IW Value-Chain Survey: A Map Of The World

Aug. 15, 2005
IW's 2005 Value-Chain Survey sets benchmarks for global manufacturers in procurement, new product development, supply-chain planning and logistics.

Disruptive forces such as soaring raw materials and logistics costs are challenging U.S.-based global manufacturers, but research shows that they are keeping focused on what matters most: profits, revenues and market share.

How does that translate into value-chain management? Manufacturers are continuing to work closely with their suppliers and customers to keep costs down while trying to maintain and grow their markets. They are tapping strategies such as spend analysis and component standardization. They are sourcing from overseas and investing in IT at home.

These findings come from the 2005 IndustryWeek Value-Chain Survey, which we conducted in conjunction with IBM Business Consulting Services with assistance from APQC, an open-standards benchmarking collaborative based in Houston.


IndustryWeek editors and subject-matter experts within IBM Corp., our research partner, developed the survey instruments for each of five functional areas. Each survey consisted of 18 to 27 questions. The questionnaires were mailed to appropriate functional job titles obtained from the audited subscription files of IW and other lists of Penton Media Inc., IW's parent company. Research partner APQC mailed the survey forms to about 25,000 people and then collected, cleaned and tabulated the results from February to May 2005. IBM and IndustryWeek analyzed the results for this report and subsequent activities. There were 650 completed questionnaires for an overall response rate of 2.6%. The category of Customer Order Management had too low of a response rate for valid reporting.

Survey results tell the story of how manufacturers are responding to the unrelenting forces of globalization and offer a map of sorts for all manufacturers. The route to cheaper supplies from overseas sources may look like a clear path, for instance, but IW's value-chain research documents that supplier lead times are elongating, a step back from the improvements wrought from years of lean implementations. Some companies may find the payoff worth it. Others may find themselves with cheaper raw materials and components, but fewer customers.

In this article, IndustryWeek presents a top-level sampling of value-chain benchmarking data in procurement, logistics, product development and supply-chain planning. We will present other results of the survey with more in-depth reporting throughout 2006, but this initial report likely will give you, Mr. or Mrs. Manufacturing Leader, reason to both pat yourself on the back and take pause. The globe is not getting any bigger. But the world of manufacturing is. It would be easy to blindly follow the lead of compatriots and competitors, but it's best to chart your own course, based on your company's goals, products and customers.

Priorities Shifting

About IBM Business Consulting Services

With consultants and professional staff in more than 160 countries, IBM Business Consulting Services is one of the world's largest consulting services organizations. IBM Business Consulting Services provides clients with business process and industry expertise, and the ability to translate that expertise into integrated, adaptive solutions for on demand business that has the potential to deliver bottom-line business value.

Manufacturers responding to the survey are more concerned with reducing costs than they were during the same study in 2003. On average, 51% of respondents in 2003 cited reduced costs as a top objective. In 2005, that number grew to 71.7%. In each of the four areas for which we are reporting, increasing profits remained the top objective of responding companies, with at least 73% of respondents in each category citing it as one of three top objectives. But reducing costs, moved from the No. 3 objective to No. 2 in product development and supply-chain planning. Increasing revenues was No. 3 for all but those responding to the supply-chain-planning portion of the survey, who cited improved customer relations as more important.

It's no surprise considering the higher cost of raw materials, energy and transportation in 2005 that cutting expenditures become a higher priority. However, manufacturers must be careful not to focus too much on the current landscape. They must plan for tomorrow's journey as they are traveling today. The value-chain survey, shows, for instance, that product innovation is not a top priority for manufacturers. Respondents ranked it fifth among a list of priorities that included increased profitability, reduced cost, increased revenue, reduced cycle time, improved quality, increased unit volume, innovation and increased customer services. Simultaneously, respondents are tying more of their product development efforts to customer desires. Sounds like a good thing. And it is. But what about tomorrow's customers? Tapping new markets takes innovation. Tomorrow's customers are on your horizon.

A Word On Customer Order Management

While the customer-order management portion of the survey drew too few responses to be valid, much is changing in the world of customer relations and CRM (customer relationship management) technology. According to Dan Hirschbuehler, a specialist in industrial-sector CRM at IBM Business Consulting Services, this "continues to be one of our hot, growing target areas."

Specifically, Hirschbuehler sees four trends:

  • Service management: Manufacturers are transforming their companies from product companies to service companies as a way to grow revenues and reduce costs.
  • Touching customers: Manufacturers are trying to connect directly to customers without angering distributors. The manufacturers want information on consumers, and some have found a solution in collecting customer data via their Web sites while offering product information.
  • Consolidation and improvement of call centers.
  • Offering products via bundled pricing instead of separate prices for separate products and services.

IW Value Chain: Procurement
Compiled By Jill Jusko

Executives Ignored
Percentage Of Purchases Via Online Trade Exchanges
2003 Survey 2005 Survey
0% 66.5% 63.7%
0.1%-5.0% 10% 9.6%
5.1%-10% 8.5% 6.7%
10.1%-100% 15% 20%
In 2000 IndustryWeek wrote of electronic marketplaces: "Trading exchanges promise to streamline business and reduce waste across an entire value chain." Five years later the use of both private and public electronic marketplaces remains low. Indeed, "stagnant" is the best term to describe the use of such marketplaces; consider that in the 2003 value-chain survey 66.5% of respondents reported no use of private online exchanges. Why haven't B2B electronic marketplaces caught on? It may be that trade exchanges simply haven't produced the value many anticipated, except for some commodity purchasing. Or that trade exchanges are considered more trouble than they are worth. One possible conclusion of these findings is that the procurement professionals who were going to use trade exchanges already are doing so.
The Asian Factor
Percentage Of Site's Direct Materials Sourced From Asia
(all respondents)
(annual revenue over $100 million)
Three Years Ago
(all respondents)
0%-5% 53.1% 43.2% 71.5%
5.1%-15% 25.4% 24.3% 16.1%
15.1%-100% 21.5% 32.4% 12.5%
Value-chain data indicate that U.S. procurement professionals are looking increasingly to Asia as a source for direct materials. And the larger the site's corporate parents, the more likely it is to make Asia (which includes China and India) a part of its sourcing strategy. By contrast -- and likely to no one's surprise -- U.S. suppliers' share of the procurement dollar continues to erode. Three years ago slightly more than a quarter (26.4%) of survey respondents sourced over 95% of their direct materials from the United States; that compares with 17.6% of respondents today.
Lead Times Suffer
Changes In Supplier Lead Time Over The Past Three Years
Increased More Than 25% 5.5%
Increased 0.1% To 25% 20.7%
Remained The Same 41.4%
Decreased 0.1% To 25% 25.5%
Decreased More Than 25% 6.9%
Global sourcing strategies may be taking a bite out of suppliers' lead times. More than one-quarter of survey respondents report that their suppliers' lead times have increased in the past three years, compared with just 8.1% of respondents who reported increased lead times in the previous value-chain survey, conducted in late 2003. Additionally, supplier performance may be falling victim to heightened security at U.S. entry points, as well as a lack of capacity by and booming demand for transportation services.
IW Value Chain: Logistics
Compiled By Jill Jusko
Logistics Costs Surge
Logistics Costs As A Percentage Of Sales
2003 Survey 2005 Survey
0.0% To 2.0% 32.5% 12.2%
2.1%-5.0% 28.3% 12.2%
5.1%-10% 19.2% 24.4%
10.1%-100% 20.0% 51.2%
If manufacturing executives have their eyes firmly fixed on logistics costs, it is with good reason. Value-chain survey data show logistics costs have skyrocketed in the past few years. Indeed, the percentage of survey respondents who say logistics costs are 10% or more of sales has more than doubled since late in 2003, when the last value-chain survey was conducted. There's little reason to believe costs will decline soon. Surging fuels costs show no signs of dropping. Globalization has stretched the length of the value chain. Transportation providers have boosted their prices, both to offset fuel costs but also as a result of growing demand for their services and constraints in capacity. And increased security requirements for freight also has increased costs.
Show Me The Cost Savings
RFID Tag Strategy
No Strategy 75.4%
Slap And Ship For Compliance 9.2%
Maintain Seperate Inventory Of Tagged And Untagged Items 6.2%
Tag All Products In Manufacturing 3.1%
RFID Benefits
Meet Compliance Requirements 54.8%
Improve Distribution Processes 45.2%
Improve Trading Relationships 35.5%
Reduce Distribution Center/Warehouse Costs 29.0%
Reduce Inventory 22.6%
Other 6.5%
For all of its hype, radio frequency identification (RFID) remains in its infancy among manufacturers, at least when it comes to RFID's impact on the value chain. Fully three-quarters of survey respondents report having no RFID tagging strategy. Even among the survey respondents who say they have a strategy, more than half see RFID's largest benefit as its ability to help them meet compliance requirements. The lesson: Proactive efforts by manufacturers to introduce RFID into their logistics management may have a long way to go until proven cost benefits emerge.
Logistics Gives Nod To Outsourcing
Outsourcing Effectiveness
Extremely Effective Somewhat Effective
Transportation (Inbound/Outbound) 51.2% 41.5%
Warehousing And/Or Distribution Centers 54.5% 33.3%
Customs/Export 37.8% 48.6%
Audit And Payment Services For Freight Bills 36.7% 46.7%
Product Returns/Transport Handling 23.1% 57.7%
Transportation Management Services 28.6% 46.4%
Disposition Decision-Making For Returned Products 26.3% 47.4%
Many manufacturers outsource logistics functions. Data indicate that maybe many more should. More than half of survey respondents outsource transportation and customs, and approximately a quarter outsource other logistics functions. What should garner greater attention from manufacturers who don't outsource logistics, however, is the effectiveness claims of those who do outsource. A vast majority of the latter group report that their outsourcing efforts are effective. The moral of this story? Manufacturers continue to struggle in their efforts to improve the performance of their logistics function; outsourcing remains a viable option.

IW Value Chain: Product Development
Compiled By
Bruce Vernyi

We Are Talking, But Are We Listening?
To What Extent Have The Following New Product Development Practices Been Implemented At Your Site?

Collaboration With Customers
No Impementation 1.2%
Some Impementation 45.3%
Extensive Impementation 53.5%
If Implemented, How Effective Has Each Practice Been In Reaching Your Site's Top Objectives?

Collaboration With Customers
Not Effective 2.9%
Somewhat Effective 47.3%
Extremely Effective 49.8%
What Is The Most Significant Management Challenge FOr Your Site's New Product Development Efforts?
Correct ID Of Customer Needs 56.2%
What Is The Most Frequent Reason For Product Development Launch Delays Or Failures At Your Site?
Poorly Defined Customer Needs 35.2%
Which Would Have The Most Significant Impact On Reducing Your Site's Product Development Time-To-Market?
Collaboration With Customers And Suppliers 35.6%
It is acknowledged that effective communication with customers leads to greater success and profit, but results seem to be dodging efforts. Almost all (98%) manufacturers report collaboration with customers in developing new products, and 97% report that they find collaboration is effective in reaching the top objectives for their facilities. Yet a significant number (56%) report that the "Correct identification of customer needs" continues to be a major challenge for management, while more than one-third (35%) report that "Poorly defined customer needs" is the most frequent reason for product development launch delays or failures and a similar number (36%) report that improved collaboration with customers would have a significant impact in cutting their facilities' development time-to-market.
E-Commerce Advancing
To What Degree Are Product Drawings And Specifications Shared Electronically With Internal And External Partners
Shared Electronically With Internal Partners Only 14%
Shared Electronically With External Partners Only 5%
Shared Electronically With Internal And External Partners 58%
No Sharing Electronically 24%
An overwhelming number (58%) of manufacturers are sharing their product drawings and specifications with their internal and external partners, taking advantage of the efficiencies and reduced costs associated with the Internet. A mere 24% of the respondents said they do not share any data electronically, while 14% said they share data only with internal partners.
Cycle Times Are Contracting
What Is The Average Time-To-Market (Product Development Cycle Time) From The Start Of The Design Process Until The New Product/Service Is Ready For Sale/Market For New Product Variation (In Days)?
0-100 Days 31%
100.1-200 Days 25%
200.1-300 Days 14%
More Than 300 Days 30%
What Was The Average Time-To-Market Three Years Ago (In Days)?
0-100 Days 28%
100.1-200 Days 22%
200.1-300 Days 13%
More Than 300 Days 38%
The amount of time needed to take a product from concept to commercially available continues to shrink. Nearly one-third (31%) of manufacturers report that their average time-to-market is less than 100 days. Only 28% of the respondents said they had similar product development cycle times three years ago. Meanwhile, the number of manufacturers for whom product development cycle time is between 100 and 200 days increased to 25% (up from 22%) and the number for whom product development cycle time is between 200 and 300 days increased to 14% (up from 13%). The number of respondents who said product development cycle time is more than 300 days fell to 30%, down from 38% three years ago.

IW Value Chain: Supply-Chain Management
Compiled By
Bruce Vernyi

Customer Relationship Programs Prove Their Value
If Implemented, How Effective Has Each Practice Been In Reaching Your Site's Top Three Goals Or Objectives?
Not Effective Somewhat Effective Very Effective
Continuous Replenishment Programs For Customers 8.2% 60.3% 31.5%
Customer Interaction With Production Employees 17.0% 72.3% 10.6%
Management Of Inventory At Customer Site 17.2% 58.6% 24.1%
Shared, Real-Time Electronic Demand/Inventory Data 14.3% 47.6% 38.1%
Returns Management/Reverse Logistics 16.4% 67.2% 16.4%
Advanced customer relationships, including continuous replenishment programs; customer interaction with production employees; management of inventory at customer sites; shared, real-time electronic data on production demand and inventory control; and returns management and reverse logistics programs, have been implemented to some degree at nearly 40% of the manufacturers that responded to the survey. Of the manufacturers that have these practices in place, the most valuable are continuous replenishment programs and shared, real-time electronic data on production demand and inventory control, with more than one-third of the respondents that have them saying these are "extremely effective" programs.
Inventory Measures Measure Up
For Each Supply-Chain Process Listed Below, Please Indicate The System/Technology Used.
Vendor Package Internally Developed Manual/ Spreadsheet
Demand Planning 46.1% 22.5% 31.4%
Production Scheduling 38% 32% 30%
Inventory Planning And Replenishment 46% 35% 19%
Warehouse Management 38% 38% 24%
Transportation Management 35% 23% 42%
Just over 70% of the respondents say their cash-to-cash cycle time -- the time from the purchase of raw materials to the sale of the end product -- is less than 60 days. More than 40% of the respondents say their cash-to-cash cycle time is less than 30 days. Similarly, 67.7% of the respondents say their facilities see more than four inventory turns a year, and 14.1% of those see more than 26 inventory turns per year. Meanwhile, 65.3% of the respondents say their facilities have a production attainment level greater than 85%, and 25% of those say their production attainment level is above 95%.
Delivery Rates On-Time
For Primary Products, What Is Your Site's Standard Customer Lead-Time (Order-Entry To Shipment)
0.0-2.0 Days 34.3%
2.1-7.0 Days 31.4%
7.1-30.0 Days 19.6%
More Than 30 Days 14.7%
What Is Your Plant's On-Time Delivery Rate?
0-90% 29.4%
90.1-95.0% 16.7%
95.1-97.0% 9.8%
97.1-100% 44.1%
Is Your Plant's On-Time Delivery Rate Based On A Commit Date Or A Request Date?
Commit Date 55.2%
Request Date 44.8%
Slightly more than 55% of plants' on-time delivery rates are based on a commit date, rather than a request date, and customer lead-times -- from order-entry to shipment -- is less than two days for 34.3% of the respondents, and between two and seven days for 31.4% of the respondents. With that, 44.1% of the respondents report their plants achieve an on-time delivery rate of better than 97%.

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