The Next Stage of Supply Chain Excellence (page 2)

-- Supply Chain Management Review, 3/1/2005

Page 2 of 6

Let's step back to the topic of the supply chain's impact on stock-market performance. A survey of Standard & Poor's 500 organizations reveals that supply chain excellence has a very positive impact on publicly traded stock prices. (See Exhibit 1.) Companies that can bring inventory levels down by 20 percent can lift their shares by as much as 6 percent. Likewise, companies that can boost the utilization of their fixed assets by just 5 percent can also lift their stock by 6 percent.

That kind of uplift in stock price, earnings per share, and cash flow is typical of the organizations that can demonstrate their supply chain advantages. It's not uncommon for those companies to see a 25-percent improvement in customer service, 10- to 20-percent reduction in delivery cycle times and materials costs, and more than 40-percent improvements in cash-to-cash cycle times. With such leverage from current supply chain best practices, it is possible to glimpse the untapped potential of harnessing process-improvement principles and new IT utilization models as well.

The leverage is also evident from another financial perspective: cash-to-cash cycle time. This unit of measure has emerged as one of best ways to assess supply chain efficiency and effectiveness—to demonstrate how well the supply chain maximizes working capital. Cash-to-cash cycle time is the time it takes to receive cash in the treasury after spending on materials. It has three elements: inventory-days of supply, days sales outstanding, and payables. The metric equation is: (inventory days of supply + receivables days supply - payables). The gap between "best" and "average" cash-to-cash times is striking in every sector, according to studies by consultancy PRTM. The studies show that in general the cycle time for "best-in-class" companies is less than half the cycle time for "average" companies. In industrials, the "best-in-class" cycle time can be less than a quarter of the average number. What's interesting is that the gap has grown much wider in the last few years.

The Promise of an Integrated Model

As noted earlier, the supply chain leaders feel compelled to stay far out in front. So what approaches will they use to continually deliver the improvements that buoy stock prices and market capitalization? The authors believe that a three-pronged approach has become essential to consistently outstanding supply chain performance. We have labeled it the "dynamic on-demand supply chain" (DODSC.) (See Exhibit 2.) The DODSC depends on the integration of supply chain management, process-improvement frameworks like Six Sigma and lean, and on-demand technology. Aleda Roth, professor of supply chain management at The University of North Carolina, further explains this integration: "For companies to be competitive, they will need an integrated supply chain approach—a supply chain strategy coupled with a process improvement model and enabling technology." Additionally, as Roth points out, if companies truly want to be out on the leading edge, this integrated supply chain approach will need to extend beyond the company's own four walls and connect to key supply chain partners as well.

Each of the elements of the DODSC will require a strong change management effort. The DODSC is no overnight retrofit; it is really the end point of a journey during which the supply chain adds progressively more value for the organization. Indeed, world-class companies such as Dow Chemical and IBM are just now starting to embrace the DODSC concept to varying degrees. For example, Suheil Nassar, a program director in IBM's Integrated Supply Chain group, acknowledges that "The further upstream we introduce the elements of DODSC, the faster we will see positive results in our supply chain."

There can be no argument with the first prong of the DODSC concept: a company must have a clearly articulated supply chain strategy that is linked to its overall business goals. Much has been written in the pages of Supply Chain Management Review and elsewhere about such linkage and its payoffs. It is sufficient for us to re-emphasize some of the fundamental attributes of an appropriately aligned supply chain strategy. It assumes an end-to-end view of the supply chain, from suppliers' suppliers to customers' customers. Major decision points will be mapped out throughout the extended enterprise, and roles will be well-defined, with decision-making responsibilities and lines of authority clearly spelled out. An aligned supply chain strategy also calls for appropriate monitoring and performance measurement in real time, with alerts that trigger rapid decision making.

In this article, we want to focus attention on the other two elements of the DODSC triangle. One is the process improvement dimension—companies must have a business process framework supported by proven techniques such as lean/Six Sigma. (Four or five years ago, Six Sigma and lean were thought of as separate disciplines. Increasingly, however, they are considered as one, as, for example, at Xerox and at automotive supplier Delphi.) The other is a robust technology platform designed to enable the improvements that result from the integration of lean/Six Sigma and supply chain management strategy.

We will look first at the process improvement dimension, paying particular attention to lean and Six Sigma. Continued...

Previous 1 2 3 4 5 6 Next