Why companies flunk supply-chain 101

By Miles Cook Only 33% Correctly Measure Supply-Chain Performance; Few Use The Right Incentives

More than 85% of senior executives say improving their firms’ supply-chain performance is one of their top priorities, but fewer than 10% are adequately tracking that performance. And fewer still—7%— collect the information necessary to meaningfully measure their progress. Those are key findings from a new survey by Bain & Company.

The study,which polled 162 top managers with supply-chain oversight, also finds that the supply-chain gap is set to widen: two-thirds of companies that say they are already ahead rate improvement of supply- chain performance as a “high” or “top” priority; but just over a third of laggards say they will prioritize catching up.

The consequence is a growing performance gap between average firms and the exemplars—companies such as Wal-Mart, Dell, and Toyota that meticulously analyze everything from customer forecasts to product to warehouse turns. Already, the top performers are twice as efficient as the average. Independent research shows they put about four percent of revenues into their supply chains, while average players allocate almost 10%. (See Figure 1)

Figure 1

Average players are half as efficient as the stars...... such as Dell Computer

9.8% 10% 35 32.1 30 8% 24.6 24.1 25

6% 20 Percent of Days of Revenue 4.2% Inventory 4% 15

10 8.9 7.1 2% 5 4.2

Compaq Dell Compaq Dell Compaq Dell 0% 0 Average Top 1997 1999 Q3 2001 Miles Cook, based in Atlanta, Quartile is co-director of Bain & Company's Total supply-chain cost practice. Source: PMG's 1999-2000 Supply-Chain Note: Excludes additional "channel inventory" at Compaq resellers of 2-4 weeks Management Benchmarking Series Source: OneSource On many other measures and across multiple 1 Most companies are hazy about industries, the leaders’ two-to-one performance their supply-cchain performance. advantage shows up again and again. Only 15% say they have full information on what’s What’s more, the leaders are extending their lead. happening in their own companies. (See Figure 2) Dell Computer is a great example. For almost a decade, Even among firms that say supply-chain improvement analysts have praised the PC maker for operating is a priority, slightly less than two-thirds say they’ve a lean supply chain, contrasting it favorably with got all the necessary information.

traditional competitors. But even though its 2 Too many companies are supply-cchain introverts. competitors have invested to improve, Dell has In other words, too many companies fail to adequately actually managed to extend its lead. In 1996, Dell recognize that the supply chain extends far forward kept 15 days of inventory—half that of rival Compaq. to customers, and back, to suppliers and their suppliers. Last year, Dell’s inventory was down to almost Our study showed only 7% going outside their four four days while Compaq’s was still at 24. walls to track the performance of supply-chain So why are some companies flunking supply chain activities at their vendors, providers, basics? Bain’s research uncovers four reasons: distributors, and customers. (See Figure 3)

Figure 2: Only 15% say they have good Figure 3: Only a third of businesses track information on their supply chains supply-chain performance outside their four walls

Full information on the company's supply-chain performance and that of its suppliers and customers 100% 100% Full information on the company's supply-chain 15% performance At the department 80% 80% level or divisional levels only

60% 60% Percent of Selective information Percent of At the corporate Respondents Respondents level 40% 40%

At the corporate level and across 20% Basic information 20% selected suppliers 33% and customers

Little or no information Across your extended supply chain 0% 0% How much information do you have on your supply chain? What's the highest level at which you track performance of your company's supply chain? Source: Bain & Company

Source: Bain & Company

Bain & Company, Inc. Why companies flunk supply-chain 101 2 Imagine how difficult it is for a supplier to plan It’s just as bad when transportation managers are production effectively when a key customer measured on delivery cost but not on on-time withholds forecast data. performance. By using the cheapest, slowest route, a fortune can be lost in carrying costs, speed to The benefits of opening up are many. If Ford had market, and lost inventory turns. not built solid links to suppliers and customers, it couldn’t have handled its huge recall of Firestone The supply-chain leaders go further, fostering tires as effectively as it did in late 2000. collaboration between key functions such as and distribution. 3 Incentives don’t tie to supply-cchain improvements. Only two out of five survey respondents said their 4 There’s still a bias toward quick IT fixes. companies use pay-for-performance rewards to Businesses have looked to sophisticated software motivate their supply-chain executives. (See Figure 4) to solve their supply-chain problems. Yet most But, even those doing so, often make the mistake turn their no faster than they did a of using the wrong targets. Almost 80% of those decade ago. Asked to rate a list of six ways to incentives fail to take into account customer improve their supply-chain activities, respondents feedback and vendor results. Companies that reward gave the highest weighting—21%—to “Rebuild buyers when they avoid running out of stock, but our supply-chain IT systems.”A more fundamental don’t offer anything when they improve inventory solution— “Improve our supply-chain talent”— turns, are penny-wise and pound-foolish. was cited by just 14%.

Figure 4

Managers have few ...and there's little to incentives to make supply encourage them to improve chains work better... the whole supply chain

100%

Departmental or divisional level 80%

60%

Percent of Respondents Corporate level 40% No

20% Corporate level and some suppliers and customers

Ye s The extended supply chain 0% Are managers' financial incentives On which levels of supply-chain directly linked to supply-chain performance are managers' performance in your company? financial incentives based?

Source: Bain & Company

Bain & Company, Inc. Why companies flunk supply-chain 101 3 So what can businesses do right now? They can So they leave money on the table—or overpriced emulate the supply-chain exemplars by sticking goods on shelves. Look at the sector: leaders to these five fundamentals: such as Wal-Mart are now starting to use their supply-chain skills for sophisticated management Get the strategy right first of shelf placement and pricing. Rather than taking Most managers are unclear about their firms’ the typical approach of “art over science” in strategic underpinnings. So it’s not surprising that allocating product space, the leaders analyze what they don’t know which supply-chain improvements moves and moves profitably, and then assign space can drive real advantage, which service enhancements and set inventory based on product attractiveness. customers will value, and how they should hook their operations into those of suppliers and Reach past your four walls customers so the whole chain is competitive. The best performers have already linked their Many still believe that supply-chain software will operations with those of their customers, suppliers, sort things out. But technology can’t atone for and logistics providers. They know their own flawed processes. performance metrics, and those of all partners in the supply chain. They have visibility from the Put star players on the problem beginning to the end of their supply chains, and can Supply-chain roles are rarely seen as glamorous. make cost and volume adjustments before it’s too late. But the supply-chain maestros such as Dell set plenty of store by them. They recruit top-caliber Not all parts are created equal people who can save them millions of dollars with A sure-fire sign that your supply chain is unhooked better forecasts, vendor strategies, and execution. is when everything flows through it the same way: The best companies also work to align many all vendors deliver on the same terms; every item is departments under a senior executive whose job is stocked in every distribution center. Best practice means to plan, measure, and optimize the performance of managing multiple supply chains, and having options. the whole chain—both internally and externally.

Replace hunches with metrics With real growth so elusive nowadays, the supply If you don’t track performance—the performance chain is an essential place to look for gains. It’s a of the whole supply chain—you’re in the dark real source of competitive advantage, as the industry about what your supply-chain inefficiencies cost. leaders have proved. They continue to prove it: they’re Yet many companies are guessing when setting accelerating so fast that they may never be caught. inventory targets. They don’t know how much So who has a chance to catch up? The businesses of their products will sell at what prices, and they that understand that supply-chain practices have don’t analyze what they’ve sold at different prices. to run on data, not on instinct.

Further reading BAIN & COMPANY, INC. Two Copley Place Weakest links in the supply chain Boston, Massachusetts 02116 USA Financial Times by Miles Cook and Nick Jackson 1 617 572 2000 www.bain.com Making CRM work Bain Strategy Brief by Darrell Rigby and Fred Reichheld

The limits of scale Bain Strategy Brief by Ashish Singh and James L. Gilbert

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