Simplify, collaborate, adapt. Those steps to supply-chain optimization seem so natural and easy in the context of Dell, Procter & Gamble and Wal-Mart. Yet why is supply-chain optimization still the exception rather than the rule? Why the optimization lag when common knowledge signals that competition today is supply chain versus supply chain? It's not that executives fear change; rather the issue is recognizing the magnitude of change -- constant change -- that success now requires, notes Boston-based Bob Ferrari, director of supply chain business development for software provider SAP AG. The difficulty lies in the two primary change agents that threaten traditional modes of competition and business conduct, explains consultant David A. Taylor, author of "Supply Chains: A Manager's Guide" (Addison-Westley/Prentice Hall, 2003). Both change agents redirect the focus of competitive effort and both relentlessly reconfigure the business model, emphasizes Taylor. One is directed toward the historic -- and successful -- preoccupation with optimizing the internal production processes of companies. In the past, winning meant just being able to make something better, faster and cheaper, he adds. The next step is to optimize beyond the four walls of the plant. His point: In the emerging business model, competition will be defined as companies working together to beat other companies working together. (The operating presumption is that the best manufacturers have already squeezed as much efficiency out of the factory floor as they're going to get.) The second factor is the effect of classic vertical integration down at the retail level -- the big bucks retailers led by Wal-Mart. "It used to be that manufacturers controlled the supply chain. Today there is a sharp transition of control from production to the point of sale," Taylor says With the consumer in the supply-chain driver's seat, companies such as P&G are transforming themselves. P&G's goal: Make supply-chain efficiency the core competence of the company. Its strategy is to pare inventory by 50%, reduce consumer-level out-of-stocks by half and achieve 20% savings in logistics costs. P&G estimates the strategy will also be able to reduce consumer stock replenishment time by half. Meanwhile, Wal-Mart's strategy has vertically integrated everything from controlling the manufacturers through their dictates all the way down to how customers actually shop in their stores. Other companies, to compete, must either vertically integrate themselves or at the very least devise how to uniquely optimize their supply chains. Clearly the search for supply-chain efficiency is reshaping business investments and strategies in consumer goods, but no sector is immune. Consider how supply-chain optimization needs redirected production equipment investments for the rededication of a Cleveland Ford Motor Co. engine plant. Its lesson: Assess all investment strategies in terms of how they impact supply-chain optimization. At the plant, standalone CNC machines now dominate a production equipment layout that in the past would have been home to transfer lines. The quest for supply-chain efficiency redirected that equipment investment. Transfer lines are "hard" automation while the CNC machine tools give the flexibility needed to quickly meet customer preferences with new product configurations, explains Ford's Roman Krygier, group vice president of Global Manufacturing and Quality. The facility has begun producing the new Duratec V-6 for the 2005 Ford Five Hundred and Mercury Montego sedan and the Ford Freestyle. The Weakest Link Ignoring this emerging supply-chain imperative carries substantial, measurable penalties to companies, notes a research team from Georgia Institute of Technology's DuPree College of Management, Atlanta, and the University of Western Ontario. Their research first revealed a link between the announcement of supply-chain failures and a 10% decrease in stock-market prices. That triggered further analysis. Did the price deterioration reflect a market overreaction or was it true fallout from supply-chain disruptions? The results: In the year leading to an announced supply-chain disruption, average operating income of companies dropped 107%, return on sales plummeted 114%, and return on assets dropped 92% What's more, the study revealed that companies with supply-chain problems averaged about 7% lower sales growth, 11% higher costs, and a 14% increase in inventories. The researchers were surprised to discover how long it took companies to recover from a supply-chain malfunction. Their research showed that operating income, sales, total costs and inventories remained flat during the two-period after a company announced its supply-chain problem. "The supply-chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years," says DuPree's Vinod Singhal, professor of operations management. "Like a heart attack that cuts off the flow of blood, a supply-chain glitch cuts off the flow of information or supplies. And similar to a heart attack, it has lasting effects on a company's health." (Singhal's University of Western Ontario partner is Kevin Hendricks, associate professor of operations management.) Other key findings: Industry sector doesn't matter. Supply-chain glitches often receive more attention in the high-tech area, but companies are negatively affected regardless of their industry. Small firms get hit harder. Average operating income dropped 150% for small firms compared with an 86% decline for large companies. Fault doesn't matter. Even when supplies and customers cause the supply-chain disruption, companies were still negatively affected. The Georgia Tech study provides more evidence why companies should pay attention to supply-chain optimization, but are enough managers listening? "When people talk about supply-chain management, they may agree that it's important, but they are not investing in solutions," says Singhal, noting that lack of investment has become more pronounced the last couple of years due to the economic downturn. Another problem: Companies aren't always investing in the right supply-chain solutions. There are two key aspects of supply-chain management -- efficiency and robustness -- and the trend has been to focus on efficiency. "Even though a supply chain may be efficient, if it's not robust, it could still malfunction," Singhal says. "One reason supply-chain problems occur is because there isn't enough slack in the system. As companies try to make their supply chain more efficient, they take away slack because it's expensive." To Singhal, timing of the fix is critical. "When companies can't respond to demand, customers take their money and loyalty elsewhere. A number of costs go up, such as expediting, shipping and customer penalties. Loss of reputation may even require a company to increase its marketing expenditures." He says quick resolution prevents escalation of the problem. It's also important because there are more global supply chains today, which increases the odds for more companies to suffer from a disruption. To reduce the frequency and probability of glitches, the researchers recommend the following:
- Better forecasting and planning.
- Collaborating with supply chain partners.
- Identifying and tracking key indicators that can provide early warning of supply chain problems.
- Developing strategies to respond to problems when they arise.