WINTER 2010 V O L . 5 1 N O. 2 Steven A. Melnyk, Edward W. Davis, Robert E. Spekman and Joseph Sandor Outcome-Driven Supply Chains REPRINT NUMBER 51221 S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S Companies such as Wal-Mart Stores Inc. have developed a demand-driven supply chain, but every industry is different. The key is to arrive at outcomes that differentiate a supply chain from its competitors a blend that customers find attractive and for which they are willing to pay. Outcome-Driven Supply Chains THE LEADING QUESTION The supply chains of tomorrow must deliver varying degrees of six outcomes the traditional cost-related benefit plus responsiveness, security, sustainability, resilience and innovation depending on key customers' needs. BY STEVEN A. MELNYK, EDWARD W. DAVIS, ROBERT E. SPEKMAN AND JOSEPH SANDOR How can supply chains be designed and managed not only for reduced cost but also for multiple outcomes? FINDINGS XThere are six basic WHEN PROPERLY DESIGNED and operated, the traditional supply chain has offered customers three primary benefits reduced cost, faster delivery and improved quality. But managers are increasingly recognizing that these advantages, while necessary, are not always sufficient in the modern business world. A new paradigm is emerging of a more sophisticated supply chain one that also serves as a vehicle for developing and sustaining competitive advantage under a variety of performance objectives. In academic terms, we could say that while the old supply chain was strategically decoupled and price driven, the new supply chain is strategically coupled and value driven. More simply put, the supply chain should be designed and managed to deliver specific outcomes. So concluded participants in COURTESY OF WAL-MART outcomes, each with a corresponding set of specific design traits. XOutcomes should be blended, where feasible, without overfocusing on any single one. XSupply chains' design and management should be tailored to particular operating conditions. WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 33 S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S the Supply Chain Management 2010 and Beyond research initiative, a four-year set of surveys and workshops on which this article is based. (See \"About the Research.\") We believe that supply chains should provide one or more of six basic outcomes: \"cost,\" responsiveness, security, sustainability, resilience and innovation. Cost. Reducing price (initially) and cost (ultimately) are the key objectives. This \"cost\" outcome is a combination of monetary cost (the primary performance criterion) and delivery and quality ABOUT THE RESEARCH This article is based in large part on the findings of the Supply Chain Management 2010 and Beyond research initiative, which since its inception in 2005 has carried out a largescale review of the supply chain management literature, developed a survey instrument (questionnaire) for identifying major issues associated with the supply chains of today and tomorrow, and completed four research workshops. The questionnaire was originally constructed from the findings of the literature review, but it was also seen as a living document in that it subsequently was modified as necessary to reflect insights gained from each workshop. The selection of the survey participants was considered of primary importance to the success of the study. Thus the research team selected recognized academic supply chain researchers and knowledgeable representatives from companies generally regarded as leaders in the practice of supply chain management. The workshops were designed to bring together all participants in a survey group to review the survey findings, identify the current and future states of supply chain management, and help uncover major gaps affecting the progress of supply chains from current to future states. Because supply chain management is so strongly influenced by practice and because it is an emerging field, the workshops provided a valuable opportunity for participants to share their experiences in a structured environment. (The number of academic researchers was limited to a maximum of one for every two practitioners; and to ensure active discussion between participants, each workshop was limited to a maximum of 40 people.) Each workshop had a central organizing characteristic, which allowed the researchers to focus on specific issues of importance to the project as well as to tailor some of the content to the needs and interests of local hosts. (Workshops were held in Michigan, Switzerland, Virginia and Alberta.) Generally, the workshops reviewed the responses to the survey requests, identified the present and future states of supply chain management, and explored how to reduce the obstacles to, and enhance the facilitators of, the supply chain of the future. After each workshop ended, the research team reconvened in order to glean insights about what was learned and to identify any unexpected results. (secondary criteria). Using the terminology of Terry Hill,1 cost is the \"order winner,\" while delivery and quality are \"qualifiers.\" Responsiveness is the ability to change quickly in terms of volume, mix or location as a function of changing conditions. Typically, responsiveness warrants a higher price. Security is an outcome that has recently garnered 34 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 a great deal of attention, with instances of tainted food products from China and tainted generic drugs from India. It implies that the supply chain's products will not be contaminated or otherwise unsafe. Sustainability differs from security, as it involves \"green\" environmentally responsible supply chains that eliminate waste, reduce pollution and contribute in a positive manner to improving the quality of the environment through eco-friendly processes, subassemblies and finished goods. Carbon footprint reduction along the supply chain is one example. Resilience ensures that the supply chain can recover quickly and cost-effectively from disruptions caused by natural disasters (such as earthquakes), social factors (employee strikes), medical emergencies (epidemics such as H1N1 flu), economic setbacks (the bankruptcy of a critical link in the chain) or technological failures (a software crisis). Innovation. In recent years, many companies have increasingly relied on their supply chains as a source of new products and processes or improvements in existing ones. Organizations' key innovation tasks have been performed not only internally but also in collaboration with supply chain partners.2 For example, Lafley and Charan3 relate how Procter & Gamble Co. obtained new antiwrinkle technology from a small French cosmetics company, which led to P&G's highly successful Olay Regenerist line of skin creams. Once the desired outcome is selected, it influences critical supply chain characteristics and practices; some of these design traits are summarized in the table \"Supply Chain Outcomes and Key Design Traits\" (p. 37). But it is important to recognize that while the traits must be present somewhere in the supply chain, they need not manifest themselves in each and every link. Actually creating and harnessing these traits in the right places, however, is a major management undertaking, especially when the supply chain is comprised of more than one company. For many managers new to supply chain management, this challenge is made more daunting by the lack of useful frameworks and guidelines, which are necessary if managers are to answer questions such as: How do you design a supply chain for a specific desired outcome? When can outcomes be blended, and under what conditions should they not be? SLOANREVIEW.MIT.EDU How do you turn your supply chain into a competitive weapon? We address these questions here. Blending Supply Chain Outcomes Some researchers and managers might be tempted to regard the six basic supply chain outcomes as mutually exclusive. But in practice, effective supply chains are often hybrids reflecting various combinations of the six. Hau L. Lee4 in fact concluded from his extensive study that supply chains focusing on only one of the six outcomes were fatally flawed, as they could not develop and maintain a sustainable advantage over the competition. In particular, Lee found that supply chains offering low cost alone were unable to respond sufficiently to unexpected changes in demand and supply. Similarly, the SCM 2010 and Beyond workshops indicated that such \"overfocused\" supply chains often cannot meet the requirements of the newly emerging business environment. In the figure \"Blending Supply Chain Outcomes to Achieve Competitive Advantage,\" for example, it appears that Company D is overfocused on cost. It will likely outperform any competitor as long as the customer demands the lowest price above all else. However, the other three companies are more adaptable and agile, as they offer a blend of outcomes. The goal is to arrive at a blend that differentiates a supply chain from its competitors a blend that key customers find attractive and for which they are willing to pay. Consider the following propositions about blending outcomes, supported by the current results of the SCM 2010 and Beyond project: Blending outcomes means making trade-offs. When the supply chain manifests numerous outcomes, it is unlikely to outperform, on any single outcome, another supply chain that is more heavily focused on it. That is the price paid for having a supply chain that is adaptable, and it helps the company differentiate itself in the marketplace. On the other hand, a greater mix may position a supply chain for faster adaptation when market conditions change. When blending outcomes, it is important for at least one of them to stand out. It might be tempting to try to build a supply chain that does a SLOANREVIEW.MIT.EDU BLENDING SUPPLY CHAIN OUTCOMES TO ACHIEVE COMPETITIVE ADVANTAGE While Company D appears to offer low-cost products or services to the exclusion of all other outcomes, it lacks the versatility of Companies A, B and C to respond to changing conditions. Fraction of each outcome in company's overall blend Innovation \"Cost\" 1.0 0.8 0.6 0.4 0.2 0 Sustainability Resilience Company A Company B Company C Company D Security Responsiveness \"decent\" job on every outcome but fails to excel on any one of them. The problem with this approach is that the company may suffer from the curse of mediocrity, possibly rendering it a weak competitor. Blending outcomes places greater emphasis on the alignment of incentives within the supply chain. The flexibility gained by blending allows greater responsiveness to the needs of critical customers, potentially resulting in a more competitive supply chain. But the incentives needed to ensure the appropriate actions and performance can vary substantially for different outcomes. Incentives for cost reduction, for example, may conflict with those for responsiveness and resilience.5 Blending outcomes complicates the performance measurement process. Dealing with only one outcome makes it easier to design a simple and mutually consistent set of metrics. When blending several outcomes, however, the measurement of performance becomes by necessity more complex reductions in performance along one dimension might be necessary, for example, to allow performance improvements in other dimensions. It is also important to choose performance measures with care. If the goal is, say, to develop a supply chain WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 35 S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S that delivers responsiveness and sustainability, a focus on measuring and rewarding cost might create confusion and frustration. Under certain conditions, blending outcomes allows for the leveraging of practices and resources. Some combinations of outcomes are complementary, as the practices and resources required to support a particular outcome may also serve other desired outcomes. For example, a cost-focused supply chain, with its emphasis on waste reduction and control, can more readily be transformed into a sustainable supply chain because many of the underlying tools and processes are the same. Similarly, the sharing of practices and resources is also possible when blending responsiveness and resilience. Responsiveness often demands buffers with respect to capacity, lead time and inventory, which also help increase resilience to supply chain disruptions. The same or similar outcomes may be achieved by following different paths. Given the diverse ways in which different companies might achieve outcome negatively affect the ability of the supply chain to attain the other outcome. Cost-oriented supply chains regard slack as a form of waste something that must be eliminated or reduced. But innovation demands slack for success. Because failure is likely to occur during the innovation process, slack provides safety in the form of resources to complete the task without jeopardizing other aspects of the business. Cost-driven supply chains also typically demand standardization of processes. In such systems, the mantra is often \"Without standardization, there is no opportunity for improvement.\" Yet for innovation truly to be successful, a diversity of processes and approaches is often needed. Adaptability: Key to Success By beginning with the outcomes and designing the supply chain to deliver them, the goal is not simply to align incentives or metrics. Rather, it is also to align the capabilities of the supply chain with the members' shared vision for competitive success based on a profound understanding of key customers. Full realization of this goal depends on a variety of factors, including the following: Some researchers and managers might be tempted to regard the six basic supply chain outcomes as mutually exclusive. But in practice, supply chains are often hybrids reflecting various combinations of the six. their supply chain objectives, there is no one monolithic approach to a set of supply chain outcomes. For instance, if one company wants to skim the price-insensitive segments of the market to recoup its cost of innovation, and another company favors a penetration strategy to gain large market share at a lower margin, the outcomes could be much the same. The differing approaches may be inevitable, even desirable, as each company should address its unique customer base in an optimal manner. But while some outcomes can be blended effectively, other outcomes probably never should be. A primary example involves innovation and cost (especially if the latter outcome is pursued through the use of lean systems and other inventory-reducing practices). Here the procedures for attaining one 36 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 Critical supply chain drivers. Companies such as Wal-Mart, Toyota and Dell have developed supply chains that are demand driven. But supply chains can also be supply driven, as when dealing in oil, gas, electricity and other products that cannot be stored for long periods of time. Supply chains can also be technology driven. What works well in one industry or context might not work in another. Locations where the supply chain is deployed. Most of the academic work done in supply chain management has been limited to developed economies. Yet as companies focus more on low-costcountry sourcing and other strategies that depend on emerging economies, many of the traditional assumptions regarding factors such as transportation, infrastructure, work force and security must be revisited. Countries' cultural differences. Business terms and practices that work well or are clearly underSLOANREVIEW.MIT.EDU SUPPLY CHAIN OUTCOMES AND KEY DESIGN TRAITS Certain characteristics and practices are essential to addressing a set of objectives that in turn may ultimately lead to achievement of a particular outcome. OUTCOME OBJECTIVE KEY DESIGN TRAITS Cost Reduce product costs, ensure timely and reliable delivery and maintain quality. Responsiveness Respond to changes in demand (volume, mix, location) quickly and at reasonable cost. Security Ensure that supplies coming through the supply chain are protected from disruption because of external threats. Protect product integrity and consistency. Sustainability Provide products through a supply chain that ensures controlled and minimal resource impact, both today and in the future. Ultimately implement and maintain a \"cradle to cradle\" perspective.i Resilience Develop a system that can identify, monitor and reduce supply chain risks and disruptions, as well as react quickly and cost-effectively. Offer the critical customer \"peace of mind.\" Innovation Provide critical customers with a stream of products and services that not only are new but also address needs that competitors have neglected or not served well. Provide new ways of producing, delivering or distributing products.ii SLOANREVIEW.MIT.EDU Reduced use of slack in its three forms inventory, lead time and capacity. Standardization of products and processes where possible. Emphasis on reducing waste and variance across the supply chain. Modular supply chain design, involving close interaction and integration with immediate customers and first-tier suppliers (other suppliers are expected to manage their own suppliers). Close information linkages with critical customers and suppliers to monitor demand, facilitate/improve forecasting and monitor state of supply. Excess capacity redundancy in the supply chain (especially on the upstream side). Supply planning to include not only production capacity but also logistics capacity. Prequalified suppliers. Emphasis on small-lot production. Extensive supplier development and supplier assessment systems. Information systems to coordinate production/information flows. Emphasis on visibility and transparency, provided through integrated information systems (or, in extreme cases, vertical integration) throughout the supply chain. Redundancy of resources in case of a problem with a supplier. Limited number of partners (fewer opportunities/entry points for a possible threat). Mapping of the supply chain to identify possible weak points. Comprehensive and integrated supply chain planning and management. Emphasis on control through certification, extensive auditing or other means. Visibility/transparency throughout the supply chain to ensure that all members are aware of threats or opportunities. Greater emphasis on the Three Ps (product design, process, packaging). Integrated supply chain planning and management, in recognition that design must begin with resource extraction and end with product disposal/renewal. Use of broader performance measurement systems and measures (total cost of ownership, triple bottom line). Extensive supplier prequalification and assessment to ensure that the \"right\" suppliers are selected and that they understand what is required. Extensive use of audits and certification standards throughout the supply chain (ISO 14001). Introduction of systems for product takeback (reverse logistics) and marketing waste. Emphasis on visibility and transparency, provided through integrated information systems (or, in extreme cases, vertical integration) throughout the supply chain. Acceptance of the need for excess resources (inventory, capacity, lead times). Mapping of the supply chain to identify possible weak points. Integrated supply chain planning and management. A focus on possible threats not only to suppliers but also to logistics linkages. Presence of precertified/prequalified suppliers. Extensive use of contingency planning (\"What if?\" analysis). Development and protection of intellectual property, due to cooperation with key suppliers. Deliberate presence of excess resources. Viewing suppliers as sources of \"near innovations\" developed to solve problems in other markets but that have to be refined before they can be used to address current customer needs. Close integration, especially with critical customers and suppliers, so as to innovate jointly. Encouragement of a wide range of different perspectives and solutions. Avoidance, during early stages of product development, of specific performance metrics so as not to stifle innovation. Offering a wide range of supply chain structures ranging from purely modular to purely integrated, depending on the type of innovation being pursued. WINTER 2010 MIT SLOAN MANAGEMENT REVIEW 37 S U P P L Y C H A I N : M A N A G I N G F O R M U LT I P L E O U T C O M E S stood in, say, North America can become sources of confusion or be totally misunderstood when applied in another setting. This point was driven home during the second 2010 and Beyond workshop, held in Lausanne, Switzerland, in June 2007. During the participant discussions the facilitators, who were from the United States, stressed the importance of collaboration. This term was bothersome Our goal here has been to demonstrate that one size does not fit all and that future supply chains must first and foremost be tailored to the end-user. In today's world, it is typical that low cost can readily be replicated and thus is unlikely to lead to competitive advantage over the long term. Supply chain managers will succeed only if they understand the needs of key customers and strive to maintain alignment between the supply chain's design and its customers' changing needs and desires. To paraphrase Charles Darwin, it is not the strongest that survives, it is the most adaptable to change. Supply chain managers will succeed only if they understand the needs of key customers and strive to maintain alignment between the supply chain's design and its customers' changing needs and desires. to some of the European participants, however, who equated it, as a result of their history, with slavishly serving a hostile invader. Even when working with the British participants, the enduring truth of George Bernard Shaw's classic observation that the United States and England are two countries \"separated by a common language\" became apparent. Corporate cultures. A critical issue largely unad- dressed in studies of supply chain management is that of corporate culture or, as one participant put it, \"what people do when the boss is not around.\" This issue helps shape how employees react in different situations and how they deal with changes. It influences what supply chain members see, with whom they interact and how they go about their daily routines. Such behaviors reflect companies' core values, which need to be aligned if the supply chain is to succeed. Stage of product life. The demands placed on the supply chain, as well as the kinds of product attributes viewed as acceptable by the customer, change as the product moves through various stages of evolution. For example, the outcomes of responsiveness, innovation and security may be critical during the introduction and early growth stages, but less so as the product matures and concerns for cost and resilience become dominant. We would expect supply chain design and capability to adapt to these changing factors. 38 MIT SLOAN MANAGEMENT REVIEW WINTER 2010 Steven A. Melnyk is a professor of operations in the Department of Marketing and Supply Chain Management at Michigan State University's Eli Broad School of Management; Edward W. Davis is Oliver Wight Professor of Business Administration and Robert E. Spekman is Tayloe Murphy Professor of Business Administration at the University of Virginia's Darden School of Business; and Joseph Sandor is Hoagland-Metzler Endowed Professor of Practice in Supply Management at Michigan State University's Eli Broad School of Management. Comment on this article or contact the authors at smrfeedback@mit.edu. REFERENCES 1. T. Hill, \"Manufacturing Strategy: Text and Cases,\" 3rd ed. (McGraw Hill Higher Education, 2000). 2. D. Tapscott and A. Williams, \"Wikinomics: How Mass Collaboration Changes Everything\" (New York: Penguin Group USA, 2008). 3. A.G. Lafley and R. Charan, \"The Game-Changer: How You Can Drive Revenue and Profit Growth With Innovation\" (New York: Crown Business Publishing, 2008). 4. H.L. Lee, \"The Triple-A Supply Chain,\" Harvard Business Review 82, no. 10 (October 2004): 102-111. 5. V.E. Narayanan and A. Raman, \"Aligning Incentives in Supply Chains,\" Harvard Business Review 82, no. 11 (November 2004): 94-102. i. W. McDonough and M. Braungart, \"Cradle to Cradle: Remaking the Way We Make Things\" (New York: North Point Press, 2002). ii. C. Markides, \"Strategic Innovation,\" Sloan Management Review 38, no. 3 (spring 1997): 8-23; and C. Markides, \"Strategic Innovation in Established Companies,\" Sloan Management Review 39, no. 3 (spring 1998): 31-42. Reprint 51221. 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To request permission, use our Web site (www.pubservice.com/msstore), call or e-mail: Toll-free: 800-876-5764 (US and Canada) International: 818-487-2064 Fax: 818-487-4550 E-mail: MITSMR@pubservice.com Posting of full-text SMR articles on publicly accessible Internet sites is prohibited. To obtain permission to post articles on secure and/or password-protected intranet sites, e-mail your request to MITSMR@pubservice.com Customer Service MIT Sloan Management Review PO Box 15955 North Hollywood, CA 91615 I provided two articles and assigned these as reading in preparation for this essay. The articles are \"The Race For Supply Chain Advantage: Six Practices that Drive Supply Chain Performance \Missy Cline BBA 405 QUESTIONS: 1) Based on your reading of the assigned articles relating to attributes of the most successful supply chains, prepare a critique of Mr. Smith's statement and the LB business and supply chain strategy. A critique means you must present your evaluation of his comments and if you view them as supportive of the key concepts of these articles or not. Explain the reasons for the position of your critique. It appears that LB employs an SCM process dominated by practices number one, six and possibly number four, but that is not really identified in his email. It is more of a presumption based on the dynamic he refers to. LB is built and designed for speed and as a result helps to minimize costs and also drives the product to market. Because of this, LB has aligned their corporate strategy with their SCM, which relates to practice number one (Supply chain strategic alignment). The other part of the process relates to their Corporate Responsibilities and Ethics and their need to employ the right people to ensure they are managing their employees correctly as it is a global operation and that refers to practice number six (The right talent, accountable for performance). LB sources the goods in four main countries: The United States, China, India, and Sri Lanka and these countries face particular issues mostly either economic and/or humanitarian. In three of the four countries: China, India, and Sri Lanka, of which they are the most populous countries on the planet and have in the past and even still to this day the human rights of their people violated on a regular basis from poor working conditions, to low pay, to various physical and mental abuses and beyond, even human slavery. The workers in these countries have to be protected above and beyond more than American workers in that the infrastructure is not in place in these countries that many times allow for them to speak up about their working conditions. LB requires that they provide good conditions for all of its employees in addition to the contractors and subcontractors as well as not only providing wages for their employees, but a future and hope and belief of a better life for them and for their families. 1 Missy Cline BBA 405 The fourth country, the Unites States, faces economic burdens in that product production in the United States is typically very expensive and cost prohibitive versus outsourcing to the aforementioned countries. in doing so, it leads back to the previous paragraph, but emphasizes how LB needs key managers to ensure that they are following their Corporate Policy of Ethics as the backlash from the companies' consumers, mostly United States based, which could potentially run the company out of business if they were to continuously ignore human rights violations that were sustained over time. The company works to get their products to market quickly giving up initial SCM efficiency until they can go back over time and work to streamline the process most likely once they are profitable. Over time, they can go back and through their SCM mapping and identify any inefficiencies and make adjustments until it possibly meets both efficiency and speed goals. I support LB's position as they seem heavily aware and they are determined not to align themselves with companies or entities that do not share their views. Being a global SCM, they are choosing to do business in a way that sets a standard for humanity regardless of the bottom line and their continuing need to maximize profits. 2) Next, consider the key areas of performance described in the articles. Keep in mind some of the attributes of one article overlap or are similar to those contained in the other article, others are different. Select which attributes seem to be evident at LB based on the information provided about LB and the statement from Mr. Smith. To what degree, are the attributes you selected evident in his description of his supply chain and company strategy? Explain why you believe they are evident what is the basis for your selection and how do the specific attributes contribute to the strategy presented in the information provided about the LB and by the statement of Mr. Smith. LB's focus is on speed to market. They see it as the key in the fashion industry for them, especially as the fashion cycle continues to shorten. Because of that, their claim of focus is most likely towards world-class integrated planning, practice number five. However, in looking at position you realize that to get to that point you are relying on your personnel even more so, so in reality it is really two practices number six and number nine in that order. You need the right people in place under practice number six creating a reliable and stable foundation for the flow of communication, 2 Missy Cline BBA 405 techniques and skills throughout SCM to then utilize practice number five since you are talking about trying to control cost and inventory to increase speed. Later on they go back with practice number four to lean out and streamline the SCM process from end-to-end to maximize their profits. Mr. Smith states that speed is the differentiator in his industry, to beat out his competitors to market and to make money. In doing so, they may not be the most efficient in their SCM, because they charge full price for their products and offer them at their best shelf life. Then they can believe that they are winning the market against their competitors in doing so thus providing their lifestyle brand. They do not want to reduce their retail costs as time goes on since they are offering a lifestyle brand, a way of life they feel is the best. They understand the tradeoff, but feel that this strategy is the winning strategy for them and that they can dominate the market in this way. 3) Thinking broadly about the supply chain at LB, (or any supply chain generally), describe where the supply chain begins and where it ends. What trade-offs between key attributes are made and how is a balance between key attributes achieved? How do these trade-offs and balance contribute to LB achieving its strategic objective? 3 Operations Practice The Race for Supply Chain Advantage: Six practices that drive supply chain performance In conjunction with Georgia Tech College of Management The Race for Supply Chain Advantage: Six practices that drive supply chain performance Excellent supply chain management helps leading companies around the world achieve better service, lower costs, lower inventory, and ultimately competitive advantage. Our research shows that the best organizations are creating this advantage by using six valuable practices Today's corporations are struggling with their supply chains. Supply base globalization on the one hand, and product/channel diversification 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 fuel and commodity costs. Against this backdrop, however, a select cadre of companies has succeeded in turning their supply chains into a strategic weapon. For example, Jones Soda beat major softdrink manufacturers 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 favorite 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 portfolio in order to capitalize on its outsourcing ambitions. These companies and many others are using their supply chains to create true competitive advantage. 4 The Race for Supply Chain Advantage: six Practices that Drive Performance What really transforms supply chains from a liability to an asset? Many studies have measured excellent performance through cost, availability and inventory benchmarks, but few have linked company performance to the practices that underlie it. Now, new research by McKinsey & Company and Professors Vinod Singhal and Soumen Ghosh of the College of Management at the Georgia Institute of Technology, into the supply chain practices of more than 60 companies delivers that essential insight (see Exhibit 1). EXHIBIT 1: Breakdown of companies surveyed Exhibit 1Breakdown of companies surveyed Retail Pharma Automotive 15 21 15 5 High-Tech 44 Source:McKinsey; Georgia Tech College of Management Packaged Goods Senior supply chain executives from participating companies took part in indepth structured interviews covering more than 50 aspects of supply chain management. At the same time, data on their actual supply chain performance (service, cost, and inventory) was crunched to distinguish leaders from laggards. With a rich database covering both practices and performance, we were finally able to analyze the key question: 'What practices truly drive performance?' The results of these analyses are compelling. Only six supply chain practices matter most to company performance, while two of 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 performance, 1.7 times more likely to have strong D&L (distribution and logistics) cost performance, and 2.7 times more likely to have strong inventory performance (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 of this article shares our research and experience on what drives supply chain performance and where companies might focus to create advantage for their organization. The Race for Supply Chain Advantage: six Practices that Drive Performance Exhibit 2Companies that excel at the most important practices are building EXHIBIT 2: Companies that excel at the most important practices are building real advantage over their peers real advantage over their peers 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 Average survey score (1-5 scale) across the most important practices Improved likelihood of being a top performer vs. bottom 3.8 Service 1.4x 2.7 Cost Inventory Bottom third Top third 1.7x 2.7x Top performers create advantage over their peers through greater timeliness and completeness of delivery to their customers with lower supply chain operating costs and greater inventory efficiency * Absolute difference in distribution and logistics cost as a percent of sales Source: Team analysis; McKinsey; Georgia Tech College of Management IT and organization: No silver bullets Our survey indicates that two of the strategies commonly employed to improve supply chain performance - IT investment and organizational restructuring (e.g., centralizing or decentralizing the supply chain organization) - are often not as useful as managers expect. In fact survey results indicate that companies with more formal IT systems and more or less centralized supply chains perform no better than others. Top-performing companies in our survey were as likely to use a mixture of formal and home-grown IT tools like spreadsheets to operate parts of their supply chains as they were to invest in comprehensively formal IT solutions. We found that many organizations tend to expect IT solutions to drive improvement without putting the right processes and capabilities in place first. Systems can be useful tools, but cannot replace sound decision making. Good companies use IT to inform decisions but do not depend on IT to drive those decisions. In fact, companies in our survey that had fewer formal IT systems performed slightly better on average in cost and service than those that had invested in a high degree of formal IT systems. The second area that has received much attention in recent years is the degree of centralization of the supply chain organization. Many companies have established centralized supply chain functions, taking control of the supply chain away from individual business units to try to maximize overall efficiencies. According to 5 6 The Race for Supply Chain Advantage: six Practices that Drive Performance our survey results, there seems to be no advantage to centralizing or decentralizing supply chain control across business units. Top-performing companies were equally likely to centralize their supply chain management across business units, devolve it to individual business units, or use a mixture of both approaches. Again, it seems that the underlying processes and incentives really drive performance, coupled with a functional organizational model that supports them. Six practices for success \" Top-performing companies in our survey were as likely to use a mixture of formal and home-grown IT tools like spreadsheets to operate parts of their supply chains as they were to invest in comprehensively formal IT solutions. \" Some supply chain practices, however, do appear to have a powerful effect on supply chain performance. We analyzed the impact of practices on the probability of a company achieving top service, D&L cost, and inventory performance to understand which practices drive performance and which do not. As a result, we found six levers that significantly improve the likelihood of a company having a high performing supply chain (see Exhibit 3). In addition, these results were confirmed by the collective experience of Georgia Tech and more than 1000 supply chain engagements completed by McKinsey & Company in the last five years. The Race for Supply Chain Advantage: six Practices that Drive Performance 7 1 Supply chain strategic alignment 2 Segmentation to embrace the complexity that matters 3 A balanced and forward-looking design Leading companies create a top-down and forward-looking vision of their overall supply network. They ensure that the network balances productivity, flexibility, and risk to deliver great service without excessive cost or risk. 4 A lean, end-to-end value chain 5 World-class integrated planning 6 The right talent, accountable for performance 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 from the shop floor to the most senior managers clearly understand the supply chain strategy and aspirations. 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. Leading companies task their supply chain managers with optimizing end-toend value chains, and drive true collaboration across functions. They typically deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma), which they have made their own. Leading companies use disciplined integrated planning processes to ensure the organization executes in synchronization, without the need for 'heroes.' They focus their planning efforts where it matters - using sophisticated and robust techniques where they are valuable and using unaided computer predictions elsewhere. Leading companies make supply chain talent development and acquisition an organizational priority. Supply chain positions form part of the top management career track. Once the right people are on board, companies hold talent fully accountable for their contribution to supply chain performance. The Race for Supply Chain Advantage: six Practices that Drive Performance The race for supply chain advantage 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 tradeoffs. These supply chains, which spanned all industries surveyed, have created true competitive advantage for their organization. The gap between top and bottom performers is wide and likely to widen as a new class of super-competitors emerges that is moving on to the next horizon of practices such as sustainability and full integration of supply chains across suppliers and customers. Thus the race for advantage is intensifying. Top performers are racing to create even more advantage over their peers while others are racing to catch up (see Exhibit 4). Exhibit 310% of companies are using the levers that matter most to EXHIBIT 3: 10% of companies are using the levers that matter most to simultaneously outperform on service, cost and inventory simultaneously outperform on service, cost and inventory ALL SECTORS Percent of companies Better service performance 8 Top third performance Top performers 10% Top performers achieve both cost, service, and inventory advantage . . . Top performing companies were found in every sector studied Others 90% Over 85% of these leading companies also have top-third inventory performance . . . challenging the notion of a cost, service, and inventory trade-off Better cost performance Source:Team analysis; McKinsey; Georgia Tech College of Management Exhibit 4The gap is widening as leading companies move on to the next horizon of supply chain management EXHIBIT 4: The gap is widening as leading companies move on to the next horizon of supply chain management EXAMPLES 6 practices that drive performance Source:McKinsey 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 The race is real for companies to master the drivers of performance as a basis for tackling even more advanced opportunities The Race for Supply Chain Advantage: six Practices that Drive Performance Thinking carefully about where to focus As companies race to close the gap between top performers and others, they need to think carefully about where they invest their energy as individual practices have different benefits (see Exhibit 5). For example, companies using strong segmentation 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 performer, but see little distribution and logistics cost advantage. In another example, companies taking an 'end-to-end' approach to their supply chain benefits are more likely to see the benefits 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 performer). Companies attempting to drive improved performance should therefore focus on the practices that are most likely to improve the type of performance that matters most to their business strategy Exhibit 5Top companies are selectively using 6 levers to drive performance EXHIBIT 5: Top are selectively using 6 levers to drive performance where it is most needed where it companies is most needed 9 Benefit of having practices that score in the top third of companies surveyed vs. bottom third* Key practices driving performance Service Cost Inventory 1.3X 1.4X 1 Explicitly link the supply chain strategy to the corporate strategy and set clear, well understood aspirations 1.9X 2 Use segmentation to embrace the complexity that matters 2.0X 2.5X 3 Design and build forward looking networks that meet service, cost and risk aspirations 1.8X 2.3X 4 Create a lean, end-to-end value chains by optimizing across functions 5 Execute world-class integrated demand and production planning processes with discipline 1.3X 6 Get the right talent on board and hold them accountable 1.7X 1.3X 2.0X 2.6X 4.0X Improved likelihood of being a top third performer vs. bottom third* In addition, our research strongly indicates that companies with strong network and end to end practices are much more likely to have lower COGS 1.6X * Not additive Source: Team analysis; McKinsey; Georgia Tech College of Management In addition, organizations should consider their starting capabilities when prioritizing their improvement efforts. In particular, our survey showed that 2 of the 6 practices that matter require strong performance on other practices to achieve best practice (see Exhibit 6). First, companies that successfully 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 for the other 4 practices, companies are capturing the benefits without much need to be strong at any additional levers suggesting a few natural starting points for companies early in the supply chain transformation journey. 9 10 The Race for Supply Chain Advantage: six Practices that Drive Performance Regardless of the current performance of an organization's supply chain, however, these six practices and the nature of their impact show managers where they should be focusing their supply chain improvement effort for the biggest impact, and where it is likely to be wasted. The rest of this article looks at each practice in turn, in more detail. Exhibit 6Our research indicates that several practices require strength EXHIBIT 6: Our research indicates that several practices require strength elsewhere to achieve best practice while others have low dependencies elsewhere to achieve best practice while others have low dependencies Practice Practices that require strength in other practices 1 Explicitly link the supply chain strategy to the corporate strategy and set clear, well understood aspirations 2 Use segmentation to embrace the complexity that matters Practices with little dependency 3 Design and build forward looking networks that meet service, cost and risk aspirations 4 Create a lean, end-to-end value chains by optimizing across functions 5 Execute world-class integrated demand and production planning processes with discipline 6 Get the right talent on board and hold them accountable * Based on conditional probability analysis Source: Team analysis; McKinsey; Georgia Tech College of Management Prerequisites to achieve best practice (dependencies)* 6 Get the right talent on board and hold them accountable 3 Design and build forward looking networks that meet service, cost and risk aspirations 5 Strictly adhere to world class demand and production planning processes Practice 1 Supply chain strategic alignment 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 from the shop floor to the most senior managers clearly understand the supply chain strategy and aspirations. In our survey, supply chains having an intimate link to their company strategies outperform those that lack this link. Similar to Jones Soda and Cisco, these companies explicitly consider both cost and revenue opportunities from their supply chain in their strategic planning sessions. In over 70 percent of companies, the supply chain manager is a full-time member of the corporate strategy development team and is responsible for creating the link between strategy and operations. These high-level strategic links work in both directions. They help supply chain managers align their efforts with the strategic goals of the business units they serve and help business unit managers understand the opportunities available to them through clever use of their supply chain capabilities. Alignment in theory must also be translated into alignment in practice. Fiftyone percent of companies in our survey excel at turning strategies into tactical change plans that drive results. They do so by first setting and communicating clear aspirations and ensuring all colleagues - from the shop floor to the most 12 The Race for Supply Chain Advantage: six Practices that Drive Performance 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 performance. In particular, top practitioners are 1.9 times as likely to be a top service performer. \" In over 70 percent of companies, the supply chain manager is a full-time member of the corporate strategy development team and is responsible for creating the link between strategy and operations. \" Two of the world's largest retail operations illustrate how different strategic objectives translate into radically different supply chain approaches. Wal-Mart, with its relentless focus on cost reduction, has made extensive efforts to reduce labor in its distribution centers. It uses its size and scale to force 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 flexibility to handle products of all shapes and sizes over a strategy that minimizes cost alone. The Race for Supply Chain Advantage: six Practices that Drive Performance Practice 2 Segmentation to embrace the complexity that matters 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. Increasing product and customer complexity has been one of the most significant challenges for many organizations in recent years. Globalization produces geographically diverse customer groups, while within the same markets the growth of small, more demanding consumer niches call for different products, different levels of service, and different routes to market. Some companies have chosen to tackle this challenge by ignoring it, despite the complaints of those in the supply chain. They struggle to find an acceptable compromise to meet these diverse requests, using a single set of supply chain processes, often leading to higher cost. The best companies in our survey by contrast, have grasped the complexity challenge. Sixty-seven percent of these best companies, as opposed to 35 percent of all companies surveyed, use effective segmentation techniques to identify the specific product and service demands of different customer groups. They then build their production and distribution networks specifically to meet these demands, ultimately enabling complexity at a lower cost than a one-size-fits-all approach. 13 14 The Race for Supply Chain Advantage: six Practices that Drive Performance The key to these companies' success, however, is their ability to meet the demands of their different customer segments without excessively increasing supply chain costs. They use a variety of methods to achieve this, starting by considering supply chain design concurrently with product and portfolio development processes. They are able to influence others to use common platforms to ensure that different products can share as much content as possible at minimum overall supply chain cost. They also take regular steps to rationalize their product portfolio to eliminate low value-added complexity wherever possible. Companies that have mastered segmentation still make use of standardized supply chain processes wherever possible. They do this by defining standard processes for each supply chain segment based on the unique product or customer needs. By doing so, they avoid the costs of a one-size-fits-all approach, while still using processes that are well understood across the organization. \" The key to these companies' success, however, is their ability to meet the demands of their different customer segments without excessively increasing supply chain costs. \" Based on our research, the case for best practice is compelling. Companies that achieve best practice in segmentation and complexity management are 2 times as likely to be a top service performer and 2.5 times as likely to be a top inventory performer. The best companies manage to keep the cost of this additional flexibility under control, however. Overall distribution and logistics cost levels for best practice companies were just as likely to be a top D&L cost performer as a bottom. For example, a consumer goods company with high and increasing supply chain complexity used supply chain segmentation and portfolio management tools to improve ROIC, service, inventory, and profitability. Initially, the company had a one-size-fits-all supply chain to handle the varying needs and demand patterns of its products. In addition, the organization continued to add SKU's to their portfolio, while very rarely eliminating unprofitable SKU's or SKU's that had a high degree of overlap in the product portfolio. To remedy the situation, the company began by defining different material and information flows based on the unique demand patterns of its SKU's. For example, its higher volume, more stable products were produced in a rhythmic fashion and the planning team rarely modified the computer generated forecasts. On the other hand, the higher volatility products were given more flexibility in the plants and a significant portion of the planning department's time was focused on better predicting the demand fluctuations. The Race for Supply Chain Advantage: six Practices that Drive Performance At the same time, the organization implemented a series of cross-functional monthly review meetings to cross-functionally manage the portfolio of SKUs in each category. Leads from functions such as manufacturing, engineering, sales, and marketing reviewed the category performance to identify opportunities to improve the positioning or contribution of problem SKU's. Ultimately, if the issues could not be resolved, the SKU was eliminated. The results of their effort are compelling. The organization's service levels increased by 1 percent point while inventories decreased by over 35 percent. In addition, the organization improved the profitability of its target SKU's by 10-20 percent. 15 16 The Race for Supply Chain Advantage: six Practices that Drive Performance The Race for Supply Chain Advantage: six Practices that Drive Performance Practice 3 A balanced and forward-looking design Leading companies create a top-down and forward-looking vision of their overall supply network. They ensure that the network balances productivity, flexibility, and risk to deliver great service without excessive cost or risk. While many of the companies we spoke to are working hard to make incremental decisions on where to place new assets, the very best organizations make their decisions using a comprehensive and forward looking network strategy. They first design an overall supply chain strategy to deliver the right service levels to their different customer segments at the right cost and at the appropriate levels of 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 of the supply chain design allows these companies to make the best tradeoffs for overall supply chain performance. They control costs by keeping asset utilization high, for example, but not so high that they lose the flexibility 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 performers 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. 17 18 The Race for Supply Chain Advantage: six Practices that Drive Performance A global chemical company used effective network optimization to improve its service to two very different customer groups. Initially the company had a single supply chain design for all its markets, keeping inventories low by pushing product steadily into the market. This approach worked well for its North American customers, who mostly bought predictable quantities on a The very best organizations make contract basis; but it was failing in Asia where a their decisions using spot market operated. The push system could not a comprehensive and respond quickly enough to meet demand peaks forward looking network in the Asian market and it often found itself strategy. having to sell at a discount to keep from building excessive inventories when demand slowed. \" \" To fix the problem, the company segmented its network. They kept the low-cost, low-inventory push system in place for North America, but reorganized supply to Asia on a pull basis and replenished larger local inventories on demand. The cost of the additional stock was considerable, but using the new system meant the company could respond to demand peaks, eliminating the need for discounting and greatly improving customer satisfaction. Keeping local stocks also allowed better control of transport. Finally, by utilizing capacity on vessels traveling to Asia more effectively, the company cut its transportation costs by 10 percent. The Race for Supply Chain Advantage: six Practices that Drive Performance Practice 4 A lean, end-to-end value chain Leading companies task their supply chain managers with optimizing end-toend value chains, and drive true collaboration across functions. They typically deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma), which they have made their own. The geographically and functionally diverse nature of the supply chain function can lead companies to optimize locally at the cost of overall efficiency. Concentrating on solely on improving the performance of the planning function or manufacturing, for 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 of end-to-end supply chain costs, the best companies ensure that management decisions improve the total business, not just functional performance. They even extend this end-to-end perspective beyond the boundaries of the organization, by involving suppliers in supply chain decision-making processes and systematically aligning supplier incentives with supply chain objectives. Such a broad, cross-functional approach inevitably involves complex tradeoffs and the need for problem solving. Using standard \"lean\" and other continuous improvement problem-solving tools, these companies ensure that all functions have a common approach for resolving such issues and driving end-to-end improvement. In addition, they align metrics across the organization to drive true collaboration. 19 20 The Race for Supply Chain Advantage: six Practices that Drive Performance \" \" End-to-end thinking has a powerful effect on supply chain cost. Companies that use Companies that use this approach can capture savings that are end-to-end thinking can simply not accessible to those that only capture savings that are simply not accessible to optimize within functional or regional those that only optimize silos. In our research, companies that use within functional or regional best practice end-to-end approaches are silos. 1.3 times more likely to have better D&L cost, and 2 times more likely to have better inventory performance than those that do not. Even more encouraging, our data strongly indicates that best practice endto-end performance 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 manufacturing, and desired improvements in margin, service, and inventory. The company drove improvement through a combination of improved cross-functional processes such as innovation, and applying lean techniques with a perspective across functions such as transportation and planning. Interestingly, they found that capturing the economic value in one function often required the cooperation of other functions that did not directly own the cost. For example, approximately 50 percent of the transportation opportunity they identified required changes outside of the direct control of the transportation team (e.g., warehouses needed to load trucks differently, engineering needed to redesign pallet heights to better utilize trucks). As a result of these changes, the company saved hundreds of millions in cost, improved service levels to industry best practice rates, and reduced targeted inventory by 30 percent. The Race for Supply Chain Advantage: six Practices that Drive Performance Practice 5 World-class integrated planning Leading companies use disciplined integrated planning processes to ensure the organization executes in synchronization, without the need for 'heroes.' They focus their planning efforts where it matters - using sophisticated and robust techniques where they are valuable and using unaided computer predictions elsewhere. Even the most agile supply chains must execute against a plan. The quality of the integrated planning processes used by the companies in our survey played a key role in determining the overall effectiveness of their supply chains at meeting customer needs without excessive inventories or D&L costs such as expedited freight. The best companies in our survey execute strong cross-functional planning processes that integrate actions across functions in the business. They execute the S&OP process in regular meetings with active participation from senior leaders across the business including sales and finance. During these forward looking meetings, the senior leaders agree on one future view of demand for the business, and may need to allocate product to certain customers to develop a feasible capacity constrained production plan. Capacity planners use real-time visibility of inventories and production lead times across the supply chain to inform these decisions. In addition, the senior leaders use the meeting to agree on a long term demand plan that feeds the network and capacity planning processes. Of course, strong demand plans are required to have an effective S&OP meeting. To do effective demand planning, companies start by understanding the unique demand patterns of their products and customers. These demand patterns form 21 22 The Race for Supply Chain Advantage: six Practices that Drive Performance the basis