The Ideal Supply Chain Is Within Reach

Thursday, May 20, 2004

Tony Friscia

The U.S. economy is experiencing a productivity boom last seen in the post-World War II era. The last boom was
fueled by the widespread deployment of mass production systems, the automobile, and their pervasive impact on the
way we live. This new one can be linked to the widespread deployment of technology and information and, at last,
their pervasive use throughout business and society. Economists and futurists argue persuasively that we are at the
beginning of the deployment phase of the technology revolution, and that if it plays out, we will see an
unprecedented boom cycle.

Follow the leaders

For business, this deployment phase means improving performance across the value chain like never before. The
successful will be the productivity and, thus, market-share leaders of the new economy. Some oft-cited examples
already exist:

Dell, with close to $1M in revenue per employee, dwarfing the industry average
Wal-Mart, whose size exceeds the Gross Domestic Product (GDP) of most countries
Toyota, which is now the second largest global automaker
Cisco, which dominates the networking market

In each case, the foundation of their dominance is supply chain performance. These companies leave competitor
casualties in their wake as they move forward. As technology drives the productivity boom in many other industries,
what do you have to do to take advantage of the foundation supply chain opportunity, to be a leader rather than a
casualty? I constantly think about this question and about AMR Research’s role in the process.

Supply chain, supply chain, supply chain

Ten years ago, AMR Research worked extensively with organizations to evaluate and select Enterprise Resource
Planning (ERP) systems to replace aging applications and infrastructure. Doing so, we identified a supply chain
software market that was forming to capitalize on these largely back-office-oriented ERP backbones. In response,
we launched the industry’s first service dedicated to analyzing this new software market and teamed with consulting
firm PRTM to create the Supply-Chain Operations Reference (SCOR) model and the Supply Chain Council, which
now functions as an independent non-profit organization serving the industry.

Now, as we come out of the severe downturn of the past few years, a supply chain opportunity has once again
emerged. But this time, while technology remains a critical factor, business and best practices take the lead in this
new supply chain revolution.

Best practices are key

To make sense of this new opportunity and to help you to realize it, we have spent the past two years benchmarking
supply chain performance across a number of industries. This research reveals some telling results:

Demand forecast accuracy, perfect order fulfillment (perfect means complete, accurate, and on-time), supply
chain cost, and cash-to-cash cycle time are the four most critical metrics a company can use to get a quick,
balanced snapshot of its supply chain performance. The Takeaway: With these four metrics, you can see
how good a view of demand you have, where you’re making trade-offs between cost and service, and how
well you’re managing your cash flow.
Demand forecast accuracy creates high responsiveness and cuts cost right through the supply chain. The
Takeaway: Companies that are best at demand forecasting average 15% less inventory, 17% stronger perfect
order fulfillment, and 35% shorter cash-to-cash cycle times, while having a tenth of the stockouts of their
peers.
 Demand forecast accuracy correlates with perfect order fulfillment: A 1% point improvement in demand
forecast accuracy can yield a 2% point improvement in perfect order fulfillment capability. The
Takeaway: Even a minor improvement in a company’s demand visibility can have a dramatic effect on its
customer responsiveness.

The supply chain is changing

These findings make it clear that the supply chain management opportunity is at a crossroads. On one side, you have
the general recognition of its strategic importance. On the other side, many of the principles and approaches that
traditional supply chain management was established upon are dramatically changing.

Take the following, for example:

As corporate goals move to profitable growth from cost cutting, the supply chain manager’s role shifts from
responsibility for product movement (inbound and outbound) to overall responsibility of the integrated
supply chain from customer to supplier, including product and information movement.
Lean principles are core to supply chain strategy. These have moved from the manufacturing world, where
principles like flow, Just-in-Time (JIT), and kanban reshaped the plant floor, and now are being applied
across the enterprise through initiatives like Six Sigma.
A real shift has occurred in process design and alignment from a supply/internal orientation to one focused
on the demand signal and the integration of the multilayered value chain (from your supplier’s supplier to
your customer’s customer).

Underlying all of this, the technology that is required is also changing. Most companies placed their bets on the
potential of optimization technology to overcome constraints, but leaders have targeted execution systems that let
them respond to changes faster. Practitioners have also recognized the limits of historical data as a predictor of the
future, and are increasingly using real-time information to get closer to demand.

Introducing your next-generation supply chain team

With this growing base of benchmarking data as a foundation, and a commitment to understanding the evolving role
of technology, AMR Research has grown and refocused its supply chain team to help you navigate the decisions you
need to make with speed and confidence.

Our supply chain work is three-pronged:

Strategy: The Demand-Driven Supply Network (DDSN) is a framework we developed to help companies
use demand-based data to improve service and lower costs--to fulfill the perfect order.
Best Practices: Rather than a pure technology bent, our research is based on how to capitalize on Lean
management principles, including Six Sigma, to push cost and variability out of every operational area.
Technology: We are aggressively covering new technologies like Radio Frequency Identification (RFID)
and their potential to create new levels of supply chain performance. But as with all of our technology
coverage, we are pragmatic and committed to identifying the real Return on Investment (ROI) and maturity
of the tools prior to recommending the implementation.

Ultimately, it is all about unlocking productivity gains. The potential is to double industry productivity rates by
combining multiple lean initiatives with the pragmatic use of information systems and breakthrough technology like
RFID.

I’d love to talk to you more about these issues. Please send me an e-mail to let me know your thoughts--
tfriscia@amrresearch.com.

Copyright © 2004 AMR Research, Inc.