The Race for Supply Chain Advantage

8/6/2019 The Race for Supply Chain Advantage

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Todays corporations are struggling with their

supply chains. Supply base globalization on the

one hand, and product/channel diversication on

the other, mean that supply chains are now more

complex than ever. Many companies report

rising inventory levels and increased service

pressure at the same time as they are impacted

by rising uel and commodity costs.

Against this backdrop, however, a select cadre o

companies has succeeded in turning their supply chains into a strategic weapon.

For example, Jones Soda beat major sotdrink manuacturers to win an exclusive

contract to provide beverages during the Seattle Seahawks NFL games using a

unique supply chain that allowed consumers to print their avorite game photos

on bottles in real time, creating a beverage souvenir in around 10 minutes. In

another case, Cisco Systems discovered it needed to reduce unnecessary product

complexity across its product portolio in order to capitalize on its outsourcing

ambitions. These companies and many others are using their supply chains to

create true competitive advantage.

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4 The RACe OR SuPPly ChAIn AdvAnTAGe: Six PracticES that DrivE PErOrmancE

What really transorms supply chains rom a liability to an asset? Many studies

have measured excellent perormance through cost, availability and inventory

benchmarks, but ew have linked company perormance to the practices that

underlie it. Now, new research by McKinsey & Company and Proessors Vinod

Singhal and Soumen Ghosh o the College o Management at the Georgia Institute

o Technology, into the supply chain practices o more than 60 companies delivers

that essential insight (see Exhibit 1).

Senior supply chain executives rom participating companies took part in in-

depth structured interviews covering more than 50 aspects o supply chain

management. At the same time, data on their actual supply chain perormance

(service, cost, and inventory) was crunched to distinguish leaders rom laggards.

With a rich database covering both practices and perormance, we were nally

able to analyze the key question: What practices truly drive perormance?

The results o these analyses are compelling. Only six supply chain practices

matter most to company perormance, while two o the usual suspects are not

as consistently valuable as reported. Companies that have built strength in

the practices that matter most are 1.4 times more likely to have strong service

perormance, 1.7 times more likely to have strong D&L (distribution and

logistics) cost perormance, and 2.7 times more likely to have strong inventory

perormance (see Exhibit 2). Strength in these supply chain metrics is key to

driving sales, margin, and return on capital. It also helps sustain competitive

advantage.

The remainder o this article shares our research and experience on what drives

supply chain perormance and where companies might ocus to create advantage

or their organization.

:

15

5

21

Retail

Pharma 15

Packaged

Goods

44

High-Tech

Automotive

Source:McKinsey; Georgia Tech College of Management

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5The RACe OR SuPPly ChAIn AdvAnTAGe: Six PracticES that DrivE PErOrmancE

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Our survey indicates that two o the strategies commonly employed to improve

supply chain perormance IT investment and organizational restructuring (e.g.,

centralizing or decentralizing the supply chain organization) are oten not as

useul as managers expect. In act survey results indicate that companies with

more ormal IT systems and more or less centralized supply chains perorm no

better than others.

Top-perorming companies in our survey were as likely to use a mixture o

ormal and home-grown IT tools like spreadsheets to operate parts o their

supply chains as they were to invest in comprehensively ormal IT solutions. We

ound that many organizations tend to expect IT solutions to drive improvement

without putting the right processes and capabilities in place rst. Systems can

be useul tools, but cannot replace sound decision making. Good companies use

IT to inorm decisions but do not depend on IT to drive those decisions. In act,

companies in our survey that had ewer ormal IT systems perormed slightly

better on average in cost and service than those that had invested in a high

degree o ormal IT systems.

The second area that has received much attention in recent years is the degree o

centralization o the supply chain organization. Many companies have established

centralized supply chain unctions, taking control o the supply chain away rom

individual business units to try to maximize overall eciencies. According to

Companies that excel at the most

important practices . . .

. . . are much more likely to be top service, cost, and inventory

performers creating real advantage over their peers

Top performers create advantage over their peers through greater

timeliness and completeness of delivery to their customers with lowersupply chain operating costs and greater inventory efficiency

:

Improved likelihood of being a top performer vs. bottom

2.7x

1.7x

1.4xService

Inventory

Cost

Average survey score (1-5 scale)

across the most important practices

3.8

2.7

Bottom third Top third

* Absolute difference in distribution and logistics cost as a percent of sales

Source: Team analysis; McKinsey; Georgia Tech College of Management

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our survey results, there seems to be no

advantage to centralizing or decentralizing

supply chain control across business

units. Top-perorming companies were

equally likely to centralize their supply

chain management across business units,

devolve it to individual business units, or

use a mixture o both approaches. Again,

it seems that the underlying processes

and incentives really drive perormance,

coupled with a unctional organizational

model that supports them.

S pes o suess

Some supply chain practices, however, do appear to have a powerul eect on

supply chain perormance. We analyzed the impact o practices on the probability

o a company achieving top service, D&L cost, and inventory perormance to

understand which practices drive perormance and which do not. As a result,

we ound six levers that signicantly improve the likelihood o a company

having a high perorming supply chain (see Exhibit 3). In addition, these results

were conrmed by the collective experience o Georgia Tech and more than

1000 supply chain engagements completed by McKinsey & Company in the last

ve years.

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1

2

3

4

5

6

Spp cai stratgic aigmt

Leading companies align their supply chain strategy with the corporate

strategy, and then drive alignment throughout the supply chain on objectives

and aspirations. In the very best companies, supply chain colleagues rom the

shop foor to the most senior managers clearly understand the supply chain

strategy and aspirations.

Sgmtatio to mbrac t compxit tat mattrs

Leading companies actively manage product and service complexity. They

design multiple supply chains within a network to capitalize on the complexity

that delivers competitive advantage. They take steps ruthlessly to eliminate

complexity where it does not.

A baac a orwar-ookig sig

Leading companies create a top-down and orward-looking vision o their

overall supply network. They ensure that the network balances productivity,

fexibility, and risk to deliver great service without excessive cost or risk.

A a, -to- a cai

Leading companies task their supply chain managers with optimizing end-to-

end value chains, and drive true collaboration across unctions. They typically

deploy a standard toolkit or continuous improvement (e.g., Lean or Six Sigma),which they have made their own.

Wor-cass itgrat paig

Leading companies use disciplined integrated planning processes to ensure the

organization executes in synchronization, without the need or heroes. They

ocus their planning eorts where it matters using sophisticated and robust

techniques where they are valuable and using unaided computer predictions

elsewhere.

T rigt tat, accotab or prormac

Leading companies make supply chain talent development and acquisition an

organizational priority. Supply chain positions orm part o the top management

career track. Once the right people are on board, companies hold talent ully

accountable or their contribution to supply chain perormance.


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te e o supply dge

No one company excelled at all six practices, though 10% did combine them to

create simultaneous service and cost advantage (see Exhibit 3), challenging the

notion that supply chain managers must make tradeos. These supply chains,which spanned all industries surveyed, have created true competitive advantage

or their organization.

The gap between top and bottom perormers is wide and likely to widen as a

new class o super-competitors emerges that is moving on to the next horizon

o practices such as sustainability and ull integration o supply chains across

suppliers and customers. Thus the race or advantage is intensiying. Top

perormers are racing to create even more advantage over their peers while others

are racing to catch up (see Exhibit 4).

:

The race is real for

companies to master

the drivers ofperformance as a basis

for tackling even more

advanced opportunities

Next horizon . . .

Sustainability in supply chain

Speed as a source of competitive advantage

Cross-enterprise supply chain optimization

Flow-through logistics and distribution

RFID-driven supply chain visibility

6 practices thatdrive

performance

EXAMPLES

Source:McKinsey

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10%

Top

performers

Others

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:

Percent of companiesTop third performance

Top performers achieve both cost,

service, and inventory advantage . . .

Top performing companies were found

in every sector studied

Over 85% of these leading companies

also have top-third inventory

performance

. . . challenging the notion of a cost,

service, and inventory trade-off

ALL SECTORS

Source:Team analysis; McKinsey; Georgia Tech College of Management

Betterserviceperformance

Better cost performance

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tkg eully bou wee o ous

As companies race to close the gap between top perormers and others, they need

to think careully about where they invest their energy as individual practices

have dierent benets (see Exhibit 5). For example, companies using strongsegmentation and complexity management practices are 2 times more likely to

be a top service and 2.5 times more likely to be a top inventory perormer, but see

little distribution and logistics cost advantage. In another example, companies

taking an end-to-end approach to their supply chain benets are more likely

to see the benets in distribution and logistics cost, and inventory (1.3 and 2

times more likely respectively to be a top distribution and logistics cost and

inventory perormer). Companies attempting to drive improved perormance

should thereore ocus on the practices that are most likely to improve the type

o perormance that matters most to their business strategy

In addition, organizations should consider their starting capabilities when

prioritizing their improvement eorts. In particular, our survey showed that 2

o the 6 practices that matter require strong perormance on other practices to

achieve best practice (see Exhibit 6). First, companies that successully implement

segmentation and complexity management practices also have strong network

and planning processes. Second, aligning the supply chain strategy with the

corporate strategy and building alignment around that strategy within the supply

chain seems to require strong talent. On the other hand, the survey showed that

or the other 4 practices, companies are capturing the benets without much

need to be strong at any additional levers suggesting a ew natural starting points

or companies early in the supply chain transormation journey.

Improved likelihood of

being a top third performer

vs. bottom third*

:

Benefit of having practices that score in the top third of companies surveyed vs. bottom third*

* Not additive


In addition, our

research strongly

indicates that

companies with

strong network and

end to end practices

are much more likely

to have lower COGS

Key practices driving performance CostService Inventory

Explicitly link the supply chain strategy to the corporate

strategy and set clear, well understood aspirations1 1.3X1.9X 1.4X

Use segmentation to embrace the complexity that matters2 2.0X 2.5X

Design and build forward looking networks that meet

service, cost and risk aspirations3 1.8X 2.3X

Create a lean, end-to-end value chains by optimizing

across functions4 1.3X 2.0X

Execute world-class integrated demand and production

planning processes with discipline5 2.6X1.3X 4.0X

Get the right talent on board and hold them accountable6 1.7X 1.6X

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Regardless o the current perormance o an organizations supply chain,

however, these six practices and the nature o their impact show managers where

they should be ocusing their supply chain improvement eort or the biggest

impact, and where it is likely to be wasted. The rest o this article looks at each

practice in turn, in more detail.

:

Practice

Prerequisites to achieve best practice

(dependencies)*

Explicitly link the supply chain strategy

to the corporate strategy and set clear,

well understood aspirations

1

Use segmentation to embrace the

complexity that matters2

Design and build forward looking

networks that meet service, cost and

risk aspirations

3

Create a lean, end-to-end value chains

by optimizing across functions4

Execute world-class integrated demand

and production planning processes with

discipline

5

Get the right talent on board and hold

them accountable6

Get the right talent on board and hold them

accountable6

Design and build forward looking networks

that meet service, cost and risk aspirations3

Strictly adhere to world class demand and

production planning processes5

Practices that require

strength in other

practices

Practices with little

dependency

* Based on conditional probability analysis


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I or sr, spp cais aig a itimat

ik to tir compa stratgis otprorm

tos tat ack tis ik. Similar to Jones Soda

and Cisco, these companies explicitly consider

both cost and revenue opportunities rom theirsupply chain in their strategic planning sessions.

In over 70 percent o companies, the supply chain

manager is a ull-time member o the corporate

strategy development team and is responsible

or creating the link between strategy and

operations.

These high-level strategic links work in both directions. They help supply chain

managers align their eorts with the strategic goals o the business units they

serve and help business unit managers understand the opportunities available to

them through clever use o their supply chain capabilities.

Alignment in theory must also be translated into alignment in practice. Fity-

one percent o companies in our survey excel at turning strategies into tactical

change plans that drive results. They do so by rst setting and communicating

clear aspirations and ensuring all colleagues rom the shop foor to the most

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senior managers clearly understand

the strategies. They then translate the

aspirations into strategic initiatives and

ultimately deploy and monitor tactical

change plans.

Companies in our survey that achieved

best practice in strategic alignment are

much more likely to achieve top service,

cost, and inventory perormance. In

particular, top practitioners are 1.9 times

as likely to be a top service perormer.

Two o the worlds largest retail operations illustrate how dierent strategic

objectives translate into radically dierent supply chain approaches. Wal-Mart,

with its relentless ocus on cost reduction, has made extensive eorts to reducelabor in its distribution centers. It uses its size and scale to orce suppliers to

adopt standardized case and unit packaging to streamline its processes as much

as possible. Amazon, on the other hand, has prioritized ensuring its warehouses

have the fexibility to handle products o all shapes and sizes over a strategy that

minimizes cost alone.

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Icrasig proct a cstomr compxit

as b o o t most sigifcat cags

or many organizations in recent years.

Globalization produces geographically diverse

customer groups, while within the same markets

the growth o small, more demanding consumer

niches call or dierent products, dierent levels

o service, and dierent routes to market. Some

companies have chosen to tackle this challenge

by ignoring it, despite the complaints o those in

the supply chain. They struggle to nd an acceptable compromise to meet these

diverse requests, using a single set o supply chain processes, oten leading to

higher cost.

The best companies in our survey by contrast, have grasped the complexity

challenge. Sixty-seven percent o these best companies, as opposed to 35 percent

o all companies surveyed, use eective segmentation techniques to identiy the

specic product and service demands o dierent customer groups. They then

build their production and distribution networks specically to meet these

demands, ultimately enabling complexity at a lower cost than a one-size-ts-all

approach.

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The key to these companies success, however, is their ability to meet the demands

o their dierent customer segments without excessively increasing supply chain

costs. They use a variety o methods to achieve this, starting by considering

supply chain design concurrently with product and portolio development

processes. They are able to infuence others to use common platorms to ensure

that dierent products can share as much content as possible at minimum overall

supply chain cost. They also take regular steps to rationalize their product

portolio to eliminate low value-added complexity wherever possible.

Companies that have mastered segmentation

still make use o standardized supply chain

processes wherever possible. They do this by

dening standard processes or each supply

chain segment based on the unique product

or customer needs. By doing so, they avoid

the costs o a one-size-ts-all approach,

while still using processes that are well

understood across the organization.

Based on our research, the case or best practice is compelling. Companies

that achieve best practice in segmentation and complexity management are 2

times as likely to be a top service perormer and 2.5 times as likely to be a

top inventory perormer. The best companies manage to keep the cost o this

additional fexibility under control, however. Overall distribution and logistics

cost levels or best practice companies were just as likely to be a top D&L cost

perormer as a bottom.

For example, a consumer goods company with high and increasing supply chain

complexity used supply chain segmentation and portolio management tools to

improve ROIC, service, inventory, and protability. Initially, the company had

a one-size-ts-all supply chain to handle the varying needs and demand patterns

o its products. In addition, the organization continued to add SKUs to their

portolio, while very rarely eliminating unprotable SKUs or SKUs that had a

high degree o overlap in the product portolio.

To remedy the situation, the company began by dening dierent material

and inormation fows based on the unique demand patterns o its SKUs. For

example, its higher volume, more stable products were produced in a rhythmicashion and the planning team rarely modied the computer generated orecasts.

On the other hand, the higher volatility products were given more fexibility

in the plants and a signicant portion o the planning departments time was

ocused on better predicting the demand fuctuations.

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At the same time, the organization implemented a series o cross-unctional

monthly review meetings to cross-unctionally manage the portolio o SKUs in

each category. Leads rom unctions such as manuacturing, engineering, sales,

and marketing reviewed the category perormance to identiy opportunities to

improve the positioning or contribution o problem SKUs. Ultimately, i the

issues could not be resolved, the SKU was eliminated.

The results o their eort are compelling. The organizations service levels

increased by 1 percent point while inventories decreased by over 35 percent.

In addition, the organization improved the protability o its target SKUs by

1020 percent.


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o wr to pac w assts, the very best

organizations make their decisions using a

comprehensive and orward looking network

strategy. They rst design an overall supply

chain strategy to deliver the right service levelsto their dierent customer segments at the right

cost and at the appropriate levels o risk, and then

optimize their network structure, transport links

and inventory levels to match.

Keeping cost, customer service, and risk in mind during every stage o the supply

chain design allows these companies to make the best tradeos or overall

supply chain perormance. They control costs by keeping asset utilization

high, or example, but not so high that they lose the fexibility needed to serve

unpredictable customers.

The companies that achieve best practice in supply chain design are much more

likely to have better service and lower inventory, without incurring additional

cost. Top perormers were 1.8 times more likely to have top service levels and

2.3 times more likely to have to inventory levels without any apparent impact

on D&L cost.

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A global chemical company used eective network optimization to improve

its service to two very dierent customer groups. Initially the company had a

single supply chain design or all its markets, keeping inventories low by pushing

product steadily into the market. This approach

worked well or its North American customers,

who mostly bought predictable quantities on a

contract basis; but it was ailing in Asia where a

spot market operated. The push system could not

respond quickly enough to meet demand peaks

in the Asian market and it oten ound itsel

having to sell at a discount to keep rom building

excessive inventories when demand slowed.

To x the problem, the company segmented its network. They kept the low-cost,

low-inventory push system in place or North America, but reorganized supply

to Asia on a pull basis and replenished larger local inventories on demand.

The cost o the additional stock was considerable, but using the new system

meant the company could respond to demand peaks, eliminating the need or

discounting and greatly improving customer satisaction. Keeping local stocks

also allowed better control o transport. Finally, by utilizing capacity on vessels

traveling to Asia more eectively, the company cut its transportation costs by

10 percent.

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T gograpica a ctioa irs

atr o t spp cai ctio can lead

companies to optimize locally at the cost o

overall eciency. Concentrating on solely on

improving the perormance o the planning

unction or manuacturing, or example, risks

introducing additional costs or poorer service

elsewhere in the chain.

The best companies in our survey take extensive

steps to avoid this problem. By giving supply chain managers control and ownership

o end-to-end supply chain costs, the best companies ensure that management

decisions improve the total business, not just unctional perormance. They even

extend this end-to-end perspective beyond the boundaries o the organization, by

involving suppliers in supply chain decision-making processes and systematically

aligning supplier incentives with supply chain objectives.

Such a broad, cross-unctional approach inevitably involves complex tradeos

and the need or problem solving. Using standard lean and other continuous

improvement problem-solving tools, these companies ensure that all unctions

have a common approach or resolving such issues and driving end-to-end

improvement. In addition, they align metrics across the organization to drive true

collaboration.

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End-to-end thinking has a powerul eect

on supply chain cost. Companies that use

this approach can capture savings that are

simply not accessible to those that only

optimize within unctional or regional

silos. In our research, companies that use

best practice end-to-end approaches are

1.3 times more likely to have better D&L

cost, and 2 times more likely to have better

inventory perormance than those that do

not. Even more encouraging, our data strongly indicates that best practice end-

to-end perormance leads to lower COGS.

A large CPG in Europe and North America took a lean, end-to-end approach

to improving its business. The CPG previously had success building a strong

continuous improvement program in manuacturing, and desired improvements

in margin, service, and inventory. The company drove improvement through

a combination o improved cross-unctional processes such as innovation, and

applying lean techniques with a perspective across unctions such as transportation

and planning. Interestingly, they ound that capturing the economic value in one

unction oten required the cooperation o other unctions that did not directly own

the cost. For example, approximately 50 percent o the transportation opportunity

they identied required changes outside o the direct control o the transportation

team (e.g., warehouses needed to load trucks dierently, engineering needed to

redesign pallet heights to better utilize trucks). As a result o these changes, the

company saved hundreds o millions in cost, improved service levels to industry

best practice rates, and reduced targeted inventory by 30 percent.

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e t most agi spp cais mst xct

agaist a pa. The quality o the integrated

planning processes used by the companies in our

survey played a key role in determining the overall

eectiveness o their supply chains at meeting

customer needs without excessive inventories or

D&L costs such as expedited reight.

The best companies in our survey execute strong

cross-unctional planning processes that integrate

actions across unctions in the business. They execute the S&OP process in

regular meetings with active participation rom senior leaders across the business

including sales and nance. During these orward looking meetings, the senior

leaders agree on one uture view o demand or the business, and may need to

allocate product to certain customers to develop a easible capacity constrained

production plan. Capacity planners use real-time visibility o inventories and

production lead times across the supply chain to inorm these decisions. In

addition, the senior leaders use the meeting to agree on a long term demand planthat eeds the network and capacity planning processes.

O course, strong demand plans are required to have an eective S&OP meeting.

To do eective demand planning, companies start by understanding the unique

demand patterns o their products and customers. These demand patterns orm

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the basis o the overall supply chain segmentation strategy reerred to in practice

six. Then, the organization denes dierent planning processes or each o the

segments. For example, a company might use unaided statistical orecasting or

products with long liecycles and stable demand it is typically very hard to

improve on the unaided output. For a dierent segment that is highly promoted,

the same company might invest to build very collaborative demand planning

processes with its customers. They then use these demand plans as inputs or

robust and cross-unctional sales and operations planning processes that ensure

alignment between current purchasing, production and distribution activities and

the latest orecasts.

Strong processes are only good i they are consistently executed. Top companies

in our survey described exceptional discipline in execution while many others

described heroic eorts that work around the system to deliver to a particular

customer. Unortunately, heroic eorts oten cause problems elsewhere in the

system, which can leave an organization in a constant state o re-ghting.

Companies in our survey that built world-class integrated planning systems were

much more likely to be a top supply chain perormer. In act, they were 4 times

more likely to achieve top third inventory perormance, 2.6 times more likely to

achieve top distribution and logistics cost perormance, and 1.3 times more likely

to achieve top service perormance. Building a world-class integrated planning

system is clearly critical to drive strong supply chain perormance.

IT storage maker SanDisk took a series o steps to world-class integrated planning

skills.1 The company built ormal cross-unctional demand management processes

and established a new demand-management unction with its own leadership tocoordinate the process. It then changed responsibilities and incentives to ensure

that every unction was motivated to improve overall demand-management.

Finally, it augmented its existing statistical orecasting techniques with input rom

customers. As a result o the changes, the company reduced excess retail inventory

by 40 percent and channel inventory by 20 percent. Customers beneted too.

On-time delivery perormance improved by 30 percent and product in stock rose

by 40 percent.

1 McKinseys Supply Chain Management Practice; Oliver Wight, 2006; Aberdeen, 2005; literaturesearches


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T bst compais i or sr tak a

stratgic approac to acqirig a opig

tat in the supply chain unction. They also

place great emphasis on making the best use o

their talented people by holding them accountable

or perormance improvement.

The best companies also work hard to tie talentdevelopment in the supply chain unction with

that o the wider organization. Supply chain roles

become part o the career path or general managers and sta regularly moves

between supply chain roles and other unctions.

While it is common or supply chain unctions to recruit new talent only when

positions become vacant, the best companies use talent gap analyses to identiy

uture capability needs. They then take steps to ulll those needs, developing

training and mentoring programs to build internal capabilities and recruiting

people with a broad range o backgrounds and experience.

In the best companies, each and every member o the organization is responsible

and accountable or the supply chains contribution to business success. Companies

achieve this by building a comprehensive series o aspirations that cascade as

metrics rom strategic requirements or overall supply chain perormance to

every part o the organization. Critically, these metrics express perormance

requirements in terms that are directly relevant to each unction.

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By building alignment with the business

strategy, these metrics help every unction

understand their own direct impact on

supply chain perormance. Metrics drive

appropriate tradeos between cost,

service and inventory levels, or example

and to ensure that unctions work together

to deliver the best result or the business

as a whole.

Metrics must be used to be eective, o course, and best-in-class companies ensure

that all managers are held accountable or the perormance o their unction

against supply chain metrics. Metrics are also reviewed constantly to keep them

aligned with business needs.

Companies in our survey that achieved best practice in talent and perormancewhere 1.7 times as likely as poor practitioners to be a top service perormer. They

delivered this perormance with better inventory levels at the same time (they were

1.6 times as likely to be a top inventory perormer). Just as important, strong

talent management is important to the overall ability o the organization to create

and sustain advantage, and to race or the next horizon o opportunities.

In 2003, IBM2 achieved a best-in-class perormance management system by

creating the Integrated Supply Chain (ISC) group. The ISC contained 19,000

employees in 56 countries and was responsible or over $45 billion in annual

spend. The organization was charged with optimizing end-to-end supply chain

perormance. Its impact was sizable customer satisaction increased 1 percent,cycle time dropped 6 percent and IBM achieved its lowest inventory levels in 30

years. A key part o the success o this process was the companys development

o a comprehensive set o KPIs, covering both the internal perormance o the

supply chain group and its interactions with other unctions. Critically, these

metrics were then used to manage perormance. The objective, said the leader

o the group, was to produce a situation where individual unctions were not

mesmerized by their own internal metrics.

2 Global Logistics and Supply Chain Strategies, World Trade Magazine, Venture Outsource.Com

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* * *

Excellence in supply chain management has become a critical dierentiator

or many companies today. As some leading organizations have built world-

beating businesses on ast, cost-eective and fexible supply chains, others havebeen brought to their knees by an inability to supply increasingly complex and

dispersed markets. The companies in our survey with high-perorming supply

chains all used a combination o the practices described in this article to achieve

that perormance.

For companies whose supply chains do not currently meet best practice standards,

these ndings are cause or signicant optimism. Selective ocus on a ew key

levers and avoiding expending undue energy on others can make a big

dierence in perormance. Indeed some o the best companies in our survey seem

to have increased their supply chain perormance dramatically by ocusing on

a ew practices that mattered most. However, the gap between top and bottomperormers is only likely to widen as top perorming organizations leverage their

capabilities to race or even more competitive advantage.

For those that are doing well, however, there is no opportunity or complacency;

competitors are racing to catch up and a new horizon o opportunities exists

to drive even more advantage potentially creating the next generation o super-

competitors.


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Abot t Rsarc

The Supply Chain Best Practice research project, designed in conjunction with

Proessors Vinod Singhal and Soumen Ghosh o the College o Management at

Georgia Institute o Technology, measures the link between supply chain practices

and perormance across a broad range o industries. To test this hypothesis,

companies shared quantitative perormance data and participated in one or

more 2-hour structured interviews, during which over 50 supply chain practices

were assessed.

While many indicators can measure supply chain perormance, we decided to

ocus on three dimensions: cost, service, and inventory. Cost used distribution

and logistics (D&L) cost in percent o sales and inventory as percent o cost

o goods sold. Service examined delivery perormance using the on-time-in-ull

(OTIF) level or its closest available KPI. Inventory perormance was measured in

terms o days on hand (DOH).

To ensure that dierences in levels o supply chain perormance between industries

did not disguise the superior perormance o some companies, we scored individual

companies against the appropriate industry average or cost and inventory, andaccepted industry standard or service. These indices also allowed us to better

estimate the best practice advantage across sectors with smaller sample sizes.

To date, over 60 large multinational companies or large business units

have participated in the survey. They came rom our dierent industries:

consumer goods and retail, automotive and assembly, pharmaceuticals, and the

process industry. Participants had yearly revenues up to $66 billion with up to

300,000 employees.


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McKis Cotacts:

Brian Ruwadi, Principal, Cleveland

[email protected]

Joshua Wine, Associate Principal. Tel Aviv

[email protected]

Bruce Constantine, Engagement Manager, [email protected]

Martin Lsch, Principal, Stuttgart

[email protected]

Alex Niemeyer, Principal, Miami

[email protected]


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Opeos Pe

copyg 2008 mKsey & copy

The Race for Supply Chain Advantage

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