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					IBM Business Consulting Services

IBM Institute for Business Value

                                   Supply Chain
Follow the
Scoring high on the supply
chain maturity model
                  IBM® Institute for Business Value
 IBM Business Consulting Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior business executives around critical
  industry-specific and cross-industry issues. This executive brief is based on an
in-depth study by the Institute’s research team. It is part of an ongoing commitment
   by IBM Business Consulting Services to provide analysis and viewpoints that
  help companies realize business value. You may contact the authors or send an
                 e-mail to iibv@us.ibm.com for more information.
Follow the leaders
Scoring high on the supply chain maturity model

Introduction                                                   Executive summary
IBM Business Consulting Services completed the 2005            What do the top-performing supply chains have in
Value Chain Survey in conjunction with IndustryWeek            common?
magazine. This survey identifies current practices, captures   Top supply chains do have a common trait: the ability
significant trends and establishes operational perfor-         to respond quickly to shifts in demand with innovative
mance benchmarks in five key areas of Supply Chain             products and services. To do this, they employ a variety
Management: New Product Development, Supply Chain              of business strategies and models, coupled with leading
Planning, Procurement, Logistics and Customer Fulfillment.     management practices. And they consistently measure
                                                               their performance based on a handful of key indicators:
IBM and IndustryWeek conducted the survey and                  • Perfect order attainment
distributed each of the five survey questionnaires to
                                                               • Demand management accuracy
5,000 IndustryWeek subscribers throughout the United
States of America (a total of 25,000 surveys were              • Time to value
distributed). Each survey included 18 to 27 questions          • Cash-to-cash cycle time
about overall business objectives, enabling technologies,
                                                               • Supply chain cost.
current practices as well as core performance data
such as level of resources (full-time equivalent), cycle
                                                               These indicators of supply chain performance are the
times or efficiency rates. There were a total of 650 survey
                                                               gauges used to monitor the efficiency of the business.
respondents, the majority of which are in the Consumer
Products and Industrial Products industries, with limited      Leading companies have evolved and transformed their
representation from Distribution and Transportation,           supply chains from static and isolated, to functional,
Automotive, Retail, High Tech, Pharmaceuticals, Services       focused operational excellence, to horizontal integration
and Energy.                                                    within the company, to external collaboration with
                                                               partners, and eventually to on demand performance (see
This major research project was undertaken with
                                                               Figure 1). According to AMR Research’s recent ranking of
support from the IBM Benchmarking program, the IBM
                                                               the world’s top supply chains, the companies that were
Institute for Business Value and APQC, a third-party
                                                               highly rated carry less inventory, have shorter cash-to-
research organization previously known as the American                                                    1
                                                               cash cycle times and are more profitable.
Productivity & Quality Center, to gain perspective on
where supply chain management is today and the                 Follow the leaders.
direction in which it is evolving. This report places the
research findings into an overall context and provides
insight into the continuing evolution of supply chain and
value chain management principles.

IBM Business Consulting Services

    Figure 1. The supply chain maturity model.
                                                                                        On demand
                                                                                       supply chain

                                                                         External                        75%

                                                                                                          Increased profitability
                                                          Horizontal                                                                52%

                                                                                                                                    Reduced cost
    Static supply              excellence


                                                                                                      Top performance objectives
                                                                                                            of respondents
              Traditional                                                              On demand

    Source: IBM Institute for Business Value analysis.

According to the 2005 Value Chain Benchmarking Study,                         • Coordinating business functions across the supply
supply chain executives’ top three objectives remain:                           chain
1. Increased profitability                                                    • Developing mutually beneficial ways to strengthen
2. Reduced costs                                                                supply chain relationships

3. Improved responsiveness.                                                   • Synchronizing supply and demand through planning
                                                                                and forecasting
To meet these objectives, the leaders understand that                         • Managing supply chain cycles
supply chain effectiveness must be more than efficiency
                                                                              • Developing variable cost structures
and low cost – revenue growth and profitability are best
achieved by creating an integrated value chain with the                       • Sharing risks with partners
ability to condition demand and respond to supply chain                       • Using realtime information to create responsive,
shifts with innovative products and services.                                   customer-driven processes.
                                                                              In this year’s Value Chain Study report, we will draw a
Many companies are progressing toward the vision of an
                                                                              parallel between multi-industry benchmarked results and
on demand, customer-driven supply chain – one that is
                                                                              supply chain maturity in four key areas:
integrated end-to-end across the business and with key
customers, partners, suppliers and service providers. The                     • The perfect product launch: Product introduction and
top-performing supply chains are actively transforming                          lifecycle management
their strategies and adopting leading management                              • Synchronizing supply, conditioning demand: Customer-
practices including:                                                            driven planning

                                                                                                                                          Follow the leaders

• Global buying power through strategic sourcing:                                   Key survey findings
  Dynamics of global sourcing                                                       Launching products and services that best fit customer
                                                                                    requirements is clearly the top objective for new product
• Logistics excellence for superior customer fulfillment:
                                                                                    development. Lower introduction costs and first-to-market
  Perfect order attainment
                                                                                    strategies pale in comparison to bringing to market
                                                                                    innovative products that meet customer wants and needs
The perfect product launch                                                          (see Figure 2).
Successful innovation has become a key determinant
of revenue growth, competitive margins and, in some                                 Collaboration with customers to understand their
cases, even survival. The ability to bring this innovation to                       requirements is the primary strategy for new product
market quickly, efficiently and ahead of the competition                            development, followed by customer product configu-
is becoming increasingly important. A key element of this                           ration and specifications for design. Most consider these
process is an efficient product launch. These processes                             practices extremely effective (97 percent and 90 percent
require integration and coordination among multiple                                 respectively). Identifying and meeting customer require-
functional areas, including product design, procurement,                            ments is the primary challenge for remaining competitive.
sales and marketing, planning and manufacturing/                                    Over 56 percent responded that the correct identification
process. In addition, as organizations increasingly                                 of customer needs is their most significant management
leverage core capabilities of other companies, this                                 challenge in new product development.
innovation has to be delivered through virtual networks
– working with partners in a collaborative environment to                           To design for customer requirements while maintaining
bring product and services to market faster, smarter and                            cost control objectives, many manufacturers are incor-
cheaper. Consequently, organizations now not only need                              porating product commonality and reuse techniques
to integrate internally, but also externally with suppliers                         with standardization of components. Reusing existing
and customers, creating end-to-end supply chain                                     designs and other knowledge assets can help streamline
processes and capabilities with differentiated responses                            the product development process and, at the same time,
to customer requirements.                                                           significantly improve product quality by standardizing and

   Figure 2. What is the primary strategy for your site’s new product development efforts?

        Best fit to customer requirements                                                                                                   61

      Innovative product/service features                                                                      37

                  Low product/service cost                               13

                              First to market               3

                                        Other       0

                                                0               5   10    15   20     25        30        35        40   45   50     60         70
                                                                                                                              2003   2005
   Source: IBM Institute for Business Value 2005 Value Chain Study.

IBM Business Consulting Services

reusing proven components and assemblies. A formal                                Figure 4. What percentage of new products is launched to
program of commonality and reuse can also help reduce                             market on time/on budget?
direct materials procurement costs, speed time-to-market
                                                                                  What percentage of new products is launched to market
and improve product quality.
                                                                                  on time?                                 2003    2005

There has been little change in the past three years in                                                    50
developing new products/service innovations. Growth has
primarily been in new customer markets and extensions                                                      40

                                                                                    Percent respondents
to existing products. New product variations increased 16
                                                                                                           30   28
percent from three years ago, plus average time-to-market                                                                                        27
                                                                                                                          23        22   23
is decreasing for new product variations (see Figure 3).                                                                       19
                                                                                                           20                                           19

    Figure 3. What is your site’s average time-to-market for new                                           10
    product variations? What was it three years ago?
                            50                                                                              0
                                                                                                                <=40%     41-60%    61-80%           >80%

                            40                                         38         What percentage of new products is launched to market
      Percent respondents

                                                                                  on budget?
                            30   28
                                                    25                                                     40
                                                                                     Percent respondents

                            20                                                                                       28             29   28
                                                              14                                           30
                                                         13                                                                                            25
                            10                                                                                  19        20   19

                                 0-100       101-200     201-300       >300                                10
                                 days         days        days         days
                                      2002   2005                                                           0
                                                                                                                <=40%     41-60%    61-80%           >80%
    Source: IBM Institute for Business Value 2005 Value Chain Study.
                                                                                  Source: IBM Institute for Business Value 2005 Value Chain Study.

Historically, new product development efforts have
concentrated on achieving on-time and on-budget                                   The perfect product launch manages the devel-
targets. However, the 2005 Value Chain Study revealed                            opment and support of complex products and services
that a significant proportion of respondents miss their                          throughout the entire lifecycle from product design to
product development schedule targets, and it’s getting                           product build to post-sales service. It includes the
worse. Likewise, a significant proportion of respondents                         integration of traditional product lifecycle management,
miss their product development budget targets, and here                          such as product innovation, design and collaboration, with
as well, performance is falling (see Figure 4).                                  sourcing and procurement, supply chain planning and
                                                                                 execution, and service – the entire product lifecycle.

                                                                                                                                                       Follow the leaders

What the leaders are doing to achieve the perfect                                       Key take away and recommendations
product launch                                                                          Achieve the perfect product launch through the
As companies evolve up the supply chain maturity model                                  integration of product/service lifecycle management
toward an on demand supply chain (see Figure 5), they                                   activities with customers, suppliers and service providers.
realize that business performance is directly related to                                Deliver superior innovation of products/services through
their ability to bring superior products and services to                                effective cost management. Begin by tightening the
market in a cost-effective manner. Many of the leaders are                              integration with partners during the design phase to
implementing the following practices:                                                   validate that all (people, processes, technology) are
• Collaborating with customers to explicitly define                                     aligned prior to product launch. Accelerate the devel-
  requirements                                                                          opment of people skills for rapid delivery.

• Including logistics and “get-to-market” requirements in
                                                                                        Synchronizing supply, conditioning demand
  product/service design
                                                                                        When companies can move away from reacting to market
• Integrating with suppliers and supply chain service                                   conditions to a more proactive stance, they create a
  providers during design, development, production                                      sharp competitive edge. Responsive supply chains can
  and service                                                                           enable market conditioning through trend analysis and
• Using componentization and standards to develop                                       supply and demand information – using order trends and
  variations on products at lower costs                                                 actual demand to provide early warnings of constraints
                                                                                        and excesses, identifying key forecasting events and
• Outsourcing design and development activities for
                                                                                        order events. This provides advanced insight for demand
  noncore products and/or components.
                                                                                        conditioning. The processes and systems can correlate

   Figure 5. Perfect product launch – where are you on the                                                                                      On demand
   supply chain maturity model?                                                                                                                supply chain
                                                                                                    •   Use of collaborative techniques
                                                                                                    •   Componentized, reuse of design
                                                                                                    •   Standardized components           5.
                                                                                                    •   Formal, integrated process with

                                               Functional                     integration

            Static supply                      excellence
                                                                                                                            4.    • Customers/suppliers
                chain                                                                                                               involved in design
                                                                                                                                  • Some coordination of
                                                                                                                                    lifecycle phases
                                                                                           3.   • Formal new product              • Synergies leveraged across
                                                                                                  development procedures            enterprise
                                                           2.                                   • Integration of engineering      • Launches are well managed
                                                                • Formal processes, but vary
                                                                                                  with operations
                                                                  by project/business unit
                       1.   • Ad hoc processes                                                  • Cross-functional teams for
                                                                • Dates/budgets often missed
                            • Design specs “thrown over                                           design planning processes
                                                                • Limited market research
                              the wall”
                            • Procurement and operations
                              not involved in launch
             Traditional                                                                                                                         On demand

   Source: IBM Institute for Business Value analysis.

IBM Business Consulting Services

and analyze the information and detect likely supply                                  Inventory planning and deployment is primarily based
constraints and excesses, then alert the appropriate                                  on customer sales (78 percent) and volume, followed by
parties of exceptions and recommend actions. These                                    product grouping, region or geography and lastly, margin
early warnings allow the company to position itself to                                or market share. Few respondents (only 15 percent)
condition demand for existing and planned supply.                                     use customer profitability as a determinant for inventory
                                                                                      deployment, even though profitability is the number
Demand-driven synchronization of supply chain planning                                one objective.
and execution activities, in collaboration with suppliers
and partners, enables companies to balance demand                                     A majority of the respondents are effectively using
and supply, and to optimize customer service and                                      realtime, shared electronic demand and inventory data to
inventory levels by continuously planning, in realtime,                               gain visibility into customer demand and to collaborate on
across organizational boundaries. The result is a feasible,                           forecasts. In a totally integrated supply chain, customer
synchronized plan.                                                                    point-of-sale or demand information is used within the
                                                                                      organization to better plan and adapt production and
Key survey findings                                                                   other schedules in accordance with demand require-
Political/economic uncertainty is affecting costs and                                 ments. To further synchronize supply with demand, the
lead times (see Figure 6). Trending indicates that these                              customer forecast information is fed back to key suppliers.
influences are affecting sales less, but are continuing to                            In times of spikes in demand, the company can then shift
impact supply chain effectiveness.                                                    production back and forth between suppliers.

Companies are employing customer-focused practices to                                 Most companies responded that they are “rapidly”
synchronize customer demands for product delivery (e.g.,                              responsive to changing market conditions (70 percent)
the “perfect order”), while balancing the costs associated                            and have realtime visibility inside and outside the enterprise
with excessive inventory in the pipeline. Many companies                              (60 percent). Yet, when asked about collaborative planning
are using continuous replenishment programs to maintain                               initiatives, only 31 percent are implementing collaborative
customer-specified levels of products on the shelf and                                approaches with suppliers and only 25 percent with
direct material inventories in supply. They are finding these                         customers. Likewise, few are sharing visibility to inventory
programs to be extremely effective (see Figure 7).                                    and demand with suppliers (33 percent).

      Figure 6. How has political/economic uncertainty impacted your supply chain efforts over the past five years?

                         Increased cost                                                                                                62

                  Increased lead times                                                                  38

                       Decreased sales                                           22

                              No impact                                17

                        Increased sales                        10

                                    Other                6

                                            0                10             20           30             40          50            60           70
    Source: IBM Institute for Business Value 2005 Value Chain Study.

                                                                                                                                                  Follow the leaders

 Figure 7. To what extent have the following customer practices been implemented?

                         Continuous replenishment              21                                  48                                   31                 91.8%

          Returns management/reverse logistics                 19                        41                                        40                      83.6%

            Shared, realtime electronic demand/
                                  inventory data                16                  41                                        43                           85.7%

    Inventory management at customer location                   16              29                                        55                               82.7%

           Customer interactions with production          3               39                                           58                                  82.9%

                                                         0           10   20   30             40     50      60      70        80            90      100
                                                                                                                  Extensive         Some          None
  Source: IBM Institute for Business Value 2005 Value Chain Study.

As organizations seek to get closer to their customers and                          Respondents indicated that forecast accuracy is being
“pull” demand through their supply chains, an accurate                              measured primarily by stock keeping unit (SKU), product
reflection of product demand is critical to increasing sales                        family or grouping, and customer segmentation. Thirty-
revenue, profitability and customer satisfaction, while                             three percent are measuring forecast accuracy at the
reducing inventories and order cycle times. Demand                                  market level.
planning and inventory planning and replenishment appli-
cations are being used more extensively than they were                              Demand/Supply planning and synchronization results
two years ago. Since 2003, the use of these applications                            in quantifiable supply chain performance improvement
has grown by 9 percent. Most are using vendor packages,                             (see Figure 8). Companies employing advanced demand
and some (an average of 29 percent) are using inter-                                planning techniques typically carry less inventory, are
nally developed software. Demand/supply planning is                                 more likely to meet customer requirements for perfect
becoming much more organizationally integrated, with                                order attainment and are generally more profitable. In the
sales and marketing, finance, supply chain operations,                              2005 Value Chain Study, customer lead time improved
information technology and even key partners involved in                            significantly from 2003, with over 60 percent delivering
the sales and operations planning processes.                                        products in seven days or less. Inventory turn rates for
                                                                                    finished goods are higher, and the cost of quality has
Effective demand management can have a significant                                  improved from 2003. Cash-to-cash cycle time has made
impact on new product introductions, while similarly                                a leap, with 71 percent achieving less than 60 days and
affecting the decision to retire an existing product. These                         41 percent with cash-to-cash cycles of less than 30 days.
issues (along with many others) must be considered                                  On-time delivery has improved, with over 54 percent
by businesses everyday when attempting to forecast                                  of the respondents achieving levels of 95 percent and
demand: pricing, product mix, promotions and other                                  above, as opposed to 48 percent in 2003.
factors that impact the delivery of products and services.

IBM Business Consulting Services

     Figure 8. Key supply chain performance indicators.

        For primary products, what is your standard customer                       What is your annual total finished goods inventory
        lead-time?                                                                 turn rate?

                                100                                                                        100
                                       15               16                                                               14
                                 80                                                                         80           8
          Percent respondents

                                                                                     Percent respondents
                                       30               17             > 30 days                                                       > 26
                                                                       8-30 days                            60    46                   13-26
                                 60                                                                                      46
                                                                       3-7 days                                                        5-12
                                 40    29                              0-2 days                             40                         0-4

                                 20                     34                                                  20    36     32

                                  0                                                                          0
                                      2003             2005                                                      2003   2005

        What is your on-time delivery rate?                                        What is your site’s annual cost of quality?

                                100                                                                        100
                                                                                                                  25     23
                                 80    39               44                                                  80
          Percent respondents

                                                                                     Percent respondents

                                                                       >97%                                                            >10%
                                 60                                    96-97%                               60    27                   6-10%
                                                        10             91-95%                                                          3-5%
                                 40    19                              0-90%                                40                         0-2%
                                                        17                                                        22     37

                                 20    33                                                                   20
                                                        29                                                        26     23

                                  0                                                                          0
                                      2003             2005                                                      2003   2005

    Source: IBM Institute for Business Value 2005 Value Chain Study.

                                                                                                                                                    Follow the leaders

What the leaders are doing to achieve supply and demand                                  Key take away and recommendations
synchronization                                                                          Achieve profitability objectives by synchronizing demand
As companies evolve up the supply chain maturity model                                   and supply. Implement organizationally integrated (sales
toward an on demand supply chain (see Figure 9), they                                    and marketing, supply chain operations, finance, IT),
are developing demand-driven extended supply chain                                       collaborative planning processes with key customers,
networks. Many of the leaders are implementing the                                       suppliers and service providers. Use real demand to
following practices:                                                                     replace forecasts. Create a synchronized and adaptive
• Collaborative demand planning and forecasting with                                     capability, by mastering integration and enabling rapid
  customers and suppliers                                                                execution across the extended supply chain. Implement
                                                                                         a robust capability to sense customer demands and
• Customer inventory planning and deployment programs
                                                                                         other critical events as they occur and respond to them
  including continuous replenishment and shared
                                                                                         in the most efficient way. Create high responsiveness
  management of inventory
                                                                                         and cost/profit performance models that help identify the
• Integrated sales and operations planning among                                         best supply response to optimize opportunities or resolve
  functions within the organization and the extended                                     problems with speed and flexibility.
  supply chain network
• Specialized and differentiated supply chain strategies
  based on customer segmentation, customized service
  levels and strategic planning.

   Figure 9. Condition demand, synchronize supply – where are you                                 • Customer demand changes                   On demand
   on the supply chain maturity model?                                                              automatically adjusts purchasing,
                                                                                                                                             supply chain
                                                                                                    manufacturing and logistics plans
                                                                                                  • Shareholder value analysis based    5.
                                                                                                    on cash-flow impact
                                                                                                  • Optimized bundled pricing and
                                                                                                    conditioned demand
                                            Functional                       integration
         Static supply                                                                                                    4.    • Customer demand forecast/
             chain                                                                                                                actual pull.
                                                                                                                                • Supplier partnerships for
                                                                                                                                  just-in-time responses
                                                                                           3.   • Forecasts shared with some    • Daily planning processes
                                                           2.                                   • Supply and demand plans
                                                                • Different capabilities for
                                                                                                  automated and integrated
                            • Supply plans are mostly             each business unit
                       1.                                                                         across functions
                              manually generated quarterly      • High inventory levels
                                                                                                • Weekly planning processes
                            • No formal supply chain strategy   • System-generated demand/
                                                                                                • Business unit managers set
                              – each function adjusts as they     supply plans
                                                                                                  planning objectives
                              see fit
                            • Frequent over- and understock
              Traditional                                                                                                                    On demand

   Source: IBM Institute for Business Value analysis.

IBM Business Consulting Services

Global buying power through strategic                                                  Key survey findings
sourcing                                                                               Profitability (77 percent) and cost containment (65
Global sourcing patterns continue to shift dynamically                                 percent) continue to be the major objectives for
in search of lower-cost sources. In addition, companies                                procurement and supplier management functions,
continue to rationalize and harmonize their own global                                 followed by improved quality and increased customer
value chain resources in search of more efficient and                                  responsiveness. Collaboration with suppliers and global
effective means of meeting global customer demands.                                    sourcing of direct material are viewed as the key factors to
Fast, flexible, efficient and transparent response to                                  achieve profitability and reduced costs (see Figure 10).
changing end-customer demands and supply shocks
                                                                                       Collaborative design and development, where companies
remains a strategic mission for supply chain management
                                                                                       engage suppliers and exchange knowledge during
and will be essential to compete.
                                                                                       the entire product lifecycle, can help reduce costs and
To effectively analyze and manage total procurement                                    time-to-market, and, at the same time, maintain quality
spend, companies need basic as well as compre-                                         standards. Working in isolation and making assumptions
hensive information, and visibility into purchasing spend                              about supplier capabilities may undermine sourcing strat-
and behavior patterns. Enterprises need operational                                    egies because of higher costs, and may fail to leverage
and supplier performance measurements to effectively                                   supplier knowledge for componentization and reuse.
manage supplier relationships. Shifting to customer-driven
                                                                                       Global sourcing of direct materials is definitely on the
supply networks can be accomplished by integrating
                                                                                       rise. Sourcing within North America has remained
sourcing, procurement, operations and logistics with
                                                                                       relatively stagnant over the past three years; however
partners to better manage global strategic sourcing and
                                                                                       direct material sourced from Europe, South America and
spending, and to achieve reduced procurement costs,
                                                                                       China/India is increasing (see Figure 11). Global sourcing
enhanced profitability and cash flow.

     Figure 10. What are the key initiatives underway to achieve your objectives?

                   Supplier collaboration                                                                                         63

        Global sourcing direct materials                                                                               51

                  Total cost of ownership                                                                    46

                           Spend analysis                                                         34

                     Contract compliance                                          22

               e-Procurement/e-sourcing                         10

     Global sourcing indirect materials                        9

                                      Other                             13

                                              0               10             20          30             40        50        60         70
     Source: IBM Institute for Business Value 2005 Value Chain Study.

                                                                                                                             Follow the leaders

 Figure 11. Sourcing by region.

    What percentage of your site’s direct materials are                     What percentage of your site’s direct materials are
    sourced from North America?                                             sourced from China and India?

                            100                                                                     100
                                   21               24                                                           22
                             80                                                                      80
      Percent respondents

                                                                              Percent respondents
                                                                   >97%                                    31                 >15%
                                   28               21                                                           25
                             60                                    90-97%                            60                       5-15%
                                                                   75-90%                                                     1-5%
                                   19               28             <75%                                          28           <1%
                             40                                                                      40

                             20                                                                      20    42
                                   32                                                                            25

                              0                                                                       0
                                  2002             2005                                                   2002   2005

    What percentage of your site’s direct materials are                     What percentage of your site’s direct materials are
    sourced from Europe?                                                    sourced from South America?
                            100                                                                     100
                                                    10                                                     13    18
                             80                                                                      80
      Percent respondents

                                                                              Percent respondents

                                                    38             >10%
                             60                                    2-10%                             60
                                                                   1-2%                                                       >1%
                                                    21             None                                    87    82
                             40                                                                      40                       None

                             20                                                                      20

                              0                                                                       0
                                  2002             2005                                                   2002   2005

Source: IBM Institute for Business Value 2005 Value Chain Study.

IBM Business Consulting Services

is posing some difficult performance challenges for           Supplier lead times have improved with 74 percent
many industries – longer lead times, slower inventory         reporting stable or decreasing lead times over the
turns and unpredictable delivery – often compounded by        past three years. Results from 2005 show a significant
cultural issues.                                              improvement in supplier on-time delivery, with 63 percent
                                                              reporting delivery of at least 85 percent of supplier orders
As companies continue to seek qualified global sources        by the date originally requested. There has been a slight
to fulfill supply, many are beginning initiatives where the   improvement in purchase order processing cycle time.
total cost of ownership (TCO) is a key driver of strategic    Inventory turn rates have remained relatively stagnant.
sourcing. TCO involves the analysis and inclusion of all
process costs, actual procurement costs, and even opera-      What the leaders are doing to achieve global buying power
tions and maintenance costs, if applicable. Fifty-nine        As companies evolve up the supply chain maturity model
percent of the survey respondents use total cost as the key   toward an on demand supply chain (see Figure 13), they
performance criteria in evaluating suppliers, followed by     are increasing their buying power through strategic global
price, quality and delivery.                                  sourcing, while creating virtual supplier networks. Many of
                                                              the leaders are implementing the following practices:
Many companies struggle to capture accurate, timely
                                                              • Continuing to source from low-cost jurisdictions for
data that could give them insight into enterprisewide
                                                                direct and indirect materials
spend patterns, such as maverick spend rates, contract
compliance and price optimization opportunities. Most         • Implementing proactive category management to drive
respondents do not plan to invest in procurement appli-         continuous value creation
cations, but the demand for supply chain integration          • Investing in fewer, deeper supplier relationships
technology and electronic payment systems appears               and develop collaborative supplier relationship
solid. Respondents are making supplier management               management programs with mutual objectives and
and procurement technology investments in the                   performance criteria
following areas:
                                                              • Outsourcing basic procurement, payment and audit
• Internal supply chain integration 60 percent                  functions as a way to unlock new value
• Web-enabled e-Procurement                                   • Driving adoption of TCO approaches through more
  and e-Sourcing                    59 percent                  strategic and complex, value-based contracting.
• Spend analysis                    54 percent
                                                              Key take away and recommendations
• Electronic payment                67 percent.               Achieve profitability objectives by increasing your global
                                                              buying power through an integrated, high-performance
Establishing global buying power through strategic
                                                              network of suppliers and service providers. Become
sourcing involves creating supply relationships that
                                                              business partners, not just buyers. Focus on business
help optimize potential value contribution by accurately
                                                              value contribution by enhancing customer service
matching demand requirements with supply market
                                                              capabilities and category and supplier management skills,
capabilities. There is continued emphasis on overall
                                                              and by establishing measurements that track procurement
supply chain performance and profitability as evidenced
                                                              efficiency and effectiveness. Explore additional capability
by the results of the following key sourcing and
                                                              sourcing options such as co-sourcing or similar arrange-
procurement measurements (see Figure 12).
                                                              ments to reduce risk and increase buying power.

                                                                                                                                                      Follow the leaders

Figure 12. Supplier management and procurement performance.

What is your site’s average supplier lead-time on purchased                        What percentage of supplier orders is delivered by the
materials?                                                                         original request date?

                         50                                                                                60
                         40                                                                                     59

                                                                                   Percent respondents
 Percent respondents

                                            23                                                             20        37
                         20                                                  18
                                                         17 16                                             10
                                                                       14                                                       23
                                                                                                                                                 20               20
                                                                                                            0              16               17

                               0-10        10.1-20       20.1-30       >30 days                                 0-85%     85.1-90%      90.1-95%             >95%
                               days         days          days
                                                                                                                                     2003        2005
                                                             2003     2005

Using standard costs, what is your business site’s annual raw                      What is the average cycle time, in hours, to place a purchase
material inventory turn rate?                                                      order at your site?
                         50                                                                                40        38
                                                                                     Percent respondents
   Percent respondents

                               26 26                                                                                       20               20               20
                                                              24                                           20
                                                                                                                                                 17               18
                         20                              19

                                                                       10                                  10
                         10                                                  7

                          0                                                                                 0
                              0-4 turns   4.1-12 turns    12.1-26      >26 turns                                0-0.5       0.6-1            1.1-4             >4
                              per year      per year     turns per     per year                                 hours       hours            hours            hours
                                                           year                                                                                  2003     2005
                                                               2003   2005
Source: IBM Institute for Business Value 2005 Value Chain Study.

IBM Business Consulting Services

     Figure 13. Global buying power through strategic sourcing – where are                                                • Virtual, outsourced network                   On demand
     you on the supply chain maturity model?                                                                              • Visibility to supplier inventory, orders,    supply chain
                                                                                                                            forecasts and shipments
                                                                                                                          • Global sourcing organization            5.
                                                                                                                          • Rationalized resources and sources
                                                                                                                          • Manage by performance


                                             Functional                       integration

          Static supply                      excellence                                                                                             4.    • Standard purchasing
                                                                                                                                                            processes integrated with
                                                                                                                                                          • Integrated supply network
                                                                                               3.                     • Cross-functional leveraged        • Several procurement
                                                                                                                        buying. e-procurement               processes outsourced
                                                              2.   • Leveraged buying within                            applications                      • Centralized sourcing
                                                                     functions                                        • Service level agreements for        organization
                              • Limited leveraged buying,
                         1.                                        • Master contracts for key                           key suppliers
                                unknown spend by commodity
                                                                     suppliers                                        • Enterprisewide visibility of
                              • No formal supplier relationships
                                                                   • Supplier management                                orders and inventory
                              • No outsourced functions
                                                                     consolidated and centrally                       • Planning and identifying new
                                – all sourcing and procurement
                                                                     managed                                            sources of supply
                                                                   • No plans for global sourcing
                              • No strategy for global sourcing
                                                                     – next 12 months
                Traditional                                                                                                                                              On demand

     Source: IBM Institute for Business Value analysis.

Logistics excellence for superior customer                                                   Key survey findings
fulfillment                                                                                  As any shipper of products knows, transportation costs
Today’s decentralized supply chain models and tighter                                        are out of control. Transportation cost increases, driven
trading partner collaborations demand expanded logistics                                     primarily by fuel prices in the past two years, combined
capabilities – more stocking locations, more frequent                                        with a capacity shortfall have led to a significant rise in
ordering, smaller order sizes, more costly modes of trans-                                   logistics costs.
portation, multichannel distribution, configure-to-order
                                                                                               Figure 14. What is your site’s total logistics cost as a
capabilities, personalization and distributed responsibility.
                                                                                               percentage of sales?
With improved visibility and fulfillment tools, the logistics                                                                                                                   Up from 20%
function has become a key component of supply chain                                                                       60                                                      in 2003

operations, helping to combat inefficiencies in warehouse                                                                                                                               51
labor, transportation and space utilization, and inaccuracies
                                                                                                    Percent respondents

in inventories and customer shipments. Implementing                                                                       40
expanded, yet cost-effective, strategies for supply chain
logistics has become a mission-critical objective.                                                                        30
                                                                                                                                  Down from
                                                                                                                          20     34% in 2003
                                                                                                                                       12                12

                                                                                                                           0          0-2%           2.1-5%          5.1-10%        >10%
                                                                                               Source: IBM Institute for Business Value 2005 Value Chain Study.

                                                                                                                                                     Follow the leaders

Formal distribution strategies are being implemented, as                                  orative order fulfillment and visibility – designing and
companies look for ways to balance the global sourcing                                    implementing processes and Internet-based technol-
of material with increasing transportation and distribution                               ogies to provide visibility and realtime management of
costs and, as always, rising customer service requirements                                distributed order fulfillment across today’s complex, highly
(see Figure 15). Many are considering the placement and                                   outsourced supply chains.
deployment of inventories in their networks to counter-
balance the recent skyrocketing increases in transportation                               Companies are finding that these practices are effective
costs. Some companies are even reestablishing distribution                                (80 percent and above) in meeting their objectives for
facilities closer to the customer to combat transportation                                increased profitability, cost containment and increased
capacity and costs issues. Another tactic is implementing                                 customer responsiveness/service.
differentiated logistics services for particular customer
segments and markets, which over 73 percent of the                                        More and more companies are developing a variable,
respondents are embracing.                                                                global logistics network of service providers to better
                                                                                          manage end-to-end logistics costs while providing
As companies strive to develop an integrated and                                          greater levels of on-time delivery, fill rate and other
informed logistics network, many are implementing                                         customer performance expectations. They are accom-
collaborative processes, including supply chain visibility                                plishing this by outsourcing components of their overall
and exception management, with logistics service                                          logistics capabilities to transportation and distribution
providers. Many are seeking improvements in collab-                                       service providers. Transportation (inbound and outbound)

 Figure 15. To what extent have the following logistics practices been implemented at your company?
  Formal distribution strategy (location, number,
                                                                          24                                    60                                16           91%
                                    mission, mix)

                 Collaborative carrier management                          27                              46                                27                89%

      Differentiated logistics services for discrete                           28                        45                                27                  88%
                                customer segments

              Collaboration and integration among                         22                          45                                33                     86%
                                 service providers

  Supply chain visibility for managing exceptions                     22                         40                                   38                       80%

                        Cross-docking, flow through                         26                       34                            40                           79%

                       Formal returns management                     18                        41                                41                            65%

                                                          0           10            20   30    40        50          60    70      80           90       100
                                                               Extensive implementation        Some implementation        No implementation

  Source: IBM Institute for Business Value 2005 Value Chain Study.

IBM Business Consulting Services

continues to be the highest ranking outsourced function        Figure 16. Customer fulfillment performance.
(57 percent), with customs/export, warehousing
                                                                  For primary products, what is the average customer order
and/or distribution centers (DCs) and transportation              cycle time in days?
management services (TMS) following. Overwhelmingly,                                      60         55
the respondents indicated that those outsourced

                                                                Percent respondents
functions are effective in meeting their desired objectives                               50
(transportation 93 percent, customs/export 87 percent,
warehousing/DCs 88 percent and TMS 75 percent).
Superior customer fulfillment requires keeping a careful                                                         22                   21
                                                                                          20                           17
eye on logistics performance and key indicators. For the                                                   14                                  14
last three years, customer order cycle times have been                                    10
improving (see Figure 16). For more than 75 percent
of the respondents, cycle times are below ten days.                                        0   0-5 days   6-10 days   11-20 days     >20 days
Seventy-five percent are achieving order fill rates above                                                               2003       2005
90 percent, which is relatively consistent with the 2003
                                                                  What percentage of sales orders is delivered on time,
data. On-time delivery (OTD) remains the major indicator          as scheduled?
of customer satisfaction and logistics performance excel-             40
lence, along with other perfect order components (e.g.,
complete, accurate documentation, undamaged). Eighty
                                                                                          30                             29
                                                                Percent respondents

percent of the respondents achieve on-time delivery rates
of 90 percent and greater. In this survey, OTD was defined
as scheduled delivery time versus the customer’s original                                        20
                                                                                          20                                              18
request date.

What the leaders are doing to achieve logistics excellence                                10
Companies continue to strive to improve their logistics
execution and performance in order to meet profitability
and cost containment objectives, but much more impor-                                      0
                                                                                               0-90%      90.1-97%    97.1-99%            >99%
tantly, to deliver “the perfect order” and meet customer
                                                                  What is your site’s order fill rate?
requirements for the right product at the right time for the
right price.                                                                              50                            45
                                                                    Percent respondents

                                                                                          40                                  39
As companies evolve up the supply chain maturity model
toward an on demand supply chain (see Figure 17),                                         30
they develop robust, global logistics capabilities that are                                                                                    23
                                                                                                20                                        20
variable in structure and cost – logistics networks that                                  20
are highly integrated and can fluctuate to accommodate
varying customer demand.
                                                                                                0-90%      90.1-97%    97.1-99%        >99%
                                                                                                                            2003      2005

                                                               Source: IBM Institute for Business Value 2005 Value Chain Study.

                                                                                                                                                               Follow the leaders

   Figure 17. Logistics excellence for superior customer fulfillment –
                                                                                                   • Open network supporting standards
   Where are you on the supply chain maturity model?                                                 with rapid reconfiguration                         On demand
                                                                                                   • Variable cost structure                          supply chain
                                                                                                   • Outsource all noncore supply chain         5.
                                                                                                   • Dashboards monitor end-to-end
                                                                                                     performance and alert exceptions

                                             excellence                                                                                 • Integrated distribution network
    Static supply                                                                                                                4.
                                                                                                                                          with customers
        chain                                                                                                                           • Common outsourced partners
                                                                                                                                        • Visibility to entire order-to-
                                                                                             3.      • Enterprise integrated              cash cycle
                                                                                                       network, shared assets           • Commitments are demand-
                                                              2.   • Common network and              • Common use of outsourced           driven with managed
                                                                     infrastructure                    logistics and contract             replenishment
                        • Different logistics networks/
                  1.                                               • Some outsourcing – business       manufacturing providers
                          infrastructure by business unit
                                                                     unit differentiated             • Cross-functional visibility to
                        • No enterprise approach to
                                                                   • Different services to key         inventory and shipments
                          outsourcing of logistics and
                                                                     customers                       • Differentiated services based
                          fulfillment functions
                                                                   • Customer order online/EDI,        on customer segmentation
                        • Focus on production and supply to
                                                                     receive acknowledgements
                          customers in ready state
                        • Experience high inventory levels/
                          frequent stock-outs
       Traditional                                                                                                                                    On demand
  Source: IBM Institute for Business Value analysis.

Many of the leaders are implementing the following                                         Key take away and recommendations
practices:                                                                                 Achieve superior customer fulfillment (e.g., the perfect
                                                                                           order) by restructuring logistics processes from end-
• Outsourcing of noncore logistical functions to third-
                                                                                           to-end to develop a variable network of partners
  party, leading logistics providers
                                                                                           and cost structure which are responsive to customer
• Integration of end-to-end processes with key service                                     service requirements. Outsource noncore activities to
  providers and other supply chain partners                                                service providers to support supply chain flexibility and
• Keeping a watchful eye on key events and performance                                     enable “plug and play” with systems of partners. Adopt
  criteria                                                                                 advanced technology to achieve end-to-end supply chain
                                                                                           integration and synchronization with a greater degree of
• Managing the logistics network by monitoring events
                                                                                           visibility and reliability.
  and exceptions.

IBM Business Consulting Services

Conclusion                                                   Companies are moving toward a dynamic, realtime
Complexities in supply chain management are dramati-         supply chain. This type of on demand supply chain is
cally increased by today’s shift toward emerging global      supported by applications that enable realtime infor-
markets for material sourcing, manufacturing, distribution   mation visibility both inside and outside the enterprise.
and product development. These shifts could introduce        It can respond to changes in market conditions faster
further challenges, including potential deterioration of     than traditional supply chains and uses information
performance. Integration with both internal constituents     to sense shifts and redirect resources. An on demand
and external partners such as contract manufacturers         supply chain is adaptable and can enable companies to
or suppliers is now becoming a critical competency.          seize market opportunities based on actual demand and
Focusing on global efficiency requires supply chain          market conditions.
leaders to get the foundational elements right before
addressing this new challenge.                               The 2005 Value Chain Study indicates that many
                                                             companies’ supply chains still have significant room
The role of the supply chain is also changing as it moves    for improvement in delivering high performance with
from a static, cost-centric approach to an evolving,         increased profitability.
integrated model. Organizations are focusing on the
supply chain to help transform their businesses by:
• Altering the way they think, organize and execute
• Looking at business processes horizontally rather
  than vertically
• Integrating processes within and beyond the enterprise.

                                                                                                  Follow the leaders

About the author
Karen Butner is the Global Supply Chain Management     Sponsors
Leader for the IBM Institute for Business Value, and   Theron Gilliam, Jr., Partner and Global Leader of IBM
an Associate Partner in IBM Business Consulting        Supply Chain Management Services, IBM Business
Services in the United States. She can be reached at   Consulting Services
kbutner@us.ibm.com.                                    Barrett L. Boehm, Partner and Global Leader of Supply
                                                       Chain Planning Practice, IBM Business Consulting
Contributor                                            Services
Dietmar Geuder, Senior Consultant, IBM Institute for
                                                       Joseph Gomez, Partner and Global Leader for Product
Business Value Supply Chain Management Team
                                                       Lifecycle Management Practice, IBM Business Consulting
                                                       John Sharman, Partner and Global Leader for
                                                       Procurement Practice, IBM Business Consulting Services
                                                       Angelo Perino, Partner and Global Leader for Logistics
                                                       Practice, IBM Business Consulting Services

IBM Business Consulting Services

About IndustryWeek                                             About APQC
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circulation of approximately 200,000 senior U.S. manufac-      problems in the areas of metrics, measurement, best
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egies that drive continuous improvement enterprisewide.
About IBM Business Consulting Services                         1
                                                                   Friscia, Tony, Kevin O’Marah and Joe Souza, “The AMR
With business experts in more than 160 countries, IBM              Research Supply Chain Top 25 and the New Trillion-
Business Consulting Services provides clients with deep            Dollar Opportunity,” AMR Research, November 2004.
business process and industry expertise across 17
industries, using innovation to identify, create and deliver
value faster. We draw on the full breadth of IBM capabil-
ities, standing behind our advice to help clients implement
solutions designed to deliver business outcomes with far-
reaching impact and sustainable results.

About the IBM Benchmarking Program
The IBM Benchmarking Program understands the impor-
tance of benchmarking as a step toward performance
improvement. The program offers a structured approach
to benchmarking in supply chain, finance and human
resources processes. The IBM benchmarking program
has existed since 1992 and has helped thousands of
organizations in more than 50 different countries with their
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Global Supply Chain Council Global Supply Chain Council http://www.supplychains.com
About Founded in 2002, the Global Supply Chain Council is Asia’s leading professional organization serving a fast growing community of more than 60,000 executives and representing leading companies who view their value chains as a critical driver of shareholder value and competitiveness. As an independent professional organization, the Council’s mission is to stimulate the understanding and adoption of supply chain management by providing a range of services including websites, magazine, directory, newsletters, research, workgroups, conferences, maps, video programming among other services. Targeting manufacturers and retailers end-users on line, in print and in person, the Council delivers a unique combination of education and lead-generation sources that helps logistics service providers, consultants, and software vendors and equipment suppliers achieve their growth objectives.