RBS-SupplyChain2010

8/2/2019 RBS-SupplyChain2010

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How resilientwill internationalsupply chainsprove in 2010?An report, in association with RBS


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RBS Foreword 4

Executive summary 5

Introduction 6

Pushing through change 8

Change for the sake of change? 12

Where the dangers lurk 14

Acts of god and governments 18

Managing the chain 20

Case studies 23

Conclusions 25

Contents

2010 The Royal Bank of Scotland Group plc. 2010 Economist Intelligence Unit. All rights reserved. This report

including the research eldwork was written in co-operation with the Economist Intelligence Unit (www.eiu.com).


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RBS Foreword

Thats why weve commissioned the Economist Intelligence Unit to produce this independent report which provides insight

into the general health of supply chains within a sample of 250 UK-based corporates.

The results show that over half the companies surveyed were condent that they would increase their revenues in 2010.

Interestingly, even for larger companies, the report shows that China is not the obvious choice it once was. If the nancial

markets are to be believed, the competitive advantage that Chinas undervalued currency brings may not be available for

much longer. Buyers will therefore extend their supply chains to other areas of the globe in search of cheaper or better

sources. But of course, a supply chain is only as strong as its weakest link. As globalisation on both the supply and market

side increases, the complexity of supply chains also increases, leading to a closer, more co-dependent relationship with

suppliers. This, as we know, can often be a delicate balance. What is certain, however, is that supply chains are gradually

playing a more prominent part in the fortunes of companies, and the effective management of these chains is becoming a

critical determinant of competitiveness.

Thats where RBS can help. Although this report suggests progress is denitely being made in managing the risks inherent in

extended supply chains, there is still much work to be done. We have years of experience when it comes to supporting our

customers international operations. And our extensive international network in over 35 countries means we can really helpyour business make the most of the opportunities out there.

Id like to take this opportunity to thank you for your interest in the Economist Intelligence Unit survey and report. I hope you

nd it of use.

John Lyons

Head of Global Transaction Services UK

The Royal Bank of Scotland plc

Please note that the report contained in this paper is sponsored by The Royal Bank of Scotland Group plc (RBS), although the ndings expresseddo not necessarily reect our views. No representation or warranty, express or implied, is or will be made and no responsibility or liability is or willbe accepted by RBS or any of our ofcers or employees in relation to the accuracy or completeness of this report and any such liability isexpressly disclaimed.

Theres no doubt that the economic challenges o the last year have changed the ace o

commerce in the UK. But as companies look to diversiy and take advantage o the potential

profts international markets can oer, they must also balance the risks and supply costs involved.

This means that the importance o maintaining healthy and costeective supply chains has

never been greater.


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Executive summary

A key strategy or increasing revenues and preserving

margins is cutting costs with suppliers. Some 63% of

respondents negotiated lower prices in the past year, and

41% hoped to do so in 2010. A fth had switched the

countries in which suppliers are located, a third had

reduced the number of suppliers and half reported that

their relationships with their remaining suppliers were,

indeed, more cooperative than before the recession.

Modern supply chain management (SCM), however,

extends well beyond price cutting. The term SCM

recognises that when some 80% of a products content is

bought in, as is now common practice, the producing

company relies heavily on its selection of suppliers, and

close cooperation with them. Survey respondents listed

specialist expertise as the second most important

consideration when choosing a supplier, after cost.

In spite o the ragile state o the global economy, the

fnancial stability o suppliers is just the third most

important consideration when selecting a supplier. Only

36% of respondents selected nancial stability as a

consideration when choosing an overseas supplier.

However, after a supplier is selected, nancial accounts

are the top area for ongoing monitoring, chosen by 64% of

respondents.

Insolvency o a supplier is a major threat to the supply

chains o a signifcant minority o respondents. 29% of

respondents have experienced an insolvency

in the past year and a quarter see insolvency of a

supplier as one of the biggest threats to the resilience oftheir supply chains over the next year.

Respondents are also looking to take advantage o

opportunities created by the recession. The top three

opportunities spotted were greater availability of talented

workers in the labour market, lower interest rates (which

makes nancing of debt less expensive) and better

prospects for mergers and acquisitions. A quarter will use

the impetus of the recession to review and/or rationalise

their supply chains.

The fnancial crisis has put the spotlight on

companies supply chains as management

struggles to realise the benefts o

outsourcing and reduce risks. The results o

this survey suggest that their eorts havepaid o: well over hal the companies were

confdent o increasing their revenues in

2010, retaining their customer base and

preserving their margins. Other major

fndings include:


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Introduction

At the same time, the number of foreign subsidiaries has

massively increased over the past 20 years tripling,

according to estimates from McKinsey. Of the most talked

about hotspots, China recovered from the nancial crisis

well enough in the last quarter of 2009 to notch up 10.7%

annualised growth, and growth is forecast to continue at

least 8% for the next few years. And India is not far

behind, producing hundreds of thousands of trained

engineers every year, and growing economically at a

pace just slightly slower than Chinas.

Companies that can take advantage of such fast-evolving

supply opportunities wherever they may arise hold a valuable

competitive weapon, but require a well-managed modern

supply chain with the ability to cope with rapid change

and volatility. This type of supply chain requires a

standard of management several degrees higher than

that usually encountered in the traditional purchasing role.

The supply chain model is now more of a network, with

suppliers assuming the role of partners and frequently

carrying some of the risk. The recent recession and the

credit crisis have tested such supply chains and

relationships as never before, and many suppliers have

gone out of business 29% of respondents to this survey

reported such instances in the past year. Companies that

have adopted lean production techniques, such as

just-in-time inventory and reduced numbers of suppliers,

have had to be especially vigilant.

Companies dont compete: supply chains

compete is an old adage that is becoming

more compelling as the years go by. In the

days when companies manuactured, refned

or processed everything themselves, theirate was largely in their own hands. Now,

approximately 80% o the material value

o a complex product, whether an Airbus

passenger jet or a Stannah stairlit, is likely

to have been bought in, whether on the

grounds o price or a simple plastic

moulding or expertise or an electronic

control system.


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It is not surprising, therefore, that at this stage of the

economic cycle, risk is still at the forefront of everyones

minds. The moment of truth for a hard-pressed company

can be the point at which sales start to increase again

after a recession, but when the cash requirements nally

exceed resources. That perhaps explains why in this

survey all but a few of the larger companies (those with

annual revenues in excess of $1bn) apparently attach

high priority to the risks lurking in their supply chains, and

are aware that they need to be constantly alert to possible

problems. Extending the supply chain concept from supplier

to customer is not uncommon (if not always effective) in the

consumer industries (see the case study on PJ Cussons),

but elsewhere it is still a rare concept. The arguments in its

favour are universal but, in many companies, departmental

boundaries may prove insuperable.

Overall, however, the results suggest that by managing

their supply chains effectively, respondents have comethrough the nancial crisis in pretty good shape. Of

course, the survey does not cover the failures, only the

survivors, but well over half the respondents to this survey

of 282 UK companies, conducted in January 2010, were

condent of preserving their margins over the next 12

months, increasing their revenues and retaining their

existing customer base.

Still, many had reduced both the number of suppliers

and their supply chain staff, but claimed they now monitor

the remaining suppliers more closely. Collaboration and

their systems have improved, and (perhaps as a result)

their demand forecasting and continuity planning aremore accurate.

The implication is that communication within the company

is now generally smoother than in the past, especially

between the supply chain managers and the sales and

marketing teams. But some believe it is still not good

enough, specically in their liaison with the far end of the

chain (i.e. their customers).

Effective liaison assumes greater importance given

the increasing volatility in both the target markets and the

suppliers markets. The chief supply chain ofcer (if one is

appointed) acts as piggy-in-the-middle, who has the added

responsibility, whatever the nancial pressures, of keeping

inventories at a safe minimum and unit costs at a level

that satises the nance director, while leaving the supplier

with enough incentive to provide a reliable service.

As a companys national and international operations

develop, the complexity in the supply chain increases

exponentially, with different markets, different products

and different manufacturing and distribution centres. Yet

still, the survey shows that frequently the supply chain

has no single head, or is decentralised. It is difcult to

see how a process of optimisation could be achieved in

such circumstances.

Many companies, it seems, have yet to wake up to the

scale of possibilities that a well-managed supply chain can

offer, not just in terms of operational efciency, but as an

indispensable weapon in the modern competitive world.


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Dont waste a good crisis, as White House

chie o sta Rahm Emanuel told fnancial

regulators last year. Farsighted managers

can seize the opportunity to initiate

a longdesired radical change at a time whennervous colleagues and other stakeholders

are more receptive to change. The supply

chain, involving as it does practically every

department in the company, as well as a

long list o suppliers, sometimes needs a

crisis beore all parties will all into line.

For example, Toyota, facing a $2bn loss in the 2009/10

nancial year as a result of the recession, even before

the devastating eight million car product recall programme,

announced in December 2009 that, among other changes,

it was merging three purchasing divisions into two and

imposing a 30% cut in prices to suppliers for a range of

components for its 2013 models.

Despite its recent problems Toyota is still considered a world

leader in managing its supply chain, having demonstrated

in the Toyota Production System how to work with suppliers

to reduce costs on both sides and improve productivity.

Its obeya process brings all parties together to discuss

ideas and projects, and break down functional silos.

The evidence from this survey is that on a smaller scale,

many respondents are faced with similar problems to

Toyota and appear to be following the car rms lead:

56% said they were taking steps to improve collaborationand 48% went further by introducing systems to connect

and align interests more closely with supply partners.

Their primary objective, as always, was to nd ways to

cut costs by negotiating lower prices 63% said they had

done so in the past year and 41% hoped to in the coming

year. Perhaps to focus their relationships, 33% had reduced

the number of suppliers they used and, possibly for that

reason, 35% had cut their own supply chain staff. Whatever

the results of their efforts, 50% agreed that suppliers were

more cooperative as a result of the recession.

Pushing through change


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Source: Economist Intelligence Unit

Which of the following steps has your organisation taken in the past 12 months as a resultof the current downturn?

Negotiated lower prices from suppliers

Reduced headcount in supply chain function

Reduced number of suppliers

Implemented a sustainability strategy

Diversified supply chain

Increased payment terms to suppliers

Invested in supply chain management technology

Reduced capacity levels

Moved production to lower-cost countries

Increased output volumes

None of the above

0 10 20 30 40 50 60 70 80 90 100%

63%

34%

33%

32%

29%

26%

25%

23%

19%

18%

5%


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Which of the following steps do you expect to take in the next 12 months?

The number of suppliers tends to grow of its own

accord, and a periodic weeding process is probably

desirable, whatever the conclusions. Three years ago,

for example, an embarrassed Airbus, struggling to

assemble the A380 superjumbo as well as the A400M

transport, announced a gradual plan to cut its list of

suppliers from 3,000 to less than 1,000. The numbernow stands at 1,500, and would probably be nearer its

target but for the political pressures on management not

to be the cause of redundancies at its suppliers and the

need to limit the effect of the strong euro by buying

more components in dollars.

Whatever the difculties, there is an unmistakable note

of optimism in companies replying to questions about the

current atmosphere. They are, of course, the survivors,

but 51% were condent of growing their revenues over the

next year, with only 22% not condent. As to prot

margins, 39% were condent of an increase, with 29% not

condent. There is less condence at the C-level: 30%were not condent about growing revenues and 33%

feared they would not be able to increase their margins.

Negotiate lower prices from suppliers

Increase output volumes

Diversify supply chain

Reduce number of suppliers

Invest in supply chain management technology

Implement a sustainability strategy

Reduce headcount in supply chain function

Increase payment terms to suppliers

Move production to lower-cost countries

Reduce capacity levels

None of the above

0 10 20 30 40 50 60 70 80 90 100%

41%

28%

24%

24%

23%

23%

21%

17%

17%

16%

11%


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Compared to this time 12 months ago, what degree of condence do you have in your companysability to achieve the following, over the next 12 months?


Figures have been rounded to the nearest %.

At the smaller end of the scale, the up-market pram and

child car seat manufacturer Silver Cross has sales of

20m, but chief executive Nick Paxton admits to having

had tough times over the past year with some of our

major customers demanding extended payment terms.

Over several years, Paxton has carefully built up a close

relationship with a small group of suppliers, mostly in

China, and explains I dont believe in spreading our

custom. Youre dealing nowadays with a well-educated

set of managers with a good understanding of our overall

requirements and the prot that we have to make, as well

as their own business.

We have an ofce in Shanghai, and ofces in each of four

primary suppliers. We have more secondary suppliers, but

I take time to nurture relationships. For instance, we use

video-conferencing for one of the factories because e-mail

is so easily misinterpreted. Our Chinese suppliers have

actually suffered labour shortages, so we share our troublesand our relationships with them have grown stronger.

Preserve existing profit margins

Retain existing customer base

Grow revenues

Increase profit margins

Expand into new markets or customer segments

Maintain control over supply chain

Access capital at acceptable cost

16%

6%

21% 36% 25% 13%

30% 39% 20%

4%

10% 2%

21% 30% 26% 18% 4%

14% 26% 31% 20% 9%

19% 31% 30% 4%

25% 38% 29% 2%

17% 28% 38% 13% 4%

Very confident Confident Neutral Not confident Not at all confident

0 10 20 30 40 50 60 70 80 90 100%


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Change for the sake of change?

Even among larger companies, China is not quite the

obvious choice that it once was. Some 47% of larger

companies, with over 1bn in revenues, source some

of their supplies there, compared to only 19% of rms

with less than 500m. But if the nancial markets are

to believed, the competitive advantage that China has

because of its undervalued currency may not be available

for much longer. Output continues to rise in China, but so

do wages, therefore cheaper cost of labour is not a

guarantee either.

Perhaps in consequence, while 47% of the largest

rms currently source from China, just 42% say they are

enthusiastic about sourcing opportunities there over the

next three years, with slightly more (43%) now favouring

India. Oddly, smaller rms have moved in the opposite

direction, with just 19% currently sourcing from China but,

27% say they expect to source from there next year and

for it to offer the greatest sourcing opportunities over thenext three years. Equally surprising, while 41% of

companies currently source some of their purchases in

North America, just 28% expect to over the next year,

and just 14% say it will offer the best opportunities over

the next three years.

What Paxton and bosses in a similar

position disapprove o is switching suppliers,

even countries, or a relatively small cost

advantage. Among all survey respondents,

19% reported moving their production tolower cost countries. Signifcantly, the

proportion was 12% in companies with

below 500m turnover but 26% in those

above 1bn. The critics say that however big

the saving, it is likely to be temporary.

Meanwhile, the quality and reliability o the

supplies over a period will be untested, and

the advantages o close cooperation in

design, marketing and fnance will have to

be built anew.


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From which of the following regions and countries do you currently source products or services?


Which of the following regions and countries do you expect to offer the greatest sourcingopportunities for your organisation over the next three years?

Companies with global Companies with global Companies with globalannual revenues annual revenues annual revenues

Total of 25m-500m of 500m-1bn of >1bn

Africa 15.9% 14.9% 16.9% 16.0%

Australia & New Zealand 21.9% 12.8% 26.5% 26.4%

Central & Eastern Europe 36.4% 26.6% 42.2% 40.6%

China 35.0% 19.1% 37.3% 47.2%

India 32.9% 26.6% 30.1% 40.6%Latin America 19.1% 9.6% 18.1% 28.3%

Middle East 19.8% 10.6% 24.1% 24.5%

North America 40.6% 33.0% 42.2% 46.2%

Other Asia 24.0% 19.1% 25.3% 27.4%

Rest of Western Europe 53.4% 43.6% 57.8% 58.5%

UK 76.7% 75.5% 74.7% 79.2%


Total of 25m-500m of 500m-1bn of >1bn

Africa 8.5% 9.6% 4.8% 10.4%

Australia & New Zealand 6.4% 8.5% 7.2% 3.8%

Central & Eastern Europe 18.4% 18.1% 15.7% 20.8%

China 36.7% 26.6% 42.2% 41.5%

India 30.7% 19.1% 28.9% 42.5%

Latin America 10.6% 6.4% 9.6% 15.1%

Middle East 5.3% 4.3% 6.0% 5.7%

North America 14.1% 20.2% 18.1% 5.7%

Other Asia 12.7% 13.8% 13.3% 11.3%

Rest of Western Europe 18.4% 20.2% 16.9% 17.9%

UK 38.5% 43.6% 41.0% 32.1%


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I nothing else, the data shows just how

volatile supply chains have, or are expected

to, become. Labour costs, exchange rates

and local productivity all play their part, but

meanwhile commodity prices have uctuatedin the past two years and show no sign o

stabilising. Oil, as always, is the key

commodity, and its price has swung rom a

high o $147 in July 2008 down to $31 in

early 2009 and now stands at around $85.

With renewed economic growth, common

sense says the price can only go up, aecting

a vast array o material and transport costs.

At Contico, for example, a 10m supplier and manufacturer

of cleaning equipment and materials, operations director

Phil Macey complains that in three months last year, the

cost of resin for plastic mouldings increased by 78%.

Meanwhile, the range of exotic metals and rare earths

now required in modern technologies and markets adds a

further dimension to the expertise demanded of the supply

chain manager, who must pay particular attention to their

market costs and guarantees of availability.

As the supply chain extends across the globe in search

of cheaper or better supplies, volatility and the range of

demands placed on it have risen, as have the volume and

severity of the underlying risks involved. The companys

future depends on the risks being at least managed if

not avoided. But 28% of respondents admitted to

under-estimating the risks inherent in the supply chain,

and the gure grew to 34% amongst the largest companies

(with more than 1bn in annual revenue). Not far behind,the lack of a risk culture was cited by 18%. The range of

events aficting companies in the past year extended from

straightforward insolvency through falling quality (16%) to

sabotage (3%). By far the most frequent was severe weather

at 40%. However, a fth of companies (21%) were lucky

enough not to have faced any such events.

The consequential damage to a companys business by

events of these kind is well-illustrated by the case of

Land Rovers sole supplier of Discovery chassis, which

went bankrupt in 2002. The suppliers receivers,

accounting rm KPMG, demanded 60m just to maintain

supplies. To nd a new supplier would require a freshinvestment of at least 12m and a six-month wait, and

meanwhile, all production on the Discovery line would

have to cease. The case went to court and Land Rover

(then owned by Ford) settled for 15m.

Where the dangers lurk


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Which of the following events affecting the supply chain has your organisation experienced overthe past year?


Severe weather event

Insolvency

IT failure

Increased tariffs

Falling quality standards after honeymoon period

Labour dispute

Transport shut-down

Theft

Product tampering

Sabotage

Other reasons

None of the above

0 10 20 30 40 50 60 70 80 90 100%

29%

22%

19%

16%

16%

13%

12%

5%

3%

1%

40%

20%


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Land Rover was lucky. It was alleged at the time that the

supplier had been making a loss on every chassis made

at the price that Land Rover had negotiated. No doubt

Land Rover had initially been satised with the deal,

oblivious to the risk it was running with the source of a

critical component. Putting a supplier in that position, as

any supply chain director will advise, is seldom the best

policy. But having taken on the risk of relying on a single

supplier, the company compounded its problems by not

keeping a close check on the suppliers nancial health

and stepping in before the receivers were called. It

evidently failed to foresee the further risk posed byKPMGs attempt to exploit the strength of its position.

In another case, Mr Squiggles, the toy electronic hamster

made by Cepia, a large toy company in the US, caught

the world markets imagination in the run up to Christmas

2009 and 600,000 were expected to be sold in the UK

alone. Then tests in a California laboratory surfaced,

appearing to show too-high levels of the toxic chemical

antimony in the hamsters fur. Sales were halted and

frantic phone calls around the world were made.

Cepia had all the right safety certicates in place and

quickly proved the results were a mistake, but not quickly

enough to prevent a dip in sales. With modern

telecommunications, rumours can cause real damage

anywhere in the world in an instant and, at that time

of year, it could have been a disaster for Cepia.

The inference from these two examples is that a supply

chain disaster, actual or potential, can come from any

quarter, so when 52% of respondents judged their companies

audit of supplier risk to be effective and 53% thought their

assessment and identication of risks were effective, the

verdicts have to be treated with some scepticism.

The great majority of the sample say they have stepped

up their due diligence research on potential suppliers

(60%) and on-going monitoring of existing ones (58%).

Possibly as a result, those who fear insolvency among their

suppliers (29%) are outnumbered by those who say theydo not (34%) but 35% would not commit themselves.

Solvency, quality, nancial resources and the customer

base can indeed be checked, while commodity prices,

exchange rates and protectionism can in some degree

be forecast and the effects mitigated, but there will

always be risks which are more difcult to manage.


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Do you agree or disagree with the following statements?


I am fearful that partners in my companyssupply chain may become insolvent

in the next year

My company has stepped up the levelof due diligence performed on potential

supply chain partners as a resultof the recession

My company has increased the level ofongoing monitoring of my companys supply

chain partners as a result of the recession

My company has introduced systemsto more closely connect and align interests

with supply partners

6% 34% 28% 7%23% 2%

2%

Strongly agree Agree Neutral Disagree Strongly disagree

9% 26% 10%50% 2%

6% 26% 12% 2%51% 2%

7% 38% 10% 1%42% 2%

Dont know

0 10 20 30 40 50 60 70 80 90 100%

Figures have been rounded to the nearest %.


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Earthquakes, tsunamis, orest fres and

oods are another matter, and are likely to

need more careul assessment in the uture

as globalisation and the possible eects o

climate change increase. Local politics, too,must be taken into account by the supply

chain management, as Nestls recent

experience in Zimbabwe shows.

Nestls local management had come under pressure

in October 2009 to break its existing supply contracts

with local farmers, and purchase its milk instead from

farms that had been requisitioned and were now

controlled by President Mugabe and his Zanu-PF party.

Human rights groups in neighbouring South Africa heard

about it and appealed for a boycott of all Nestl products

there if it gave in. Then in December Nestl found itself

threatened with nationalisation and physical violence if it

would not accept milk from Mugabes farms. It immediately

halted all production at its Harare factory, and only restarted

once it had received (from the Minister of Industry and

Commerce) a written guarantee of the security of its

management and staff and non-interference in its

operating processes.

No doubt the Nestl management will be keeping a very

close eye on progress in Zimbabwe. But even in the

best-governed countries, the way regulations affect aparticular business may not be apparent until it is too late

to have them changed. 39% of survey respondents

expected regulations, benign or otherwise, to increase

over the next year, while 29% foresaw informal barriers

increasing, including problems with customs, health and

safety regulations and bribery. On the other hand, a

further 29% had no fear of government regulations.

Even well-intentioned government activity in the UK has

sorely tested companies supply chains. The climate

change levy, for example, has borne particularly heavily

on the UKs aluminium extrusion industry, according to

Tim Eagles, joint managing director of Stannah (see casestudy), the dominant manufacturer of domestic stairlifts.

He says We have every concern for the environment,

but the levy is applied only in the UK, so weve had to

buy our extrusions from suppliers in southern Europe.

Acts of god and governments


18/2419


Do you see any of the following protectionist measures as threats to your businessover the next 12 months?

The brewery business in the UK has more government

regulation to cope with than most, with changes to licensinghours in its pubs, the banning of cigarettes and the duty

levied on alcoholic drinks. Long a source of revenue for

the government, duty may soon be increased sharply in

an attempt to curb excessive drinking and relieve

pressure on the National Health Service.

The government shouldnt interfere too much, thinks

Andy Wood, the managing director of Adnams, the East

Anglian brewery. Were a hugely responsible company,

but our business is changing. 2009 was a seminal year,

when absolute beer volumes consumed in the home

exceeded those in pubs and bars for the rst time. The

supply chain must be exible enough to cope with theconsequences of that on our pubs, plus all the changes

government imposes upon us, and the high seasonality.

Adnams is proud of its record on another front

sustainability which is of increasing interest tocustomers, governments and local authorities alike.

A good record is coming to be a necessary qualication

when bidding for contracts and licenses. In Adnamss

case, it can point to the way its transport system has

been rationalised and bottle weight reduced, while the

brewing plant has been modernised so that instead of

15 pints of water being used to brew one pint of beer,

only three pints are now required.

Of respondents to the survey, 31% reported that their

companies had implemented a sustainability strategy,

however dened.

Increased regulatory barriers to business

Informal barriers to trade (e.g. customs practices,health and safety, bribery)

Tariffs

Export taxes

Trade defence measures

Bail-outs/state aid

Export subsidies

None of the above will be threats

0 10 20 30 40 50 60 70 80 90 100%

30%

20%

19%

18%

13%

40%

30%

12%


19/240

Managing the chain

Ideally, he or she has to have a strategic view of the

companys future and the ability to create the necessary

supply chain capacity to match, yet be a diplomat rather

than a driver, able to see which are the weak links and

where to nd solutions. The supply chain managers real

role, says consultant and author John Gattorna, is in

supplying customers with what they want its more of

a philosophy than a function. In practice, he says, supply

chains are often still seen as cost centres, little more than

purchasing and logistics departments.

Respondents to the survey reported in 43% of cases that

the supply chain head reported to the CEO or other

director, while in a further 44% there was no single head

but the structure was fairly centralised. In the remainder

it was decentralised. It may be signicant that in the

C-level view, 51% of companies had supply chain heads

reporting to the CEO or other director. The implication is

that there is a certain amount of confusion in the reportingstructure, which is likely to reduce performance. In the

decentralised cases, circumstances or the nature of the

business may obviate the need for a single coherent

supply chain.

There is a gradual trend towards greater centralisation,

however in supply chains as in so much else, everything

depends on the nature and structure of the business and

also the geographic spread. For practical reasons the

supply chain may be split into two or more as reported

by 28% of respondents. But there is wide variation, even

within a single business, according to the nature of the

product: fashionable items, or ones given heavypromotional support require one structure; short-life

products with many optional features (such as mobile

phones) demand another; slow-moving or price-sensitive

lines demand a third. As globalisation on both the supply

and the market side increases, the complexity of the

supply chain or chains also increases, and, in the opinion

of some, places a limit on its optimum size.

A supply chain is only as strong as its

weakest link, and in a company o any size,

there are many links, extending rom the

supplier, to the procurement team, to the

design and production teams, to fnance, IT,marketing, sales, customers and atersales

service. In act, it is more o a network than

a chain, with each unction responsible or

a ew links, and a single chie supply chain

ofcer a rarity.


20/2421


How would you describe the way in which your companys supply chain is managed?

With complexity comes obfuscation. Like other consultants,

Gattorna reports nding companies struggling under masses

of data, but making only slow progress in creating an

accurate and timely picture of the whole supply chain so

that it can be managed effectively. Measures of success,

apart from reducing costs, are difcult to nd, so Gattorna

favours using the cash-ow return on investment, which

everyone can understand, as the principal metric to guide

management.

With some 2,000 products and 120 suppliers, Macey at

Contico says that it is the quality of his staff that makes sure

the supply chain works. Were not just selling in the UK

we sell in Japan and the Middle East, and have just set up

Contico Europe in Amsterdam. Here in Cornwall were

incredibly lucky with staff. They have tremendous knowledge

of our products and exactly what the targets are.

We spend a lot of time with stats, covering the whole

chain from supplier to customer, and half of what we sell

we manufacture ourselves. We measure everything to the

nth degree our shipping performance, our credit notes

and quality in every aspect. The aim is not just to prove

how were doing, but to help in tendering, and ensuring

that salesmen know what to quote.

Supply chain executives in larger companies are

usually organised into their functional specialities but, as

the survey shows, communication then suffers: 31% of

respondents believed that poor communications across

the chain was one of the main obstacles to improving

performance. Also cited were poor liaison with customers

(6%) and inadequate cooperation between sales and

production (13%). Some 25% of companies had invested

in supply chain technology, or automated control or

information systems (17%). Adnams for one is abandoning

its old economic resource planning (ERP) system and

moving towards a more user-friendly web-based system.

However, supply chain managers say that although ERP

and other systems can help, solutions are to be found in

human more than electronic interaction.

In certain cases, Gattorna favours creating small

multi-disciplinary teams to focus on a group of customers

rather than a specic function. That way, he claims,

communication is much improved, and changes, for example

in product specication, can be accomplished in a matter

of days rather than weeks. Adidas, the German sports

equipment supplier, did this at the time of the last football

World Cup, because it knew that if Italy beat France, say,

sales of Italian shirts would go up 300% overnight.


Total of 25m-500m of 500m-1bn of >1bnSingle supply chain headreporting to the CEO or director

42.7% 44.1% 41.0% 42.7%

No single supply chain headbut fairly centralised

43.7% 39.8% 49.4% 42.7%

Decentralised 13.6% 16.1% 9.6% 14.6%


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Improving collaboration with suppliers is a widespread

ambition for all the obvious reasons to cope with the

growing volatility of the market, to ensure quality and

reliability standards are maintained and to improve

productivity so that costs can be reduced with minimum

pain. But suppliers are frequently referred to as partners

because the fortunes of both parties are in practice

intertwined. The relationship may actually involve some

considerable capital investment on the part of the

supplier. Risk-sharing is rare however, at least on the

scale that, for example, Boeing has chosen for rms

assembling some 70% of its new 787 Dreamliner, which

has already become a case study in the problems of

managing a global supply chain.

As the bought-in content of many products has grown,

suppliers contributions in terms of marketing as well as

technical innovation are all the greater. Ideally, products

will be designed jointly but the company needs to havecondence in the relationship where precious patents,

drawings and tooling are at stake, as demonstrated by

the Land Rover case, where these vital assets came to be

controlled by the receivers. With a sound relationship, too,

the supplier is likely to be sympathetic to a request from

the company to defer payment; and if the shoe is on the

other foot, the company will have more condence in

supporting the supplier.

In fact, half of companies questioned found that cooperation

was better since the recession, while 56% said they were

improving it further, to increase the resilience of their

supply chains. Some 48% claimed to have introducedsystems to more closely connect and align interests with

supply partners. Improvements have been made to

forecasts (31%) and continuity planning (33%), perhaps

giving suppliers more condence in their customer.

However, a further question revealed that while 43% of

respondents had condence in their companies demand

forecasts, 19% did not. There is clearly still some way to go.

Progress is also needed, according to larger rms, in

the hiring and training of supply chain staff. Ted Kondis,

consulting vice president of the supply chain specialist

Ariba, says that the pressure on costs over the past two

years has left companies short of skilled supply chain

staff to cope with renewed growth. So the question in

the minds of top executives should be Do I have the

right talent?

The problem applies especially in rms that still see the

supply chain as a fancy name for purchasing and

logistics, and as some consultants observe, their staff

often have an engineering background with a tendency to

rely too heavily on their spreadsheets and delivery

schedules, and not enough on relationships with the

people concerned.

At PZ Cussons (see case study) the complexities of its

manufacturing and marketing operations in 12 countries

require the right people with a rather broader view, and the

need is recognised as one of its four strategic pillars,

alongside its selection of markets, its brands and its

world-class supply chain. Supply chain director John

Pantelereis explains that the company believes in

growing its own timber. It recruits 60 or 70 graduates

every year, and develops the talent it needs to build

human relationships with suppliers as well as to manage

the purchasing of valuable raw materials and plan the

distribution of the products. For the supply chain, you

need to hire the best people and give them as much

responsibility as possible, he says, implying that his

company has got them and does.


22/2423

Case studiesStannahs steady climb

With the UKs housing stock having a preponderance of old houses built on

two levels connected by a winding staircase, it is perhaps not surprising that

the world leader in the stairlift market is a British rm that claims to have made

400,000 lifts since 1975. A family-owned company dating from the 1860s, its

volumes have grown every year for the past decade, so that current turnover

now tops 105m.

The skill consists as much in tting the stairlifts into a conned space as in the

mechanics, and also in controlling the second-hand market since its customers

tend to have shorter lives than the lifts. Tim Eagles, joint managing director, is

directly responsible for the supply chain and although his principal aim is to

nd better, cheaper supplies, competition in the market is growing and the

efciency of the whole supply chain is an important weapon.

Customers naturally want exactly the right product installed on the agreed

installation day, and for that, all components have to be in place and to work

as designed. But market dynamics may depend on suppliers themselves

innovating to produce new components and facilities as required.

In the past, practically everything was made in-house, Eagles says, but

nowadays, perhaps 80% is sourced outside. Plastic mouldings and castings

need higher volumes than we need ourselves to keep the price down. In our

product, the carriage and chair is standard, but the rail it runs on is bespoke,

so that has to be manufactured here and tted by our staff.

We have a reasonable level of spend in South-East Asia, but I dont deal

direct, and I turn over my stock up to 30 times a year. Theres always the risk

of quality deteriorating, and other things being equal, Id buy locally because

of better responsiveness. But I have a very good relationship with our overseas

suppliers. I also have very close cooperation with our sales force. We project

sales forward for 18 months and have an umbrella agreement against which I

can call off as needed.

Are we getting the best performance? I dont think you can tell. The supply

chain delivers whats needed, and were constantly making improvements. Ten

years ago, our stockturn was around four a year. Now the average is 20. Were

very cautious with cash. If something goes wrong, I know I can count on my

suppliers to cancel the Christmas party to put it right.

In the past, practically

everything was made

inhouse


23/244

PZ Cussonss four pillars of success

Not many companies take their supply chains quite as seriously as the 838m

personal care group PZ Cussons. Founded 125 years ago, it was known until

2002 as Paterson Zochonis, and its best-known brand is Imperial Leather soap.

With a new name, new brands and Imperial Leather relaunched, it has grown

steadily in Europe, Africa and Asia, working to a four-point strategy: selected

markets, leading brands, a world-class supply chain and the right people.

Its last annual report enlarged on the third point We operate world-class supply

chain networks that enable us to deliver our brands quickly and efciently to our

local customers... We take pride in our exible distribution capability which is

tailored specically for the local market.

The report refers, of course, to the selling end of the chain rather than the

buying end, but that does not mean the latter is neglected. John Pantelireis,

the corporate supply chain director, explains We start our supply chain

planning process with sales forecasts and any major marketing promotions

that are planned, and work back through distribution to stock levels and

purchasing needs.

The company makes most of what it sells in a number of factories in Nigeria,

Ghana and Kenya. But it also has factories in Asia and Europe, making for a

very complex supply structure. Some materials are bought centrally, mainly the

key commodities like phosphate, sulphates and tallow, and others locally, but

under the eye of the management network. Charles Worthington, the hair care

brand bought in 2004, maintains its own supply chain. The emphasis is on local

exibility, but carefully controlled by central management. Theres always a

target set for each country and product category, says Pantelireis.

Theres huge volatility in our markets now, and timing is vital. You need good

people, and we dont like to speculate or gamble. We only buy forward if we

feel the need, because it absorbs working capital and we sometimes get it

wrong. But as well as price uctuations, we have to be ready for a huge newdemand for example the hand sanitisation programme to counter swine u,

which doubled and tripled the sales of handwash brands.

Were not yet at the forefront of the climate change controversy, but

sustainability is a growing concern. We take an active interest in helping to

develop Nigerias economy, where weve operated for 100 years. Ive seen

many small companies get into difculties there, so we help where we can, and

weve got two joint ventures, with Haier, the Chinese white goods company, and

Glanbia, an Irish company making milk products. Weve also opened four retail

outlets for electrical goods to help stimulate the local economy.

We take pride in our

exible distribution

capability, which is tailored

specifcally or the local

market.


24/24

Conclusions

Next Steps

Against a gloomy economic background, the optimism this

survey reveals in the ability o respondents to increase revenues

and proft margins at their companies over the next year

belies conventional wisdom. What is certain is that their

supply chains are gradually playing a more prominent part inthe ortunes o companies as globalisation gathers pace.

The implication of the overall trend is that management of supply chains is

going to become an ever-more critical determinant of companies competitiveness.

Companies with the best suppliers benet not just from price, but from quality,

reliability, innovation and so forth all to their customers satisfaction. But to

maximise the advantages, a higher standard of management is called for, able

to cooperate closely with suppliers management anywhere in the world. That

ambition is declared by the majority of the sample, yet nearly half have reduced

their supply chain head count in the past 12 months.

Able managers are not the only requirement. A structure is required to providean overall supply picture with appropriate information to help management

decision-making. Yet most responding companies have no single supply

chain head or are decentralised. At a time when the volatility of world markets

is increasing, and with it the risks inherent in an extended supply chain, this

report indicates that while progress in managing those risks is being made,

much work still lies ahead.

To fnd out more on how we can help ufl your international ambitions,

speak to your Relationship Director or visit www.rbs.co.uk/international

Able managers are

not the only requirement.

The Royal Bank of Scotland plc

Registered Ofce: 36 St Andrew Square Edinburgh EH2 2YB

RBS-SupplyChain2010

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