Closing the Gap

Lessons learned from supply chain ‘masters’ can help

businesses survive the downturn—and position themselves
for high performance in the economic recovery
By Rup Banerjee and Jolyon Austin
These are unsettling times. With
little forewarning, the global
economy tipped into credit-
crunch induced recession—and
only now are signs emerging
that the precipitous collapse in
business activity is slowing, and
recovery can commence.
Organizations have had no
choice but to respond, in many
cases very quickly, as recession
rewrote the rules. And without
doubt, supply chains have been
materially affected. The contrast
between mid-2007 and mid-
2009 is stark. And mid-2010
will be very different again.
Even the most pessimistic
forecasters predict a resumption
of business activity and
economic growth—and the signs
are encouraging that the latter
part of 2009 will see growth,
too. So businesses—and their
supply chains—must position
themselves to take advantage of
that growth. And the time to do
so is now.
Accenture’s research1 has
shown that high performance
organizations take action during
a downturn and subsequently
go on to derive sustained
competitive advantage during
the upturn that follows.
What’s more, our supply chain
mastery research2 has also
shown that those organizations
that demonstrate industry-
leading best practice in supply
chain management are also
those very organizations that
achieve greater long-term
profitability. These findings
raise a question of obvious
importance. Are businesses in
fact exploiting the opportunities
offered by the downturn—
positioning themselves for
2
high performance through But while the majority of
accelerated growth, and seeking organizations surveyed are
out and adopting best practice? indeed attempting to adapt
their supply chains to changing
Two more recent Accenture market conditions, they do
surveys cast additional light on so handicapped by three
this. This first focuses on best challenges: excess inventory,
practice: based on responses inflexible contract frameworks
from more than 1,500 supply with logistics service providers,
chain executives across 10 and a limited understanding
industries in 21 countries, the of how customer needs have
High Performance Supply Chain changed. In short, there is a
study is the most extensive significant gap between the
research Accenture has ever current supply chain capabilities
conducted in the arena of of many of these organizations
supply chain management. and those capabilities
Covering six supply chain that Accenture has found
functions—fulfillment, representative of supply chain
manufacturing, supply ‘masters’—organizations that
chain planning, sourcing enjoy flexible, lean and dynamic
& procurement, service supply chains, with end-to-end
management and product collaboration and visibility,
development—it defined and which continually deliver
supply chain ‘masters’ as those superior customer service and
organizations that were in the operational cost performance.
top 10 percent within each
specific function, based on The issue, then, is how big is
their performance across a wide this gap—and what can be done
range of key operating metrics. to close it?
The second, carried out in
conjunction with the UK’s
Chartered Institute of Logistics
and Transport, sought to probe
the effect of the present
downturn on the operations of
a group of surveyed logistics,
supply chain and transport
executives, identifying those
responses to the downturn that
best enables organizations to
tackle the adversity they face.
The outline findings make for
somber reading. Without doubt,
the speed of change and the far
reaching effects of the current
global economy have adversely
impacted UK supply chains on a
significant scale.
3
Right Inventory,
Right Place, Right Time?
Fig 1: Are excess inventory levels inhibiting your supply chain's ability to adjust
or respond to change in demand?
Not applicable
No
Yes, partially
Yes, significantly
0% 10%
Inventory management is an
obvious problem area. Nearly
two-thirds of survey respondents
reported that the level of
inventory in their organizations
was inhibiting their ability to
respond to changing market
conditions effectively –
see Figure 1.
Right across industry sectors, the
story was the same: too much
working capital was tied up in
stagnant inventory—either simply
too much product in relation to
current demand, or worse, the
wrong type of product as well.
Given that the ability to manage
working capital effectively is a
major determinant of business
viability, this was worrying. And,
of course, surplus inventory
adds to operating costs, as well
as tying up financial resources.
That said, nearly three-quarters
4
17%
21%
Nearly two thirds
17%
20% 30%
of respondents—74 percent—
reported that actions were
underway to rectify the situation
– see Figure 2.
Those changes included:
• Selling-offinventory, which
provides short-term relief, but
which can condition customers
to expect deep discounting
• Reducing lead time and
boosting flexibility by sourcing
closer to home, albeit at the cost
of further investment in supplier
qualification exercises
• Reviewing and changing
suppliers or wholesalers—making
strategic vs. tactical decisions, in
other words, based on guarantees
of supply or the ability to
serve customers
46%
40% 50%
Will these tactics work? A
pointer to the answer comes
from looking at supply chain
‘masters’. These not only tend
to turn over their finished goods
inventory four times faster than
supply chain low-performers, but
also achieve a 5 percent better
performance in customer order
fill rates. Rather than operating
along purely functional lines,
successful organizations operate
with truly cross-functional
processes and management
structures. Equally, supply chain
‘masters’ plan for—and rapidly
respond to—disruptive events of
the sort that have characterized
recent months. As a result, they
continue to effectively balance
supply and demand at optimum
inventory levels.
Fig 2: Have you made any manufacturing, sourcing or purchasing changes in
response to the current economic environment?
Not applicable 7%
No, we have not made
any changes
Yes, we are making
some changes
Yes, we have made
significant changes
0%
In supply chain parlance, there’s a
name for this: Sales & Operations
Planning (S&OP). At Accenture,
we help clients fine-tune their
S&OP processes—reducing safety
stock and working stock while
simultaneously reconfiguring
and optimizing the physical
distribution network and physical
inventory-holding locations.
While traditional approaches to
S&OP concentrate on planning,
rather than on the physical
network that will execute those
plans, we encourage clients to
tackle both together. This then
creates a network that is both
fit for purpose, and with
inventory holdings that are
optimized to balance customer
service, working capital and
operating costs.
19%
30%
10% 20% 30%
Furthermore, by adopting
best-in-class S&OP processes,
organizations are formalizing
the interaction of financial and
manufacturing resources in
support of sales and marketing
objectives in order to meet
customers’ requirements
profitably—taking conscious,
calculated decisions about
service levels, inventory holdings
and pricing policies. The result:
• A single, agreed plan, within
which responsibilities are clearly
defined, and for which one set
of agreed assumptions have
been made
• Clear visibility and control
in respect of the company’s
performance levers
44%
74%
40% 50%
• Proven, optimized cost-service
trade-offs
• A fact-based business culture
which reduces the number of
anecdotally-based meetings and
discussions
• A clear link between the
business plan and the operations
of each department, thereby
orchestrating the work of each
department towards a common,
agreed goal
• A framework that sets
direction, priorities and
boundaries for the rest of the
business, and effectively manages
business change
5
A True Partnership?
Fig 3: Do your supply chain agreements facilitate extraordinary changes in
operating conditions?
Not applicable 8%
No
Yes
0% 10%
In theory, today’s more rigorous
approach to service provider
selection and procurement
should have resulted in
organizations enjoying stronger
partnerships with their providers,
resulting in levels of flexibility
and responsiveness that help
meet the challenges of the
present downturn. In fact, the
survey found that half the
respondents indicated that their
supply chain agreements with
service providers did not in
practice facilitate extraordinary
changes, and were consequently
more inflexible than they would
wish – see Figure 3.
Typically, for instance, it
turned out that organizations
are contracted to and tied-
in with service providers for
specific periods of between
one and five years, together
6 6
20% 30%
with those contracts’ fixed
fees, volumes, predetermined
activities and operating
models. These are constraints
that in the current market are
undoubtedly challenging, given
the importance of flexibility and
adaptability to business survival.
That said, organizations are
responding. For instance,
61 percent of respondents
meet with service providers
either weekly or monthly to
review operations, costs and
performance levels. Even so, the
discovery that 48 percent of
organizations do not benchmark
their supply chain fulfillment
activities comes as a surprise –
see Figure 4 and Figure 5.
Yet the evidence is that it’s
possible to go much further
towards meeting current
market conditions. Leading
50%
42%
40% 50%
organizations, Accenture finds,
put considerable effort into
building flexibility into their
supply chain contracts, with
supply chain ‘masters’ working
collaboratively with logistics
service providers to develop
flexibility within their supply
chain operations.
A client we recently worked
with, for example, saw a
fixed contract—loaded with
early termination penalties—
successfully adapted to one
that was more appropriate for
today’s challenging market.
Key to such changes are the
importance of collaborating
with the service provider to
understand what drives logistics
costs, and then re-assessing
the contract with a view to
explicitly include out-of-scope
items as legitimate additional
charges. Typically, the offer
Figure 4: Do your supplier or 3rd party contracts have the mechanism to
regularly review activity and cost?

Not applicable 9%

End of 13%
contract period

Annually 13%

4%
Bi-annually

Monthly 59%

61%
Weekly 9%

0% 10% 20% 30% 40% 50% 60% 70%

Figure 5: Does your organization benchmark its fulfillment distribution

activities?

No 48%

Yes 52%

0% 10% 20% 30% 40% 50% 60%

7
Figure 6: The outsourcing cycle.

Define the Strategy to be followed

Define Strategy

Improve performance Select a partner-and a

continuously and means of working together-
Improve Select
collaboratively based on that strategy
Partner

Contract and
Implement

Contract in a manner that

rewards success and flexibility

of a contract extension—of
either award duration, services
provided, or both—helps to
facilitate the renegotiation
process.
Fundamentally, we believe when
it comes to the whole process
of 3PL management, it is usually
better to work to improve and
adapt an existing relationship,
rather than arbitrarily going to
a re-tendering process, with all
of the risks and costs—many
of them hidden—that this
entails. Over time, Accenture
has developed considerable
insight into incentivizing
service providers, and which
incentives work best in
particular scenarios.
We find that a four-stage
process helps businesses
develop a self-reinforcing—and
self-sustaining—means of better
partnering with their logistics
service providers to deliver the
optimum long-term balance of
cost, service, and flexibility –
see Figure 6.
The process begins with
defining the strategy. Here, the
idea is to match the operational
parameters of the contract
to the desired outcomes.
For example, should it be a
3PL solution, or a 4PL one?
Equally, while a ‘closed book’
arrangement is likely to be most
appropriate for a commoditized
service, an ‘open book’ structure
is likely to be preferable to
one with a significant value-
adding element.
This in turn influences how bids
are solicited and assessed—and
which functions from within
the organization are involved
in the process. For long-term
success, we find that it is vital
that the negotiated contract
that is eventually put in place
is one that is both commercially
viable for both parties, as well
crystal clear in laying out the
expectations that each side has
of the other.
Finally, we find that working
collaboratively to maintain and
improve service performance
and delivery is the key to
successful relationships with
logistics service providers.

8
Meeting Customer Expectations?
Figure 7: Are you able to segment and quantify the cost of serving
your customers?
No 8%
Partly
Yes
0% 10%
In today’s economy, meeting
customer expectations is more
important than ever. And
more than ever, ‘on time in
full’—the key metric for logistics
operations—involves defining
precisely what ‘on time’ and ‘in
full’ actually mean to multiple
customer segments, particularly
when different customers have
different needs and a different
cost-to-serve.
Yet ironically, this service
differentiation has become more
difficult to undertake. Customer
bases have been segmented,
and service offerings
customized to a point which
in some cases comes close to
constituting a unique offering.
Most organizations can partly segment
and quantify their cost to serve
20% 30%
Evidence of this clearly appears
in the survey. While most
organizations reported that they
were able to partly segment
and quantify the cost of serving
their customers, only 39 percent
reported being able to fully
adjust their offering and service
levels to the requirements of
their customer base – see Figure
7 and Figure 8.
In contrast, Accenture’s High
Performance Supply Chain
study shows that supply chain
‘masters’ have a channel
strategy that is driven by
product and customer needs,
and that these actively manage
the trade-off between the cost
46%
46%
40% 50%
and service for each channel.
As a result, ‘masters’ on average
achieve an ‘on time in full’
performance that is some
13 percent better than low-
performers. Further examples
of customer differentiation
include:
• Establishing strategic
relationships across the
organization, e.g. supply chain,
sales and marketing, in order
to drive customer collaboration
and flexibility
• Focusing on transactional
effectiveness, and the
achievement of a measure
of ‘on time in full’ that is
appropriate for the customer.
9
Figure 8: Are you able to adjust your offering and service levels by customer
segment?

No 22%

Can partly adjust 39%

our offer

39%
Yes

0% 5% 10% 15% 20% 25% 30% 35% 40%

Figure 9: The long tail of over served customers

Customer
revenue

'The Long Tail'

10
• Developing a strategic
partnership approach with
customers in order to provide
a focus on information-sharing
and improved service provision
Of course, adjusting offerings
and service levels in an
environment constrained by
an over-supply of inventory,
inflexible supply chain contracts
and volatile ever-changing
customer requirements is
challenging. Yet the good
news highlighted by the
survey is that despite the
increased complexities of
customer segmentation, there
is evidence that organizations
are starting to respond to the
need to improve their ability to
differentiate their offerings.
Organisations are reviewing
and redefining their service
offerings, for example,
re-examining their costs to
serve, understanding their
customers’ strategic value and
establishing their customers’
ability to respond to supplier
service changes. In turn, this
process delivers additional
benefits as organizations come
to better understand the need
to rationalize distributors,
improve operational efficiency,
and increase the focus placed
on key customers and accounts.
Accenture has repeatedly
worked with clients to deliver
high performance through
successful channel optimization
projects that have delivered
improved customer sales
and customer focus while
simultaneously creating a
more efficient supply chain.
Key to this is understanding
the revenue and profitability
generated by each individual
customer—and taking steps to
address the ‘long tail’ of over-
served, cost-incurring, low-
profitability customers –
see Figure 9.
Typically, the focus of
our approach to channel
optimization projects is to
review and redefine the services
that our clients offer their
retail and retail distributor
customers, looking in detail at
cost-impacting factors such as
product range, account support,
lead times, order quantities,
and the required extent of
collaboration.3
11
Sustainable Performance?
Figure 10: Are you able to quantify the savings achieved through carbon
initiatives?
Not applicable
No
Yes
0% 10%
Despite the present downturn,
the issue of environmental
responsibility hasn’t gone away.
Again and again, we hear of
a continued boardroom focus
on the ‘carbon agenda’. Yet
at the exact same time as
economic conditions are forcing
organizations to justify the
expenditure and effort on the
most tangible and immediate of
returns, half of our respondents
say they are unable to quantify
the savings achieved through
carbon initiatives.
As a result, 67 percent of the
survey respondents indicate
their organizations are turning
to traditional cost-reduction
initiatives rather than holistic
business cases that include a
12
13%
20% 30%
‘de-carbonization’ agenda –
see Figure 10 and Figure 11.
And here lies danger: in fact,
a properly-managed green
initiative often finds new
and substantial cost reduction
opportunities, as well as
helping to achieve the
organization’s corporate social
responsibility goals.
As Accenture’s High Performance
Supply Chain study demonstrates,
leaders on metrics such as
cost and customer service are
also ahead of the curve on
sustainability. ‘Masters’ choose
pragmatic initiatives which
simultaneously improve cost
effectiveness and reduce supply
chain environmental impacts.
50%
38%
40% 50%
Typical cost-and-carbon
reduction tactics include route
optimization to improve load
factors, reduced empty-running,
and seeking out new operating
synergies. In both warehouse and
fleet operations, our experience
is that taking established and
proven technologies—such
as streamlined vehicle design
and low-resistance tires, or
movement sensors and natural
ventilation—delivers carbon
benefits alongside improvements
in operational performance.
Delivering cost-justifiable carbon
initiatives need not be complex.
Accenture recently worked with
a global express mail sector
business to rapidly achieve
lower transport operating
Figure 11: In the current market conditions, does your organization focus on
traditional cost reduction initiatives instead of carbon initiatives?
No, we never have
We used to,
13%
but now don't
Yes
0% 10%
costs at the same time as the
firm’s volumes were growing.
By designing the project with
both cost effectiveness and
sustainability in mind, the client
was able to move ahead from
levels of operating efficiency that
were already market-leading,
achieving a 9.5 percent reduction
in spend while simultaneously
seeing an 8.3 percent reduction
in the carbon footprint.
And in the longer term, it is
clear that more sustainable, less
carbon-intensive supply chain
operations will remain a key part
of boardroom strategies. A recent
Accenture survey of 11,000
consumers globally, for example,
found significant concern over
climate change, with 86% of
21%
67%
20% 30% 40% 50% 60% 70% 80%
consumers either “somewhat” and advocacy organizations
or “extremely” concerned over to help make a low cost, low
it. Business executives, too, carbon supply chain a reality.
have climate change on their Deep supply chain performance
agenda: another Accenture study management expertise helps our
discovered that 87 percent of clients understand their current
resources companies consider situation on cost and carbon at a
that climate change will remain detailed level, then make specific
an important challenge. interventions that achieve
sustained improvements –
Accenture’s Carbon Efficient see Figure 12.
Supply Chain methodology
includes a number of tools to
analyze supply chain carbon
footprints, develop scenarios for
reducing emissions, maximize
the use of scarce resources, and
manage emissions.
Accenture works actively with
both supply chain businesses
and leading governmental
13
Figure 12: Carbon reduction opportunities across the end to end supply chain.

Raw materials
1. Enable cleaner sourcing/manufacturing

Production

Port
2. Lower emissions in transit

Long distance
freight
3. Enable cleaner warehouse operations 6. Reduce total volume
and/or mass shipped

Inbound
logistics
7. Consolidate movements
8. Contribute to
reductions elsewhere

Distribution
center

5. Remove Nodes/legs 4. Reduce Transit Distances

Supplier/
Retailer

Use

9. Increase recycling/ re-use

End of life

Potential Focus Areas

1. Enable cleaner sourcing/manufacturing
2. Lower emissions in transit
3. Enable cleaner warehouse operations
4. Reduce transit distances
5. Remove nodes/legs
6. Reduce total volume and/or mass shipped
7. Consolidate movements
8. Contribute to reductions elsewhere
9. Increase recyclying/ re-use

14
Conclusion
What picture emerges, then, from
this snapshot of logistics practices
at a time of major economic
upset?
First, there can be no doubt
that changed market conditions
have had a major impact on
the physical supply chains of
businesses. Most organizations
have recognized the imperative
for rapid changes, and have put
actions in place. While some
of these actions have had a
positive effect on the ability
of organizations to operate
effectively, others have been less
effective—generally as a result
of the limited capabilities still
evident within some areas of the
supply chain.
Second, the downturn has seen
a reduction in the focus on
carbon initiatives. This may well
prove to be a mistake, given the
positive impact on traditional
cost-cutting initiatives that can
come from actions to reduce
carbon emissions. Our experience that are on the path to high
indicates that organizations are performance in the logistics arena
missing out on an opportunity to are precisely those that have the
develop operations that are more characteristics associated with
sustainable as well as more cost- supply chain ‘masters’. In short,
effective. it is those that have lean and
flexible supply chains, end-to-
Third, the survey concluded end visibility across those supply
that while the majority of chains, fair-but-flexible contracts
organizations are taking action with service providers, and an
to make changes in the way they understanding of how best to
operate, obstacles still remain. In harness carbon-based initiatives
particular: to the broader operational
agenda. The trick, for those not so
• Excess inventory is making
fortunate, lies in learning how to
change painful and impacting cost
emulate the leaders—and quickly.
and service levels
• Current supply chain
agreements are insufficiently
flexible, and adjust only slowly to
market changes
• Customer offerings are not
easily adjustable to changing
market conditions
The stark message, then, is that in
an increasingly volatile and multi-
polar world, the organizations
15
About Accenture
Accenture is a global management
consulting, technology services
and outsourcing company.
Combining unparalleled experience,
comprehensive capabilities across
all industries and business functions,
and extensive research on the world’s
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses
and governments. With approximately
177,000 people serving clients in more
than 120 countries, the company
generated net revenues of US$21.58
billion for the fiscal year ended
Aug. 31, 2009. Its home page is
www.accenture.com.
Copyright © 2009 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
About Accenture Supply
Chain Management
The Accenture Supply Chain
Management service line works
with clients across a broad range of
industries to develop and execute
operational strategies that enable
profitable growth in new and existing
markets. Committed to helping clients
achieve high performance through
supply chain mastery, we combine
global industry expertise and skills in
supply chain strategy, sourcing and
procurement, supply chain planning,
manufacturing and design, fulfillment,
and service management to help
organizations transform their supply
chain capabilities.
About the Authors
Rup Banerjee is a Senior Manager
within Accenture’s Supply Chain
Management practice. A Chartered
Member of the Chartered Institute
of Logistics and Transport (UK), with
over 17 years professional experience
in industry and consulting, he can be
reached at rup.banerjee@accenture.
com
Jolyon Austin leads Accenture’s UK
and Ireland Fulfillment Practice,
and has 20 years of supply chain
experience in industry and consulting.
A Chartered Member of the Chartered
Institute of Logistics and Transport
(UK), he can be reached at jolyon.
austin@accenture.com
We collaborate with clients to
implement innovative consulting
and outsourcing solutions that align
operating models to support business
strategies, optimize global operations,
enable profitable product launches,
and enhance the skills and capabilities
of the supply chain workforce.
For more information, visit
www.accenture.com/supplychain.
References
1. Jane Linder and Brian McCarthy,
"When Good Management Shows:
Creating Value in an Uncertain
Economy” Accenture, August 2008.
2. ‘Connecting with the Bottom Line
- A Global Study of Supply Chain
Leadership and Its Contribution to
the High-Performance Business’,
Accenture, 2003
3. ‘Channel Optimization - How
Branded Products Manufacturers Can
Achieve High Performance Across
their Retail and Distribution Channels’,
Accenture, 2009