The chemical industry’s next engine for profitable growth
Customer led supply chain management
By Dr. Jochen Duelli, Dr. Norbert Hültenschmidt and Dr. Frank Herrmann Dr. Jochen Duelli is a partner at Bain & Company in Munich and leads the firm's Health Care and Chemical practices in Germany and Switzerland. Dr. Norbert Hültenschmidt is a partner and Dr. Frank Herrmann a manager at Bain in Munich.
Copyright © 2005 Bain & Company, Inc. All rights reserved. Editorial team: Katie Smith Milway, Susan Donovan and Michaela Dodd Layout: Global design Customer led supply chain management
The chemical industry’s This trend is particularly strong for most commodity products and among next engine for customers with flexible requirements profitable growth for service and delivery. The emergence of low-cost Asian providers has, however, Faced with seemingly contradictory demands created expectations for reduced prices for lower prices and higher service levels, across all products and customer segments. chemical executives are increasingly Moreover, these offshore competitors will rethinking the “one-size-fits-all” supply inevitably move to capture some of the chain model. Having tapped out most higher margins in the specialty sector. traditional sources of savings, they now • Uncompromised quality. Customers recognize that future profitability and are unwilling to trade away quality growth will require a more creative approach. for lower prices, putting pressure on That approach will start with the customer vendors to either sacrifice margins or and call for segment-specific supply chains redesign processes to meet required that deliver exactly what the customer pricing levels. wants - nothing more and nothing less. • Value-added services. Customers are While recent Bain & Company research also seeking and getting new services in the chemical industry reveals that some from their chemical suppliers, such as organizations have taken initial steps in this vendor-managed inventories, express direction, all would benefit from a more delivery and dedicated stock - all of structured and comprehensive approach, which ultimately shift costs from the one we call the “customer-led supply chain.” customer to the vendor. This approach will become even more relevant in the industry’s next cyclical downturn. In response, chemical producers have cut prices and added differentiated services to A challenging strategic and retain existing customers and win new ones. operating environment But they have not, to date, systematically A number of marketplace and operational addressed the increase in costs required to factors are driving the shift toward greater capture and fulfill these orders. Inevitably, the customer focus. First, many customers drive to please customers has squeezed margins. served by the chemical industry, such as But what big opportunities remain to reduce companies in the fast-moving consumer costs? When we interviewed supply chain goods and nutrition industries, are on the executives as part of a recent study, there leading edge of supply chain innovation. was a clear sense among them that their As conditions of doing business, these firms had already reaped the lion’s share firms often set strict vendor performance of savings from traditional techniques, requirements that cannot readily be met such as sourcing, outsourcing, logistics within existing supply chains. Second, even management and inventory management. with their less demanding customers, Going forward, they expected only incremental chemical firms frequently find themselves performance improvements in those areas. trying to serve conflicting priorities with a single, relatively inflexible supply chain. Executives increasingly realize that they need to radically rethink the supply chain. In general, customers are looking for As one commented: “Our one-size-fits-all three things: approach leads to high costs and, even worse, • Low prices. Customers are increasingly to a very high number of exceptions in the channeling business to countries like daily order-to-delivery process for rush China and India, where lower labor and orders and change orders.” regulatory costs enable rock-bottom prices. 1 Customer led supply chain management
Companies have begun to focus on the “front The discipline of customer led end” of the supply chain in search of the supply chain management next wave of performance improvement. In The traditional view of chemicals as a scale- particular, we see companies beginning to driven industry has led to the development explore the move from a single supply chain to a portfolio of supply chains that of rigid product-focused supply chains. each target a separate customer segment. Historically, chemical companies have This approach will likely enhance customer approached innovation from the product satisfaction and loyalty while better matching outward and concentrated on minimizing the cost of delivery with the customer’s the costs associated with production and willingness to pay. throughput. So far, major initiatives have centered on The customer-led supply chain turns that satisfying the “no frills” segment with a approach on its head. It starts with “true” separate low-cost channel. Most initiatives external customer requirements, and it finds to date have focused on a particular product the best approach to satisfying customers area: for example, Dow Corning’s Xiameter in completely, profitably and at the lowest cost. silicones and Basell’s Alastian in polyolefins. (See Figure 1.) Paradoxically, it strips away costs and strengthens competitive position. We acknowledge these developments but suggest that while low-cost channels will be Bain’s research into customer-led growth1 has essential for many firms, they should not be shown that leading firms excel in three areas. the sole focus of supply chain reinvention. They design the right propositions for the right Low cost, after all, is not the sole customer customers. They deliver those propositions priority. It will be equally important for flawlessly across all customer touchpoints. companies to develop specialized service And they develop their capabilities to delight offerings and the adaptive and supple supply customers over and over. In the discipline chains needed to deliver them profitably. of the customer-led supply chain, these insights are no less true. How can executives identify the best portfolio of customer offerings and supply systems Design. When an organization wants to for their companies? We propose a process build a family of differentiated supply called customer-led supply chain. chains to replace or to complement its existing one, the first question is, Who
Figure 1: The principle of customer-led supply chain
Plan Source Make Deliver Customer/channel Goal Customer needs Profitable growth
Cross functional integration
Strategies, values and cultural requirements
Source: Bain SCM Practice
2 1 James Allen, Barney Hamilton and Fred Reichheld, “Achieving True Customer Led Growth,” Bain Brief, July 2005. Customer led supply chain management
will they serve? The process, therefore, to 100% - while desired lead times can begins by identifying all relevant customer vary substantially, from a few days to segments and then designing a distinct several weeks. and compelling proposition for each. • Order flexibility. Developing a clear set Segmentation starts with a thorough of rules for customer orders that achieve understanding of the customer base. While the best fit between a segment’s priorities a company’s hypotheses about its customers and the economics of meeting them is can play an important role in the process, essential. This is particularly true for they must be tested through a structured “no frills” segments, where streamlined survey of a representative sample of customers. and automated processes are essential A chemical supplier might define its segments for lower pricing. by the characteristics of the industries it Xiameter, for example, clearly lists its rules serves, such as regulatory requirements, for order pricing, processing and payment, type of end-customer applications and including its policies on freight terms, volatility of demand. Or it may delineate cancellations, rush orders and returns, them by customer traits, such as size, in nine languages on its Web site. location, importance of chemicals to overall Customers willing and able to play by economics and price sensitivity. these rules get a discount of approximately To define customer segments, companies 15% off Dow Corning’s regular pricing. should take into account both customers’ Similarly, Alastian offers relatively strict stated requirements and the costs that such terms with clear “penalty” fees for violations requirements imply. Figuring out just how and adjustments. But it also has an many segments a supplier can profitably à la carte menu of additional services, serve requires calculating not only the cost offering, for example, on-site consulting of delivering each differentiated service but services at a daily rate of €1,000 plus also the overall costs of complexity that VAT and expenses. The enforced rigidi- incremental services will add to a company’s ty of these two companies’ offerings is business systems, such as accounting, essential to their economics. inventory management, purchasing and the like. Too often such costs accumulate invisibly and erode profits. Figure 2: Dimensions of supply chain Once it has defined the characteristics of performance customization its customer segments, the organization needs to develop a tailored supply chain Which services and service What is the degree of performance package for each as well as a levels are offered to customers? integration/collaboration? clear understanding of what’s required to • Availability • Order intake/IT integration • Lead time • Vendor managed inventory deliver it. These packages typically consist of • Express service • Collaborative planning elements grouped along three dimensions • Other and forecasting (CPF) • Order tracking (see Figure 2): • Other
Supply • Supply chain capabilities. The goal is chain Customer capabilities integration to find the best match between the level of service the segment desires and that Order flexibility segment’s willingness to pay for it. Requirements for availability typically What flexibility is provided? are high across all segments - in one • On time delivery • Minimum order quantities • Delivery quantity • Batch size and packaging recent survey they ranged from 95% • Order confirmation • Other
3 Customer led supply chain management
Organizations must stick to their guns • Adjust their order-to-delivery processes and not dilute their propositions by by segment to ensure that only those making customer- or order-specific activities and costs that are valued by exceptions. To do so risks ceding to their customers remain. customers the financial benefits they • Develop any new capabilities required had hoped to retain for themselves. by any of the propositions. For example, • Customer integration. A company must a company might need activity-based also determine how it will interact with costing to support vendor-managed customers in each segment. Options range inventory, or e-business capabilities to from traditional ordering by fax or support a no-frills channel. phone, to email, proprietary e-commerce • Adjust the organizational structure2 applications, system-to-system integrations and staff levels to fit each model’s and platform applications such as Elemica performance and economic require- or CC-chemplorer. For “high-touch” ments as well as to ensure seamless segments, which require particularly cross-functional cooperation. attentive service, companies should • Enhance their forecasting abilities and consider vendor-managed inventory as adapt current processes for inventory a tool to reduce system costs and lock and safety stock management, to ensure in customers. that performance guarantees can be met economically. The design phase concludes with the creation of a detailed blueprint of the supply chain and • Update their performance measures a detailed pricing strategy for each segment. and incentive systems. Typically, the pricing strategy starts with a This exercise calls for two supporting activities: base price that covers all standard elements First, organizations should seek cost-saving for a particular performance package and opportunities by identifying possible areas for then complements it with a menu of add-on late-stage customization of “platform” products. services. Supplementary fees might be charged These could be, for example, standard products for rush orders, small orders or nonstandard that have customer-specific formulations, or lead times. Such an approach enables the commodity products that have highly varied unbundling of the product from related packaging requirements. Second, organizations value-added services and ensures that should protect their revenue streams by customers receive and pay for exactly the developing contingency plans for unforeseen services they want. disruptions in outsourced distribution and other core processes. Deliver. With propositions and segment- specific supply chains defined, the task shifts Once companies clarify their systems and to building them and rolling out the new policies, it’s time to reach out to customers. Firms should market packages proactively, product and service offerings to customers. emphasizing the relevant service and cost This phase demands strong commitment benefits. External rollouts also offer an excellent and rigorous attention to detail. opportunity to increase market penetration, Bringing the new supply chain models either by growing the share-of-wallet of existing to life requires both process-design and customers or by attracting new ones. change-management skills. Organizations While the mapping of customers into segments will need to: initially assigns them to the offering that’s most appropriate for their needs, it’s not
2 For an in depth discussion of organizational structures, please refer to our 2003 study “Supply Chain Management in the 4 European Chemical Industry.” It can be downloaded from www.bain.com. Customer led supply chain management
Figure 3: Matching customers with supply chain offers
Supply chain customer segment/service package
Smaller customer with Customer‘s articulated Highly price sensitive undermanaged needs, e.g.: Supply chain customer model supply chain • Availability: 95% • Lead time: +/ 5 days • Confirmations: < 48 hours Model 1 Option Option (e.g. Premium)
Model’s capabilities, e.g.: Model 2 • Availability: 95% Option Default • Lead time: > 4 days (e.g. Standard) • Confirmations: 1 day
Model n Default Option (e.g. “no frills”)
meant to be restrictive. (See Figure 3.) If The gap between “believers” and “achievers” customers wish to pay more for a different was a stark 10 to 1. level of service or to trade away flexibility for The challenge of achieving true customer price, they can. What should never be allowed focus across every facet of your organization are changes that confound the raison d’être is no different in supply chains, but the of an offering by, for example, providing rewards are clear. Our experience suggests high-end services at a “no frills” price. that currently the supply chain represents Develop capabilities. A customer-led supply from 6% to 10% of total costs for companies chain isn’t static. It needs to respond both in the chemical industry. We believe that by to changing customer priorities and to shifts implementing a customer-led model, it in the competitive landscape. Organizations should be possible to lower that number to will need to review their offerings on a regular 5%. Companies can generate those savings basis. They must ask: Are new segments through an improved cost base, reduced emerging? Are the economics of one or complexity and decreased contracting costs. more of our segment-specific supply chains deteriorating? What new offerings or This target also assumes peak performance capabilities will we need to develop to in logistics, inventory and warehousing sustain superior performance? across all supply chain partners.
Early adopters can expect First movers can expect the best results. significant benefits Superior performance will increase the satisfaction and loyalty of existing customers Many companies believe in letting customers and capture a greater share of their business. 3 lead their growth. Indeed, recent Bain research It will also win new customers. New high-end across 47 industries found that 80% of offerings will lock in relationships. In short, executives saw their companies as “customer the customer-led supply chain has the focused.” But achieving customer-led growth potential both to protect an organization’s is hard. The companion Bain survey of current position and to serve as a sound customers found them reporting that only 8% platform for profitable growth. of companies deliver a “superior experience.”
3 James Allen, Barney Hamilton and Fred Reichheld, “Achieving True Customer Led Growth,” Bain Brief, July 2005. 5 Customer led supply chain management
The European chemical supply chain: Governance. What is the organizational stature Self assessment and priorities of the supply chain in firms and how do they manage performance? Figure A shows that Bain recently completed a comprehensive study supply chain is not represented at the board of the supply chain approaches and concerns level of any of the firms. More typically, it has a of leading European chemical companies. This home at the division level, often as a corporate effort comprised both extensive independent staff function that offers guidance and support research and in depth executive interviews. In the to “line” supply chain executives in the business interviews, we were particularly interested in units. In addition, while some companies have three things: (1) executives’ candid assessment begun to incorporate partners in their operational of their current supply chain practices, (2) their coordination and planning activities, none has supply chain performance measures and yet coordinated incentives with its partners. (3) their highest priority initiatives for supply Further, many respondents believed that their chain performance improvement. own internal measurement systems do not yet Self assessment adequately capture supply chain performance from a customer point of view. The self assessment portion of these discussions focused on four broad areas of supply chain Margin optimization. (See Figure B.) Where do practice: governance, margin improvement, companies stand on initiatives to increase the fulfillment efficiency and working capital margins of their product sales? Most have done optimization. We were curious to learn their best to get the most from a one size fits all where large incumbents fell on a four part supply chain where exceptions are made to evolutionary scale of supply chain practice accommodate customers seeking nonstandard and sophistication. services. Some tailor their standard service levels to the requirements of their most important customer The exercise revealed no clear leader across all segments. But none are currently enjoying the areas. Instead, we saw that most firms combine margin enhancement that can come from offering isolated islands of great sophistication with other a variety of service levels by segment, in a less leading edge practices. Of the group, none way that eliminates overdelivery of standard had yet achieved an end to end integration of services, and charges for optional ones. Certain its supply chain. Notably, respondents reported firms are experimenting with bundling and themselves least well developed in outwardly upselling services to boost transaction margins, directed initiatives such as operational partnerships but rarely with value added services. Most with vendors or the development of customer led have developed an e channel, but only a few supply chains. are currently managing successful ones.
Figure A
Governance Level 1 Level 2 Level 3 Level 4
Organizational stature Low Business unit Second level/division Board Study participants
Coordination approach None Cross department Supply chain manager Integration with (Informal) external partners Study participants (Formal)
Planning approach Scattered applications ERP/MRP II Extended ERP and CRM Synchronized planning Study participants
Performance None or department level Company dashboard Some partners included KPI network measurement approach Study participants Incentive approach None Company level Aligned with partners Joint network incentives Study participants
6 Source: Interviews, Bain analysis Average respondent Range of respondents Customer led supply chain management
Figure B
Margin optimization Level 1 Level 2 Level 3 Level 4
Service level Unstructured Structured Service levels targeted Service levels tailoring one size fits all one size fits all to main segments varied by segment Study participants Static upselling, Bundling/upselling None Opportunistic Advanced with capacity allocation Study participants value added services eBusiness None Experiments and Clear strategy, Successful eChannel data collection eChannel in place Study participants
Source: Interviews, Bain analysis Average respondent Range of respondents
Figure C
Fulfillment efficiency Level 1 Level 2 Level 3 Level 4
Order process Manual, no commitments Some IT support Automated, Automated, Study participants standard lead times actual lead times Order placement Manual, high cost Manual, efficient Manual, IT supported Web based
Study participants
Distribution network Scattered, not optimized Optimized by country Optimized for enterprise Optimized Study participants with partners
Third party logistics Manual coordination Frequent renegotiation External transport and World class warehousing partners Study participants (IH or 3PL)
Warehousing Basic, high cost Basic, low cost Partial optimization Full optimization with partners Study participants with partners
Source: Interviews, Bain analysis Average respondent Range of respondents
Fulfillment efficiency. (See Figure C.) How do the as a major hindrance to managing their working companies stack up on enhancing the efficiency capital. In addition, they displayed a strong and reliability of their fulfillment activities? sense that more needs to be done to manage All respondents have an automated internal receivables and payables. process to manage orders, but in most cases, Performance measures the placement of orders by customers is handled manually. Across respondents, the percentage The interviews revealed a broad variation in of orders placed online today ranges from 5% the type and comprehensiveness of supply to 40%. By 2008, it will range as high as 50%, chain performance measures monitored by according to our survey. While most companies respondents. (See Figure E.) Inventory, lead have made their distribution network as effective times and customer satisfaction statistics were as possible on a country by country basis, some the only measures tracked by all. have taken advantage of outsourcing opportunities Priority initiatives and are managing a global network. Most harness their global purchasing power to build partnerships Executives reported that past initiatives had been with third parties for distribution, logistics and largely focused on internal and supply side warehousing, yet none report seamless man improvements. They conveyed a sense that the agement integration with partners. major supply side operational and cost benefits had been achieved and that going forward only Working capital optimization. (See Figure D.) incremental improvements could be expected. How are companies doing in their efforts to Nonetheless, respondents planned to continue minimize cash tied up in inventory and receivables working on “evergreen” topics such as logistics and to manage payables? The survey respondents improvement and inventory reductions. Some were cited the challenge of generating accurate also experimenting with radio frequency identifi forecasts in the face of volatile demand levels cation (RFID) tags and bar coding technologies. 7 Customer led supply chain management
Figure D Working capital optimization Level 1 Level 2 Level 3 Level 4 Forecasting Basic forecasting, Advanced forecasting, Collaborative planning approach Isolated limited external visibility postponed customization and forecasting, full Study participants external visibility Receivables Basic A/R handling, Some electronic Tight A/R management, Fast A/R delinquency and payables no credit check, no A/R collection. A/ Pan integral part of escalations. Electronic exceptions. A/P A/P focused on supplier management A/P management management isolated from supplier payment terms management including vendor Study participants managed inventory
Source: Interviews, Bain analysis Average respondent Range of respondents
Figure E Performance measure Overall level of implementation Variance among respondents
Forecasting • Accuracy Medium High • Volatility Low to medium High
Supplier reliability Medium High
Product availability • Production adherence Medium High • Production lead time Low to medium High • Replenishment reliability Medium Medium to high
Inventory management • Inventory level Fully Low • Days supply Fully Low
Outbound logistics • Lead time Medium Medium to high • Delivery reliability Medium High
Customer satisfaction • Complaint rate Medium to fully Low to medium
Supply chain cost Medium to fully Medium to high
Status KPI implementation Medium Low
Their current priorities, however, were largely improve data collection and workflow, geared toward the demand side. Of the current to harness automated statistical techniques initiatives, four emerged as having the highest and to explore collaborative forecasting priority across firms: with customers.
• Pursuing the global upstream supply • Creating service level differentiation. initiative (GUSI). This industry wide initia Organizations are trying to move from tive focuses on the development of global a one size fits all supply chain to more electronic data interchange standards that efficient segment specific ones. will facilitate commerce with both customers • Developing vendor managed inventory and suppliers. Chemical companies see offerings for customers. These projects GUSI as critical to integrating their systems require substantial effort to develop work with suppliers and customers. processes and to integrate vendor and Chemical executives clearly recognize the ben customer systems, but they can lock in efits of customer led supply chains for both cost relationships and help provide valuable management and revenue growth. And some input for forecasting as well as cross selling. companies have begun to implement aspects • Enhancing forecasting techniques. of the approach. Based on our research and Current techniques yield a forecasting experience, however, true advantage awaits error rate of 20% to 60%, leading to a the first organization to realize the full potential high level of respondent dissatisfaction. of a customer led supply chain. Chemical companies are working to 8 Customer led supply chain management
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