Supply Chain Management—The Practitioners' Point of View

By Greg Girard and Mitchell E. MacDonald -- Supply Chain Management Review, 6/1/1997

Managing and optimizing the supply chain has captured the attention of senior executives within every business segment of corporate America. And though they may be unclear about the details of the processes involved, top management believes that they can gain competitive advantage through supply chain management. They hear of "best practice" supply chain practices that excel in reducing operating costs, improving asset productivity, and compressing order-cycle time. They also read about leading companies that are using supply chain management as the centerpiece of their growth and profit strategies.

But how far have North American companies actually progressed in realizing the profit and potential of supply chain management? And how are they positioning themselves for supply chain excellence in the future? To answer these and related questions, Advanced Manufacturing Research (AMR) and Logistics Management Magazine surveyed logistics professionals—the practitioners at the forefront of any supply chain business-process reengineering activity.

Analysis of the more than 300 responses received reveals that supply chain management is, in fact, capturing close attention across a range of industries and organizations. The companies represented uniformly recognize it as a valuable source of competitive advantage—both for themselves and their competitors. Yet they are responding to the supply chain management imperative in different ways, through the use of various information technologies, for example, and management approaches such as outsourcing.

In short, the responses strongly suggest that while companies recognize the market and competitive potential in successful supply chain management, they are striving to figure out the best way of capturing that potential.

Everyone's Aware of the Potential

The survey respondents firmly believe in the gospel of supply chain management. Fully 85 percent said that supply chain management was a competitive factor in their marketplace. This belief held sway across every industry measured and every company size. Yet while recognizing that supply chain management was critical, respondents did not always believe that it was their own company gaining the edge. In fact, the majority felt that the competition had the upper hand because of their supply chain management superiority. Only two of five respondents said that SCM gave their company the edge in the marketplace. (Exhibit 1 gives the breakdown.)

The survey went on to ask respondents to characterize their organizations as essentially function-based (vertical) or process-based (horizontal). The analysis then proceeded to correlate the relationship between type of organization and perceived competitive supply chain management advantage relative to the competition. The results are instructive, suggesting that companies that have reengineered their organizational structures from function-based to process-based have benefited.

Specifically, the survey results underscore that competitive advantage from supply chain management is much more likely to be enjoyed by companies that have taken a process-oriented, or horizontal, approach to running their business compared to those companies that have stayed with a traditional function-based (vertical) management structure. As Exhibit 2 shows, the respondents with functionally based companies were more inclined to downgrade their firms' competitive position. Sixty percent of this group believed that their competitors held an advantage based on relative supply chain performance. The others in this category were split almost equally between a neutral and a positive assessment of their competitive position. Fewer than one in five functionally organized firms saw themselves holding a competitive advantage based on supply chain performance.

The contrast between the functionally oriented and process-oriented respondents was striking. For one thing, the latter were far more confident of the comparative superiority of their companies' supply chain performance. Nearly 60 percent of those companies organized by process believed that they had the advantage, while 35 percent saw the competition holding the edge.

Still a "Show-Me" Attitude on Technology

Since information technology is such a critical component of successful supply chain management, the survey sought to determine the types of software and systems being used and considered for the future.

The installed base of supply chain management information systems is an assortment of solutions that vary along such key dimensions as application domain, functionality, operating environment, databases, development tools and languages, user interfaces, and network architecture, among others. To make the most practical sense out of this legacy environment of heterogeneous systems, therefore, the survey asked respondents to describe the following two aspects of their SCM system development: (1) degree of integration (stand-alone versus integrated) and (2) development methodology (custom development versus off-the-shelf software).

Custom-developed software—including both the stand-alone and integrated applications—captured the biggest share of the respondents' installed base at 57 percent. (See Exhibit 3.) Off-the-shelf integrated applications held nearly one-third of the installed base, a surprisingly high market share. The penetration rate may reflect the fact that many respondents considered some parts of their Manufacturing Resource Planning/Enterprise Resource Planning (MRPII/ERP) systems as integrated supply chain management systems, and answered the questionnaire accordingly.

Respondents evaluated one more IT characteristic of the business environment for supply chain management: The attitude of their companies toward technology adoption. The responses reflect the peculiar nature of the market for supply chain management information technology. Almost half of the survey respondents viewed their own firms as being "early adopters" that had enough in-house expertise to fix or customize products. One out of 10 believed their companies to be IT pioneers, characterizing their companies as "first to adopt." At the other end of the spectrum, 4 percent said they were "technology averse."

It's clear, though, that much of this market continues to take a show-me attitude when it comes to information technology adoption. Slightly more than 40 percent viewed their firms as embracing IT solutions only after their competitors have benefited from them—or once the product has matured and become an industry standard. This show-me segment likely will shrink as industry leaders accelerate their rate of information technology adoption in pursuit of competitive advantage. Industry-leading companies increasingly will take advantage of quicker product development and version release schedules being set by leading supply chain software vendors that are using that tactic to establish dominant market positions.

In this environment, the technology maturity cycle will compress over time, bringing even the most reluctant user along sooner rather than later. The early adopter phase will shorten and the early majority population will increase. Constraining this shift will be the historic costs of legacy systems and infrastructure as well as the magnitude of conversion efforts in terms of time, financial, and human resources. These factors will combine to raise the bar for new IT investments and set the upper limits for technology adoption rates in the marketplace.

Sharp Increase in IT Spending Seen

Spending on supply chain management information technology is increasing this year over last year among the surveyed group. Although respondents were unable to quantify changes in their budgets, 40 percent indicated that their budgets for supply chain management solutions would increase. About half said it would remain level. Only 9 percent, the remainder, reported that their IT budget would decrease this year.

Respondents then were asked to identify and rank 11 business objectives that they believed would trigger their companies' next supply chain management IT project. The results of their ranking, shown in Exhibit 4, strongly suggest that solutions in the supply chain management space sell as business solutions that meet pressing corporate objectives. Each of the four highest-rated triggers ties directly to strategic objectives—the issues that grab the attention of senior management. Specifically, the favored solutions seek to:

• Improve customer service
• Upgrade order management
• Generate corporate growth
• Improve asset utilization.
  

The practitioners see supply chain management solutions as important levers for improving market share, earnings, and balance-sheet performance. Given that few senior executives really understand the scope and nature of supply chain management, however, they are more likely to favor projects in more familiar areas like manufacturing-focused enterprise resource planning (ERP). Nonetheless, these findings bring compelling messages that can be used to move supply chain management to the top of the information-systems priority rankings and build the necessary case to overcome management's wariness of committing resources and attention to supply chain projects.

As for specific software programs, the survey results highlight the features and functions that really matter to supply chain professionals. Exhibit 5 shows that two functions readily seen as supporting the "cerebral" aspects of supply chain management—advanced planning, scheduling and forecasting, and data warehousing/decision support—enjoy the highest rates of current use and about twice the rate of planned use over the next two years compared to the other functions and features.

Usage rates for intelligent messaging and workflow support, also enablers of "cerebral" supply chain management, were rated well below the two leaders but above the rest of the pack in terms of planned use.

Respondents also were asked to list the three most important software and hardware features/functions, being free to add any feature or function that they considered important. The results, summarized in Exhibit 6, suggest the following:

• About 20 percent of the respondents rated the more mature practices of vendor-managed inventory (VMI), efficient consumer response (ECR), and continuous-replenishment programs (CRP) as among the three most important requirements. These practices, now common in apparel, consumer products, consumer electronics, and other consumer-oriented vertical markets, have yet to gain mind share in many upstream verticals included in this survey.
• Generally speaking, the survey population was more concerned with software features and functions than hardware. Only one specific hardware feature, client/server technology, was rated among the three most important by a significant share (44 percent) of the market. Two other specific hardware features (NT and GUI) were given a top-three rating by only 22 percent and 15 percent, respectively.
• Intelligent messaging and workflow support enjoy one of the higher two-year planned adoption rates. Yet only 15 percent of those surveyed rated them among the top three features/functions. That suggests relatively weak support for these emerging technologies—a situation that calls for missionary marketing to deepen user understanding of their potential impacts.
  

How respondents choose IT vendors for their supply chain management applications proved particularly interesting. Asked about 10 specific information sources used in the evaluation and selection process, it's notable that respondents put detailed product demonstration at the top of the list, outpacing even Return on Investment (ROI) analysis, the second-most important information source. This may well reflect the difficulty in quantifying the direct impact of supply chain management information technology on business objectives when measured in narrow financial terms. The supply chain practitioners apparently recognized that the real business case supporting an investment decision contains a much broader scope than running the numbers.

The importance given to detailed product demonstrations and benchmarking, the third-highest rated source of information, suggests that issues typically covered by these types of investigations—such as functionality that supports best practices and mitigation of implementation risk (in terms of time and cost)—round out the typical winning business case made for these investments. In addition to detailed product demonstrations, the sales cycle supports the selection process through presentations and reference site visits, two other important sources in the IT selection process cited by respondents.

Outsourcing: An Emerging Option

Increasingly, companies are evaluating whether supply chain activities traditionally done in-house should be turned over to outside specialists. The outsourcing of these processes, which has evolved into the third-party or contract-logistics market, is estimated to be a $25-billion market that is growing at more than 20 percent annually. At this rate, it could exceed $50 billion by the year 2000. Most of the customers and third-party providers view this market as still emerging, with rapidly evolving industry structure, product and service offerings, and customer buying hierarchies.

The expenditures on outsourcing reported by the survey sample reflect the emerging nature of the third-party logistics business. While 40 percent of the respondents spent very little (less than $100,000) on outsourcing, 34 percent spent more than $1 million. And of that segment, 3 percent spent more than $50 million.

The survey sought to understand the status and potential of this market by examining the key drivers behind the decision to outsource logistics and supply chain activities. Based on discussions with users of third-party services as well as with the service providers and IT vendors, AMR has identified two types of factors that come into play when companies evaluate the outsourcing option—a "push" set and a "pull" set.

1. The "push" set includes various internal skill deficiencies (typically technical, functional, or process-based in nature) and infrastructure deficiencies (physical or technological). These push companies toward outsourcing as the most attractive option for redressing these deficiencies—considering the time, cost, and risks involved.
2. The "pull" set includes various dimensions of competitive differentiation or advantage in the market. In the supply chain arena, these revolve around improved cost efficiency and improved speed and flexibility. These potential advantages pull companies to outsourcing.

Survey respondents were asked what supply chain management-related activities their companies were currently outsourcing or planning to outsource in the next two years. The results, summarized in Exhibit 7, show that warehousing/distribution-center operations and transportation/operations management were the two most commonly outsourced activities. About one in five respondents either outsources these activities now or plans to so within the next two years. The level reported is consistent with findings of other outsourcing studies conducted in recent years.

We also asked the respondents to evaluate the "push" and "pull" sets of outsourcing drivers for each of the four supply chain activities under consideration. As shown in Exhibit 8, the findings suggest that the "pull" factors were more compelling than the "push" in encouraging respondents to outsource. Specifically, reasons pertaining to cost and efficiency were by far the most prevailing arguments for outsourcing the supply chain and logistics activities addressed in this survey. Improved speed and flexibility, the second broad category of "pull" factors considered, captured about the same mind share as "push" factors. The message for service providers in this market seems clear: Emphasize the "pull" factors like greater cost efficiency and greater speed and flexibility in positioning service offerings.

Power and Potential

The AMR-Logistics Management survey findings leave little doubt about the power and potential of supply chain management in the eyes of practitioners on the front lines. These respondents clearly recognize the competitive gains to be realized through this business process. Moreover, they have a keen sense of when their company enjoys that edge...and when it's lost to the competition.

The supply chain professionals surveyed are well aware, too, of what competitive advantage can mean in the supply chain context. As evidence of this, they cited the top four drivers of supply chain investment as enhanced customer service, improved order management, corporate growth, and improved asset utilization. These are advantages that not only drive the supply chain, but also drive the enterprise overall. And, as such, they can be used to turn top management's attention toward supply chain management.

Finally, the survey results bring important messages to the providers of third-party services and the vendors of related IT software and systems. Users increasingly understand that outsourcing benefits them most when it delivers market advantage like cost efficiency or speed-to-market—the "pull" factors. The "push" factors, such as lack of in-house expertise to do a job, are becoming far less powerful draws to the outsourcing option.

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Author Information

Greg Girard is senior analyst—supply chain at Advanced Manufacturing Research (AMR). Mitchell E. MacDonald is editorial director and publisher of Logistics Management Magazine.

The people on the front line who are managing the flow of their product to market know full well the market and competitive potential of supply chain management, according to a new survey. In some cases, they believe that the supply chain gives their own company an advantage. In others, they see that edge going to the competition. These front-line practitioners report that their companies are investing in a range of process-engineering activities, information technologies, and outsourcing alternatives to either keep that advantage—or wrest it from the competition. The Survey Details The Supply Chain Management Survey was conducted jointly by Advanced Manufacturing Research Inc. (AMR) and Logistics Management Magazine. AMR is a Boston-based market-analysis and consulting firm serving the manufacturing industry worldwide. Logistics Management Magazine is a monthly specialized business publication with a circulation of 74,000. It is published by Cahners Publishing Co. The survey was mailed in early 1997 to a cross section of 3,000 Logistics Management readers. Just over 300 readers completed the four-page questionnaire. Individually and collectively, this group has a broad range of responsibilities for logistics and supply chain management activities within their organizations. Their scope of activity includes information-oriented processes such as demand, product, and inventory planning; distribution and inventory management; and supplier/management quality assurance. It also incorporates asset-oriented processes such as transportation, warehousing and distribution-center operations. Fifteen different industries were represented among the respondents. The four biggest industry segments (accounting for about half of the respondents) were industrial products, chemicals, retail and wholesale, and electronics. The demographics of those who responded suggest that they are an excellent group for the purposes of the survey. They represent a balanced mix of companies in terms of revenues and industry sectors. The management levels of respondents were similarly balanced. Close to 40 percent described their positions as corporate, group, and divisional directors and managers—roles with broad responsibility for activities that drive customer satisfaction, cost performance, and asset utilization. Slightly more (47 percent) described their roles as general and middle management. Based on the mix of industries and the nature of respondents' responsibilities, the responses appear to form a solid basis for drawing useful inferences and conclusions about the state of supply chain management in U.S. corporations today. How Companies Learn About Supply Chain Software The survey asked respondents what information sources they used when selecting their supply chain software. The results show that three information sources predominate: trade publications, consultants, and conferences and trade shows. Reflecting the steady growth of electronic commerce, the findings also revealed that the Internet was becoming a key information source. Fully one-fifth of the respondents, in fact, indicated that they now turned to the Internet for software information. This put the Internet ahead of market research companies as an information source. The results suggest at least four components that should be included in any software vendor's marketing plan: The mix should include advertising and public-relations efforts to gain visibility in business publications that cover logistics and supply chain management. These journals are an important information source from the early stages onward in the software selection cycle. Vendors should forge strong relations with consultants, especially through content-driven alliance programs. Consultants value the information such programs bring, making them appear smarter in their clients' eyes and more leveraged in their service delivery model—both of which are key drivers of their market and financial success. Vendors should maintain some presence at conferences and trade shows. These are deep and diverse communications channels. Resources should be committed to specific opportunities only after reviewing the conference's reach and influence and then carefully aligning the vendor's presence to audience expectations. The Internet's information resource rate of 21 percent will certainly increase. Accordingly, vendors should improve the content, functionality, look, and feel of their web pages. They need to take advantage of the "push" technologies now gaining ground on the Internet.

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