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I N T E R N AT I O N A L C O M M E R C E R E V I E W
ICR (2007) 7:144–150 – DOI 10.1007/s12146-007-0019-8 – © ICR 2007
Published online: 28 November 2007
145

Soft secrets
of supply chain
success

Ulrich Thonemann Klaus Behrenbeck Ulf Merschmann


ulrich.thonemann@uni-koeln.de klaus_behrenbeck@mckinsey.com ulf_merschmann@mckinsey.com
Cologne, Germany Cologne, Germany 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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146 Soft secrets of su p ply c h ain success

I mportant supply chain performance indicators


are service levels, inventory costs, and logistics
costs. In truly excellent supply chains, companies
factors that differentiate outstandingly successful
performers from the rest.

achieve high performance in all these dimen- Measuring supply chain efficiency
sions simultaneously, i. e., high service levels with
low inventory levels and low logistics cost. Today, To carry out comparisons, we first
a well-functioning supply chain is a competitive wanted to identify companies that
Ulf Merschmann
advantage. Successful companies such as A. S. had substantially increased their
is a consultant
Watson, Tesco, or Procter & Gamble have recog- supply chain efficiency. To do so, we
in McKinsey
nized this and have started optimizing their supply needed to measure and compare
& Company’s
chains accordingly. Procter & Gamble, for example, supply chain efficiency for all 55
Düsseldorf office.
has launched a program called Consumer-driven ­companies. Our starting point was
He is currently
Supply Network, which targets a 50 percent reduc- a simply definition of an efficient
doing a doctor’s
tion in response time, a reduction in ­supply chain: one with both good
degree at the
the number of defects on the shelf, service and low costs.
Department of
a 20 percent reduction in supply
Supply Chain
Professor Ulrich chain costs, and a 50 percent reduc- Good service means meeting the
Management
Thonemann tion in total supply chain inventory. customers’ needs as well as possible.
and Manage-
is professor For retailers, this means stocking the
ment Science
for operations But not all transformation projects are shelves with the right goods in suf-
at Cologne
management this successful. A major sportswear ficient quantities. In order to meas-
University.
and director of and sports equipment producer, for ure the service level in retail, we use
the Department ­instance, faced issues in the imple- on-shelf availability. This key figure
of Supply Chain mentation of a new supply chain measures the percentage of regularly
Management planning tool in 2001, which led to listed items that are actually available on
and Manage- a decline in sales revenues totaling the retailer’s shelves. For manufacturers of consumer
ment Science hundreds of millions of US dollars and durable goods, we measured the service level
at Cologne as well as a 20 percent drop in share using the percentage of order items that satisfy the
University. price. Numerous studies show that requirements in terms of quantity, time and quality
more than half of all change programs compared to all order items in total.
are doomed to failure. This is annoy-
Dr. Klaus ing because transformation projects
Behrenbeck cost a great deal of time and money.
is Director at
McKinsey & Com- But why do some companies have
Why do some companies
pany’s Cologne supply chains that run like clockwork, have supply chains that
office, advising while others seem to have a spanner
consumer in the works? The Seminar for ­Supply
run like clockwork while
goods and retail Chain Management and Manage- other companies seem
companies in ment Science at the University of
Europe and the Cologne and the consulting firm
to have a spanner
United States of McKinsey & Company focused on in the works?
America. this question in a combined research
effort. The result is a comprehensive
Research suggests the
study of the implementation of supply reasons are often subtle.
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- With regard to expenses, we concentrated on the
panies recording considerable progress differed two most important areas: logistics and inventory
from those that made less or no progress. Upon costs. Logistics costs cover the expenses for stor-
closer analysis, we were able to identify six success age, transport and centralized control, measured as

I N T E R N AT I O N A L C O M M E R C E R E V I E W
S O F T S E C R E TS O F S U p p Ly C h A I N S U CC ESS 147

a percentage of the net sales. Inventory costs equal three different branches of the industry in 2001 and
the average scope of the finished goods inventory in 2005. It shows that companies from all three branches
the supply chain in calendar days. were able to considerably reduce their supply chain
costs by an average of about 18 percent – this
To measure and compare supply chain performance, corresponds to an annual rate of about 5 percent.
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 All companies have
and expressed as a percentage of sales:
managed to improve
■ Service costs: What are the costs for retailers, if a supply chain efficiencies
customer does not find an item on the shelf? What
are the costs for a manufacturer of consumer goods over the last five years.
or consumer durables if an order fails to satisfy the But some companies
requirements? One has to evaluate monetarily
the amount of goods which are not available on have improved far faster
the shelf or are not delivered in accordance with than others. What are
the requirements. As a rule of thumb, half of out-
of-stocks – expressed as percentage of sales – is they doing that their
a good estimate for service costs. peers are not?
■ Logistics costs: This key performance indicator
is already expressed as a percentage of sales –
a conversion is not necessary. The savings – if expressed in absolute amounts – are
particularly revealing: The 55 companies surveyed
■ Inventory costs: Initially, the inventory value is saved € 500 million per annum in the period under
determined. Then,
the inventory value
is multiplied by the
weighted average Benchmark of supply chain per formance
cost of capital to com-
pute the inventory Supply chain costs, percentage of net revenue
cost. Inventory cost
is then expressed as
Consumer goods Consumer durables Retail
a percentage of sales.
Cost of 9.0 -20% 10.0 -16% 6.6 -15%
Progress so far lost sales 1.0 0.8
Inventory 0.4 7.2 2.2 8.4 5.6
costs 0.4 1.2 0.9 0.5
The good news is that 0.4 0.9 0.8
0.8
consumer goods manu-
facturers and retailers Logistics 7.6
have improved their costs 6.4 6.9
6.4
4.9
4.3
supply chain efficiency
in the last five years by
an average of 15 to 20
percent. Figure 1 pro- 2001 2005 2001 2005 2001 2005
vides an initial overview Source: The Seminar for Supply Chain
of the progress of the Management and Management Science, Average cost reduction of polled companies: 18%
University of Cologne, and McKinsey & Company
companies surveyed.
This figure compares
supply chain costs in Figure 1: Progress on supply chain cost reduction, 2001–2005

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148 SOFT SECRE TS O F S U p p Ly C h A I N S U CC E S S

Pe r formance profile
Tra n s fo r m at i o n 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.
2001 40
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% - SC costs 2001: 6.5%
- 24 Followers
- 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 Figure 2 also highlights eight companies (four con-
and the German market, this equals an annual sav- sumer goods manufacturers, two durable goods
ing of € 1.8 billion. If we assume that manufacturers manufacturers and two retailers) who managed to
and retailers of all other industry segments achieved achieve twice the savings of the respective industry
similar performance improvements, annual savings average. We wondered what these ‘champions’ did
in the EU 25 add up to a total € 9 billion. Supply chain that was different to the rest (who we will refer to as
managers achieved remarkable results, especially if ‘followers’).
we bear in mind that diesel prices rose by 30 percent
between 2001 and 2005, and truck tolls additionally Factors driving supply chain success
made transportation on highways more expensive.
When we looked at each of the companies in detail,
So which companies improved their efficiency the we found some similarities that applied across the
most? Before we focus on this, we need to clear away board. For example, both, champions and followers
any misconceptions. Figure 2 shows the relative always appointed experienced project managers for
performance of the 55 companies across our three their supply chain projects. So what were the factors
chosen branches of the industry. It depicts not only that differed? We found six.
the performance improvement between 2001 and
2005, but each company’s starting point: whether 1. Dissatisfaction with the current situation
its supply chain costs in 2001 were high or low. The Supply chain transformation requires a trigger. As
data shows that improvements in efficiencies were a rule, this means major dissatisfaction with the
spread pretty evenly across all companies, whatever status quo, no matter how good the current perform-
their initial starting point. ance is. Overall, both champions and followers were

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S oft secrets of sup p ly c h ain success 149

starting out from a similar position, but champions ­ mbraced the two initiatives ‘improve open stock
e
tended to be particularly impatient. Seven out of and promotion planning’ as well as ‘reorganize long-
eight of them (88 percent) said they saw a very high and short-term planning processes.’
need for improvement. This compares to 64 percent
of ­followers. 4. Ambitious targets and thorough tracking
How ambitious should you be in your transforma-
Some of the champions went out of their way to tion projects? If you set your goals too high they may
communicate this sense of urgency to their employ- be perceived as arbitrary and unrealistic and might
ees. For example, one of the surveyed retailers used actually discourage employees. If you set them too
a specially designed transformation story to clarify low you might not achieve as much as you could.
the reasons for restructuring the supply chain and to The champions clearly opted for aspirational targets:
engage them in the process of change. Asked if they set very ambitious targets all (100 per-
cent) of the champions agreed while only 70 percent
2. Quick start and rapid successes of the followers did so. Champions used a range of
While planning is necessary at the beginning of different target-setting approaches (such as bench-
the project, it should not take too long. Among the marking, top-down targets or theoretical limits).
champions the average planning period was three These targets were opportunity-based, balancing the
months – far shorter than the followers’ 12 months. natural tension between stretching and maintaining
Champions used a short, intensive diagnosis to opportunity. Those responsible for delivering these
identify the overall potential for improvement and targets were given clear ownership of their projects,
the biggest specific opportunities. They focused with carefully designed monitoring measures.
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 5. Central leadership
a centrally planned transformation program with Supply chain transformations need top leadership
a central project office to manage the program. This support: the Chairman of the Board must be a visible
was double (30 percent) the proportion of followers supporter of the program. Among all champions, he
adopting the same approach. The other 70 percent was personally responsible for the transformation
of followers took a more decentralized approach. program. Among followers, this was true in only
four out of five cases. Champions also tended to
As an example of centralized planning, Gillette cre- involve staff more. For example, one of the retailers
ated an integrated program consisting of four main had traditionally focused very strongly on price in
themes: minimize complexity, improve supply and its annual supplier appraisals. However, the logis-
demand planning processes and establish opti- tics ­ department demonstrated in several analyses
mum support systems. Each of these main themes that the enormous lot sizes ordered to achieve the
was split into two to three initiatives. For instance, next scale of discount incurred immense additional
the theme of ‘improve demand planning processes’ warehousing and handling costs. As a result, top

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150 Soft secrets of su p ply c h ain success

­ anagement decided to cooperate with suppli-


m concepts and approaches more easily in a combina-
ers to focus on ­ efficient logistics as well as good tion of class lessons, experimental trials and practical
procurement terms. The new philosophy required ­learning on-the-job.
a considerable shift in buyers’ mindsets – from
price reductions to a cooperative approach. Since Conclusion
people had to change their daily behavior, it was
crucial that they understood the rationales behind Bitter experience shows that more than 50 percent
the required change. The retailer tackled this by of all transformation efforts fail. In this research we
organizing joint workshops with its logisticians. The have identified strong evidence for some of the
workshops started out with both parties outlining ­factors driving success. Overall, five of our supply
their particular objectives and ­motivations. This led chain ‘champions’ fulfilled all of the above six factors,
to some important ‘aha moments’ when the two while three of them fulfilled five of the six. The next
sides realized they had never really taken account of best followers (eleven) fulfilled four factors, 27 of
the other side’s perspective. In addition, the retailer them three factors, and the rest between two and no
used computer-based simulations to demonstrate factor. The correlation between ’success factor adop-
the positive impact of the new strategy. The effort tion’ and success was highly positive and statistically
proved ­ successful: Supply chain costs dropped significant.
­significantly.
The following questions may help practitioners act
differently ‘on Monday morning’ by following this
simple mini diagnosis:
Focus, leadership,
■ How has our supply chain performance evolved
­a mbition, planning, in terms of service level, logistics and inventory
training: it was ‘soft’ costs?

factors that marked the ■ What is the team’s attitude towards change?
champions out from
■ What about speed, coordination, and control of
the followers. These improvements?
learnings mean more
■ Are role modeling, employee commitment, and
­c ompanies can achieve capability building sufficiently established?
supply chain success.
Your answers might help your company to become
a champion.

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 Further Reading
This article provides an overview of a study which is explored in
set up their own supply chain academy. Individual detail as a book: Thonemann, U.; Behrenbeck, K.; Brinkhoff, A.;
continuing education plans, progressive teaching Grosspietsch, J.; Küpper, J.; Merschmann, U.: Der Weg zum Sup-
methods as well as change agents help to ensure ply Chain Champion – Harte Fakten zu weichen Themen, Moderne
dissemination of knowledge in the organization. Industrie, 2007 (Supply Chain Superiority – Hard Facts about Soft
Topics, Modern Industry, 2007; an English translation is planned
­Research in the field of adult learning shows that a for first half of 2008).
‘field and forum’ ­approach is key in order to succeed M. Duffy: How Gillette Cleaned Up Its Supply Chain, Supply Chain
in capability building. Adults adapt and maintain new Management Review, April 2004.

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