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What really transforms supply chains from a liability to an asset? Many studies
have measured excellent performance through cost, availability and inventory
benchmarks, but few have linked company performance to the practices that
underlie it. Now, new research by McKinsey & Company and Professors Vinod
Singhal and Soumen Ghosh of the College of Management at the Georgia Institute
of Technology, into the supply chain practices of more than 60 companies delivers
that essential insight (see Exhibit 1).
EXHIBIT 1: Breakdown of companies surveyed
Exhibit 1—Breakdown of companies surveyed
Retail Automotive
15
21
Pharma 15 5 High-Tech
44
Packaged
Source:McKinsey; Georgia Tech College of Management
Goods
Senior supply chain executives from participating companies took part in in-
depth structured interviews covering more than 50 aspects of supply chain
management. At the same time, data on their actual supply chain performance
(service, cost, and inventory) was crunched to distinguish leaders from laggards.
With a rich database covering both practices and performance, we were finally
able to analyze the key question: ‘What practices truly drive performance?’
The results of these analyses are compelling. Only six supply chain practices
matter most to company performance, while two of the usual suspects are not
as consistently valuable as reported. Companies that have built strength in
the practices that matter most are 1.4 times more likely to have strong service
performance, 1.7 times more likely to have strong D&L (distribution and
logistics) cost performance, and 2.7 times more likely to have strong inventory
performance (see Exhibit 2). Strength in these supply chain metrics is key to
driving sales, margin, and return on capital. It also helps sustain competitive
advantage.
The remainder of this article shares our research and experience on what drives
supply chain performance and where companies might focus to create advantage
for their organization.
The Race for Supply Chain Advantage: six Practices that Drive Performance 5
Exhibit 2—Companies that excel at the most important practices are building
EXHIBIT 2: Companies that excel at the most important practices are building real advantage over their peers
real advantage over their peers
Companies that excel at the most . . . are much more likely to be top service, cost, and inventory
important practices . . . performers creating real advantage over their peers
Average survey score (1-5 scale)
across the most important practices Improved likelihood of being a top performer vs. bottom
3.8
Service 1.4x
2.7
Cost 1.7x
Inventory 2.7x
The second area that has received much attention in recent years is the degree of
centralization of the supply chain organization. Many companies have established
centralized supply chain functions, taking control of the supply chain away from
individual business units to try to maximize overall efficiencies. According to
6 The Race for Supply Chain Advantage: six Practices that Drive Performance
“
our survey results, there seems to be no
advantage to centralizing or decentralizing
Top-performing
supply chain control across business companies in our survey
units. Top-performing companies were were as likely to use a
equally likely to centralize their supply mixture of formal and
chain management across business units, home-grown IT tools like
devolve it to individual business units, or spreadsheets to operate
use a mixture of both approaches. Again, parts of their supply chains
it seems that the underlying processes as they were to invest in
”
and incentives really drive performance, comprehensively formal IT
coupled with a functional organizational solutions.
model that supports them.
The gap between top and bottom performers is wide and likely to widen as a
new class of super-competitors emerges that is moving on to the next horizon
of practices such as sustainability and full integration of supply chains across
suppliers and customers. Thus the race for advantage is intensifying. Top
performers are racing to create even more advantage over their peers while others
are racing to catch up (see Exhibit 4).
Exhibit 3—10% of companies are using the levers that matter most to
EXHIBIT 3: 10% of companies are using the levers that matter most to simultaneously outperform on service, cost and inventory
simultaneously outperform on service, cost and inventory
ALL SECTORS
Percent of companies
Top third performance
Top
Better service performance
Source:McKinsey
The Race for Supply Chain Advantage: six Practices that Drive Performance 9
Improved likelihood of
Benefit of having practices that score in the top third of companies surveyed vs. bottom third* 9 being a top third performer
vs. bottom third*
Key practices driving performance Service Cost Inventory
In addition, our
Design and build forward looking networks that meet research strongly
3 1.8X 2.3X indicates that
service, cost and risk aspirations
companies with
strong network and
Create a lean, end-to-end value chains by optimizing end to end practices
4 1.3X 2.0X
across functions are much more likely
to have lower COGS
Execute world-class integrated demand and production
5 1.3X 2.6X 4.0X
planning processes with discipline
6 Get the right talent on board and hold them accountable 1.7X 1.6X
* Not additive
Source: Team analysis; McKinsey; Georgia Tech College of Management
Practices that require 1 Explicitly link the supply chain strategy 6 Get the right talent on board and hold them
strength in other to the corporate strategy and set clear, accountable
practices well understood aspirations
Leading companies align their supply chain strategy with the corporate strategy,
and then drive alignment throughout the supply chain on objectives and
aspirations. In the very best companies, supply chain colleagues from the shop
floor to the most senior managers clearly understand the supply chain strategy
and aspirations.
These high-level strategic links work in both directions. They help supply chain
managers align their efforts with the strategic goals of the business units they
serve and help business unit managers understand the opportunities available to
them through clever use of their supply chain capabilities.
“
senior managers – clearly understand
the strategies. They then translate the In over 70 percent of
aspirations into strategic initiatives and companies, the supply chain
ultimately deploy and monitor tactical manager is a full-time
change plans. member of the corporate
strategy development team
Companies in our survey that achieved and is responsible for creating
”
best practice in strategic alignment are the link between strategy and
much more likely to achieve top service, operations.
cost, and inventory performance. In
particular, top practitioners are 1.9 times
as likely to be a top service performer.
Two of the world’s largest retail operations illustrate how different strategic
objectives translate into radically different supply chain approaches. Wal-Mart,
with its relentless focus on cost reduction, has made extensive efforts to reduce
labor in its distribution centers. It uses its size and scale to force suppliers to
adopt standardized case and unit packaging to streamline its processes as much
as possible. Amazon, on the other hand, has prioritized ensuring its warehouses
have the flexibility to handle products of all shapes and sizes over a strategy that
minimizes cost alone.
The Race for Supply Chain Advantage: six Practices that Drive Performance 13
Practice 2
Segmentation to embrace
the complexity that matters
The best companies in our survey by contrast, have grasped the complexity
challenge. Sixty-seven percent of these best companies, as opposed to 35 percent
of all companies surveyed, use effective segmentation techniques to identify the
specific product and service demands of different customer groups. They then
build their production and distribution networks specifically to meet these
demands, ultimately enabling complexity at a lower cost than a one-size-fits-all
approach.
14 The Race for Supply Chain Advantage: six Practices that Drive Performance
The key to these companies’ success, however, is their ability to meet the demands
of their different customer segments without excessively increasing supply chain
costs. They use a variety of methods to achieve this, starting by considering
supply chain design concurrently with product and portfolio development
processes. They are able to influence others to use common platforms to ensure
that different products can share as much content as possible at minimum overall
supply chain cost. They also take regular steps to rationalize their product
portfolio to eliminate low value-added complexity wherever possible.
“
Companies that have mastered segmentation
still make use of standardized supply chain The key to these
processes wherever possible. They do this by companies’ success,
defining standard processes for each supply however, is their ability
chain segment based on the unique product to meet the demands of
or customer needs. By doing so, they avoid their different customer
the costs of a one-size-fits-all approach,
segments without
”
excessively increasing
while still using processes that are well
supply chain costs.
understood across the organization.
Based on our research, the case for best practice is compelling. Companies
that achieve best practice in segmentation and complexity management are 2
times as likely to be a top service performer and 2.5 times as likely to be a
top inventory performer. The best companies manage to keep the cost of this
additional flexibility under control, however. Overall distribution and logistics
cost levels for best practice companies were just as likely to be a top D&L cost
performer as a bottom.
For example, a consumer goods company with high and increasing supply chain
complexity used supply chain segmentation and portfolio management tools to
improve ROIC, service, inventory, and profitability. Initially, the company had
a one-size-fits-all supply chain to handle the varying needs and demand patterns
of its products. In addition, the organization continued to add SKU’s to their
portfolio, while very rarely eliminating unprofitable SKU’s or SKU’s that had a
high degree of overlap in the product portfolio.
The results of their effort are compelling. The organization’s service levels
increased by 1 percent point while inventories decreased by over 35 percent.
In addition, the organization improved the profitability of its target SKU’s by
10–20 percent.
16 The Race for Supply Chain Advantage: six Practices that Drive Performance
The Race for Supply Chain Advantage: six Practices that Drive Performance 17
Practice 3
A balanced and
forward-looking design
Keeping cost, customer service, and risk in mind during every stage of the supply
chain design allows these companies to make the best tradeoffs for overall
supply chain performance. They control costs by keeping asset utilization
high, for example, but not so high that they lose the flexibility needed to serve
unpredictable customers.
The companies that achieve best practice in supply chain design are much more
likely to have better service and lower inventory, without incurring additional
cost. Top performers were 1.8 times more likely to have top service levels and
2.3 times more likely to have to inventory levels without any apparent impact
on D&L cost.
18 The Race for Supply Chain Advantage: six Practices that Drive Performance
“
worked well for its North American customers,
The very best who mostly bought predictable quantities on a
organizations make contract basis; but it was failing in Asia where a
their decisions using spot market operated. The push system could not
a comprehensive and respond quickly enough to meet demand peaks
”
forward looking network in the Asian market and it often found itself
strategy. having to sell at a discount to keep from building
excessive inventories when demand slowed.
To fix the problem, the company segmented its network. They kept the low-cost,
low-inventory push system in place for North America, but reorganized supply
to Asia on a pull basis and replenished larger local inventories on demand.
The cost of the additional stock was considerable, but using the new system
meant the company could respond to demand peaks, eliminating the need for
discounting and greatly improving customer satisfaction. Keeping local stocks
also allowed better control of transport. Finally, by utilizing capacity on vessels
traveling to Asia more effectively, the company cut its transportation costs by
10 percent.
The Race for Supply Chain Advantage: six Practices that Drive Performance 19
Practice 4
A lean, end-to-end value chain
Leading companies task their supply chain managers with optimizing end-to-
end value chains, and drive true collaboration across functions. They typically
deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma),
which they have made their own.
“
End-to-end thinking has a powerful effect
Companies that use on supply chain cost. Companies that use
end-to-end thinking can this approach can capture savings that are
capture savings that are simply not accessible to those that only
simply not accessible to optimize within functional or regional
those that only optimize silos. In our research, companies that use
”
within functional or regional best practice end-to-end approaches are
silos. 1.3 times more likely to have better D&L
cost, and 2 times more likely to have better
inventory performance than those that do
not. Even more encouraging, our data strongly indicates that best practice end-
to-end performance leads to lower COGS.
A large CPG in Europe and North America took a lean, end-to-end approach
to improving its business. The CPG previously had success building a strong
continuous improvement program in manufacturing, and desired improvements
in margin, service, and inventory. The company drove improvement through
a combination of improved cross-functional processes such as innovation, and
applying lean techniques with a perspective across functions such as transportation
and planning. Interestingly, they found that capturing the economic value in one
function often required the cooperation of other functions that did not directly own
the cost. For example, approximately 50 percent of the transportation opportunity
they identified required changes outside of the direct control of the transportation
team (e.g., warehouses needed to load trucks differently, engineering needed to
redesign pallet heights to better utilize trucks). As a result of these changes, the
company saved hundreds of millions in cost, improved service levels to industry
best practice rates, and reduced targeted inventory by 30 percent.
The Race for Supply Chain Advantage: six Practices that Drive Performance 21
Practice 5
World-class integrated planning
Of course, strong demand plans are required to have an effective S&OP meeting.
To do effective demand planning, companies start by understanding the unique
demand patterns of their products and customers. These demand patterns form
22 The Race for Supply Chain Advantage: six Practices that Drive Performance
the basis of the overall supply chain segmentation strategy referred to in practice
six. Then, the organization defines different planning processes for each of the
segments. For example, a company might use unaided statistical forecasting for
products with long lifecycles and stable demand – it is typically very hard to
improve on the unaided output. For a different segment that is highly promoted,
the same company might invest to build very collaborative demand planning
processes with its customers. They then use these demand plans as inputs for
robust and cross-functional sales and operations planning processes that ensure
alignment between current purchasing, production and distribution activities and
the latest forecasts.
Strong processes are only good if they are consistently executed. Top companies
in our survey described exceptional discipline in execution while many others
described ‘heroic’ efforts that work around the system to deliver to a particular
customer. Unfortunately, ‘heroic’ efforts often cause problems elsewhere in the
system, which can leave an organization in a constant state of fire-fighting.
Companies in our survey that built world-class integrated planning systems were
much more likely to be a top supply chain performer. In fact, they were 4 times
more likely to achieve top third inventory performance, 2.6 times more likely to
achieve top distribution and logistics cost performance, and 1.3 times more likely
to achieve top service performance. Building a world-class integrated planning
system is clearly critical to drive strong supply chain performance.
1 McKinsey’s Supply Chain Management Practice; Oliver Wight, 2006; Aberdeen, 2005; literature
searches
The Race for Supply Chain Advantage: six Practices that Drive Performance 23
Practice 6
The right talent, accountable
for performance
While it is common for supply chain functions to recruit new talent only when
positions become vacant, the best companies use talent gap analyses to identify
future capability needs. They then take steps to fulfill those needs, developing
training and mentoring programs to build internal capabilities and recruiting
people with a broad range of backgrounds and experience.
In the best companies, each and every member of the organization is responsible
and accountable for the supply chain’s contribution to business success. Companies
achieve this by building a comprehensive series of aspirations that cascade as
metrics from strategic requirements for overall supply chain performance to
every part of the organization. Critically, these metrics express performance
requirements in terms that are directly relevant to each function.
24 The Race for Supply Chain Advantage: six Practices that Drive Performance
“
By building alignment with the business
strategy, these metrics help every function
In the best
understand their own direct impact on
companies, each and
supply chain performance. Metrics drive
every member of the
appropriate tradeoffs – between cost, organization is responsible
service and inventory levels, for example – and accountable for the
”
and to ensure that functions work together supply chain’s contribution
to deliver the best result for the business to business success.
as a whole.
Companies in our survey that achieved best practice in talent and performance
where 1.7 times as likely as poor practitioners to be a top service performer. They
delivered this performance with better inventory levels at the same time (they were
1.6 times as likely to be a top inventory performer). Just as important, strong
talent management is important to the overall ability of the organization to create
and sustain advantage, and to race for the next horizon of opportunities.
2 “Global Logistics and Supply Chain Strategies,” World Trade Magazine, Venture Outsource.Com
The Race for Supply Chain Advantage: six Practices that Drive Performance 25
***
For companies whose supply chains do not currently meet best practice standards,
these findings are cause for significant optimism. Selective focus on a few key
levers – and avoiding expending undue energy on others – can make a big
difference in performance. Indeed some of the best companies in our survey seem
to have increased their supply chain performance dramatically by focusing on
a few practices that mattered most. However, the gap between top and bottom
performers is only likely to widen as top performing organizations leverage their
capabilities to race for even more competitive advantage.
For those that are doing well, however, there is no opportunity for complacency;
competitors are racing to catch up and a new horizon of opportunities exists
to drive even more advantage potentially creating the next generation of super-
competitors.
26 The Race for Supply Chain Advantage: six Practices that Drive Performance
The Supply Chain Best Practice research project, designed in conjunction with
Professors Vinod Singhal and Soumen Ghosh of the College of Management at
Georgia Institute of Technology, measures the link between supply chain practices
and performance across a broad range of industries. To test this hypothesis,
companies shared quantitative performance data and participated in one or
more 2-hour structured interviews, during which over 50 supply chain practices
were assessed.