Intense pressure to reduce costs, innovate products, and expand into new markets has forced manufacturers worldwide shifting production and spreading out supply chain and other operations well beyond their home geography. But as value chains extend further, they also become more fragmented and more complex. While an increasing number of manufacturers now view the entire world as a place to sell, source, manufacture, and engineer their goods, they are struggling to put the pieces together in a way that enhances efficiency and drives revenue. Indeed, many are responding to increasing supply chain complexity in curious ways. A recent benchmarking study by Deloitte, which surveyed 600 companies from North America and Europe, uncovered five emerging supply chain paradoxes:
- The optimization paradox: Despite globalization, most supply chain optimization is done at the local level, with manufacturers focusing on isolated activities such as improving a production process or a transportation route, for example. This ignores the potential of big savings and profit gains from designing value chains from a global point of view.
- The innovation paradox: While manufacturers point to launching new products and services as the number one driver of revenue growth, they also say that supporting product innovation and improving time to market are among their least important supply chain priorities.
- The flexibility paradox: Dispersing manufacturing, logistics, and engineering to distant regions inherently makes it difficult to build and maintain flexible supply chains.
- The risk paradox: While nearly every study participant says that maintaining high quality is critical, current fragmented supply chain initiatives are increasing potential risk.
- The customer collaboration paradox: Fewer than 8 percent of respondents have a high level of collaboration with customers on key initiatives, even though most consider customer service to be a priority.
Not surprisingly, these companies can’t say one thing and do another for very long without incurring a cost. This fundamental premise was reflected in the survey findings. More than a third (38 percent) of the respondents report slim operating margins of less than five percent or have lost money over the last year. Similarly, about a third have not met their goals over the previous year for return to shareholders, market share growth, profitability, and return on capital and assets.
Synch or sink
But, there is a compelling upside to the dilemma of complex value chains: A small group of companies – seven percent of respondents – are thriving amid this complexity, excelling in key capabilities, such as product innovation, time to market, product quality and customer service levels. Astonishingly, these “complexity masters” are 73 percent more profitable than their peers.
What gives complexity masters the edge? For one thing, they are further ahead at synchronizing their activities both within and across their customer, product, and supply chain operations. For instance, complexity masters treat their product lifecycles more like “profit cycles” – a series of coordinated activities meant to squeeze the greatest profit from each product or product line. To accomplish this, managers from each of the three areas (customer relations, product development and supply chain management) work together year-round to design and develop strategies, products, manufacturing processes, marketing and sales campaigns, and customer service programs. For example, complexity masters are far more likely to factor quality and manufacturing process considerations into the product development process and work with customers on new product designs.
A couple of factors underlie complexity masters’ ability to synchronize their operations: First, they are more adept at deploying technology beyond the walls of traditional ERP. This includes technologies that reach across customer, product, and supply chain operations, including Customer Relationship Management (CRM), Product Data Management/Product Lifecycle Management (PDM/PLM), and APS (Advanced Planning & Scheduling), and others that drive collaboration, visibility, and flexibility. Second, they have a global, collaborative approach to nearly every aspect of supply chain optimization. This suggests that it’s not just what they do, but how they do it.
Nine Fundamentals of mastering complexity
By examining the perspectives and practices of these highly profitable few, we can identify nine fundamentals of mastering complexity:
- Supply chain network/assets optimized based upon business strategy.
- Global supply chain organization.
- Synchronized efforts across customers, products, and the supply chain.
- Integrated product development processes.
- Working capital viewed as integral part of supply chain design and management.
- High levels of flexibility/responsiveness.
- Integrated supply chain planning.
- Robust metrics and measurement capabilities.
- Supply chain collaboration mechanism.
For each of these fundamentals, there are multiple levels of maturity. Although the end goal will be to arrive at the upper levels where the complexity masters operate, it is unrealistic to assume that a company can get there all at once. Instead, it is essential that companies develop a plan for driving their supply chain forward that organizes and prioritizes areas to tackle. Industry tools, such as Deloitte’s Supply Chain Value Map, can aide in devising this plan. The Supply Chain Value Map helps companies to identify which supply chain processes and activities generate the most value in their organizations. It then helps them to determine the appropriate actions and software solutions needed to support these areas.
Once priority areas within the supply chain have been identified, the same basic steps can be applied to move forward in any one of them:
- Assess current state,
- identify gaps,
- identify and quantify opportunities,
- plan path forward,
- establish success criteria,
- execute and
- monitor and improve.
Scaling the walls of ERP
Obviously, technology plays a critical role in any supply chain improvement plan, but not necessarily the role that one might think. The study revealed that operating on a common ERP platform is a foundational step – sort of a qualifier that is necessary to compete – but it is not sufficient to gain an edge. Those that have really excelled have layered decision-support tools onto their ERP foundations, taking advantage of the full breadth of functionality that solutions such as SAP provide. Specifically, in the case of SAP, this means going beyond the transactional processes of SAP R/3 to the richer set of Web-enabled optimization, decision-support and collaborative capabilities of mySAP Supply Chain Management (mySAP SCM).
Unlike the IT-driven ERP implementations that preceded them, SCM implementations are typically defined by functional and business champions and are much more focused on efficiency and effectiveness of business processes. When implemented with a modular approach driven by the concept of “100-day wins,” the gains generated from implementing a particular SCM solution set can be used to offset costs and to fund the next set of capabilities. With the ability to cost-justify estimates against reasonable assurance of returns, one of the biggest mistakes companies can make is to acquiesce to the prevailing value chain paradoxes due to budget constraints.
Mastery as a mandate
Mastering value chain complexity is quickly becoming the new mandate, which is so critical that companies move forward with a plan to improve their SCM capabilities. In the coming years, businesses will become even more complex as the trend of dispersing pieces of the value chain to lower-cost regions and of increasing the number of new product introductions continues to accelerate. Companies of all sizes will have to move quickly to better synchronize their customer, product and supply chain operations in order to survive. Fortunately, the complexity masters have not only demonstrated that it can be done but they have also paved the way for manufacturers everywhere to learn from their experiences.