Why CEOs must care about supply chains

Why CEOs must care about supply chains
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First Published: Wed, Oct 14 2009. 12 57 AM IST

Updated: Wed, Oct 14 2009. 12 57 AM IST
Even as companies struggle to cope with volatile market conditions, they could soon find themselves up against another hurdle as they prepare for the next phase of growth—the perils of not focusing on their supply chain. While sales and growth have been the focus of Indian companies, investments in supply chain platforms have not merited similar attention. The challenges are further compounded by a weak logistics infrastructure that has not kept pace with growth, consumer needs and preferences that continue to evolve and the complexities created by regulation such as inter-state service taxes which have resulted in companies setting up warehouses in most states where demand exists.
Take some typical scenarios faced by chief executive officers (CEOs) today:
A CEO reviewing operations in a retail outlet was shocked to find that many of his products were “stocked out” while for a much larger number there was a stock-pile of inventory. Operating margins had not improved even after a five-fold growth in business. Wasn’t scale supposed to improve the company’s operations?
Another CEO conducted a quarterly review with his top managers as sales were falling below target while costs were rising. He found that although sales teams complained that products were not available, inventories were at record high. The procurement team claimed that it couldn’t make supply more reliable because it lacked timely information about requirements, despite the investment in IT tools for planning.
These broken supply chains can no longer serve the needs of an increasingly complex business dealing with globalization, product proliferation to meet regional differences and more stringent customer needs. Now is the time to visit the supply chain because not fixing it is the greatest bottleneck to growth. While the opportunity at hand is large, capturing it requires action across functions and not just by the operations team. Thus, fixing the supply chain needs to be on the CEO’s agenda.
Streamlining the supply chain can:
• Unlock cash through a 20-50% reduction in working capital (primarily inventory) across the value chain
• Lower costs through a 15-40% reduction in supply chain-related expenses (e.g., inbound logistics, production costs, outbound warehousing and logistics)
• Increase revenues by 5-15% through better service levels and higher customer satisfaction
The next question is where to begin and how to go about the transformation especially keeping the India challenges in mind. We believe there are six best practices that separate leaders from laggards.
Set the aspiration: The aspiration should be defined by the CEO as it enables the execution of the overall strategy and is about making continuous cost-service trade-offs across business functions.
The aspiration will determine whether to innovate, redesign or rebalance the supply chain. For example, for a high-tech company, the cost of a lost sale after launching a product and minimizing obsolescence at the end of the life cycle is critical. Key supply chain challenges include rapidly changing consumer preferences and long supplier lead times that reduce the ability to accurately forecast demand.
Thus, the supply chain design must focus on increasing speed and flexibility (example, reduce order lead times, frequent orders) even at the expense of some manufacturing efficiency or increase in logistics costs.
Think end to end: Rather than view the supply chain’s role as only order fulfilment based on instructions from sales or procurement teams, take an end to end view across the value chain to ensure that all parts are working in sync. An effective way to get the organization to start thinking end to end is by instituting a collaborative sales and operational planning process driven by the supply chain planner with input from sales, logistics, manufacturing as well as key suppliers.
Design supply chains by segment and not company: Leading companies treat products differently up and down the supply chain based on key characteristics. One consumer-products company created six distinct supply chains based on product characteristics as well as regional preferences (demand velocity, predictability, channels, and seasonality) to manage complexity.
For the high demand high predictability segment, the supply chain was run on “auto-mode” based on pre-defined business rules but actively managed the seasonal segments were accurately predicting demand was difficult.
Focus on customer breakpoints rather than competitor benchmarks: Supply chains in India are still immature, so meaningful benchmarks are hard to come by. Instead, companies should focus on less predictable processes such as order fulfilment that impact ability to meet desired service levels or burden the system with excess inventory.
Empower and then rigorously manage performance: Leading companies translate the supply chain strategy into cross-functional performance metrics focused on the top-line and bottom line with clear accountability.
For example, a retailer switched from using sales to measure the performance of its merchandising teams to entire profit and loss (affected by inventory, markdowns, distribution and logistics costs).
This enabled decisions on product selection, order quantity and pricing as trade-offs between incremental sales and total cost of ownership.
Actively build capabilities: Winning companies follow a systematic human resources strategy (recruitment, training) for the supply chain including standardized problem-solving approaches such as Six Sigma and lean and training programmes.
In addition, our work with companies shows that investing in advanced information technology supply chain planning and optimization tools alone has a limited impact if the right processes and capabilities are not in place.
At this point, the real impact for companies in India will come from investing in tools that provide greater visibility into operations.
There is no question that operating in a market such as India is challenging but frankly no different than any other emerging market.
Fixing the supply chain is core to getting the right product at the right time and cost to the right place. This sets off a powerful cycle of lower costs with scale and the ability to differentiate from competitors through better service and reliability.
Getting the supply chain right will therefore become a critical differentiator for companies to debottleneck and ride the next wave of growth. Yet the benefits don’t end merely with bottom-line impact for individual companies.
An efficient supply chain can do much more by helping India meet the next phase of growth aspirations and become a global super-competitor.
©2009/McKinsey & Co
Prashant Gupta is partner and Shaishav Dharia is associate partner at McKinsey & Co.’s Mumbai office.
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First Published: Wed, Oct 14 2009. 12 57 AM IST
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