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144 I N T E R N AT I O N A L C O M
144 I N T E R N AT I O N A L C O M

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ICR (2007) 7:144–150 – DOI 10.1007/s12146-007-0019-8 – © ICR 2007 Published online: 28 November 2007

ICR (2007) 7:144–150 – DOI 10.1007/s12146-007-0019-8 – © ICR 2007 Published online: 28 November 2007

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Soft secrets of supply chain

success

28 November 2007 145 Soft secrets of supply chain success Ulrich Thonemann ulrich.thonemann@uni-koeln.de Cologne,

Ulrich Thonemann ulrich.thonemann@uni-koeln.de Cologne, Germany

Thonemann ulrich.thonemann@uni-koeln.de Cologne, Germany Klaus Behrenbeck klaus_behrenbeck@mckinsey.com Cologne,

Klaus Behrenbeck klaus_behrenbeck@mckinsey.com Cologne, Germany

Behrenbeck klaus_behrenbeck@mckinsey.com Cologne, Germany Ulf Merschmann ulf_merschmann@mckinsey.com Düsseldorf,

Ulf Merschmann ulf_merschmann@mckinsey.com Düsseldorf, Germany

Supply chain performance has improved significantly over the last five years, with average efficiency boosts of 15–20 percent. But some companies are improving much faster than others. What distinguishes the leaders from the followers?

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SOFT SECRETS OF SUppLy ChAIN SUCCESS

I mportant supply chain performance indicators are service levels, inventory costs, and logistics costs. In truly excellent supply chains, companies achieve high performance in all these dimen-

sions simultaneously, i. e., high service levels with low inventory levels and low logistics cost. Today, a well-functioning supply chain is a competitive advantage. Successful companies such as A. S. Watson, Tesco, or Procter & Gamble have recog- nized this and have started optimizing their supply chains accordingly. Procter & Gamble, for example, has launched a program called Consumer-driven Supply Network, which targets a 50 percent reduc- tion in response time, a reduction in the number of defects on the shelf, a 20 percent reduction in supply

chain costs, and a 50 percent reduc- tion in total supply chain inventory.

Professor Ulrich Thonemann is professor for operations management and director of the Department of Supply
Professor Ulrich
Thonemann
is professor
for operations
management
and director of
the Department
of Supply Chain
Management
and Manage-
ment Science
at Cologne
University.
Dr. Klaus
Behrenbeck
is Director at
McKinsey & Com-
pany’s Cologne
office, advising
consumer
goods and retail
companies in
Europe and the
United States of
America.

But not all transformation projects are this successful. A major sportswear and sports equipment producer, for instance, faced issues in the imple- mentation of a new supply chain planning tool in 2001, which led to

a decline in sales revenues totaling

hundreds of millions of US dollars as well as a 20 percent drop in share price. Numerous studies show that more than half of all change programs are doomed to failure. This is annoy- ing because transformation projects cost a great deal of time and money.

But why do some companies have

supply chains that run like clockwork, while others seem to have a spanner

in the works? The Seminar for Supply

Chain Management and Manage- ment Science at the University of Cologne and the consulting firm McKinsey & Company focused on this question in a combined research effort. The result is a comprehensive

study of the implementation of supply chain management. Initially, we con- ducted interviews with 55 companies in consumer goods, consumer durables, and retailers in Germany. Then we identified how the approach of those com- panies recording considerable progress differed from those that made less or no progress. Upon closer analysis, we were able to identify six success

Upon closer analysis, we were able to identify six success factors that differentiate outstandingly successful

factors that differentiate outstandingly successful performers from the rest.

Measuring supply chain efficiency

To carry out comparisons, we first wanted to identify companies that had substantially increased their supply chain efficiency. To do so, we needed to measure and compare supply chain efficiency for all 55 companies. Our starting point was a simply definition of an efficient supply chain: one with both good service and low costs.

Good service means meeting the customers’ needs as well as possible. For retailers, this means stocking the shelves with the right goods in suf- ficient quantities. In order to meas-

ure the service level in retail, we use on-shelf availability. This key figure measures the percentage of regularly listed items that are actually available on the retailer’s shelves. For manufacturers of consumer and durable goods, we measured the service level using the percentage of order items that satisfy the requirements in terms of quantity, time and quality compared to all order items in total.

Why do some companies

have supply chains that

run like clockwork while

other companies seem

to have a spanner

in the works?

Research suggests the

reasons are often subtle.

With regard to expenses, we concentrated on the two most important areas: logistics and inventory costs. Logistics costs cover the expenses for stor- age, transport and centralized control, measured as

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SOFT SECRETS OF SUppLy ChAIN SUCCESS 147 a percentage of the net sales. Inventory costs

SOFT SECRETS OF SUppLy ChAIN SUCCESS

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a percentage of the net sales. Inventory costs equal the average scope of the finished goods inventory in the supply chain in calendar days.

To measure and compare supply chain performance, we aggregated the three key figures – service level, logistics costs, and days of inventory – to form one single factor. As part of this process, we assessed each dimension monetarily, i. e. converted into costs and expressed as a percentage of sales:

Service costs: What are the costs for retailers, if a customer does not find an item on the shelf? What are the costs for a manufacturer of consumer goods

or consumer durables if an order fails to satisfy the requirements? One has to evaluate monetarily the amount of goods which are not available on the shelf or are not delivered in accordance with the requirements. As a rule of thumb, half of out- of-stocks – expressed as percentage of sales – is

a

good estimate for service costs.

Logistics costs: This key performance indicator is already expressed as a percentage of sales –

a

conversion is not necessary.

Inventory costs: Initially, the inventory value is determined. Then, the inventory value

is multiplied by the weighted average

cost of capital to com- pute the inventory cost. Inventory cost is then expressed as

a percentage of sales.

Progress so far

The good news is that consumer goods manu- facturers and retailers have improved their supply chain efficiency in the last five years by an average of 15 to 20 percent. Figure 1 pro- vides an initial overview of the progress of the companies surveyed. This figure compares supply chain costs in

three different branches of the industry in 2001 and 2005. It shows that companies from all three branches were able to considerably reduce their supply chain costs by an average of about 18 percent – this corresponds to an annual rate of about 5 percent.

All companies have All companies have managed to improve managed to improve supply chain efficiencies
All companies have
All companies have
managed to improve
managed to improve
supply chain efficiencies
supply chain efficiencies
over the last five years.
over the last five years.
But some companies
But some companies
have improved far faster
have improved far faster
than others. What are
than others. What are
they doing that their
they doing that their
peers are not?
peers are not?
The savings – if expressed in absolute amounts – are
particularly revealing: The 55 companies surveyed
saved € 500 million per annum in the period under
Benchmark of supply chain performance
Supply chain costs, percentage of net revenue
Consumer goods
Consumer durables
Retail
-20%
-15%
Cost of
9.0
10.0 -16%
6.6
lost sales
1.0
0.8
2.2
8.4
5.6
Inventory
0.4
7.2
0.9
0.5
costs
0.4
1.2
0.4
0.9
0.8
0.8
Logistics
7.6
costs
6.4
6.9
4.9
6.4
4.3
2001
2005
2001
2005
2001
2005
Source: The Seminar for Supply Chain
Management and Management Science,
University of Cologne, and McKinsey & Company
Average cost reduction of polled companies: 18%

Figure 1: Progress on supply chain cost reduction, 2001–2005

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148 SOFT SECRE TS OF SUppLy ChAIN SUCCESS Performance profile Transformation Champions and Followers Transformation
Performance profile Transformation Champions and Followers Transformation Champions Followers Consumer goods Consumer
Performance profile
Transformation Champions and Followers
Transformation Champions
Followers
Consumer goods
Consumer durables
Retail
Reduction
- 4 Champions
- 2 Champions
- 2 Champions
of supply
- SC costs 2001: 9.0%
- SC costs 2001: 9.3%
- SC costs 2001: 7.4%
- Improvement SC
- Improvement SC
- Improvement SC
chain costs
costs: 40%
costs: 38%
costs: 36%
2005 vs.
40
2001
Percent
2 x Average
2 x Average
30
2 x Average
20
Average
Average
10
Average
- 5 Followers
- SC costs 2001: 10.3%
0
- Improvement SC
- 17 Followers
costs: 10%
- 24 Followers
- SC costs 2001: 6.5%
- SC costs 2001: 9.0%
- Improvement SC
- Improvement SC
costs: 14%
costs: 17%
High
Low
High
Low
High
Low
Supply chain costs 2001
Source: The Seminar for Supply Chain Management and Management Science, University of Cologne, and McKinsey & Company

Figure 2: Improvements in supply chain performance 2001–2005; 55 companies relative to their ‘starting position’ in 2001

review. projected on to the three industry branches and the German market, this equals an annual sav- ing of € 1.8 billion. If we assume that manufacturers and retailers of all other industry segments achieved similar performance improvements, annual savings in the EU 25 add up to a total € 9 billion. Supply chain managers achieved remarkable results, especially if we bear in mind that diesel prices rose by 30 percent between 2001 and 2005, and truck tolls additionally made transportation on highways more expensive.

So which companies improved their efficiency the most? Before we focus on this, we need to clear away any misconceptions. Figure 2 shows the relative performance of the 55 companies across our three chosen branches of the industry. It depicts not only the performance improvement between 2001 and 2005, but each company’s starting point: whether its supply chain costs in 2001 were high or low. The data shows that improvements in efficiencies were spread pretty evenly across all companies, whatever their initial starting point.

Figure 2 also highlights eight companies (four con- sumer goods manufacturers, two durable goods manufacturers and two retailers) who managed to achieve twice the savings of the respective industry average. We wondered what these ‘champions’ did that was different to the rest (who we will refer to as ‘followers’).

Factors driving supply chain success

When we looked at each of the companies in detail, we found some similarities that applied across the board. For example, both, champions and followers always appointed experienced project managers for their supply chain projects. So what were the factors that differed? We found six.

1. Dissatisfaction with the current situation Supply chain transformation requires a trigger. As a rule, this means major dissatisfaction with the status quo, no matter how good the current perform- ance is. Overall, both champions and followers were

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starting out from a similar position, but champions tended to be particularly impatient. Seven out

starting out from a similar position, but champions tended to be particularly impatient. Seven out of

eight of them (88 percent) said they saw a very high need for improvement. This compares to 64 percent

of followers.

Some of the champions went out of their way to communicate this sense of urgency to their employ-

ees. For example, one of the surveyed retailers used

a specially designed transformation story to clarify

the reasons for restructuring the supply chain and to engage them in the process of change.

2. Quick start and rapid successes

While planning is necessary at the beginning of the project, it should not take too long. Among the champions the average planning period was three months – far shorter than the followers’ 12 months. Champions used a short, intensive diagnosis to identify the overall potential for improvement and the biggest specific opportunities. They focused quickly on a relatively easy task, intensively involv- ing employees to quickly achieve visible improve- ments. For example, in 2002, before the beginning of the supply chain transformation, the razor manu- facturer Gillette performed benchmarking with the most important competitors at that time, and used this to derive areas of activity and target values. In the actual transformation process, it focused on the issue of complexity: for example, country-based vari- ants were standardized and low-selling items were removed from the list. In total, at least 30 percent of items were removed from its product offerings. This initial success impressed even the initiators of the project: inventories of finished products were reduced by 25 percent.

3. holistic program

Five of the eight (63 percent) champions relied on

a centrally planned transformation program with

a central project office to manage the program. This

was double (30 percent) the proportion of followers adopting the same approach. The other 70 percent

of followers took a more decentralized approach.

As an example of centralized planning, Gillette cre- ated an integrated program consisting of four main themes: minimize complexity, improve supply and demand planning processes and establish opti- mum support systems. Each of these main themes was split into two to three initiatives. For instance, the theme of ‘improve demand planning processes’

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embraced the two initiatives ‘improve open stock and promotion planning’ as well as ‘reorganize long- and short-term planning processes.’

4. Ambitious targets and thorough tracking

how ambitious should you be in your transforma- tion projects? If you set your goals too high they may be perceived as arbitrary and unrealistic and might actually discourage employees. If you set them too low you might not achieve as much as you could. The champions clearly opted for aspirational targets:

Asked if they set very ambitious targets all (100 per- cent) of the champions agreed while only 70 percent of the followers did so. Champions used a range of different target-setting approaches (such as bench- marking, top-down targets or theoretical limits). These targets were opportunity-based, balancing the natural tension between stretching and maintaining opportunity. Those responsible for delivering these targets were given clear ownership of their projects, with carefully designed monitoring measures.

their projects, with carefully designed monitoring measures. 5. Central leadership Supply chain transformations need top

5. Central leadership

Supply chain transformations need top leadership support: the Chairman of the Board must be a visible supporter of the program. Among all champions, he was personally responsible for the transformation program. Among followers, this was true in only four out of five cases. Champions also tended to involve staff more. For example, one of the retailers had traditionally focused very strongly on price in its annual supplier appraisals. however, the logis-

tics department demonstrated in several analyses that the enormous lot sizes ordered to achieve the next scale of discount incurred immense additional warehousing and handling costs. As a result, top

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management decided to cooperate with suppli-

ers to focus on efficient logistics as well as good procurement terms. The new philosophy required

a considerable shift in buyers’ mindsets – from

price reductions to a cooperative approach. Since people had to change their daily behavior, it was crucial that they understood the rationales behind the required change. The retailer tackled this by organizing joint workshops with its logisticians. The workshops started out with both parties outlining their particular objectives and motivations. This led to some important ‘aha moments’ when the two sides realized they had never really taken account of the other side’s perspective. In addition, the retailer used computer-based simulations to demonstrate the positive impact of the new strategy. The effort proved successful: Supply chain costs dropped significantly.

Focus, leadership,

ambition, planning,

training: it was ‘soft’

factors that marked the

champions out from

the followers. These

learnings mean more

companies can achieve

supply chain success.

6. Institutionalized training New processes and new approaches are rarely self- explanatory. That is why the champions relied on institutionalized training and external experts to secure employees’ real understanding of concepts and tools. Five out of eight (63 percent) of champi- ons relied on formal training processes, compared to 47 percent of followers. Some companies even set up their own supply chain academy. Individual continuing education plans, progressive teaching methods as well as change agents help to ensure dissemination of knowledge in the organization. Research in the field of adult learning shows that a

‘field and forum’ approach is key in order to succeed

in capability building. Adults adapt and maintain new

in capability building. Adults adapt and maintain new concepts and approaches more easily in a combina-

concepts and approaches more easily in a combina- tion of class lessons, experimental trials and practical learning on-the-job.

Conclusion

Bitter experience shows that more than 50 percent of all transformation efforts fail. In this research we have identified strong evidence for some of the factors driving success. Overall, five of our supply chain ‘champions’ fulfilled all of the above six factors, while three of them fulfilled five of the six. The next best followers (eleven) fulfilled four factors, 27 of them three factors, and the rest between two and no factor. The correlation between ’success factor adop- tion’ and success was highly positive and statistically significant.

The following questions may help practitioners act differently ‘on Monday morning’ by following this simple mini diagnosis:

how has our supply chain performance evolved in terms of service level, logistics and inventory costs?

What is the team’s attitude towards change?

What about speed, coordination, and control of improvements?

Are role modeling, employee commitment, and capability building sufficiently established?

your answers might help your company to become a champion.

Further Reading

Further Reading

This article provides an overview of a study which is explored in

This article provides an overview of a study which is explored in

detail as a book: Thonemann, U.; Behrenbeck, K.; Brinkhoff, A.;

detail as a book: Thonemann, U.; Behrenbeck, K.; Brinkhoff, A.;

Grosspietsch, J.; Küpper, J.; Merschmann, U.: Der Weg zum Sup-

Grosspietsch, J.; Küpper, J.; Merschmann, U.: Der Weg zum Sup-

ply Chain Champion – Harte Fakten zu weichen Themen, Moderne

ply Chain Champion – Harte Fakten zu weichen Themen, Moderne

Industrie, 2007 (Supply Chain Superiority – Hard Facts about Soft

Industrie, 2007 (Supply Chain Superiority – Hard Facts about Soft

Topics, Modern Industry, 2007; an English translation is planned

Topics, Modern Industry, 2007; an English translation is planned

for first half of 2008).

for first half of 2008).

M. M.

Duffy: how Gillette Cleaned Up Its Supply Chain, Supply Chain

Duffy: how Gillette Cleaned Up Its Supply Chain, Supply Chain

Management Review, April 2004.

Management Review, April 2004.

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