Global Trends In The Consumer Markets
By Bob Hutchinson and James G. Welty -- Supply Chain Management Review, 9/1/1998
It is impossible to understate the importance of supply chain efficiency in today's intensely competitive global marketplace.
Companies worldwide are facing the universal challenges of globalization, mass customization, and demands for higher levels of customer value and service. At the same time, advancing technology has enabled consumers to comparison shop for quality and prices—and make purchases accordingly—without regard for geographic limitations.
The juxtaposition of these factors has put organizations into what looks like a no-win situation. With prices falling and margins shrinking, the challenge is to find ways to stay profitable while maintaining competitive pricing.
In this competitive atmosphere, many companies are scrutinizing their supply chains, looking for ways to identify waste and redundancy and become more cost efficient. Most ultimately plan to redeploy supply chain dollars saved to more productive functions such as customer care, training, or new IT investments. Is this smart business? Absolutely.
In 1997, KPMG Consulting commissioned two studies to gather information about the supply chain practices of real-world companies. The first study (see sidebar on page 61) examined the supply chain practices of companies in a cross-section of industries. The findings were intriguing and seemed to indicate further study would be valuable. Because KPMG Consulting's practices are highly focused on individual industries, the firm decided to conduct an in-depth benchmarking study to identify supply chain trends specific to the consumer marketplace. The findings of that industry-specific study and the challenges it raised in terms of effective supply chain management in consumer markets are the focus of this article.
A Model for Consumer MarketsLast year, a joint team of professors from the Massachusetts Institute of Technology (MIT) and consultants from KPMG conducted a study of global supply chain trends in the consumer market segment called the Consumer Markets Global Supply Chain Benchmarking Study. The study participants included a group of selected manufacturers and retailers, 25 percent of whom were Fortune 500 companies. That inaugural study successfully identified a number of key trends and challenges in the manufacturing and retailing industries.
The Global Supply Chain Benchmarking Study had four major objectives:
- Build a supply chain management model specifically tailored for customer markets.
- Identify and develop appropriate measures for supply chain processes and performance indicators.
- Understand best practices in supply chain management.
- Understand and identify major differences in supply chain performance.
Supply chain management is a unique activity; its processes are so tightly integrated that it cannot be neatly subdivided. For a supply chain to reach maximum efficiency, sourcing and production must be coordinated with distribution, which must in turn be coordinated with customer/point of sale (POS) activities. A breakdown in the flow between any of these activities will cause inefficiencies in other areas of the system.
To facilitate the research, the study team developed a Global Supply Chain Model specifically for companies in consumer markets. The model was designed to support the measurement and analysis of overlapping and unique activities of consumer markets manufacturing and retailing companies. (Exhibit 1 shows the model.)
The Global Supply Chain Model enabled us to compare all consumer markets companies across common criteria and to evaluate manufacturer and retailer groups separately where relevant. The model includes practices and processes in the areas of sourcing/production, distribution, and customer interface/POS—the three sequential primary functional processes of most supply chains. Sourcing and production are integrated into a single process to illustrate the seamless boundary between these two channel functions.
Participating companies were further broken down into those producing and selling durable goods, those producing and selling non-durable goods, and those producing and selling a mixture of both. For this study's purposes, overarching processes are captured in what is termed the Supply Chain Architecture.
Each question in the study related to specific areas of the Global Supply Chain Model. The sub-processes in each of these areas are depicted in Exhibit 2.
Many of the survey results were expected; others were significantly counterintuitive. For example, most organizations espouse the concepts of process improvement and lean practice but few seem to actually be making real strides toward their implementation. There are relatively few "pure" best practices being put in place. There is much discussion by supply chain managers in consumer markets about strategic applications of information technology to improve supply chain processes. But few companies report making the required technology investments.
There is significant evidence that the adoption of lean practices in supply chain management is the best-practice trend of industry-leading performers in both manufacturing and retailing. Manufacturers identified significant improvements in cost, cycle time, and inventory turns in the most recent 12-month period. In addition, the leaders have considerably restructured their supply chain channel as evidenced by the reduction in the number of distribution stages between demand and supply points.
Overall improvements in supply chain performance efficiency also are evident. Forty-two percent of manufacturers reported significant past-year performance improvements in inventory levels of all major categories: raw materials, work in progress, and finished goods. Retailers also are looking to product development and production cycle times for potential reductions rather than examining the transportation process only.
Despite restructuring and improved efficiency, however, progress toward universal improvements in supply chain management is mixed. Results indicate that lean practices, including Just-in-Time (JIT) and Total Quality Management (TQM), are not common across the responding companies. Furthermore, they are largely limited to industrial manufacturing such as the automobile industry.
Maximum cycle times and inventory turns of the best performers were far greater than the averages, indicating a wide variation in supply chain performance. Many retailers still do not utilize performance-enhancing processes such as cross-docking or customer-direct shipments.
Fourteen Key TrendsThe Global Supply Chain Benchmarking Study identified 14 key trends among manufacturers and retailers in the consumer markets. Each of those trends is discussed below.
1. Lean practices are becoming more evident.
Lean practices, which are derived from lean production methods, are the key to improved supply chain performance. Lean production is a manufacturing approach that affects all aspects of the supply chain—from running the factory to interacting with customers. It incorporates such principles as minimal use of inventory, high reliance on the work force, pull systems, fewer suppliers, customer-supplier partnerships, and consideration of the buyer as an integral part of the production process.
Lean practices cut across all areas of the supply chain model. The manufacturers in our survey identified significant improvements in cost, cycle time, and inventory turns in the previous 12 months. Four out of 10 manufacturer respondents cited at least a 10-percent improvement in each area of performance measurement.
Other findings pertaining to lean practices include:
Respondents are using a great deal of information sharing with other players in the supply chain. Ninety-six percent of retailers regularly share information with their supply chain partners, and almost half share information daily. Although EDI is one of the most frequently used methods, the communication medium can range from voice to paper to EDI. This increase in communication may be enabling tightened supply chain structures and reducing costs due to fewer coordination failures.
Supply chain designs entail a closer link to the customer with fewer stages between demand and supply. For retailers, 66 percent of merchandise flows directly to them or through a maximum of one stage before it reaches the retailer or customer. A similarly high percentage of manufacturers, 73 percent, indicate their production flows directly to the retailer, customer, or a maximum of one stage before it reaches the retailer or customer.
Supply chain cycle times, which are already low, are decreasing even more. Retailers are able to replenish in as little as six days for domestic durables and 14 days for non-durables, including production, inbound transit, and outbound transit times.
Inventory turn rates are increasing, reflecting lower inventory levels. Among manufacturers, 42 percent of the respondents indicated at least a 10-percent reduction in total inventory in the previous 12 months. To better evaluate overall relationships in inventory investment, the study separated manufacturers' inventory into raw materials, work in progress, and finished goods. The study developed inventory-turn statistics for retailers detailing turns in both durable and non-durable categories. The average turn reported across all lines of merchandise was seven.
Collaboration to improve supply chain performance between customers and suppliers is on the rise. Collaboration is a core principle of partnership and supply chain coordination. Adherence to this principle is reflected in the high percentage of information sharing and the tendency to jointly forecast.
2. Overall supply chain management efficiency is improving.
For manufacturers and retailers, the data on cost reduction, performance improvement, and satisfaction demonstrate improvements in overall management and coordination of the various members and functions of the supply chain. Exhibit 3 shows the manufacturers' satisfaction ratings across key supply chain indicators. Another indication of improvement is the finding that supply chain costs are a fairly low percentage of total costs. For example, manufacturers reported that distribution center costs typically represented 1 to 3 percent of sales.
3. Though a number of companies have improved their efficiency in key areas, significant universal improvement across the supply chain is limited.
It is important to note that lean practices are not common across companies. The study findings indicate wide variation in supply chains. For example, the maximum cycle times and turns for the top performers were far greater than the averages of all respondents. Analysis of cycle times indicates that improvement opportunities lie in product development and production rather than in transportation.
Another indicator of low universal supply chain performance is the minimal usage of advanced supply chain techniques. With the exception of the automakers, manufacturers reported a low incidence of both JIT and TQM practices. The retailers, for their part, reported low usage of cross-docking and customer-direct shipments. Both of these practices are central to significantly improving supply chain performance in the consumer markets.
4. Cost management continues to be a significant area of focus.
In the past decade, both retailers and manufacturers have focused on lowering operating costs. Most retailers reported very low costs for product development and forecasting and allocation (less than 1 percent of total sales). Forty-five percent reported that buying and procurement costs were less than 1 percent of sales. (See Exhibit 4.)
5. Information technology usage is less than state of the art.
Although information sharing is increasing significantly, most manufacturers do not use dedicated terminals or exchange information and orders over the Internet. Fax and EDI are the most common order-management practices. Similarly, retailers still are heavily reliant on paper-based manual order-management processes such as mail and fax.
6. Manufacturing companies are starting to utilize supply chain management software more heavily.
There appears to be an extended period of time required for software installation. Forty-three percent of respondents report installation times of two or more years. Among manufacturers, the software most often used came from Oracle, Manugistics, SAP, Baan, i2 Technologies, and Red Pepper.
7. Historical-based forecasting and top-down planning were the important planning practices cited by retailers.
The importance of historical forecasting (see Exhibit 5) and top-down planning practices is underscored by the fact that many retailers have tight controls over these processes. More than half of the respondents, in fact, control them internally.
8. Retailers report little change in the number of vendors used.
Retailers reported working with an average of more than 1,000 vendors. Slightly more of the retailer respondents have increased rather than decreased the number of vendors used. This finding runs counter to current thinking in which most industries are reducing the number of vendors along with stock-keeping units (SKUs). Retailers still adhere pretty closely to the historic 80/20 rule of thumb, with 18 percent of the vendors supplying 80 percent of their volume.
Retailers report these statistics because they are trying to meet the demands of a consumer marketplace with a wide variety of needs, tastes, and preferences. With brand proliferation and a high rate of new product introductions, they are forced to carry a wider array of products and use more vendors than they have in the past. Despite this, retailers are attempting to develop close partnerships with key vendors whenever possible and to leverage sales volume and purchasing price with them. When companies do decrease the number of vendors, the main reasons given are consolidation and SKU reduction.
9. Quality and delivery are becoming as important as cost in driving vendor selection.
Manufacturers and retailers alike report that they are guided by product quality, cost, and delivery when selecting vendors and making purchasing decisions. Although buyers have always focused on cost, the concern with product quality and distribution reflects the increasing complexity of the buying process. This is illustrated in the responses shown in Exhibit 6.
10. Wide variation in retailer cycle times can be attributed to differences in product development and production cycle times.
Retailers reported a wide variation in overall cycle times, from 46 days to 33 weeks. These differences are best understood by examining the components of the total cycle time: product development, product manufacturing, and transportation. Exhibit 7 shows the ranges for domestic non-durable goods. (This category was selected because it had the highest number of respondents.)
By contrast, differences in cycle times from the supplier to the distribution center to final destination were 1.4 days to 10 days. Thus, retailers seeking to decrease their overall cycle time should make changes in product development and production—the two areas that will yield the greatest reduction in cycle-time variation.
11. Private-label merchandise strategies are used selectively.
Almost two-thirds of the retailers reported some in-house product development. Although the mean percentages varied widely, the majority of respondents reported internal product development to be less than 25 percent. However, several respondents put in-house product development as high as 90 percent. This finding suggests that while many retailers are not using a private-label approach to their market, a few are embracing in-house product development as a focused strategy.
12. Fulfillment indicators are improving.
Fill rates for the manufacturers were generally quite good within many of their operating functions. For example, 44 percent indicated having rates of 96 percent or greater, and 77 percent reported rates of 91 percent or greater. However, some had rates as low as 66 percent. Order-fulfillment cycle times ranged from one to three days to more than 15 weeks.
13. General Trends: Retailers
Many retailers indicated they were outsourcing their operating functions to third parties. For example, 44 percent said they outsourced transportation. In the area of controlling logistics costs, a much greater percentage of companies had more full truckload shipments outbound than inbound. Most retailers did not make extensive use of cross-docking, store-direct, or customer-direct shipments. And most indicated that they were using one to five outside carriers for their transportation needs, and outbound delivery frequency was commonly three to four times per week.
The majority of companies consolidate shipments inbound but only about half do so on outbound moves. Distribution center operating costs were typically 1 or 2 percent, with most respondents indicating a freight cost of less than 1 percent of sales. The most common supply chain channel was a three-stage distribution system, which involves shipments from manufacturers to a consolidator or a distribution center and then on to the retailer.
14. General Trends: Manufacturers
Transportation costs were typically a small percentage of the total operating costs among manufacturers, even for international shipments. As with retailers, manufacturing distribution center operating costs were typically 1 to 2 percent and the number of carriers used was typically one to five. Companies generally forecast requirements based on past history but do not use the sophisticated statistical techniques that retailers utilize to their advantage. On average, manufacturers only partially collaborate with their vendors; four out of 10 report sharing production plan information.
Opportunities for Supply Chain ImprovementBased on the findings of the Global Supply Chain Benchmarking Study, KPMG identified four factors that may be primary sources of supply chain performance improvement for both manufacturers and retailers.
1. Fewer stages in the supply chain structure should yield shorter leadtimes and, hence, higher turns and lower costs.
For manufacturers this factor is based on the following evidential study findings:
- Higher maximum procurement times for structures with one consolidator in between manufacturer and retailer, and higher fulfillment time with two consolidators in between.
- Higher finished-goods levels for direct-to-retailer structures and instances of lower raw-materials and work-in-progress inventory levels for structures with two consolidators in between manufacturer and retailer. Though these findings might seem counterintuitive, it's important to note that they were for manufacturers only—the total supply chain inventory might be higher. If a manufacturer ships directly to the customer or retailer, that manufacturer might very well have more inventory, but there are fewer opportunities in the rest of the supply chain for inventory to accumulate.
- Lower inbound freight costs for structures with two consolidators in between manufacturer and retailer. In such cases, the extra steps reduce the distance involved and thus reduce overall freight costs.
- Higher distribution costs for structures with one consolidator in between manufacturer and retailer. In these cases, the single consolidator increases costs at the single location but not necessarily throughout the supply chain.
- Lower performance satisfaction in structures with one consolidator in between manufacturer and retailer. Lean practices suggest that streamlined supply chains involving direct shipments will yield higher satisfaction levels.
2. Better information exchange and joint management processes should improve supply chain performance.
For retailers:
- Maximum cycle times went up with vendor-to-company EDI exchanges, but the minimum cycle times went down with EDI exchanges from company to vendor.
- Inventory turns improved with production planning exchanges.
- Less-than-truckload (LTL) shipments decreased, and truckload shipments increased with EDI usage.
- Both outbound freight costs and distribution center costs increased with production planning exchanges from vendor to company.
For manufacturers:
- LTL shipments and air shipments were somewhat lower, and truckload shipments somewhat higher with EDI.
- Direct-to-store and cross-docking were lower in some cases.
- Supply chain satisfaction measures generally were higher for companies practicing EDI exchanges. The one exception: They were slightly lower in the case of EDI exchanges from customers to company.
- EDI exchanges had a number of effects on transportation management activities:
- The effects on leadtime were mixed: Most leadtimes went down with EDI exchanges. However, leadtimes went up with production planning exchanges occurring from customer to company.
- EDI exchanges did not significantly affect inventory turns, although there was a moderate reduction in inventory turns in the case of EDI exchanges occurring from customer to company.
- Production plan information exchange increased some costs and leadtimes.
3. The consolidation of a vendor base will have a positive effect on supply chain performance.
- For retailers, an increased number of vendors can lead to increased cycle times and increased inventory turns.
- For manufacturers, fewer vendors reflect leaner practices and, therefore, improved performance.
4. Performance indicators differ among the companies studied based on revenue size, number of employees, types of goods, and domestic-overseas mix.
- Larger companies generally show higher levels of performance with respect to cycle times, turns, and transportation efficiencies.
- Performance in durable-goods companies (with the exception of cycle times for retailers) is generally better than performance in non—durable-goods companies.
- Leadtimes for overseas durables procurement do not differ significantly from those for non-durables.
- Companies use a variety of supply chain channel structures without clear association with performance, product mix, or industry mixes.
As the findings of the benchmarking study strongly suggest, companies are very idiosyncratic entities. They have different structures, strategies, and initiatives; unique supply chain mixes; and disparate legacy systems. There is no one right answer for every company, no magic bullet that will optimize every supply chain that needs streamlining. But there is a best approach for every unique enterprise. Finding that optimum approach is the challenge for sustaining benefits in supply chain processes.
How do you know if your supply chain improvement efforts are moving in a positive direction or adding weight to your entire system? KPMG's research has confirmed that optimization-by-numbers is usually a self-defeating proposition. Rather than fixing just one process, organization, or step, companies should strive for systemic optimization. This can be a risky proposition; the methodology and approach options are daunting. Yet the benefits of optimizing the entire supply chain system far outweigh the risks.
Because the supply chain is so very complex, systemwide process re-engineering is required to make substantive supply chain improvements. Such a project involves many, many different organizations within the same enterprise—sales, customer service, warehousing, suppliers, and procurement, to name only a few. It is important to understand that, when you undertake to improve your supply chain, you must be prepared to touch, and possibly change, every process in a business.
Using benchmarks, such as KPMG's Consumer Markets Global Supply Chain Benchmark Study, companies can search for data that resonates with relevance to their unique challenges. Armed with information, they are better prepared to develop tailored solutions for their specific needs. After identifying processes targeted for streamlining, an organization can develop an action plan to tune, replace, or redeploy assets. This process-identification/asset-redeployment cycle drives a return on investment-based approach for prioritizing initiatives. And that's when the real benefits of supply chain effectiveness begin to kick in.
| Author Information |
| Bob Hutchinson is managing director of KPMG Consulting's Global Supply Chain Consulting practice. James G. Welty is a principal in KPMG's Consumer Markets Consulting practice. |
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