
without fully understanding how to do
it right. The result: Outsourcing deals
that are structured with fundamental
faws in the business model and the
relationship. And while there are more
successes than failures, almost all com-
panies still struggle with how to improve
their outsourcing efforts.
For the past two years, the authors
have participated in a University of
Tennessee research program funded by
the U.S. Air Force to study companies
that were employing performance-based
approaches for outsourcing. A key part
of the research was to distill our obser-
vations into courseware for the Defense
Acquisition University. In addition, we
worked on the implementation of actual
defense projects to ensure that partici-
pants had a deep understanding of how
to develop a solid outsourcing agreement
(known as a service acquisition in the
government sector). In this article, we
will explore performance partnerships as
a unique approach to outsourcing.
This article is based on our research
and hands-on experience working with
organizations that have adopted sym-
biotic performance partnerships that
truly unlock win-win solutions. While
many believe win-win is just a buzz-
word thats largely theoretical in nature,
our research has proved differently. We
have uncovered a set of unwritten rules
companies can use to develop perfor-
mance partnerships that enable both
parties to achieve much higher levels
of performance and cost savings than
previously thought possible. We have
distilled our lessons and approach into
what we call Vested Outsourcing. We
selected this term because it under-
scores the importance of both par-
ties having a stake in maintaining the
arrangement and working together
to create a performance partnership.
This type of partnership takes both the
company outsourcing and the service
provider to new levels of cost savings,
service improvements and proftability.
In Search of a Better Way
Thought-leading companies have been
challenging conventional outsourc-
20
MANAGeMeNt MutuALIty resPoNse sKILLs tecHNoLoGy
SCM090901VestedOut.indd 20 9/1/2009 10:49:52 PM
21
Why do so many outsourcing relationships fail to
achieve anything near their real potential? One big
reason is that they are based on a Whats in it for
me philosophy. Vested Outsourcing changes all
that. It encourages both parties to act for mutual
benefitand in the process lays the foundation
for sustained success. The five rules of Vested
Outsourcing presented here show how.
Gary Bates
SCM090901VestedOut 21 9/1/2009 5:04:53 PM
22
Outsourcing
ing models for the past ten years. One result of this has
been the emergence of Vested Outsourcing. And while
no two Vested Outsourcing partnerships are alike, all
good ones achieve a similar goal: A performance partner-
ship based on optimizing for innovation and improved
service, reduced cost to the company outsourcing,
and improved profts to outsource provider. (See the
Performance Pyramid depicted in Exhibit 1.) In suc-
cessful performance partnerships, companies and their
service providers work together to develop performance-
based solutions that are aligned to their respective inter-
ests. Importantly, both parties receive tangible benefts
from the relationship.
At the heart of a Vested Outsourcing contract is an
agreement on desired outcomes that both companies will
achieve. The agreement clearly defnes fnancial rewards for
meeting or exceeding the agreed-upon outcomes and speci-
fes the penalties for falling short. Simply stated, if the out-
source provider achieves the desired outcomes (results), it
receives a bonus. It is important to understand that Vested
Outsourcing is not just gainsharing. Gainsharing is usually
structured to return to the service provider a portion of cost
savings that they bring to the relationship. It is based on
productivity measures, and on reducing the cost of service
for a specifed range of activities.
Vested Outsourcing is much broader. While it certain-
ly includes the cost reduction concepts of gainsharing, it
also includes increases in revenue, service level improve-
ments, process improvements, and so forth. Where prof-
it-sharing is based on proftability or cost measuresor,
managing ones portion of the existing piece of the pie
Vested Outsourcing focuses on value creation, making the
pie bigger so all parties can enjoy a bigger share.
This new approach challenges and encourages the
outsource provider to apply innovative solutions and/
or investments to solve a clients problem and to create
value. But in doing so, the outsource provider also takes
on some risk, in essence putting skin in the game. The
provider looks at how it can best apply world-class pro-
cesses, technologies, and capabilities that will drive value.
This commitment to deliver against the projected value
for the company outsourcing (such as a commitment to
reduce costs or improve service, or both) shifts risk to the
outsource provider. In exchange for achieving this incre-
mental value, the company outsourcing commits to allow
the provider to earn additional proftabove and beyond
industry average profts for their service area. The result is
a win-win Vested Outsourcing partnership.
Going the Whole Nine Yards
While the notion of partnerships is widely applauded in
business, our experience and research has found that most
organizations optimize partnerships for their own self
interests. This typically refects a Whats In It for Me?,
or WIIFMe mentality. Western cultures are ingrained
with winning from early childhood. Similarly, business
schools and law schools focus much of their curricula on
winning. Procurement and sales professionals, too, are
trained in the art of negotiations to help them win.
Companies that embark on a Vested Outsourcing
agreement must put aside WIIFMe in favor of WIIFWe
(Whats In It For We). This latter approach seeks to
unlock a greater opportunity than is currently realized
by either party. Put another way, it increases the size of
the entire pie vs. maximizing the size of the slice for any
one party (for example, lower costs at the expense of the
outsource providers profts). Only by working together
can both parties succeed. WIIFWe effectively tosses the
conventional win/lose mentality out the window.
Developing a WIIFWe relationship is easier to
describe than to do. Its not easy for most organizations
to quickly transition from a culture of oversight and
control to one of mutual respect. True win-win requires
effort and commitment by both parties. Outsourcing
does not mean abdication: it must be a partnership with
regular, frequent communication to manage the expecta-
tions as well as the work. One of the most pernicious
problems infecting traditional outsourcing arrangements
results from micromanagement. A different set of equal-
ly destructive problems can emerge when a company
hands over a process completely to the outsource provid-
er, washes their hands of that process, and walks away.
(The accompanying sidebar lists the ten most common
ailments impacting outsourcing relationships.)
EXHIBIT 1
The Performance Pyramid
Source: Supply Chain Visions
Reduced Cost
to Company
Innovation,
Improved Service
Improved Margins
to Provider
Goal:
Performance
Partnership that Optimizes
for Mutual Desired Outcomes
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Outsourcing
A Vested Outsourcing relationship succeeds because
both organizations work together to achieve mutually
agreed upon, mutually benecial goals. In our experi-
ence, only those organizations that truly set aside the
WIIFMe for the WIIFWe mentality were able to achieve
true Vested Outsourcing partnerships that delivered out-
standing results.
The New Rules of Outsourcing
Our research identied ve principles that are embed-
ded in sound outsourcing arrangements. We have come to
view these principles as the rules of Vested Outsourcing.
(See Exhibit 2.) When implemented in conjunction with
a win/win Whats-in-it-for We philosophy, game-changing
outsourcing relationships can happen.
Rule 1: Adopt an Outcome-Based vs.
Transaction-Based Business Model
Traditionally, many outsource arrangements are built
around a transactional model. (See also discussion of the
Activity Trap in the sidebar.) Most often this transaction-
based model is coupled with a cost-plus or a competitive-
ly bid xed price per transaction pricing model to ensure
that the buyer is getting the lowest cost per transaction.
Under this conventional method, the service provider is
paid for every transactionregardless of whether or not
it is needed. The more inefcient the entire process, the
more money the service provider can make.
The conventional business model does achieve the
lowest cost for transactions for the company outsourcing.
However, it often does not help the company achieve what
it really wants or needs. Why? The company that has out-
sourced gets what they contracted; but what they needed
is an efcient and low-cost total support solution.
Vested Outsourcing, by contrast, operates under an
outcome-based model in which the provider aligns its
interests to what the company really wants (the efcient,
low-cost total solution).
A Vested Outsourcing model fundamentally shifts how
a company buys services. The concept is fairly straight-
forward. Instead of paying a provider for unit transactions
for the various services providedsuch as pallets in the
warehouse, miles traveled, spare parts shipped, technical
support hours, and so forththe company and its ser-
vice provider agree upon desired performance outcomes.
Desired outcomes are still quantiable, but take a differ-
ent form: they can be availability, reliability, cost, revenue
generation, employee or customer satisfaction, or even
asset investment targets. For example, in a traditional
outsource relationship the 3PL would be paid based on
units received, pallets stored, units picked and packed,
orders processed, and so forth. In a vested outsourcing
agreement, by comparison, the 3PL would be paid based
on meeting the performance level for orders lled, prod-
ucts available, or on time delivery. In essence, Vested
Outsourcing buys outcomes, not individual transactions.
Rule 2: Focus on the WHAT
not the HOW
Adopting a Vested Outsourcing business model does not
change the nature of the work to be performed. At the oper-
ational level, there is still a need for material to be stored,
orders to be managed and fullled, calls to be answered,
and goods to be delivered. What does change is the way in
which the company purchases the outsourced services.
Under Vested Outsourcing, the buyer species
what they want; the provider is responsible for deter-
mining how it gets done. Your in-house operations are
either too expensive or ineffective (or both) and youre
looking outside for someone who can do the job better
than you can do it. So when you nd that provider, you
let them do the job, right? The problem that often aris-
es here, however, is something we call the Outsourcing
Paradox. By outsourcing, companies effectively concede
that they are not in the best position to do a specic job
or jobs. Yet when they turn the work over to someone
more competent, they cant resist telling that service pro-
vider how to do the job.
The most effective Vested Outsourcing partnerships
include minimal discussion of the processes the service
providers must follow to meet the requirements. Instead,
they focus on performance expectations. Its up to the
service provider to gure out how to put the supporting
pieces together to achieve the companys goals.
Performance partnerships let each rm do what they
3.
Clearly Defined
and Measurable
Desired Outcomes
EXHIBIT 2
Principles of Vested Outsourcing
Source: Supply Chain Visions
Win/Win
(WIIFWe)
Relationship
1.
Outcome-Based
vs. Transaction-
Based Business
Model
5.
Insight vs.
Oversight
Governance
Structure
2.
Focuses on
the WHAT not
the HOW
4.
Pricing Model
Incentives are
Optimized for
Cost/Service
Tradeoffs
24
SCM090901VestedOut 24 9/1/2009 5:05:32 PM
do best. Unless the outsourcing company has both the
skills and the resources to keep up with the latest inno-
vations in the service they are outsourcing, they should
leave the details to the experts.
Rule 3: Clearly Define and Measure
the Desired Outcomes
The third rule of Vested Outsourcing is to clearly defne
and measure desired outcomes. Both parties must be
explicit in defning the desired outcomes. These out-
comes are expressed in terms of a limited set (ideally,
no more than fve) of high-level metrics. Organizations
should spend time during the outsourcing process, and
especially during contract negotiations, to explicitly
defne how the relationships success will be measured.
Attending to this upfront helps ensure that neither time
nor resources are wasted pursuing the wrong objectives.
Once the desired outcomes are agreed upon and
explicitly expressed, the service provider can propose
a solution that will deliver the required level of perfor-
mance at a pre-determined price. Under the purest form
of Vested Outsourcing, the outsourcing company only
pays for results (namely, orders shipped complete and on
time), not transactions (picking, packing and shipping).
The service provider is paid for the value delivered by its
overall solution, rather than being paid for the activity
performed.
We cannot stress enough the importance of getting
this right. Carefully defning and measuring the desired
outcomes will position the relationship for success, by
assuring that the right things get done in the right way.
Conversely, getting it wrong will result in potentially
hundreds of thousands (if not millions) of dollars wasted
in a relationship plagued by the common outsourcing
ailments we have noted in the sidebar.
Rule 4: Optimize Pricing Model
Incentives for Cost/Service Tradeoffs
The fourth rule centers on a properly structured pricing
model that incentivizes the optimal cost/service trad-
eoffor put another way, avoids the Penny Wise and
Pound Foolish trap. The pricing model is based on the
type of contract (fxed price or cost reimbursement) that
will be used to reward the outsource provider.
When establishing the pricing model, businesses
need to apply two principles. First, the model must bal-
ance risk and reward for both parties. The agreement
should be structured to ensure that the provider assumes
risk only for decisions within its control. For example, a
transportation service provider should never be penalized
(or rewarded) for the changing costs of fuel. Second, the
agreement needs to require the service provider to deliv-
er solutionson time and complete shipments not
just perform pick, pack and ship transactions.
When properly constructed, Vested Outsourcing will
incentivize the service provider to solve customer prob-
lems proactively. Service providers are thus encouraged
to develop and institute innovative and cost-effective
methods of performing work to drive down total cost
while maintaining or improving service.
Vested Outsourcing essentially is a strategic bet by
the service provider that it can meet the service levels
at the set price, for example 98 percent on time and
complete shipments. Inherent in the business model is
reward for the provider to make investments in process,
service, or associated products that will generate returns
in excess of contract requirements. Performance partner-
ships are usually based on achieving the desired tradeoff
either by achieving:
Higher service levels at the same cost.
The same service levels at lower costs.
Higher service levels and lower service levels.
If the service provider does a good job, it will reap the
rewards of greater proftability.
Vested Outsourcing does not guarantee that service
providers will reap higher profts. However, it does give
providers the authority and autonomy to make strategic
investments in their processes and product reliability
that can generate a greater ROI compared to conven-
tional cost-plus or fxed price per transaction approach.
Vested Outsourcing also typically seeks to encourage ser-
vice providers to meet the desired performance levels at
a fat or decreasing cost over time. Therefore, the service
provider has to leverage its unique skills and capabilities
to make the processes much more effcient. In addition,
the provider may realize intangible benefts such as con-
tract extensions or references from their clients.
Rule 5: Governance Structure Must
Emphasize Insight vs. Oversight
In the early days of outsourcing many companies made
the mistake of simply throwing the work over the fence
to their provider without clearly defning the require-
ments or developing performance metrics or SLAs (ser-
vice level agreements). As scary as it may seem, we still
see some companies today that operate without ben-
eft of a formal contract or any real agreement in place.
Fortunately, this is a declining minority. Yet some have
gone to the other extreme, succumbing to the measure-
ment minutiae aliment. They often have a small army
of people often referred to as program managers who
micromanage the outsource provider.
25
Outsourcing
An effective Vested Outsourcing partnership out-
sources processes to service providers that are real
experts in those processes. The partnerships should be
managed to create a culture of insight vs. oversight. Lets
look at the meaning of both words to get a better under-
standing of the difference.
Insight. Power of acute observation and deduction;
penetration, discernment, perception.
Oversight: Watchful care; superintendence; general
supervision. Escape from an overlooked peril.
If you have done a good job picking the right out-
source provider and you trust them and their exper-
tise, why do you need a small army providing general
supervision over them? A sound governance structure
should establish good insightnot provide layers of
oversight.
How Vested Outsourcing Rules
Work Together
In Vested Outsourcing, the organizations work together
upon a foundation of trust and mutual accountability to
achieve the outcomes. Supported by the careful align-
ment of performance objectives and controls, the service
provider is empowered to pursue improvements that will
deliver higher performance, greater profts, and lower
total ownership cost. Vested Outsourcing uses the power
of free market innovation to improve the outsourc-
ing relationship. This can be a challenging mindset to
embrace. But participants should always keep in mind
the ultimate goal: performance partnership that optimiz-
es for mutual desired outcomes.
For the service providers, Vested Outsourcing is an
10 Common Outsourcing Ailments
1.
Penny Wise and Pound Foolish
When outsourcing, you need to think beyond the
short-term bottom line. The danger in focusing on the
cheapest offer is that it inevitably leads to tradeoffs in qual-
ity and/or service. Unfortunately, many executives view out-
sourcing as a quick-fix solution to resolving balance sheet
problems. Often companies suffering from a Penny Wise
and Pound Foolish mentality, fall into a loop of frequently
bidding out their work, picking the lowest price provider,
and then transitioning to that supplier. This can lead to a
vicious cycle of bid and transition, bid and transition, bid
and transition.
2.
The Outsourcing Paradox
This ailment typically begins with the experts at the
outsourcing company developing the perfect set of tasks,
frequencies and measures for the engagement. The result is an
impressive document containing all the possible details on how
the work is to be done. At last, the perfect system! However,
this perfect system can actually sow the seeds of failure of
the outsourcing effort. The reason: its the companys perfect
system, not one designed by the provider of the services, whos
supposed to be the experts at getting the job done.
3.
The Activity Trap
Traditionally, companies purchasing outsourced servic-
es have used a transaction-based model where the service
provider is paid for every transactionregardless of wheth-
er or not it is needed. Businesses are in business to make
money; providers of outsourcing services are no different.
The more transactions they perform, the more money they
make. There is simply no incentive for them to reduce the
number of non-value-added transactions because it would
result in a reduction of revenue. Make sure your outsourcing
agreement is not based on pushing the cash register button
every time a specified activity is performed, especially when
that activity is not value added.
4.
The Junkyard Dog Factor
When the decision to outsource comes down, it usually
means that jobs will be lost as the work and jobs transition
to the service provider. This often results in employees hun-
kering down and staking their territorial claim to certain
processes that simply must stay in house. Even if the major-
ity of the jobs are outsourced, many companies choose to
keep their best employees on board to manage the new
outsource provider. These employees are often the same
ones who were asked to help write the statement of work
(SOW). Is it any wonder then, that SOWs become rigid
documents that dictate conventional and less-than-optimal
ways of performing the tasks being outsourced?
5.
The Honeymoon Effect
At the beginning of any relationship, both parties go
through a honeymoon stage. Outsource providers will jump
through hoops as they ramp up for their new client, whos
happy just to have someone else doing the job. But while
the provider remains conscientious about meeting the com-
panys expectations and service levels outlined in the con-
tract, it never progresses beyond this point. The Honeymoon
Effect lingers on, even while performance levels for the ser-
vices provided may be improving industry wide. The prob-
26
opportunity to exercise greater fexibility in deciding
how support is provided, to ensure cash fow stability
through long-term contracts, and to increase revenue.
For the company doing the outsourcing, its a chance
to enhance performance while decreasing costs and
assets employed. In short, vested outsourcing changes
the fundamental business constructs of the typical out-
sourcing approach.
Companies wanting to embark on a Vested
Outsourcing partnership and thereby realize lower costs
for the outsourcing company and higher profts for the
service provider, neither of which can be attained by one
organization working alone, will need to fully embrace
the WIIFWe philosophy. Further, they will need to con-
sistently live the fve rules of outsourcing to ward off the
common ailments that can weakenand even destroy
an outsourcing partnership. Vested Outsourcing is game-
changing; it is the way to healthy and thriving outsourc-
ing relationships. jjj
Authors notes: Our upcoming book, Vested Outsourcing,
published by Macmillan, will offer a comprehensive guide for
developing successful Vested Outsourcing partnerships. It is
designed to help all companies begin their effort to take their
outsourcing relationships to the next level.
The University of Tennessee offers a three-day open enroll-
ment class at the schools Center for Executive Education, titled
Performance-Based Outsourcing: Buying Results, Not Activities!
(See http://PBO.utk.edu) You can also contact Bric Wheeler at
the University of Tennessee (BWheeler@utk.edu) for information
on customized, in-house training on performance-based outsourc-
ing. Also, readers are encouraged to visit the authors blog at www.
vestedoutsourcing.com, which includes additional resources, suc-
cess stories, and other material.
lem: while the honeymoon lasts, theres no inherent incen-
tive to raise service levels (or decrease the price) beyond
whats contained in the Service Level Agreements.
6.
Sandbagging
Lets look at a typical outsourcing example of sandbag-
ging. Many times during contract negotiation, someone on
the company side, often a senior manager, will ask, Just how
much can I save? Rather than establish the highest level
of savings achievable as early as possible (which would be
most beneficial to the company outsourcing), the provider
will sandbag and offer up the savings in smaller increments
over time. Why deliver everything up front when you know
that your hardnosed customer is just going to hammer you
for more next quarter or next year? The providers know that
total savings are made of up low hanging fruit and long-
term savings. They often hold back some improvements in an
effort to manufacture future savings opportunities in case
they dont perform well in a given quarter or year.
7.
The Zero-Sum Game
Companies that play this game believe, mistakenly,
that if something is good for the outsource provider, then
its automatically bad for them. Providers feel the same
way from the other perspective. Many organizations fail
to understand that the sum of the parts, when combined
effectively, can actually exceed the whole. This was
proven by John Nashs Nobel Prize winning research,
commonly referred to as game theory. The theorys basic
premise is that when individuals or organizations play a
game together (or work together to solve a problem) the
results are always better than if they had played against
each other (i.e., worked separately).
8.
Driving Blind Disease
The Driving Blind Disease afflicts companies
that have not done their homework in preparing for
the outsourcing engagement. Specifically, it relates
to the lack of a formal governance process to monitor
the performance of the relationship. Research from
the Aberdeen Group shows that one of the biggest
challenges organizations face today is assuring that
negotiated savings are actually realized on the bottom
line.
9.
Measurement Minutiae
When companies try to measure everything,
they usually succumb to the malady of Measurement
Minutiae. Whats remarkable is the scale of the minu-
tiae that some organizations are able to create. We
have found spreadsheets with 50 to 100 metrics on
them. Measurement minutiae is often associated with
companies that are suffering from the junkyard dog
factor and with agreements that have fallen into the
activity trap. If you find yourself micromanaging your
service provider, youre either bored or you dont trust
them.
10.
The Power of Not Doing
The saddest of all ailments is the one we call the
Power of Not Doing. This happens when a company falls
into the trap of establishing measures for the sake of mea-
sures, without thinking through how those measures will be
used to manage the business. Weve all heard the old adage
that You cant manage what you dont measure. But if
you dont use your measures to make improvements, you
should not expect results.
27
Is Supply Chain the
By Mike Duffy
Mike Duffy is Executive Vice President
of Operations at healthcare distributor
Cardinal Health. He can be reached at
Mike.Duffy@cardinalhealth.com.
If the U.S. healthcare sector
is to rein in its soaring costs,
it would do well to look to
the supply chain leaders
of the consumer packaged
goods industry. Specifically,
health care professionals need
to consider a shelf-back
collaborative approach that
involves increased trust among
partners, better alignment of
goals and incentives, and greater
transparency of information.
Cardinal Healths Michael Duffy
explains.
B
ack in 2002, I didnt realize how easy I had it when
senior executives from my employer at the time,
The Gillette Company, returned from a tense meet-
ing with some of our largest customers. Our execu-
tives had been forced to admit that we had failed
to deliver effective customer serviceand they did
not come home happy. While our products were
constantly in demand, our company could not reliably ship to those
big retailers requirements with case fll rates in the 80-90 percent
range, falling far short of expectations of 98 percent rates.
1

The executives had committed that we would fx the delivery prob-
lems. Of course, it wasnt easy to create a plan to make that commitment
a reality. We needed to fx a number of processes that simply werent
working the way we needed them to. More important to our success was
changing how our organization viewed the supply chain. Our culture
had to shift from one in which we pushed products into the market to
one focused on improving product availability at the retailers shelf. That
mindset had to permeate our organization and embed itself in all that we
didfrom developing our packaging to creating responsive supply-side
systems that reacted quickly to changes in consumer demand.
But making the necessary fxes was easy in the sense that we had
a burning platform from which to drive change: The retailers were
threatening not to carry our new products unless we fxed our service
issues. We also had several things working in our favor: unwavering
support from our senior leadership team, full access to customer data,
and control over the end-to-end processes required for supply chain
optimization. As a result, over the next 18 months, we were able to
increase customer service fll rates by 10 percent, cut inventory by 25
percent, and reduce costs by 3 percent.
Can It Work in Health Care?
I moved from consumer products to the health care industry in 2006,
and Ive found that its easy to draw parallels between the situation we
were in at Gillette in 2002 and the situation our industry is in today.
(I now work for Cardinal Health, a global manufacturer and distribu-
tor of medical and surgical supplies and technologies dedicated to
making healthcare more cost-effective.) Like Gillette at the time, the
28
MANAGEMENT MUTUALITY RESPONSE SKILLS TECHNOLOGY
SCM090901_HealthCare 28 9/1/2009 10:52:40 PM
29
Cure for Rising
HEALTHCARE
COSTS?
30
Healthcare
health care supply system operates largely as an absorp-
tion model, moving products downstream without vis-
ibility into demand at the point of use. An outcome of
that model is similar to what we saw at Gillette prior
to the transformationproducts can be out of stock as
much as 15 percent of the time.
Yet the supply chain transformation that occurred
at Gillette and other consumer packaged goods (CPG)
companies during the 1990s and early 2000s has yet to
take root in healthcare. In fact, there is some sentiment
that this transformation is not possible. The healthcare
value chainthat is, the chains of activities that can
create value for providers such as hospitals, for payers
such as insurance companies, and most importantly
for patientsis extremely complex. Consider the con-
clusion reached by Dr. Lawton Burns and his Wharton
School colleagues following their 42-month study of
the healthcare value chain in 2002:
Extended enterprises are not likely to emerge in
healthcare for a host of reasons. The three key ingredi-
ents in such enterprisesdedicated asset investments in
ones trading partners, effective knowledge management
and information sharing, and trustare all lacking.
2
I agree that there are some fundamental differ-
ences between healthcare and the CPG industry that
must be taken into account when determining wheth-
er the extended enterprise that has been so success-
fully applied in CPG can be applied to healthcare.
Specifcally:
1. The healthcare delivery system is very fragmented
and regionalized, with no single national player capable
of driving industry change as Wal-Mart did in consumer
goods.
2. Pricing models indexed to infation have histori-
cally not created an incentive for trading partners to col-
laborate and drive cost out of the system.
3. Healthcare lacks the technological sophistication
found in other industries.
However, despite those differences, the conclusion
that an extended enterprise model is unlikely to emerge
in healthcare must be challenged. The model is not only
possible; it is essential. As supply chain leaders, we must
break through silo thinking, challenge old paradigms and
push ourselves to fnd solutions for the industrys issues.
In doing so, we will provide the necessary leadership for
transforming our industry and helping restore the global
competitiveness of American business.
The Mandate for Change
From a macro perspective, the United States ability to
compete in a global economy using domestic operations
will be heavily infuenced by our ability to reform health
care and rein in cost, particularly in labor-intensive oper-
ations. In its report, The Economic Case for Health
Care Reform, the White House estimates that slowing
the growth rate of health care spending by 1.5 percent a
yeara 20 percent reduction in the current projected
rate of growthwould increase economic out-
put by more that 2 percent in 2020 and
nearly 8 percent in 2030.
3
The big question, of course, is how to
do this. Supply chain leaders can play a
central role in providing the answer. Lets
size up the healthcare supply chain issues,
though. While every hospital is unique, it
is reasonable to assume that the average
hospitals expenditure on supplies and on
labor to manage supplies is approximately
25 percent of its total operating budget.
This assumption is based on the following:
A comprehensive study of the administrative cost
of health care published in The New England Journal
of Medicine estimated that the average U.S. hospital
devoted 24.3 percent of spending to administration.
4
Included in the tasks categorized as administrative were
accounting and ensuring that supplies are on hand.
In their research published in Hospital Material
Management Quarterly, Nathan and Trinkaus conclude
that, In most hospitals and medical establishments,
about 35 percent of their budgets are spent on supplies
and labor to manage the inventories, material, and infor-
mation fows.
5

The Healthcare Financial Management Association,
a membership organization for healthcare fnancial man-
agement executives and leaders, estimates that the average
hospital spends 14 percent of its budget on supplies.
6

It has been estimated that hospital health care costs will
grow 6.2 percent per year through 2016.
7
As Exhibit 1 illus-
trates, a 100-200 basis point reduction in growth in supply-
related costs would lead to a 24-48 basis points reduction
in hospital expenditures by 2016. This is equivalent to a
An efficient healthcare
supply chain will not
only reduce costs, but also will
increase patient safety by ensuring that the
right product is available at the time the nurse
needs it.
$20-40 billion annual reduction in hospital spend across
the U.S. If we assume that this saving applies to all aspects
of healthcare, such an effort can help reduce annual
national health care expenditure by $60-120 billion.
Based on the results that have been achieved in other
industries, it is reasonable to expect that changes in the
healthcare value chain that are achievable in the next
fve years can dramatically slow the growth in supply
costs. This will reduce supplies as a percentage of total
spend while setting the stage for even greater reductions
in the years that follow.
The State of Healthcares Value Chain
In many respects, healthcare in the United States has
never been better. Hospitals are staffed by highly skilled,
world-class professionals and equipped with sophisticated
diagnostic and imaging systems. However, when it comes
to the value chain, health care lags other industries in
adopting best practices and optimizing operations.
In The Economic Case for Health Care Reform,
referenced previously, the White House acknowledges
that our system is complex and we have high admin-
istrative costs. Yet there is little visibility into supply
and not much sophistication in the systems and pro-
cesses that control it. Many hospitals still rely on the
bulk stockroom as the hub of their supply chain. In this
model, technicians set target stock levels for the various
products stocked in the hospitals units and laboratories.
Expediting, hot shots, and rush orders are part of the
everyday routine because, even though months or years
of inventory may exist upstream in the extended value
chain, products are often unavailable when the nurse
needs them.
This, of course, contrasts sharply with the perfor-
mance of a retail supply chain where product movement
is closely monitored, as sophisticated inventory man-
agement systems and point-of-use technologies have
replaced dated legacy products. These systems have
provided retailers and manufacturers alike with the data
required to improve on-shelf product availability while
lowering systemwide inventory and costs.
A Day in the Life of a Hospital Order
The extent of the difference between CPG and health-
care became obvious to me shortly after I moved into
my current role at Cardinal Health. I decided to spend
a night at one of our distribution centers to track the
life of an order. The customer whose order I chose to
observe was one of our more progressive partners, so
I expected to see a fairly effcient process as I tracked
the order from generation at the hospital through prod-
uct put-away at the hospital supply station. To my sur-
prise, that order was touched by nine people, and data
had to move among six different information systems.
By contrast, the most effcient direct store delivery
(DSD) manufacturers utilize one system to generate
and put away an order and have no more than three
people touch the product.
The difference between what I observed and what
occurs in retail highlights the opportunity that exists.
From point-of-manufacture to point-of-use, there are
redundancies and ineffciencies across the healthcare
value chain (Exhibit 2). Although the lack of sophisti-
cated technology solutions certainly contributes to this
problem, technology should not be viewed as the pana-
cea for the healthcare value chain. It will ultimately play
a pivotal role if we are to match the effciency of the
retail supply chain, but it is not the starting point. Other
foundational elements are needed if we are to maximize
the benefts that technology will afford us.
A Plan for Change
While progress is being realized in pockets across the
healthcare value chain to address some of its ineffcien-
cies, there is a limit to the magnitude of impact these
improvements will have without fundamental changes in
how wehealthcare suppliers, distributors and provid-
31
EXHIBIT 1
How Reducing Supply Chain Costs Can
Reduce Hospital Expenditures
Type of Expenditure
Total National Health Expenditures
Hospital Care
Supply Related Costs (25% spend
assumption)
Hospital Care
Current Projections (2009-2016)
Assumed Reduction in Growth
Revised Growth Rate
Revised 2016 Supply Costs
Savings
Revised 2016 Hospital Care Costs
Savings (%)
New CAGR
Change in CAGR (%)
Extrapolating to Total National Health Expenditures
2016 Total NHE Savings
2009
$2,509.5
$789.4
$197.4
6.2%
1.0%
5.2%
$281.0
$19.2
$1,181.8
1.6%
5.9%
-0.24%
$60.7
2016
$3,790.2
$1,201.0
$300.3
6.2%
2.0%
4.2%
$262.8
$37.4
$1,163.6
3.1%
5.7%
-0.48%
$118.1
(National Health Expenditures, $ billions)
Source: CMS
Projected
PROJECTED SAVINGS FROM IMPROVED SUPPLY CHAIN
32
Healthcare
ersview the value chain. In much the same way that
we undertook a mindset change at Gillette, professionals
in this industry need to reorient their view of the supply
chain and take a shelf-back approach.
We simply cannot be satisfed until we improve the
availability of products at the point of use while reduc-
ing end-to-end system costs. Although there will be chal-
lenges in achieving the types of success seen in other
industries, I frmly believe it can be done.
Admittedly, there are no easy fxes. But there are
lessons we can apply from other industries to create
improvements now. These lessons center on trust, align-
ment and information transparency.
1. Building Trust and a
Collaboration Mindset
In an AMR Research study of more
than 275 life sciences and health care
companies, participants were asked to
identify the challenges they faced in
working on joint opportunities across the
healthcare value chain. One of the main
impediments cited was collaborating with
trading partners.
Additionally, participants were asked Is
there a lack of trust with your trading part-
ners? Almost three-quarters answered yes.
Not surprisingly, AMR concluded that the
different industry segments in the health-
care value chain do not trust each other.
This has been a hindrance to information
sharing and collaboration which drives sig-
nifcant costs and ineffciencies.
8

How important is trust and collabora-
tion to improving supply chain performance? Its hard
to overstate it. For evidence, turn to a McKinsey and
Company Supply Chain Champions study conducted
to determine the characteristics of the leading consum-
er goods supply chain leaders. McKinsey plotted the
performance of 40 leading packaged goods companies
based on service levels and cost, and then correlated the
success of these leaders with various supply chain attri-
butes. Supply chain collaboration surfaced as the lead-
ing success factor (see Exhibit 3).
As these and other industry leaders have collaborat-
ed more closely with their trading partners and taken a
holistic look at their supply networks, they have driven
substantial cost and inventory out of
the system while improving service
levels and sales. (Exhibit 4 shows the
savings achieved in three key indus-
tries.) While much of the collabora-
tion occurred between retailer and
manufacturer, industry associations
and exchanges such as the Grocery
Manufacturers Associations Logistics
Committee, Transora and GS 1 pro-
vided forums for CPG companies to
develop and share best practices, tackle
industry-wide issues, and deploy com-
mon data standards. The goal of these
associations is best illustrated by the
GMAs Logistics Committee mission
statement: The committees mission is
to identify emerging logistics trends in
Performance of 40 Leading
Packaged Goods Companies
Key Success Factors of Consumer
Packaged Goods Supply Chain Leaders
Correlation with Supply Chain Success
EXHIBIT 3
Success Factors Associated with Collaboration
Source: McKinsey & Company
SC Collaboration
Supply
Chain
Service
Level
High
Low
Low High Supply
Chain Cost
0.40
Product Flexibity 0.35
Integrated SC Organization
0.30
Complexity Management 0.30
Planning Process 0.27
SC Controlling/Systems 0.22
Leaders
Followers
Manufacturers Distribution Consumers
EXHIBIT 2
Opportunities to Eliminate Redundancy and Reduce Complexity
Redundant warehouse assets
Excess inventories, leading to losses/writeoffs
Mismatched demand/supply locations-expedited shipping, poor service
Increased complexity, resulting in errors, increased costs, poor service
Internal
Warehouse
Wholesale
Distributor
Hospital
Care Provider
Patients
External
Warehouse
Manufacturing
1
1
2
2 2 2
3
3 4
4
4
1
the industry with the goal of promoting increased effec-
tiveness and effcient business practices for serving our
customers and consumers.
In healthcare, we do not have the equivalent of a
GMA Logistics Committee promoting the identifcation
and sharing of best practices across the industry. But
that is not to say there cannot be an equivalent cross-
industry forum.
2. Aligning Goals and Incentives
While building trust takes time, there are some key
enabling elements that can be put in place immediately.
The frst is aligning the goals and incentives of participants
across the value chain. Currently those goals are often not
aligned: Manufacturers are concerned about sales, hospi-
tal materials managers focus on purchase price and pur-
chase price variances, and distributors work on keeping
the two partners happy. These incentives cause the supply
chain partners to add ineffciencies to the system.
In addition, many of the relationships in the health
care value chain are governed by metrics that track the
effciency of the transaction between two trading part-
ners. Instead, partners need to work together to clearly
defne the metrics that are important to the success
of the system, not simply to the individual partners.
Focusing on the metrics that matter will lead to a better
and more complete understanding of the supply chains
performance. In turn, this will lead to identifcation and
dialogue around areas of opportunity, alignment on how
best to close gaps, and improvement in overall perfor-
mance. A simple example is focusing on service levels
to the hospital, if not at the point of use. While it is
important to understand the service per-
formance from the manufacturer to the
distributor, what matters most is that the
nurse has the product when its needed.
This evolution occurred at the time
I was at Gillette and was critical to our
turnaround. Historically, we had mea-
sured service using two key metrics: dol-
lar fll rate and on-time shipment. These
two metrics were not customer-centric
and only mattered to Gillette. Our cus-
tomers did not order products in incre-
ments of dollars; they ordered cases. Plus,
they didnt care when we shipped the
product provided that it met their delivery
expectation, which we didnt know since
we werent tracking delivery time. To help
change our culture, we redefned our cus-
tomer service metrics. Instead of looking
at dollar fll rate, we began to measure
case fll rate. Instead of measuring our
performance based on on-time shipment, we switched to
on-time delivery. In addition, my entire organization added
customer service metrics to their scorecard. In doing so,
we ensured that internal functions were working toward
the same end goal.
That same degree of organizational change is occurring
here at Cardinal Health and is starting to impact how we
work with our suppliers. For example, we had one supplier
that has been a gold performer on our supplier scorecard
for years. The supplier excelled in every category we mea-
sured. Yet, when I visited with our selling organization,
this supplier was routinely identifed as an issue because
our fll rates to the hospital for their products were low.
As we matched the feedback we were hearing from the
feld with how we measured this and every other supplier,
we identifed gaps on our scorecard. Most notably, there
was no measure for how well our mutual customer, the
hospital, was being serviced. As a result, the supplier was
unaware of the problem and couldnt offer solutions.
Efforts like this are transforming the way we inter-
act with our supply partners. We have established a sup-
plier advocacy council that will identify areas where we
can jointly improve supply chain effciency. The coun-
cil will also help ensure that Cardinal Healths supply
chain direction and corresponding technology platform
are aligned with industry thinking and standards. We
are introducing a new supplier performance scorecard
that will focus on how we are servicing our mutual cus-
tomerthe hospital. This will further drive alignment
between Cardinal Health and suppliers on key future
33
EXHIBIT 4
Savings from End-to-End Collaboration in Other Industries
Consumer
Savings from Collaboration, % of Base Line
Source: McKinsey
20
30
5
2
1
Automotive
10
20
8
1
0
Electronics
20 20
3
0
2
Inventory Cost
Administration Logistics Production Spend
34
Healthcare
business initiatives that drive costs out of the supply
chain while improving product availability.
We are also undergoing a comprehensive review of
our current processes while aggressively tackling our
legacy system issue. By reviewing our current processes
through a shelf-back lens, we will identify opportunities
to redesign, simplify and improve the performance of the
end-to-end supply chain. In addition, we will introduce
new technologies to streamline information fow and
improve the transparency of data, creating a platform for
even tighter integration with suppliers and providers.
Forward-thinking hospitals are addressing similar issues
within their organizations. By working closer with its part-
ners to address ineffciencies and improve inventory man-
agement, the Lahey Clinic successfully drove $1.3 million
in costs out of its supply chain (see accompanying sidebar).
Nebraska Medical Center created a strategic advisory board
that elevated the role of supply chain professionals and pro-
vided a platform for a more strategic relationship with its
supply chain partner. Through this process, the center real-
ized frst year savings of $1.9 million attributed to reduced
consumption through automation, product substitution and
more effective negotiations.
3. Improving Information Transparency
A key enabler to building collaboration is improving the
transparency, as well as accuracy, of information. Consumer
goods companies lead the way in terms of effective supply
chain information sharing. They have been more effective
in turning into valuable information data from store-level
point-of-sales systems, inventory management systems, and
loyalty card databases, thereby enabling them to optimize
supply chain performance and innovation.
In addition, CPG companies have launched numerous
data synchronization efforts since the early 2000s to further
improve business performance and establish the ground-
work for future improvements. Examples of the ineffcien-
cies that data synchronization efforts target include:
High administrative costs driven by both manual
work and rework caused by data match errors.
Underutilized logistics assets due to pallet and
product master data errors.
Reduced warehouse productivity due to lengthy
receiving processes.
9

Led by Wegmans Food Markets and supported by
Coca-Cola Co., General Mills, Hershey, J.M. Smucker,
Nestle, PepsiCo, and Procter & Gamble (P&G), a pilot
was conducted by the Grocery Manufacturers Association
(GMA) to validate the opportunity in supply chain effcien-
cies that would be realized by investing in data synchroniza-
tion. Included in the fndings were the following meaning-
ful savings: (1) improved accuracy of product weights and
measures, leading to $2.2 million of savings for one sup-
plier and (2) improved logistics and distribution effcien-
cies, allowing Wegmans to eliminate $1 million in labor and
inventory carrying costs from its distribution network.
10

Taking a cue from other industries, the U.S. Department
of Defense (DoD) launched a pilot in 2006 to test the
global data synchronization networks (GDSN) applica-
bility in healthcare. Their conclusion from the pilot: All
parties agree that consistent and synchronized data would
bring great beneft to them as individual entities as well as
to health care overall.
11
The DoD is looking to build on
L
ahey Clinic is a physician-led, non-profit healthcare
group in suburban Boston, with more than 500 physi-
cians and 4,600 other personnel supporting a 327-bed
hospital and a 24-hour ambulatory care center. In enhanc-
ing its supply chain operations, Lahey first moved to a
stockless inventory system, which essentially replaces the
hospitals bulk stockroom with distributor-held inventory.
In this case, Cardinal Health now manages the clinics
inventory and arranges for just-in-time delivery of clinical
products to stocking cabinets in the hospitals units and
laboratories.
Lahey also deployed Pyxis Products automated dis-
pensing cabinets to control the dispensation of medications
and medical supplies in a way that automates inventory
management and enables usage to be tracked to employ-
ees and patients. Employees use their ID numbers or fin-
gerprints to access inventory. The system then transfers the
information to the hospitals billing system and generates
reports that can be used to optimize medication and supply
utilization and manage costs.
Lahey also worked closely with Cardinal Health to
implement an enterprise-wide systems approach to supply
chain efficiency to replace its management-by-committee
approach. The clinic created a new position, Director of
Supply Chain Management, to help implement recommen-
dations and drive greater compliance. This experienced
supply chain administrator built a team that was able to
streamline the materials management information sys-
tem to enable more effective use of the data generated by
the Pyxis cabinets. This data was analyzed to better illus-
trate precisely what drives the cost structure and allowed
the team to improve inventory control, reduce waste and
improve workflow.
To date these improvements have generated $1.3 million
in savings and a 70 percent reduction in product stock-outs.
Lahey Clinic: Best
Practices in Action
these results and expand its pilot with addi-
tional items and manufacturers.
Based on the results seen in other
industries and the success of the DoD
pilot, it would be reasonable to expect that
additional data synchronization programs
are occurring throughout the healthcare
industry. However, one of the key conclu-
sions of the GMA study provides some
insight into why this is not the case: Data
synchronization is not just about technologyit is about
people and processes working together to form a highly
integrated and collaborative value chain.
Job Must Be Done Today
Improving the performance of the healthcare supply chain
will be a core element of reducing the cost of healthcare
in the U.S. An effcient supply chain will not only reduce
costs, but also will increase patient safety by ensuring that
the right product is available at the time the nurse needs
it. Likewise, it will free up capital that can be diverted to
fund further research and recovery efforts.
The solution is not easy and will take some time.
Despite the documented successes of companies
like Gillette and P&G, not all CPG companies have
embraced the importance of communication and collab-
oration. In fact, in 2005, in a GMA report highlighting
the characteristics of companies that were winning in
the marketplace (as defned by sales and operating mar-
gin growth), one key differentiating trait was still that
winnerscollaborate more closely with their partners
to drive execution and eliminate waste.
12

Some of these winners are starting to emerge in
healthcare, as seen in the best practices being deployed
by leaders such as Lahey Clinic and Nebraska Medical
Center. Now we need to build on their successes by
establishing stronger relationships among all partners,
aligning goals and increasing transparency to ensure that
the value chain contributes to the White Houses goal of
slowing the growth rate of healthcare spending.
At Cardinal Health, we are committed to making
healthcare more cost-effective. By better aligning our-
selves with our suppliers, implementing new scorecards
to gauge performance, partnering with hospitals to deliv-
er supply chain improvements, and reviewing internal
processes in the spirit of improving the extended supply
chain, we are taking the necessary frst steps for improv-
ing the healthcare value chain.
But it should go without saying that the job of reduc-
ing healthcares value chain costs is bigger than any one
company. We must all break through the industrys siloed
thinking, challenge old paradigms and push ourselves to
fnd solutions for the industrys issues. This is our oppor-
tunity. It can be doneand its a job that cannot wait
much longer. jjj
Sources:
1 How Gillette Cleaned Up Its Supply Chain, Supply Chain
Management Review (April 2004)
2 The Healthcare Value Chain: Producers, Purchasers and
Providers, Lawton Burns and Wharton School Colleagues,
published by John Wiley & Sons (2002)
3 The Economic Case for Health Care Reform, Executive
Office of the President Council of Economic Advisors (June
2009)
4 Costs of Health Care Administration in the United States
and Canada, Steffie Woolhandler, Terry Campbell, and
David Himmelstein, The New England Journal of Medicine
(August 21, 2003)
5 Improving Health Care Means Spending More Time
with Patients and Less Time with Inventory, Nathan, J.
and Trinkaus, J, Hospital Material Management Quarterly
(November, 1996)
6 HFMAs Health care Finance Outlook, 2008-2013
(November 2007)
7 Health Spending Projections Through 2017, John A Poisal,
Federal Forecasters Conference (April 24, 2008)
8 The Health care Value Chain Transformation: a Time
to Learn, Unlearn, and Relearn, Hussain Mooraj, AMR
Research, and Aamir Rehman, MD, Saint Peters Heath
System, 2008 Healthcare Exchange (November 2008)
9 Synchronization The Next Generation of Business
Partnering: How Leading Companies are Delivering
Actual Results, Grocery Manufacturers Association, Food
Marketing Institute, Wegmans Food Markets, Accenture LLP
and 1Sync (2006)
10 Data Synchronization Improves Supply Chain for Wegmans,
Logistics Today (August 10, 2006)
11 Creating a Source of Truth in Health care: Testing the
GDSN as a Platform for the Health care Product Data Utility.
Results from DoD Health care GDSN Pilot Phase IIA, DoD/
VA Data Synchronization Program (September 2007)
12 Winning with Customers to Drive Real Results: the 2005
Customer and Channel Management Survey, Grocery
Manufacturers Association (2005)
35
The supply chain transformation
that occurred at Gillette and other
consumer packaged goods
companies during the 1990s
and early 2000s has yet to take
root in healthcare
An Update on the State of
Supply Chain
EduCation
By Stanley E. Fawcett
upply chain management is no longer a stranger in the corpo-
rate boardroom. Indeed, todays ubercompetitive environment
has placed SCM in the spotlight on the strategy stage. To meet
ever-rising customer expectations in the face of ferce competi-
tion, companies are building global networks and streamlining
value-added processes. The goal is to effciently use worldwide
resources to proftably meet the needs of global consumers.
Supply chain activities lie at the heart of these strategies. Yet, many com-
panies struggle to fnd managers capable of executing these strategies and
creating value across organizational and national borders. This reality raises
a fundamental question for academics and practitioners alike: How well are
our educational resourcesnamely professional associations, universities and
industry publicationsproviding the education needed for managers to design
and lead todays global supply chains?
This article seeks to answer this vital question by evaluating the relevance
and effcacy of existing supply chain educational resources. Its based on a
survey of (1) academics teaching supply chain subjects and (2) practitioners
working in the supply chain arena. The fndings are compared and contrasted
to earlier studies on supply chain education conducted over the past 15 years.
Given the rapid evolution of this business discipline, a new dimension has
been added to the analysis and discussion. Specifcally, this latest survey also
asked respondents to evaluate the importance and usefulness of continuing
education and professional development activities.
Survey Methodology
The original State of Logistics Education was reported in 1995 in the
Journal of Business Logistics
1
with a follow-up report appearing 10 years
later in Supply Chain Management Review.
2
The present study employed an
updated version of the original instrument, making it possible to track chang-
ing perceptions regarding professional associations, university programs, and
supply chain journals as well as to identify new educational resources that
have become popular in recent years. The principal change to the current
study was to include a set of questions to assess continuing education and
36
Stanley E. Fawcett (Stan_Fawcett@
byu.edu) is the Donald L. Staheli
Professor of Business Management
at Brigham Young University.
ManaGEMEnt Mutuality RESponSE SKillS tEChnoloGy
SCM090901_Education 36 9/1/2009 10:43:21 PM
professional development activities. A constantly chang-
ing environment makes life-long learning a critical com-
ponent of a modern education.
The data for this study were collected using a web-
based questionnaire that was e-mailed to potential
respondents. The mailing list for the academic version
of the survey was complied by going to the websites of
leading supply chain universities across America (all of
the university programs contacted or identifed in the
2005 study were included in this process). Faculty pro-
fles were read and 289 faculty who specialize in supply
chain education were identifed. The practitioner mail-
ing list was compiled from the read-
ership of Supply Chain Management
Review and Logistics Management
magazine. The foremost goal in creat-
ing the mailing lists was to include a
broad cross section of academics and
practitioners. A total of 302 usable
surveys were returned: 102 academic
surveys and 200 practitioner surveys.
The questionnaire consisted of four
sectionsprofessional associations,
university programs, continuing educa-
tion, and publications. Each section, in
turn, consisted of two principal parts.
Respondents were initially asked to
rate the importance of various criteria
that are used to evaluate diverse educa-
tional resources. They were then asked
to evaluate the educational resources
themselves based on these criteria.
This approach helped develop a com-
mon reference point for respondents to
use in their evaluations.
Professional Associations:
The Quest for Relevancy
A number of professional associations
are dedicated to the needs of supply
chain professionals. The three largest,
APICS, the Council of Supply Chain
Management Professionals (CSCMP), and the Institute
for Supply Management (ISM), entered the supply chain
arena from distinctly different domainsproduction,
logistics, and purchasing respectively. However, in recent
years, these associations have morphed from their original
functional orientations to focus on end-to-end resource
management. Other, typically much smaller, associations
such as the Warehousing Education and Research Council
(WERC) have retained their targeted educational focus.
Importantly, limited collaboration among the various associ-
ations means that they increasingly compete for not just the
same mindshare but also for a slice of companies currently
Universities, professional associations, and publications all have a role to play in
developing the supply chain leaders of the future. But how effectively are they
stepping up to the task? Updated research conducted among both supply chain
practitioners and educators show that theyre making an effort. But greater, faster
progress needs to be made if we are to meet tomorrows leadership challenge.
37
Bruno Budrovic
SCM090901_Education 37 9/1/2009 10:43:30 PM
38
Education
shrinking professional development budgets.
To assess how effectively these associations are engag-
ing professionals to shape the supply chain discipline, the
survey asked respondents to evaluate the value of member-
ship along six dimensions: role in educating supply chain
professionals, national conferences, seminars and work-
shops, local meetings, professional certifcation, and pres-
tige of belonging. Since the original survey in 1995, both
academic and practitioner respondents have consistently
identifed the associations role in educating professionals
as their most valued contribution. Even so, the two respon-
dent groups value specifc educational activities differently.
Academics rate national conferences highly, practitioners
much less so. In fact, in both the 2005 and 2009 surveys,
practitioners gave national conferences among their low-
est scores, suggesting they view these events as delivering
marginal valuea problematic fnding in a recessionary
environment. By contrast, practitioners rate seminars and
certifcation highly. Supply chain professionals are seeking
the latest, relevant skills and a means to communicate that
they have acquired them.
Based on their perceptions of how well the asso-
ciations deliver the six services considered, respon-
dents rated the effectiveness of 15 groups on a fve-
point scale (1=Poor, 3=Average, and
5=Outstanding). Respondents also
indicated whether they are active mem-
bers of each association. The lowest-
rated associations from the 2005 survey
were replaced with the following four
associations: Association of Strategic
Alliance Professionals, Strategic Account
Management Association, Supply Chain
Council, and Voluntary Interindustry
Commerce Solutions (VICS). Exhibit 1
highlights key results of those ratings.
The data draw attention to three
fndings:
1. The overall association ratings
declined signifcantlyand across the
boardfrom 2005 to 2009 (average
2005 rating = 3.68 compared to 3.19 in
2009). Only one association, CSCMP,
received a rating above 4.0. (CSCMP
was the most highly respected associa-
tion in both 1995 and 2005.)
2. Membership levels decreased dra-
matically for most of the organizations.
Only APICS escaped a large decrease
in activity level. With the exception of
WERC, the smaller, specialized logistics
associations have fallen from favor, attracting membership
levels of 3 percent or less.
3. The absence of memberships in the Association
of Strategic Alliance Professionals and the Strategic
Account Management Association suggests that sup-
ply chain professionals have yet to embrace the need
to step out of traditional roles and seek a more strategic
approach to integrated resource management.
Overall, what do these fndings mean? In a resource-
constrained world where managers are struggling to learn
how to manage across boundaries, todays professional
associations are struggling to achieve and communicate
their relevance. Moving forward, we can expect more con-
vergence and competition among the leading supply chain
professional associations.
University Programs:
Educating Tomorrows Leaders
Todays supply chain leader is defned less by functional
position or job description than by mindset and skill set.
Effective SC managers possess strong functional skills but
make holistic decisions. They build collaborative relation-
ships while executing with discipline. They scan relentlessly
and know the world is changingso they embrace change.
EXHIBIT 1
Participation in and Effectiveness of Professional Associations
Council of Supply Chain
Management Professionals
Membership
4.15
4.41
34%
68%
Institute for
Supply Management
3.89
4.06
22%
38%
Warehousing Education
and Research Council
3.88
4.13
7%
26%
Supply Chain Council
3.66 7%
APICS
3.66
4.03
22%
22%
The International
Society of Logistics
3.20
3.45
2%
11%
American Society for
Transportation and Logistics
3.18
3.68
10%
44%
Voluntary Interindustry
Commerce Solutions
3.17 3%
Transportation
Research Forum 3.40
2%
14%
Supply Chain and Logistics
Association of Canada
2009 2005
Scale: 1 = Poor, 3 = Average, 5 = Outstanding
2.92
3.35
1%
12%
2.96
SCM090901_Education 38 9/1/2009 10:43:38 PM
Unfortunately, few managers possess this combination
of attitudes and skills. A senior executive described this
as his companys greatest supply chain challenge, explain-
ing, We can fnd great entry-level peoplethe ones with
strong functional skills. But fnding people who can bring
everyone together to work as a cohesive team is a real chal-
lenge. Theyre just not out there. He then pled for universi-
ties to create the curriculum needed to produce this type of
manager. To assess the characteristics deemed important in
a university supply chain education, respondents were asked
to evaluate North Americas leading supply chain programs.
Using a fve-point scale (5=Very Important; 1=Very
Unimportant), respondents were asked to rate the fol-
lowing criteria that impact the quality and reputation of
supply chain programs:
Faculty.
Research contributions.
Source for future employees.
Department reputation.
Graduate and undergraduate curriculum.
Alumni visibility.
Overall university reputation.
Continuing education presence.
Exhibit 2 reports results of this rating process. In
both 1995 and 2005, academics rated a programs facul-
ty as the most important factor. Practitioners agreed in
2005. However, opinions diverged in 2009. Academics
still viewed a programs faculty as the
most important success factor (rating
of 4.58); however, practitioners placed
faculty in a tie for the third in impor-
tance (rating of 4.11).
This fnding is representative of the
divergent ratings and priorities aca-
demics and practitioners expressed.
Academics rated eight of the nine cri-
teria as more important than their prac-
titioner counterparts (fve signifcantly
so). The one exceptionpractitioners
rated continuing education as more
important than academics. The greatest
discrepancies occurred in the areas of
alumni encountered in the work place,
research, and source of employees. On
a relative basis, practitioners are giving
more weight to curricular issues. With a
score of 4.23, graduate curriculum was
the practitioners highest-rated criteria.
Practitioners are also concerned with
overall university reputation (rating of
4.15). As companies rationalize their
sources of employees, they are increasingly selecting
schools based on curriculum and reputation.
Based on the evaluation criteria, respondents were
asked to identify and rank up to the top 20 supply chain
programs in North America. To facilitate the ranking
process, the respondents were provided a list of 57 uni-
versities that have been identifed as national or regional
leaders. Respondents could also write in schools not on
the list. School rankings were determined by allocating
20 points for each frst place ranking, 19 points for each
second place ranking, 18 points for each third place
ranking, and so on down to one point for each twentieth
place ranking. Point allocations were then summed to
arrive at a total score for each school.
Exhibit 3 shows the Top-20 results for the academic
and practitioner respondents. An overall weighted-aver-
age top 20 list is also shown. As with the football polls,
the rankings here are not likely to escape controversy.
After all, some loyalty is likely expressed in these rank-
ings as many of the practitioners graduated from the
listed schools. This is also true of the academics.
As in the previous surveys, Michigan State and
Penn State lead the ranking. Other programs with
long traditions in supply chain-related disciplines like
Arizona State, Ohio State, Maryland, and Tennessee
continue to be highly regarded. Some schools such as
MIT, Georgia Tech, and Stanford have built on their
39
EXHIBIT 2
Criteria Used to Evaluate Education Programs
Faculty
4.11
4.58
Source for Employees
3.97
4.38
University Reputation
4.15
4.37
Program Reputation
4.05
4.33
Graduate Curriculum
4.23
4.32
Alumni in the Workplace
3.62
4.32
Undergraduate Curriculum
4.11
4.29
Research Contributions
3.79
4.23
Continuing Education
4.06
3.93
Practitioner Academic
Scale: 1 = Very Unimportant, 3 = Average, 5 = Very Important
SCM090901_Education 39 9/1/2009 10:43:45 PM
40
Education
universities sterling reputations to achieve widespread
recognition. Most of the remaining top-rated programs
tend to be large state schools that have invested con-
sistently over the past ten years to establish a supply
chain presence. Three exceptions exist: Brigham Young,
Central Michigan and Miami (OH) universities. This
result contrasts sharply with the 2005 fndings that
identifed several smaller, regional programs among the
top 20. These newcomers have found it diffcult to
retain mindshare in a very competitive and fnancially
diffcult market. Indeed, the recent economic downturn
has forced both universities and companies to focus on
core programs and recruiting relationships.
To summarize, the essential ingredients to building a
highly rated supply chain program appear to be consis-
tent over time. They include the following:
1. Build a strong curriculum. Although MBA pro-
gram curriculum is the most visible, undergrad and pro-
fessional development curriculum are also important.
2. Hire well-know productive scholars who have the
demeanor and skills to reach out to and work with the
practitioner community. Outreach skills have been over-
looked in the past!
3. Establish a user-friendly placement process that
strengthens corporate relations and makes it easy to hire
capable problem solvers.
4. Create program visibility. Building a solid program
is necessary; marketing it aggressively is a
step toward suffciency.
Climbing into or up the Top 20
requires resource dedication and resolve.
A sustained presence demands a sus-
tained effort.
Publications:
Evolving Reader Needs
Publications are the currency of aca-
deme. Because the ability to publish
determines professional reputation and
success, the publish-or-perish mindset
is frmly ingrained. Thus, educators have
long rated the quality of research jour-
nals. More importantly, it is through their
research that educators seek to advance
the supply chain discipline and improve
business practice. Therefore, in the 2005
survey, practitioners were asked to weigh
in and share their perceptions of research
journals. A divide between academic and
practitioner perspectives was evident: aca-
demics pursued rigor; practitioners valued
relevance. The question was proposed, Is it possible to
please both worlds? The fndings of the current survey
in which respondents were asked to rate 25 leading jour-
nalsindicate that this divide has yet to be fully bridged.
To guide their evaluation of the journals, the respon-
dents were asked to assess and use these seven criteria:
quality of articles, impact on the discipline, relevancy,
readability, timeliness of topics, theoretical vs. applica-
tion orientation, and variety of topics covered. Of note,
although both groups value relevance, academics place
the most emphasis on quality and impact while practi-
tioners rate timeliness and variety more highly than their
educator counterparts. Each publication was rated on a
fve-point scale with 5=Outstanding and 1=Poor.
Among academics, the Journal of Operations
Management received the highest rating (4.16). This
was the frst time that a non-logistics journal was so
highly ranked. The only other journal to receive a score
above 4.0 was the Journal of Business Logistics at 4.01.
Rounding out the top fve were two practitioner-oriented
journalsHarvard Business Review (3.96) and Supply
Chain Management Review (3.78)and the International
Journal of Physical Distribution and Logistics Management
(3.64). The presence of both HBR and SCMR among
the top fve academic journals denotes that supply chain
educators value high-quality, practical research. Overall,
the fndings confrm that the nature of the supply chain
EXHIBIT 3
Ranking of Supply Chain Programs
Practitioner
Michigan State
Penn State
Ohio State
Tennessee
Arizona State
MIT
Maryland
Georgia Tech
Stanford
Arkansas
Iowa State
Oklahoma
Auburn
Brigham Young
Northwestern
Pennsylvania
Miami (OH)
Purdue
Indiana
North Carolina St.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Academic
Penn State
Michigan State
MIT
Georgia Tech
Ohio State
Tennessee
Arizona State
Stanford
Harvard
Wisconsin-Madison
Pennsylvania
Northwestern
Purdue
North Carolina St.
UCLA
Georgia
Indiana
Texas A&M
Brigham Young
Central Michigan
Overall
Michigan State
Penn State
Ohio State
Tennessee
Arizona State
MIT
Georgia Tech
Stanford
Maryland
Arkansas
Harvard
Pennsylvania
Northwestern
Iowa State
Purdue
Brigham Young
Auburn
North Carolina
Wisconsin-Madison
Indiana
SCM090901_Education 40 9/1/2009 10:43:52 PM
discipline is changing. Only four of the
top ten journals are traditional logistics
journals. Discovering how to use sup-
ply chain resources to create dynamic
capabilities and customer value is
todays focus.
Not surprisingly, the practitioners
viewed the value of the journals quite
differently, rating HBR (4.16) and
SCMR (4.15) as their two top publications, followed by
JBL (3.92), Journal of Supply Chain Management (3.72)
and in a tie for ffth, the Journal of Purchasing and Supply
Management (3.67) and IJPDLM (3.67). Practitioners
not only are more focused on practical research but also
more interested in learning about supply relationships. If
they really want to infuence practice, educators need to
recognize these interests and needs of the business com-
munity. Managers are looking for research that will help
them solve todays pressing competitive dilemmasthey
are not interested in rigor without application.
The survey also looked into the readership of the vari-
ous journals. Among academics, four journals are read by
40 percent or more of the respondents: Journal of Business
Logistics, Harvard Business Review, Journal of Operations
Management, and Supply Chain Management Review.
Among practitioners, only SCMR achieves a readership
of 40 percent. HBR is a close second with a 36 percent
share. A precipitous drop off in readership occurs beyond
these two journals. Overall, readership among both edu-
cators and practitioners has declined since 2005.
Professional Development:
The Need for Continuing Education
In the early 1990s, Professor Bud LaLonde, one of the
forefathers of modern SCM, warned that professionals
who failed to spend 10 percent of their time learning new
skills would become obsolete within fve years. A decade
later, his message changedmanagers now needed to
invest 20 percent of their time to avoid obsolescence
within three years. Globalization and compressed tech-
nology cycles have only accelerated and
made steeper the obsolescence curve.
To evaluate whether todays supply
chain professionals are keeping pace
with our hectic marketplace, respon-
dents were asked to give their view of
continuing educations importance as
well as indicate many hours they spent
building new skills in the past year. On
a scale of 1=Not important to 5=Very
important, both educators (4.28) and
practitioners (4.45) perceive profession-
al development to be highly important to
continued success. Yet, both groups fall
well short of the amount of investment
Professor LaLonde recommended: on
average, last year academics dedicated
133 hours and practitioners invested
106 hours in pursuit of better skills.
When asked what motivated their
continuing education efforts, practi-
tioners responded that their desire to
contribute more effectively on a day-
to-day basis (4.52) was the primary rea-
son for pursuing additional education
(see Exhibit 5). Advancing their careers
(3.98), achieving a professional certifca-
41
EXHIBIT 4
Overall Ranking of Supply Chain Journals
Harvard
Business Review
4.06
Supply Chain
Management Review 4.12
Journal of
Business Logistics
3.97
4.19
Journal of
Operations Management
3.89
3.66
International Journal of
Physical Distribution and
Logistics Management
3.66
3.95
Journal of Supply
Chain Management
3.59
3.83
International Journal of
Logistics Management
3.57
3.91
Journal of Purchasing
and Supply Management
3.44
3.29
Production and
Operations Management
3.44
TR Part E: Logistics and
Transportation Review
3.37
3.68
50%
43%
59%
44%
37%
33%
39%
16%
31%
13%
36%
40%
16%
10%
6%
20%
11%
8%
6%
4%
2009 2005
Scale: 1 = Poor, 3 = Average, 5 = Outstanding Educator
2009 Readership
Practitioner
3.97
Although supply chain professionals
recognize continuing educations
importance, they need more flexible and
higher-quality options to help keep them off the
wrong side of the obsolescence curve.
SCM090901_Education 41 9/1/2009 10:44:05 PM
42
Education
tion (3.70) and obtaining a formal degree
(3.66) were other important motivators.
Interestingly, practitioners noted that
approximately 40 percent of their con-
tinuing education efforts are self-directed
reading and study. The next most popu-
lar approach to improving relevance is to
seek a formal degree from an accredited
university (23 percent of time and effort).
Company-directed activities represented
only a small fraction of the time invested.
Finally, the survey evaluated the
effectiveness of a variety of continuing
education formats on a fve-point scale
(1=Poor; 5=Outstanding). Practitioners
rated the formal classroom experience as
most effective (4.10) followed by semi-
nars and workshops (3.76). Academics
agreed that these were the most effective formats, but
reversed the order (seminars, 3.93 and classroom 3.73).
Despite the increased use and popularity of distance
learning, such formatsregardless of type (independent
study, multimedia, on-line)received signifcantly lower
scores from both audiences. This fnding connotes both
a challenge and an opportunity for purveyors of profes-
sional development programs.
The overall message: although supply chain profes-
sionals recognize continuing educations importance, they
need more fexible and higher-quality options to help keep
them off the wrong side of the obsolescence curve.
The Mandate:
New Skills for a New Era
As the frst decade of the 21st century comes to a close,
the supply chain revolution is well underway. Companies
are rethinking the way they design processes and are striv-
ing to change the way they manage relationships. They
are implementing strategies that utilize all the resources
of the supply chain to meet customer needs better than
competing supply chains. However, despite a wealth of
educational institutions and opportunities, companies are
fnding it diffcult to fnd people with the right skills
deep functional know-how guided by a holistic, collabora-
tive visionto turn these strategies into reality.
This is tomorrows educational mandate: to help stu-
dents and managers alike build these skills so they can
effectively manage an entire supply chains capacities
and capabilities to create outstanding customer value.
Todays diffcult economic circumstances will heighten
the challenge. As companies retrench and redouble their
efforts to reduce costs, spending on training and profes-
sional development will likely be cut. Educational activi-
ties that are undertaken will need to yield a measurable
return on investment.
Unfortunately, the current survey of supply chain edu-
cational resources suggests that practitioners are some-
what skeptical regarding the value they are obtaining.
Membership in professional associations and article reader-
ship are both downin some cases dramatically. So too are
the impact scores attributed to these resources. This is par-
ticularly true of the associations and journals that are tightly
focused on traditional transportation activities. Practitioner
interest continues to move toward integrated resource man-
agement. Associations and journals that fail to adapt quickly
are likely to be relegated to the status of irrelevancy.
Tomorrows professional development dilemma is
doubly challenging given the emphasis on new technolo-
gies for delivering educational content. Practitioners and
educators agree that in-class and seminar-based pro-
grams provide the most effective education. They also
agree that most distance-learning approaches are not
currently providing the high-level learning they feel they
need to remain on the cutting edge. Improvements are
neededboth in content and delivery. If the purveyors
of supply chain education do not respond quickly, we
will likely fnd that we lack the managers to lead the next
stage of the supply chain revolution. VVV
Sources:
1 Stanley E. Fawcett, David B. Vellenga, and Larry J. Truitt
(1995), An Evaluation of Logistics and Transportation
Professional Organizations, Programs, and Publications,
Journal of Business Logistics, Vol. 16, No. 1.
2 Stephen M. Rutner and Stanley E. Fawcett, The State
of Supply Chain Education, Supply Chain Management
Review, September 2005.
EXHIBIT 5
Professional Development: Motivation and Effectiveness

Ability to Contribute
Motivation
Effectiveness
4.52
Advance Career 3.98
Achieve Certification 3.70
Obtain SUM Degree 3.66
Classroom 4.10
Seminars/Workshops 3.76
Distance Learning: On-Line 3.33
Distance Learning: Independent Study 3.15
Distance Learning: Multimedia 2.92
Scale: 1 = Very Unimportant, 3 = Average, 5 = Very Important
SCM090901_Education 42 9/1/2009 10:44:18 PM
43
SaaS:
Right for You?
By Sean A. Murphy
Sean A. Murphy (sean.murphy@
reedbusiness.com) is associate editor at
Supply Chain Management Review.
In the past decade, Software as a
Service (SaaS) has evolved from a
technical fad to a value generator
for many supply chains, especially
those involved with Transportation
Management Systems (TMS). Now,
SaaS is beginning to branch out
into other supply chain activities
like demand planning and supply
management. Heres how to
determine if SaaS is right for you.
S
oftware as a Service (SaaS) was a new technologi-
cal idea 10 years ago. And like all technological
innovations, it probably had an equal chance of
becoming widely popular, a tool for generating
value, or written off as a neat idea destined to be
remembered as nothing more than a fad.
Now, a decade later, SaaS is clearly no passing
fad (Exhibit 1 shows SaaS growth rate for 2007-2008 compared
to more traditional in-house software and technology). With
the growing need for intricate networks of data, and equally
intricate methods of storing, accessing and delivering that data,
many companies are discovering that building such a network
not to mention writing software to run itis a daunting task.
This is to say nothing of what it takes to maintain and operate
such a network once it is up and running.
Naturally, that takes time and resources away from what
the supply chain manager should be doingmanaging the sup-
ply chain. SaaS is designed to fx that. The concept is simple: a
third-party provider offers, for a subscription fee, to set up serv-
ers to host the companys data, and the technical infrastructure
needed to manage it.
For some supply chain managers concerned with transporta-
tion management, this has been a godsend. (See accompanying
sidebar for how Welchs has put SaaS to use in transportation
management.) But according to analysts, academics and SaaS
users who spoke with Supply Chain Management Review, SaaS
is branching out into demand planning, forecasting, supply
management, and may expand even further into common supply
chain management practices.
In this article, we discuss what SaaS can do, where its going,
and whether its right for the supply chain management model.
We also include things to watch out for when setting up a SaaS
system, and we offer two brief case studies from GE and Welchs
describing what SaaS has done for them.
MANAGEMENT MUTUALITY RESPONSE SKILLS TECHNOLOGY
SCM090901SAAS 43 9/1/2009 10:51:38 PM
44
A SaaS History
The early versions of SaaS date back to the late 1990s.
These offerings were driven by venture capital frms, who
began putting their backing behind companies that were
willing to use this nascent technology, according to Bruce
Richardson, chief research offcer at AMR Research.
But it was not an easy beginning. Chris Caplice, execu-
tive director at the Massachusetts Institute of Technologys
Center for Transportation and
Logistics, said the frst SaaS
offerings focused on transpor-
tation management, and had
no other applications available.
And for those using SaaS
for transportation management,
Caplice said upgrades were
often a problem. The systems
were advanced enough to send
out automatic software updates,
but if, for example, the system
served 20 customers, all 20
of those customers had to
be online at the same time
in order for the upgrades to
work. It was a little clunky,
he said. Since then, SaaS
has evolved to the point
where todays providers are
more likely to keep the most
critical upgradeable systems
separated enough from their
customers that upgrades will
go more smoothly, Caplice
said.
Transportation man-
agement is still king in the
SaaS world, according to
Dwight Klappich, vice presi-
dent of research at Gartner.
In particular, transportation
systems, where companies
need to stay connected to a vast
network of carriers, still beneft
more from SaaS than any other sup-
ply chain-related function.
But other supply-chain related func-
tions such as demand planning, forecasting,
inventory and combinations of these functions such as
collaborative planning, forecasting and replenishment
(CPFR) are becoming more and more mainstream for
people looking to use SaaS, said Ben Pivar, vice president
of CapGeminis North American Supply Chain Practice.
Another parallel trend worth mentioning is the
increased willingness to give up proprietary software sys-
tems in favor of packages from software vendors such as
EXHIBIT 1
SCM Total Revenue and Share by Revenue Type, 2007-2008
Application Software Licences
Saas
Application SW Maintenance
Implementation/Service/ Consult/Custom Development
Other
Total
Source: AMR Research
2,144
323
1,646
2,311
29
6,455
Revenue
2007
($M) Revenue Type
2,173
401
1,704
2,372
30
6,681
Revenue
2008
($M)
33%
5%
26%
36%
0.5%
100%
Revenue
Share,
2007
33%
6%
26%
36%
0.5%
100%
Revenue
Share,
2008
1%
24%
4%
3%
4%
4%
Growth
Rate
2007-2008
Daniel Guidera
SaaS
SCM090901SAAS 44 9/1/2009 10:36:26 PM
45
Oracle and SAP. While not necessarily a move toward
SaaS, Pivar said migrating to software packages might
serve as a gateway to SaaS, building up a companys trust
in third-party involvement to someday motivate them to
taking the plunge.
SaaS is also becoming more popular in global trade
management. There, Klappich said, the emphasis is on
content and regulation compliance, as opposed to net-
work management. Theres a shift from SaaS being an
option to being a preference, he said.
SaaS and Inventory Management
One function that has not yet become a popular SaaS
option is warehouse management systems (WMS),
says Klappich. Since SaaS is, by defnition, designed to
involve networks of disparate sources of data, warehous-
es, which often are contained within one building, dont
need SaaS. Theres really no advantage, the analyst
said. Its a very on-premise function, by and large.
Theres another problem with WMS-related SaaS
products: computing power. Managing a large warehouse
full of inventory can involve tracking millions of SKUs
with millions of variables. That just chews up compute
power, Klappich said, making SaaS actually a less-eff-
cient alternative to traditional WMS.
The one scenario that could make sense here is using
SaaS to track inventory that was spread out over multiple
locations. For example, Klappich said, airplane manufac-
turers often keep spare parts scattered at various airports
worldwide. He also recalled a client that was selling
medical testing equipment, which required the distribu-
tion and tracking of small packets used by doctors.
They needed some of the same capabilities of a
small WMS, Klappich said of this particular situation.
Granted, some of the warehouses in the network were
nothing more than a few shelves in a supply closet in
a clinic somewhere, but no matter what the network of
locations looked like, SaaS kept track of the inventory
like it was all in the same building.
A more common example of SaaS being used to
maintain inventory is in consumer service systems,
which includes everyone from the local plumber with
spare washers on his truck to high-tech computer parts
in the vans run by Best Buys Geek Squad mobile com-
puter service. That is mobile inventory, Klappich said,
and as such could beneft from a SaaS-based inventory
tracking system.
Cheaper and Easier
One of the biggest draws of late to
SaaS, especially given the current
state of the worlds economy, is price.
Theres no doubt that SaaS is less
expensive than on-site software,
AMRs Richardson said.
CapGeminis Pivar called the idea
of implementing SaaS very compel-
ling for small to medium sized busi-
ness, which he defnes as up to $1 bil-
lion companies. In addition to price,
he cited another big selling point
for the concept: Ease of installation.
Companies paying for SaaS technol-
ogy dont have to worry about deliv-
ery of hardware or software, Pivar
explained. They also dont have to
hire anyone to install it all. This cuts
down dramatically on the cost and
time involved in implementation.
AMRs Richardson noted that
upgrades are easy, too. With on-site
software packages, he said, its often
unclear when an upgrade will be
available or necessary, and even then,
costs for upgrades can vary widely.
W
elchsisnowputtingSaaStousetoimproveitstransportationmanage-
ment.BillCoyne,directorofpurchasingandlogisticsforWelchs,said
oneofthejamandfruitjuicecompanysmostnotableforaysintoSaaSwasthe
adoptionofanew,outsourcedtransportationmanagementsystemwhichfirst
wentonlineinearly2008.Thatsystem,Coynesaid,allowedalldataconnected
toWelchstransportationandlogistics,includingshipments,freightbillpay,and
otherstatisticstobecollectedtogetherinathird-partycompanysdataware-
houses.
ForCoyne,itwasnttheoutsourcedmodelthatattractedhim,buttheidea
thatallrelevantdatawasavailabletohim.TheSaaSprovider,Coynesaid,is
abletodeliverthedatainanyformWelchsneeds.Theyallowustosliceitand
diceitanywaywewish,hesaid.
Forexample,Coynesaidanalysisofdeliverypatternstoregularcustomers
hasexposedinefficienciessuchasapartially-fulltruckloadgoingout.Sincea
fully-loadedtruckcostsWelchsthesameasapartialload,Coynesaidtheanaly-
sisofthedatahasledtoWelchssuggestingalternativedeliveryschedulesand
volumestocustomers.
CoynedeclinedtosayexactlyhowmuchWelchshassavedinlogisticscosts
sofarusingthesystem,buthesaiditwasasignificantsavings.Considering
Welchsspendsover$50millionayearontransportation,thesavingshavemore
thanjustifiedsendingthedatatoanoutsidesourceformanagement.
Wedontreallycareifweredrawingfromaninternalsourceoranexternal
source,hesaid,summoninguptheprojectssuccess.
Welchs Gets Out of TMS Jam
SCM090901SAAS 45 9/1/2009 10:51:57 PM
46
SaaS
SaaS, on the other hand, often lumps upgrade fees into
the overall subscription fee. While the customer rarely
knows just where all the subscription money then goes,
updates are largely automatic, and dont cost the cus-
tomer anything additional at all.
But Is It Safe?
Despite the increase in popularity of SaaS, some com-
panies still hesitate, in large part due to concerns over
security. Some of the larger companies are still a little
skeptical about losing data, CapGeminis Pivar said. Its
a trust issue.
In addition, CIOs often have trouble integrating
SaaS applications into their IT model. In some cases,
its a technical issueit can be diffcult to incorporate
SaaS into a system dependent upon client/server setups.
Sometimes, however, it can be the CIOs fear of losing
control, Pivar said.
They are somewhat justifed, according to
Richardson. Handing over control to a third party means
youre at their mercy when things go wrong. Even the
largest companies promoting SaaS-type products like
Amazon, Google, and salesforce.com have experienced
outages. Richardson cautioned that any company looking
into SaaS needs to do research on a potential providers
redundancy and robustness.
Loss of control is not the only concern, Richardson
added. Many companies, he said, have been gun-shy
about using SaaS applications because of fear that the
third-party provider will somehow get hacked, leading to
very costly and very public cases of customer credit card
numbers or other information being stolen.
In truth, though, Richardson said the SaaS industry as
a whole has been aware of this concern, and responding
well enough to the demand that outsourcing data to anoth-
er companys center might be safer in the long run than
keeping everything in-house. Theres an excellent chance
theyve got far better security than you do, he said.
MITs Caplice also said he doubted SaaS was any
more risky than any other venture for a company. My
sense is, its a risk, he said, but its minimal. Caplice
added that the term in house is becoming a thing of
the past. Even companies that dont use SaaS often keep
their data centers at another location anyway.
In evaluating whether to adopt SaaS for supplier manage-
ment, GE took the threats of data loss or security breaches
seriously, said Tom Hattier, GEs manager of shared sourcing
interests. But the company ultimately determined those con-
cerns were a cost of doing business. Its just another level of
risk to worry about, he said. (For more on GEs experience
with SaaS, see accompanying sidebar.)
As part of the loss of control issue, Caplice noted
many companies that use SaaS have to get used to less
customizability. Often, a user gets what the provider
wants to provide, whether its a perfect ft for the cus-
tomers needs or not. This will give larger companies an
advantage, Caplice said, since as you get bigger, you get
more accustomed to standardization. Smaller business,
on the other hand, which are used to building their own
custom applications will have to learn to adjust.
For any software provider, including SaaS, developing
standard approaches that address how to interact with
carriers, data felds, determine who can see what, and
I
n November of 2007, GE was evaluating how it managed
its global supplier list, which the company maintained
back then on an in-house server. GE naturally needed to
communicate with its suppliers from time to time, and sup-
pliers needed to convey information such as banking data
and updated contact names, addresses, and phone numbers
back to GE.
At the time, all that was literally being handled by
several roomfuls of people on telephones at GE relaying
information back and forth. With half a million suppliers
to keep in touch with, GE decided it needed a better way,
according to Tom Hattier, manager of shared sourcing ser-
vices for the company.
At first, GE was content with trying to develop a system
to automate the process on its own, until they discovered a
SaaS provider, Aravo, which worked largely in the area of
supplier management. It was the closest thing wed seen
to what we wanted to do on our own, Hattier said.
In addition to hosting the supplier information, Aravo
will act as the go-between GE needed to streamline the
exchanges of information between the company and its
supplier.
Aravos system was installed and live in six months, only
a third of the amount of time it would have taken GE to
build its own. That was certainly a factor, Hattier said of
GEs decision to go with the outsourced option.
But a philosophical issue also drove the company to
hire Aravo to manage GEs supplier list. While GE was
certainly capable of building its own system, Hattier said,
why should they, since GE is in the business of making,
among other things, jet engines, light bulbs, appliances and
health care equipment? Theres still the issue of are we in
the vendor management software business, and were not,
Hattier said.
GE Lights up Global
Suppliers
SCM090901SAAS 46 9/1/2009 10:52:04 PM
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To Implement Collaborative Distribution Requires New
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CPG manufacturers may need to move their inventory to co-locate
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SCM090901_ads.indd 47 8/31/2009 2:32:37 PM
48
SaaS
other concerns is a daunting task. No software is fex-
ible enough to handle every situation, Caplice said.
Taking the Plunge
CapGeminis Pivar said supply chain managers mull-
ing over a switch to SaaS should start with a clear
understanding of the technology, and what it means.
Specifcally, potential SaaS customers need to know
that subscribing to a third-party SaaS program usually
involves sending potentially sensitive company data out-
side the frewall and internal networks.
SaaS customers also need to know what security mea-
sures are in place, where your data is, who is guarding it,
and how you can get at it. To some extent, they need to be
comfortable a little bit with giving up control, Pivar said.
Pivar added it pays to do the research. Once the
subscription is bought and the data offoaded, the SaaS
customer could be stuck with the chosen vendorfor
good or bad. Like any customer buying any product or
service, theres a chance the SaaS providers service will
not live up to its advertising, or that the provider doesnt
evolve fast enough to keep up with the technology down
the road. If that happens, and the customer wants out,
it might not be easy. The switching costs of going to
another provider could be high, Pivar said.
Pivar said customers will also have to get used to a
new way of paying for the technology. The pay scales and
terms of SaaS are often handled on a subscription basis,
which is vastly different from the one-time license fee
purchase of software package. They need to be comfort-
able with that model.
Gartners Klappich also warned about checking the
terms of the contract. Prices and other terms of a SaaS
contract are very different from packaged, in-house soft-
ware contracts. He cautioned potential buyers not to
sign a contract thats too long-termtwo to three years
is normal. Remember, if you make a bad decision, youre
stuck paying for it, he said.
Klappich echoed Hattiers advice on not taking the
vendors word for anything. Model out the ultimate cost of
ownership, including maintenance costs. And since service
terms will be dependant on third-party software or hard-
ware, it pays to make sure there wont be any additional
costs from those third-party companies, Klappich advised.
SaaS may be ruled by transportation management
applications today, but AMRs Richardson believes thats
due to change. Already, he said, the trend is leaning
toward including more sourcing and procurement ser-
vicesand that will likely continue.
Both CapGeminis Pivar and Richardson said SaaS will
become more a part of cloud computing in the future.
While the concept of the cloud continues to evolve,
making a frm defnition impossible, it is led by companies
like Googles online applications such as Google Docs.
The concept is virtually identical to Saas: Use a virtual,
offsite data center to host and run various business appli-
cations. In essence, Richardson said SaaS and cloud
computing are the same thing.
Stepping Into SaaS
Its clear that SaaS is not for everyone. For now, anyway,
companies that keep inventory in one or very few locations
will likely have little need for a SaaS-based warehouse
management system, nor will any supply chain manager
with little or no transportation management responsibility.
Until recent years, for almost any application out-
side of hardcore TMS, SaaS could seem
like overkill. In addition, the increased
risk of loss of control, and keeping sensi-
tive corporate data on a server somewhere
outside the company frewall, and away
from the companys protection, would
seem to discourage interest in the tech-
nology. But that could change soon. SaaS applications
that handle demand planning, forecasting, and collab-
orative planning, forecasting and replenishment are
becoming more popular, especially with the current
economy driving a need for a cheaper, more effcient
way of managing data.
So what if you want to get in on the action? There
are plenty of choices. In evaluating these choices, tops
on your list of concerns would have to be security. Its
crucial for your provider to be able to demonstrate that
your data will be safe, both from thieves and accidental
outages. In other words, get ready to add SaaS to your
risk management plan. Also, even if you planned from
the start to hand your data and software management
over to someone else, be sure youre really ready to give
up control over it.
Of course, all of this means youll have more free-
dom to worry about more important things, like run-
ning your supply chain. Youre also sure to have a leg
up over any other company that isnt SaaS-enabled,
and if the future really is in the clouds, that will make
all the difference. VVV
Theres no doubt that SaaS is less
expensive than on-site software
Bruce Richardson, AMR Research
SCM090901SAAS 48 9/1/2009 10:52:10 PM
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S50 September 2009 SUPPLY CHAIN MANAGEMENT REVIEW
P
oliticians sometimes turn to the
catchphrase Now, more than ever to
encourage citizens to vote for them.
Yet while this overused term has lost much
of its persuasiveness in the political arena,
it still has real signicance in a business set-
tingparticularly in tough economic times. A
case in point: Sales and Operations Planning, or
S&OP.
S&OP is an integrated business management
process that allows management to achieve
focus, alignment, and synchronization
among all functions of the organization.
It is the set of business processes and
technologies that enables a company to
respond effectively to demand and supply
variability with insight into the optimal
market deployment and most protable supply
chain mix.
Monthly S&OP plans include an updated sales
plan, production plan, inventory plan, customer
leadtime (backlog) plan, new product develop-
SPECIAL SUPPLEMENT: SALES & OPERATIONS PLANNING
S
OP
&
Sales & Operations
Planning (S&OP)a
structured process
of helping balance
demand and supply
is benecial under any
business conditions.
And in tough economic
times, it takes on a
whole new level of
importance.
By William Atkinson
:
S&OP: Now Mor e
Than Ever
Jim Frazier
SCM090901S&OP_Supp 50 9/1/2009 4:59:44 PM
SUPPLY CHAIN MANAGEMENT REVIEW September 2009 S51
ment plan, strategic initiative plan, and result-
ing nancial plan. The S&OP process rou-
tinely reviews customer demand and supply
resources, then re-plans quantitatively each
month across an agreed-upon rolling horizon,
usually 24 months. The re-planning process
focuses on changes from the previous S&OP.
In sum, S&OP strategies help companies
make planning decisions at the right time for
the best combination of products, customers,
and markets to serve. If done properly, it can
have a direct impact on protability, perfor-
mance, customer satisfaction, and the product
portfolio.
S&OP Is Right for the Times
While S&OP has value for companies in any
economy, experts agree that it is a particularly
important technique to apply during tough
economic times. In this economy, we have
denitely seen an uptick in interest in S&OP
as a strategy, comments Fred Baumann, vice
president, industry strategies for JDA Software
Group. A lot of it has been driven by the need
to do scenario management more than ever
before, due to the unknowns of the future of
the economy.
Larry Lapide, a recognized expert on S&OP
and research afliate with the MIT Center for
Transportation & Logistics, agrees. If rev-
enues arent changing that much, S&OP is not
as critical, he points out. However, S&OP is
extremely important in times like this, because
revenues are changing very quickly and drasti-
cally. As a result, Dr. Lapide notes, you need
to maintain the connection between what is
happening in the revenue stream and what is
happening in supply chain, manufacturing,
and logistics.
You need to plan more, and plan more
frequently, continues Lapide. In particular,
he notes, you need to schedule multi-function
meetings with marketing, sales, nance, and
operations, to gure out what you are going to
sell, make, and keep in inventory. In volatile
times, it is very important to be able to do this
well. For example, operations people really
need to know what is happening on the sales
side, he adds.
Tim Vaio, an expert on supply chain solu-
tions at Hitachi Consulting, conrms the criti-
cal value of S&OP in tough times. However, he
emphasizes, the benets
of implementing the
process will only be as
good as the quality of
the S&OP strategy itself.
In a good economy, a
poor or even average
S&OP process can mask
a lot of aws and inef-
ciencies, he explains. As
a result, you can make
a bad decision, and
it wont hurt you very
much. In a poor economy, though, having a
poor or average S&OP process can really hurt
you, because the bad decisions you make will
have a direct negative impact.
Vaio sees two other reasons to have a
top-notch S&OP process in times like these.
Competition is ercer in a down economy,
so innovation becomes more important, such
as new product introduction, he states. An
effective S&OP process is a keystone to having
a successful new product introduction, Vaio
adds.
Third, a strong S&OP process provides bet-
ter visibility and integrated information that
can be used in the business planning process.
This allows you to project with more consis-
tency and condence what your results will be,
both from an operations and nancial per-
spective, the Hitachi consultant says. (The
accompanying sidebar shows how one com-
pany, BASF, has realized widespread advantage
from its S&OP program.)
Integrated Business Planning
So, it seems that you can struggle with an
average S&OP process, or achieve a measure
of success with a good one. However, some
companies are taking things a step further,
transforming traditional S&OP into an even
more robust strategy called Integrated Busi-
ness Planning (IBP). Some analysts say that
this advanced version of S&OP may be the
single best guide for navigating through tough
economic times.
One expert who understands the edge that
IBP can provide to companies is Nari Viswa-
nathan, vice president and principal analyst,
supply chain management practices, for Ab-
erdeen Group. Viswanathans recent research
While S&OP has value for
companies in any economy,
experts agree that it is
a particularly important
technique to apply during
tough economic times.
SCM090901S&OP_Supp 51 9/1/2009 4:59:57 PM
S52 September 2009 SUPPLY CHAIN MANAGEMENT REVIEW
has shown that some leaders are moving
toward this more advanced technique. IBP
involves extensive collaboration between the
various groups in an organization and enables
the unication of business goals and strate-
gies, rather than just being a functional supply
chain process, as S&OP is, he explains.
Viswanathan contrasts traditional S&OP
and IBP as follows. S&OPs core elements:
Involve volumetric supply demand bal-
ancing only.
Represent a tactical process with limited
linkage to overall business goals.
Is spearheaded primarily by the sales or
operations organizations.
Integrated Business Planning, on the other
hand:
Protably aligns supply, demand, product,
and service (with risk management being an
important aspect of the process).
Is a strategic technology-enabled process
aligned and integrated with nancial and cor-
porate goals and metrics.
Offers a balanced approach with equitable
participation from key stakeholders: sales,
operations, product development, nance,
and service.
Hitachis Vaio also sees a trend of com-
panies expanding to IBP from S&OP as they
recognize the need to become even more
proactive in this economy. These days, S&OP
is being used more with integrated business
planning to create an overall business plan-
ning process, he says. This involves linking
traditional S&OP information with nancial
information.
According to Vaio, S&OPs
traditional benets include
improved service, reduced
obsolescence, and improved
inventory turns. Plus, an
important additional benet
is enhanced responsiveness
to the market as a whole. To
be more responsive to the
market, you need visibility
and control of your supply
chain, and IBP provides this,
he states. (A joint survey by
SCMR, IBM, and Oracle con-
ducted earlier this year identi-
es the main benets that
companies hoped to achieve
through their S&OP effort. See
Exhibit 1.)
JDAs Baumann echoes the
inherent benets of IBP. He
notes that some companies
have been working to elevate
their S&OP processes to an
enterprise-wide global scale
in order to enhance sup-
ply chain visibility, reduce
costs, and achieve more
integrated business planning
and management. This next
generation S&OP can actu-
ally become a mission-critical
element of an IBP strategy,
Baumann notes, which in-
BASF is the worlds largest chemical company, with revenues of $82
billion in 2008. We have doubled our revenues in the last seven years,
and we are the worlds most protable chemical company, reports
Alan Milliken, the rms business process education manager. S&OP
has denitely played a part in this.
BASF implemented its rst S&OP process in 1992. Since that time,
it has been expanding the use of the strategy to all of its business
units. Currently, the company has implemented S&OP in virtually all of
its 75 or so business units. The only units where it is not in place are
those that we have just acquired in the last year or so, says Milliken.
Why is S&OP so useful to BASF? When people ask Milliken this
question, most expect him to respond with one or more of S&OPs
traditional benets, such as better service, less inventory, and lower
cost. Indeed, Milliken admits that these are important.
However, the greatest benet that S&OP provides to the company,
he states, has been the creation of formal and comprehensive cross-
functional teamwork and communication. In effect, everyone in the
organization now knows what everyone else is doing. We have really
beneted from having a truly integrated organization, he emphasizes.
According to Milliken, it works like this: When you are in difcult eco-
nomic times like these, and you have the formal structure of the S&OP
process, plus the formal cross-functional integration and collaboration
structure that S&OP has helped to create, you can respond to market
conditions so much faster and better. Milliken continues: If you try
to respond with traditional communication during tough economic
timesthe hierarchical route, where you throw it over the fence and
wait for a responsethat will be a killer. In a siloed organization, you
just cant deal with the problems that occur in an economy like this.
For BASF, its ability to respond effectively during any economic con-
ditions is a result of having built a cohesive cross-functional teamwork
and communication network. And the root of that, Milliken empha-
sizes, has been the S&OP process.
BASF Cr edi t s S&OP as a
Cor ner st one of Success
SCM090901S&OP_Supp 52 9/1/2009 4:59:58 PM
SUPPLY CHAIN MANAGEMENT REVIEW September 2009 S53
volves linking operations to business
performance. In the past, S&OP has
primarily been unit-based supply
and demand balancing, he explains.
These days, more companies are
seeing it as an integrated business
planning framework.
According to Baumann, when
you have a well-dened and well-
run IBP process, you quickly see
improvements across at least two
key metrics: (1) forecast accuracy
because you have more cross-functional
interaction within your own company as well
as with trading partners and (2) stronger rev-
enue because the forecast is more accurate
and thus you are better able to manage risks
and opportunities.
S&OP as a Roadmap
As companies evolve from average S&OP
processes, to more strategic ones, and nally
to integrated business planning, other trans-
formations are also taking place, according
to one observer. For one, we are seeing more
adoption of S&OP by senior leadership in
companies, especially the CFOs, says
Baumann of JDA. We are also seeing
more interest around demand sensing
and shaping. That is, as companies
assess their time-phased S&OP plans,
they are also coming up with demand
shaping. This involves shaping de-
mand upwards to close gaps that are
exposed through the monthly S&OP
cycle. New promotions or earlier new
product launches are among the ways
in which to accomplish this.
In short, the best-run S&OP and IBP strate-
gies are those that not only provide executives
with comprehensive information on what has
happened, what is happening, and will hap-
pen, but also serve as roadmaps for navigating
the twists and turns in a challenging economy.
Given the magnitude of those challenges
companies face today, the now-more-than-
ever mandate of S&OP comes through loud
and clear.
William Atkinson is a free-lance writer special-
izing in supply chain management. He can be
reached at w.atkinson@mchsi.com.
EXHIBIT 1
Expected Benefits from S&OP
Improve inventory optimization
Cut costs without reducing customer service
Improve forecast accuracy
Gain better balance of supply and demand
Improve customer service
Increase profits
Ability to make more changes/Be more flexible
Reduce lost sales opportunities
Minimize out-of-stock situations
Minimize risk
Source: Study by Supply Chain Management Review, IBM, and Oracle, February 2009.
0% 10% 20% 30% 40% 50% 60%
50%
49%
46%
43%
41%
39%
36%
35%
35%
52%
SCM090901S&OP_Supp 53 9/1/2009 4:59:58 PM
54
SUPPLY MANAGEmENT
Planning and the
Process Industries
Tobuildforfuturesuccess,processcompaniesand
othersthatoperateinindustrieswithahighfixed-
costassetbaseneedtoevaluatetheircurrentpeople,
processesandsystems.
ByKishKhemani,AndrewWalbererandOliverZeranski
Kish Khemani
(kish.khemani@
atkearney.com)
is a partner at
A.T. Kearney.
Andy Walberer
(andrew.
walberer@
atkearney.com)
is a principal and
Oliver Zeranski
(oliver.zeranski@
atkearney.com) is
a manager at the
firm.
Supply chain planning
and optimization pres-
ent a range of challeng-
es in both good and bad
economic times. Those
companies that take a
disciplined approach to
balancing cost, inven-
tory and service can best optimize their margins,
helping them to enjoy significant competitive
advantage.
The need to excel at supply chain plan-
ning is taking on increased importance dur-
ing the current global economic downturn. In
particular, its brought unprecedented uncer-
tainty and change to the process industries
chemical companies, oil refiners, mining opera-
tors, and similar operationsand calls for adop-
tion of a new approach to supply chain planning.
Supply chain planning is typically performed
on three different time horizons, ranging from the
high-level strategic work that is embarked upon
every few years to the monthly planning that
takes place at the operational level. In between
lies tactical planning, which uses the annual bud-
get, sales forecasts, and scenario planning to plan
demand, production, inventory, logistics, and
finances. Given todays uncertain economic envi-
ronment, companies need to be acutely aware of
impending risks and have contingency plans in
place before risks materialize.
During times of uncertainty, process compa-
nies should refocus their supply chain planning
efforts by:
Expanding the scope of inputs to increase
the understanding of value chain dynamics.
Shifting the balance from planning precision
to big-picture understanding and risk awareness.
Retaining flexibility and exploiting market
opportunities.
This column takes a closer look at the key
changes that process companies need to make
in order to navigate in todays uncertain business
climate.
Expanding the Scope of Inputs
Companies typically employ both bottom-up and
top-down approaches to demand planning. In
bottom-up planning, the sales department fore-
casts anticipated demand to develop scenarios
that are then rolled up to the sub-regional and
regional levels. The top-down approach looks
at market trends in order to anticipate demand.
The two different sets of forecasts are then ratio-
nalized against one another to determine the
demand target, which is typically pegged within
a narrow range.
In the current environment, this rational-
ized approach will not yield the desired results.
Consider the challenge of exporting from the
Middle East to markets in Asia and Europe.
Lengthy, marine supply chains always call for
detailed planning, as maritime transportation
has characteristically long lead times. When
the global business climate is stable, companies
typically employ a model that allows them to suc-
ceed despite the long lead time disadvantage.
But because regional demand plans in the cur-
rent volatile climate can be so inaccurate, sup-
ply chain execution plans must now be based on
SPOTLIGHTon
SCM090901_supplymgmt 54 9/1/2009 11:00:08 PM
55
SUPPLY MANAGEmENT ( c o nt i nu e d)
multiple demand scenarios.
A top-down approach to demand planning is superior in
uncertain times, as the volatility in local markets leaves the
bottom-up approach fraught with inaccuracy. While macro
trends and indicators are not an especially accurate way to
project demand, this type of big-picture, forward-looking
philosophy brings a global perspective. Macro-level demand
planning by geography and end-use market is a simplified
approach that forces the planning team to grapple with and
come to understand the market itself rather than the com-
panys own potentially limited internal numbers.
By planning more frequently, companies can better
respond to a changing business environment.
Undertaking frequent reevaluations of their stra-
tegic parameters (such as service levels and make
vs. buy decisions) helps companies improve their
ability to make changes that enable them to quick-
ly adapt and work through the current situation
and ultimately position themselves for success
when conditions improve.
Standard service levels, including fill rate, lead time
and cost to serve, need to be continually reviewed in order
to retain existing customers. Many U.S.-based chemical
companies, for example, have adjusted service levels down-
ward as part of a move toward explicit service-level pricing,
which allows them to share cost benefits with customers.
Make-versus-buy decisions need to be challenged as it
may be possible to exploit economies of scale or oversup-
ply when determining whether precursor materials should
be processed in-house or purchased. To illustrate, supply-
and-demand balances in key regions have been affected by
recent capacity adjustments, such as the reduced demand
for ethylene derivatives from the U.S. Gulf Coast.
EmbracingRiskManagement
Companies that integrate risk management into the supply
chain planning process are better prepared for the supply
chain disruptions that are almost inevitable during uncer-
tain times. The supply chain team should be included in
the risk management process in order to heighten aware-
ness of potential risks and prepare supply chain risk miti-
gation strategies.
Risk management tools are essential to understand-
ing and classifying risks. Those risk areas with the high-
est potential business impact and probability will require
detailed mitigation plans. One significant risk that many
companies face is potential business disruption brought
about by financially distressed suppliers and customers.
This speaks to the importance of the continual monitor-
ing of these external parties financial well being. In addi-
tion, on the supply side, capacity adjustments are bringing
about supply disruptions in many industries and material
value chains.
ExploitingMarketOpportunities
Every crisis offers opportunities. However, it is those com-
panies that retain supply chain flexibility that will be pre-
pared to take advantage of the market opportunities that
will open up when demand returns. Process companies
that position their key assets to restart quickly will enjoy
a head start when demand increases. These assets must
be carefully prioritized on the restart timeline. Performing
opportunistic maintenance during times when contractor
resources are available and lining up their support services
for restarts will help avoid delays when demand recovers.
While merger-and-acquisition activity has been static
for more than a year, many chemical and refining assets
likely will be made available by financially stressed com-
panies over the next year. Those that feel confident will
buy; those that lack confidence will look to exit some parts
of their business. Supply chain leaders should work with
senior management to evaluate potential buying opportu-
nities. Those companies that opt to sell distressed assets
can use their supply chain managers market awareness to
help identify potential buyers.
Process companies and others that operate in industries
with a high fixed-cost asset base need to evaluate their cur-
rent people, processes and systems and measurements in
order to build for future success. Linkages between resourc-
es that are engaged in the collection and comprehension
of macro trends and the supply chain must be forged or
reinforced. Similarly, those in charge of asset disposal need
to be engaged with the planning team to rationalize future
network capacity. Steps must be taken to ensure that the
planning process properly factors in risk. Macro scenarios
must be continually updated and reviewed, and woven into
the planning and hedging process.
While this discussion has emphasized practices to be
followed by companies in the process industries, it goes
without saying that every company is looking for ways to
make it through the period of current economic uncertain-
ty. The ones that will be best positioned for success when
conditions improve will be those that have taken a forward-
looking view.
SPOTLIGHTon
Theneedtoexcelatsupplychain
planningistakingonincreased
importanceduringthecurrent
globaleconomicdownturn.
SCM090901_supplymgmt 55 9/1/2009 11:00:16 PM
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