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(originally published by Booz & Company)


Capturing the Value of Supply Chain Management

An exclusive survey shows CEO participation, smart use of technology, and bold change initiatives are key to successful Supply Chain Management.

For two major consumer products companies that recently merged, rationalizing and integrating their two supply chains — the set of operations and processes a company uses to obtain materials, transform them into finished products, and distribute these finished products to customers — was a prodigious undertaking that could make or break their union. Millions of dollars in savings were at stake, and many complex process changes lay ahead.

“When Supply Chain Management is a CEO-level agenda item, annual savings improvements in the ‘cost to serve customers’ are nearly double.”
As the companies drew up their postmerger integration strategy for both distribution and sales, senior executives agreed the approach to supply chain integration needed to be all-inclusive, involving every division, and it would even require more acquisitions. Indeed, acquisitions were made to improve the scale of the new company’s operations. Distribution itself was realigned so that a single distributor served each market. And each distributor deployed an exclusive sales force to sell only the combined company’s products. This effort was reflected in the result: In one year, the newly merged company saved more than $100 million, while the exclusive distributor sales force strategy drove an immediate 10 percent increase in market share. Competitors were soon racing to catch up.

This rare merger success story underscores the power of Supply Chain Management (SCM) when it is viewed not as an isolated function within a corporation, but as an embedded cross-functional capability designed to unify and rationalize otherwise incongruent parts of a dispersed organization. But this victory is the exception, not the rule. Although SCM officially reached “adulthood” this year — 21 years after Booz Allen Hamilton coined the term — it continues to fall short of its great promise.

A survey conducted by Booz Allen in the fourth quarter of 2002, which received nearly 200 responses from manufacturing and industrial companies in North America, Europe, Asia, and Latin America, many with annual sales of more than $1 billion, clearly identifies reasons the discipline has underdelivered. The core message from respondents, which included chief operating officers, chief financial officers, chief administrative officers, manufacturing/operations vice presidents, and logistical/shipping directors, is this: Top management needs to take a far broader view of Supply Chain Management, deepen its own involvement in the design and ongoing guidance of the function, and take a more realistic view of what technology can — and cannot — do.

Learning from Mistakes
Overwhelmingly, the survey showed that senior executives at large companies worldwide believe SCM hasn’t lived up to what it promised in the 1980s, when it took the corporate world by storm. Nevertheless, respondents’ answers suggest a number of ways executives can learn from SCM’s youthful mistakes, and improve this management practice. Among the survey’s conclusions:

  • In organizations where Supply Chain Management is part of the overall business strategy — and, therefore, a CEO-level agenda item — annual savings improvements in the “cost to serve customers,” a broad measure of manufacturing costs, were nearly double (8.0 percent versus 4.4 percent) those of firms where SCM responsibility resided lower in the organization.
  • Companies willing to consider steps as significant as reorganizing the supply chain itself when appropriate (also known as “breaking constraints”) achieve savings in two key cost measures that are 36 percent and 55 percent greater than companies willing only to make adjustments within the existing supply chain structure.
  • Nearly half (45 percent) of survey respondents said their supply chain information technology (IT) solutions have failed to live up to expectations, suggesting that for Supply Chain Management to reach its full potential, technology alone is not the answer.
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  1. “Beyond Utopia: The Realist’s Guide to Internet-Enabled Supply Chain Management,” by Keith Oliver, Anne Chung, and Nick Samanich, s+b, 2Q 2001; Click here.
  2. “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” by Lawrence M. Fisher, s+b, 1Q 2001; Click here.
  3. “Making ERP Succeed: Turning Fear into Promise,” by Scott Buckhout, Edward Frey, and Joseph Nemec Jr., s+b, 2Q 1999; Click here.
  4. “Balanced Sourcing: The Honda Way,” by Timothy M. Laseter, s+b, 4Q 1998; Click here.
  5. “Setting Supplier Cost Targets: Getting Beyond the Basics,” by Timothy M. Laseter, C.V. Ramachandran, and Keith H. Voigt, s+b, 1Q 1997; Click here.
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