Supply Chains

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					‘Supply Chains are Still Playing Catch-up’                                Issue Date : 12/1/2006


Mr. Peter Koudal, Head, Manufacturing Practice, Deloitte Consulting talks to T. E
Narasimhan about SCM trends and challenges which, according to him, are still
stymieing companies big and small because manufacturing is undergoing
changes more rapid than ever before in history in this interview published in the
inaugural issue of Indian Supply Chain Analytic Network (I-SCAN).
                        I-SCAN: What are the current SCM trends in manufacturing in different
                        parts of the world?
                        Mr. Peter Koudal: The global manufacturing industries continue their
                        evolution toward becoming truly global. From our ongoing Deloitte Global
                        Benchmark Program, we are seeing three major drivers of the globalisation
                        of supply chains:

                         (1) Drive towards cost reduction and pursuit of low-cost country sourcing
                         and logistics opportunities. A very large share of companies have
                         undertaken significant efforts to reduce cost by closing existing production
                         facilities, reduce their work forces, and outsourcing manufacturing, logistics
                         and even R&D functions to low-cost countries. China as well as India are
top destinations for those geographical moves. For India, it is particularly R&D that will drive
interest in investment and relocation over the next three years.

(2) Continued push of ever-more products into the global value chains. Our benchmark research
across more than 800 companies around the world suggest that today about 29 percent of total
sales of manufacturers are new products (products introduced over the previous three years).
That is up dramatically from just 21 percent in 2000. By 2007, manufacturing executives in the
companies we have studied say that the percentage will reach 35 percent. This means that by
2010 more than 70 percent of the products being sold today will be obsolete.

(3) Pursuit of new markets around the world is creating increasingly global complexity for
manufacturing companies. With sources of supply and R&D networks spread liberally around the
world, the entry and expansion in each new market presents the global value chain with enormous
challenges to keep up. For the companies that do not have the capabilities in place to manage
these dynamic changes in the global network structure on a continuous basis, the cost, challenges
and risk often will outweigh the benefits.

Q: Where would you say the definition and analyses of SCM effectiveness of SCM in
manufacturing rank now in the minds of management in developed countries (vs.) developing
countries
A: Overall, supply chain management as a managerial discipline has gained tremendous
awareness over the last 10 years. In both developed and developing markets, the focus on supply
chain management by governments, industry organisation, companies, and professional
associations has grown remarkably. This is of course not surprising.

It is clear that the world's best-managed companies use Supply Chain Management as a key part
of their overall business approach. Because SCM implies the effective coordination and
integration of activities across the enterprise and with customers and suppliers using improved
strategies, processes and technologies, leading companies are using the SCM approach to create
a more integrated management and technology infrastructure to support the end-to-end supply
chain. The best companies are clearly ahead in doing that.

Because the competitiveness of any economy relies fundamentally on the competitiveness of the
companies operating in the economy, and because SCM is a core discipline for improving
company competitiveness, governments and industry associations in both developed and
developing countries have been quick to adopt the language, practice, and implications for policy-
making that SCM entails.
While most countries still have a long way to go in creating optimal conditions for supply chains, it
is nevertheless encouraging that there is less and less debate of the merits of creating favorable
conditions for supply chain management. Rather the debate seems more focused on prioritising
the initiatives and investment projects needed to make economies more attractive to building
better local supply chains, and accessing more effectively global business networks.

Q: You have done some research on supply chain integration, what is level of awareness /
adoption of integration methodology in different industry segment, and please elaborate on what
you think of the development.
A: While I think companies have come a long way over the last decade in integrating their local
and global supply chains, they still have a very long way to go. The problem is that the complexity
of their operations -- new markets, new products and services, new suppliers, new locations, etc. -
- is growing as fast as, and sometimes faster than, their efforts to improve their supply chain
capabilities.

This is happening in just about all the industries we have studied. If we look at four major enablers
of integration -- visibility, collaboration, flexibility and technology -- we find that in most cases
companies are struggling to keep their supply chains up to the challenges of new business
demands. For example, in the global automotive industry, we have seen a sustained effort to
improve their supply chains through better processes, tools, and technologies. Yet, the
performance of most of the automotive companies we have studied are still not where most
executives would want it to be. Their improvements have simply not been able to keep up with
ever-changing, ever-more complex competitive and operating environments, and ever-more
demand customers requiring new products and new services at lower and lower cost.

Q: Comment on the extent to which tools like balanced score card are being put to use and give
us your observation on setting and standardising supply chain metrics.
A:Management tools like the balanced scorecard are certainly being adopted in many companies.
However, most companies still have a long way to go in developing, implementing, integrating, and
leveraging these tools to improve the performance of their businesses.

The problems in adopting tools like these are many. Fundamentally, large, global companies are
challenged in regards to their visibility into their global networks. They don't fully have good
information on key metrics such as product cost, logistics cost, manufacturing cost, product and
customer profitability, etc., as well as their levels of operational performance in terms of inventory
metrics, service levels, etc. This is a major problem for companies because it means that their
overall business strategies and decisions are based on "much-less-than-perfect" information.

As a result their plans may be sub-optimal and the execution of the plans may be sub-optimal
because they are directed by managerial information that is incomplete at best, and false at worst.
Tools like balanced scorecard certainly can help companies identify and hopefully rectify some of
these major problems of performance management. But in most cases companies need to make
significant investments in organisational alignment (both internally and with customers and
suppliers) and technology infrastructure just to get the metrics.