Now It's A Job For The CEO

Dec. 21, 2004
New IW survey examines the benefits -- and barriers -- associated with top-level value-chain collaboration.

There was a time when top-ranking executives in manufacturing tended to distance themselves from such operational details as supply-chain management or information sharing with upstream and downstream partners in the "value chain" -- that continuum of activities that ultimately delivers something of value to an end customer. In the past, company presidents and CEOs were more inclined to fret about internal politics and bottom-line earnings than plunge into the various intercompany relationships that can either elevate or undermine the ultimate success of a business. But, like last month's stock price, that's history. Today, in many firms, executives at the highest corporate levels are driving the development of value-chain strategies to enhance interactions with business partners. They've seen, for example, what innovative business models have done for leading companies like Dell Computer Corp. and Cisco Systems Inc., shrinking inventory costs and accelerating the cash-to-cash cycle. In adopting elements of the so-called virtual corporation -- often through outsourcing -- they are trying to leverage the efficiencies of their value-chain partners. And they are beginning to understand that all of this requires a higher level of collaboration and information sharing if they expect to improve not only the performance of their own companies but also the overall performance of the value chains in which they participate. To varying degrees that's true whether their companies are "chain starters" that supply raw materials and components, midchain suppliers, finished-product manufacturers, distributors, or direct marketers. Executives in each of those segments -- including 1,309 who lead finished-product firms -- were among the more than 2,000 respondents to an IndustryWeek survey designed to assess the impact of effective value-chain strategies and identify major obstacles to optimizing the performance of a value chain. Among the major findings of the extensive research project, conducted in association with Ernst & Young, the New York-based management consulting firm, were these:

  • Nearly one-third of the survey participants (31.2%) said that, in their companies, the CEO or president is "most responsible" for value-chain-improvement initiatives. Another 33.6% indicated that responsibility rested at the vice-president level.
  • More than half of the executives said that their firms have adopted -- or are in the process of developing -- formal value-chain strategies. Of the 36.7% who now have formal strategies in place, a heavy majority believe their efforts have been at least "somewhat effective" -- although only 26.1% think the strategies have been "highly effective."
  • Only 13.3% of the respondents rate the overall performance of the primary value chain that they participate in as "very good" or "excellent" -- indicating that there is considerable room for improvement.
  • Companies that have adopted formal strategies -- and especially those with highly effective strategies -- tend to be more successful in growing top-line revenues.
  • Intercompany pressures on pricing issues are the most common stumbling block to value-chain optimization. Fully 44.2% of the executives cited pricing issues as a "major" barrier, while 39.7% blamed poor communication.
A strategic imperative Considering the level of executive involvement, value-chain management has clearly become "a strategic imperative" in most companies, observes Robert Neubert, Ernst & Young's national director of automotive and industrial products services. "It is not something that is being left to the purchasing department. It has reached the highest levels in the corporation," he says. "People see it as a key element of strategy." In smaller companies -- those with revenues of less than $100 million -- the president or CEO is most likely to bear the primary responsibility for value-chain improvement, the IW survey found, while large companies more frequently assign vice presidents the leading role.
How Effective Are Value-Chain Strategies?
Companies with formal strategies, by type of company (# of respondents)* Percentage who say "somewhat effective" Percentage who say "highly effective"
Finished-product manufacturer (498) 68.5% 28.7%
Midchain supplier (274) 71.5% 25.2%
Chain starter (92) 76.1% 21.7%
Wholesaler/distributor (59) 69.5% 30.5%
Direct Marketer (51) 68.6% 31.4%
ALL RESPONDENTS (743) 71.2% 26.1%
* Some respondents occupy more than one value-chain position.
Who's Most Responsible
For Value-Chain Improvement Efforts:
CEO/President 31.2%
Vice president 33.6%
Manager 17.3%
Director 17.1%
Other 1.4%
None 3.9%
Only 17.3% of the respondents indicated that responsibility rests in the hands of people with "manager" titles; however, this is more prevalent in industrial equipment, automotive, and high-tech companies. "One explanation," Neubert suggests, "is that supply-chain operations for these industries are more mature and they [must deal with] more complex value-chain issues." In a complex supply chain, he says, "companies are more likely to push responsibility downward and drive execution throughout the organization." The IW survey results indicate that the closer a company is to the end consumer, the more likely it is to have a "highly effective" value-chain strategy. While 31.4% of direct marketers regard their value-chain strategy as highly effective, only 21.7% of executives with "chain-starter" firms gave such an optimistic appraisal. This suggests that firms at the end of the chain may enjoy an advantage by being closer to the pulse of marketplace demand -- or because they have greater leverage in influencing the rest of the chain. Value-chain strategy encompasses various elements. In addition to cultivating partnerships and building trust with immediate customers and suppliers, it also includes initiatives that create ripple effects across multiple tiers of a given chain. Among them:
  • Inventory strategies -- such as JIT delivery, real-time inventory tracking, CPFAR (collaborative planning, forecasting, and replenishment), synchronizing supply/demand planning, and cross-docking of materials at warehouse locations.
  • Sharing critical information -- with suppliers, customers, and other value-chain partners. Providing access to real-time information on production plans, sales orders, and inventory levels can smooth the flow of materials and reduce inventory costs throughout the chain.
  • Collaborative product development -- specifically, initiatives that involve suppliers and customers in the early stages of the development process.
  • Adoption of Web technologies -- including various e-business solutions that improve the flow of information throughout a value chain, improve logistics management, and reduce cash-to-cash cycle times.
Companies that have implemented effective value-chain strategies tend to perceive a twofold benefit. Not only do they do better individually, but the performance of the overall chain often improves. Among the executives who assess their strategies as highly effective, 57.9% rate the overall performance of their primary value chain as "very good" or "excellent." Meanwhile, only 5.6% of those with ineffective strategies see their value chains functioning at that level. Closer to home, sound value-chain strategies appear to generate better internal results. For example, 77.4% of the executives who rated their firms' strategies as highly effective reported an increase in the number of immediate customers over the last three years. A considerably lower percentage of firms with "somewhat effective" strategies or ineffective strategies cited growth in their customer base. "This provides important evidence to support the often-overlooked revenue benefit of value-chain initiatives," says Glenn Dalhart, a partner in Ernst & Young's supply-chain-management consulting practice. "People who pay attention to their value chain and formulate formal strategies for their value chain can have a substantial positive impact on the top line of their organization." As a result, he believes that top executives "should be thinking about the positive revenue implications of their value-chain strategy -- not just about improvements in productivity or working capital." Because evolving value-chain disciplines look not only at the supply side of the equation, but increasingly focus on the customer -- and even the customer's customer -- advanced value-chain initiatives are often "customer-driven," Dahlhart adds. "This trend has been accompanied by the creation of new customer-focused value-chain metrics such as 'perfect orders.'" Significantly, internal metrics that ultimately impact bottom-line performance -- such as total inventory turns -- appear to be more impressive in firms with highly effective strategies; survey data show that these companies have a median of 10 turns a year, compared with just five turns for those with ineffective strategies.
Perceived Barriers to Value-Chain Optimization
Issues No barrier Minor barrier Major barrier
Pricing pressures 10.5% 45.3% 44.2%
Poor communication 10.7% 49.6% 39.7%
Lack of leadership at the top 19.9% 45.2% 34.9%
Knowledge/training 6.9% 58.3% 34.7%
Corporate philosophical differences 18.9% 47.9% 33.3%
Lack of trust 22.5% 50.9% 26.6%
Technology incompatibility 29.7% 53.5% 16.8%
Who Are The Culprits?

Percentage of respondents citing specific tiers in a chain as the "greatest barrier" to achieving overall value-chain objectives.

Own company 43.7%
Immediate customers 21.2%
Immediate suppliers 20.3%
Supplier's suppliers 10.2%
Customer's customer 8.5%
Stumbling blocks Who -- and what -- are the major obstacles to optimizing performance in a value chain? First, the "who" question: More than two-fifths of the executives surveyed pointed a finger at their own companies as the greatest barriers. Next on the list of culprits were immediate suppliers and immediate customers -- each blamed by slightly more than 20% of the respondents. A deeper cut of the survey data, however, shows that executives in firms with highly effective value-chain strategies are much less inclined to fault their own firms. Only 19.8% of this group saw their companies as the major culprit. In contrast, 68.4% of those with ineffective strategies singled out their own firms as the biggest barrier. Eugene Long, Ernst & Young's global supply-chain director, offers a plausible explanation for why a firm's immediate partners are often seen as the chief ogres. "It's likely," he says, "that resistance received from immediate customers and suppliers would be a significant barrier to the value chain's performance." The most common causes of "misalignment with value-chain partners," he observes, are pricing pressures and poor communication. Indeed, survey participants most frequently cited these as major barriers. Asked what would most benefit the performance of their chains, many of the respondents mentioned improved communication -- both internally and with partners. One executive saw a need for "better communication from suppliers when shipments are going to be late." Another longed for "better advance notice of changing customer requirements as driven by the customer." After pricing pressures and communication, the next biggest barriers were deemed to be lack of leadership at the top of the company, inadequate knowledge or training, and corporate philosophical differences. Somewhat surprisingly, "lack of trust" was well back in sixth place on the list -- cited by only 26.6% of the executives as a major barrier. Technology incompatibility, mentioned by just 16.8%, seemed to be the least-worrisome issue. Long is a bit puzzled why technology compatibility didn't rank higher as an obstacle, since it is integral to many intercompany-communications strategies. One reason for communications breakdowns between companies, he notes, is that they "are not using information technology in a way that achieves better communication and a higher level of trust." What makes one company's strategy more effective than another's? Commitment to execution is certainly a factor. But the scope of the strategy -- including the types of information a company shares with customers and suppliers -- also has an impact. Highly collaborative companies are more willing to share information on a timely basis and tend to be more willing to make compromises "for the benefit of the entire value chain," says Fred A. Kuglin, a partner in Ernst & Young's supply chain/operations practice. "Collaboration can be viewed as a critical enabler of performance in an extended enterprise value chain," he asserts. Analysis of the IW survey data, Kuglin observes, reveals that the more collaborative manufacturing companies enjoy higher on-time delivery rates and shorter cash-to-cash cycle times, regardless of their position in the value chain. Dell Computer exemplifies this phenomenon, he notes, in that it quickly relays information about customer orders to its suppliers who, in turn, are committed to quick delivery. Highly collaborative finished-product manufacturers also reported shorter order-to-shipment leadtimes than less-collaborative firms, although that does not seem to hold for midchain suppliers and chain starters. Kuglin's explanation: Because information such as sales forecasts, order forecasts, and actual orders "are available earlier as a result of information sharing across the value chain . . . the order-to-delivery time appears longer, although the customer still receives the order on time, when it is required. Thus, collaboration results in maximizing the time a company has to respond and fill an order, without [necessarily] modifying the timing of the actual customer demand or the expected shipment date." IndustryWeek's examination of the metrics reported for on-time delivery, order-to-shipment leadtimes, and cash-to-cash cycle times suggests some correlation between performance levels and information-sharing practices. For example, firms that share sales-order data and inventory information with suppliers had a median cash-to-cash cycle of 60 days -- 10 days shorter than the median for all companies. The Web factor Adoption of e-business initiatives such as Web-enabled procurement, business planning, and inventory tracking appear to contribute to a higher level of performance across the chain. An examination of IW survey data shows that executives whose firms' currently use Web-enabled solutions for 12 different business processes are more inclined to view the performance of their overall value chain more favorably. For example, 18.5% of those who use Web-based systems for sales forecasting rate the performance of their primary value chain as "very good" or "excellent," compared with just 13.3% of all survey participants. Processes for which Web-enabled solutions show the strongest correlation with higher-performing value chains are quality control, invoicing, inventory tracking, sales forecasting, and business planning. On the other hand, using the Internet for exchange of engineering data seems to make only a marginal difference, if any. As companies increasingly rely on business partners as a result of outsourcing and adoption of other elements of the virtual-corporation model, they will be looking for ways to "leverage the capabilities of their external partners," observes Brian Giuffrida, marketing director at Framework Technologies Corp., a Burlington, Mass., provider of communications solutions to support multi-organizational, cross-functional teams. "And the best way to do that," he says, "is through use of the Internet."
Sound Strategies Enhance Top-Line Revenues
Perceived effectiveness of value-chain strategy Percentage of respondants reporting change in number of immediate customers
Decreased Remained the same Increased
Not effective 27.8% 27.8% 44.4%
Somewhat effective 18.9% 21.8% 59.3%
Highly effective 12.4% 10.2% 77.4%
Source: IndustryWeek, ERNST & YOUNG 2000
Effective Strategies Improve Inventory Metrics
Perceived effectiveness of value-chain strategy Median performance metric
Total annual inventory turns Raw-material days on hand Finished-goods days on hand
Not effective 5 turns 45 days 25 days
Somewhat effective 9 turns 25 days 16 days
Highly effective 10 turns 20 days 14 days
Source: IndustryWeek, ERNST & YOUNG 2000

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