Supply Chain Organizations Enter Second Decade
Research shows supply chain organizations making steady progress since they first appeared more than ten years ago.
By Lora Cecere, Research Director, AMR Research -- Supply Chain Management Review, 3/1/2006
Supply chain organizations first started appearing within companies in the early 1990s. A decade later, our research shows that while more and more companies have formed supply chain organizations, the concept is still evolving. In this column we share information from an AMR Research study on supply chain organizations conducted in November 2005. The study included responses from more than 300 North American companies across more than a dozen industries.
Three-quarters of the manufacturing and distribution companies surveyed reported having a group that they call a “supply chain organization.” These units are found more frequently in process-manufacturing organizations (81 percent) than in discrete-manufacturing companies (73 percent). Similarly, supply chain organizations more commonly appear in larger organizations; 86 percent of companies with more than 10,000 employees reported having a supply chain organization compared to only 69 percent of companies with fewer than 10,000 employees. Yet while the great majority of respondents have some type of supply chain organization in place, many of these units are relatively new. Our study found that only 52 percent had a supply chain organization in place for two or more years. The remaining 48 percent had a supply chain group in place for less than two years. Of this latter number, 25 percent have had a supply chain organization for one to two years, and 23 percent for less than a year.Key Questions Raised
The research also sought to gain some insight into such questions as:
* What organizational reporting structure drives the best results? Before we can answer the question of what makes a good supply chain organization, we need to understand the goals of such an organization and what defines success. However, we found that even among those companies with a supply chain organization, there is no clear consensus on the term “supply chain.” In discrete industries, the definition centers on design, assembly, and the management of the supply base. Process-based industries, on the other hand, place relatively greater emphasis on customer-service and fulfillment in their definition. The objectives of supply chain groups also differ based on their organizational maturity. As the supply chain organization matures, the focus shifts from manufacturing to the support of cross-functional processes like sales and operations planning (S&OP) and new product launch. As part of this maturation process, the organization moves from a forecasting orientation to a demand-sensing one and from functional measures to business metrics that are shared across the organization. The genesis of the supply chain organization is deeply rooted in manufacturing; early on most supply chain organizations reported exclusively to the vice president of manufacturing. Interestingly, that traditional reporting relationship has been reversed. Today, 58 percent of companies have manufacturing report through the supply chain organization. Fully 59 percent of those supply chain organizations have a C-level reporting relationship. This is most frequently a direct report to a chief operating officer (although seldom to the chief executive officer). As these relationships have flip-flopped, we find that only 39 percent of supply chain groups today report directly to manufacturing. Notably, a direct reporting relationship to manufacturing is more common in discrete organizations than in process-based industries. It’s also more common in larger companies. In 42 percent of discrete manufacturing companies and in 30 percent of process-based companies, the supply chain organization reports directly to manufacturing. In 41 percent of companies with under 10,000 employees and 34 percent of companies over 10,000 employees, the direct report is through manufacturing. Yet while manufacturing's dominant reporting position may be slipping, the function still actively participates in the supply chain activities of most organizations. In fact, as shown in the table below, manufacturing’s participation is significantly greater than other key functional areas.
Our research found, however, that as supply chain organizations mature, the manufacturing influence becomes more balanced with cross-functional input from other functions. Overall, there is less emphasis on reacting to demand or matching supply to demand and more emphasis on sensing opportunities and creating capabilities. At this point, it’s important to emphasize that a supply chain organization should not be confused with a supply chain corporate planning group. While 75 percent of companies surveyed said that they had a supply chain organization, only 61 percent indicated that they had a corporate planning group. Moreover, not all supply chain planning groups report to the supply chain organization. Instead, we find that when corporate planning and supply chain groups exist in the same company, direct reporting relationships occur 61 percent of the time. For the balance, planning's reporting relationships are evenly distributed among sales, marketing, and manufacturing.
Organization Makes a Difference
Our research shows that supply chain organizational design does make a difference. For example, when a corporate planning group reports directly to a larger supply chain organization there is a difference in a company's success rate for new product introductions. In the study, when asked if their company had more than a 70-percent success rate in new product introductions, 28 percent of the supply chain organizations with planning groups reporting directly to them said that they met this hurdle. Only 18 percent of supply chain organizations without the direct reporting relationship met the hurdle.
The survey pointed to a number of other interesting correlations as well. For example, supply chain organizations that have sales and marketing report directly to them are closer to their customer and have a greater capability to sense true channel demand. Exhibit 1 shows the impact of sales and marketing reporting relationships on the amount of time it takes to sense true channel demand. Basically, in cases where sales and/or marketing reports directly to the supply chain organization, the company can sense and respond to true channel demand more quickly.
Our study also reveals a close correlation between the supply chain organizations's position within the company and its success in sensing demand, introducing new products, and establishing S&OP processes. Companies with supply chain organizations reporting directly to C-level executives score better on these dimensions than those companies that have the supply chain report directly to manufacturing.
At the conclusion of the first decade of the development of supply chain organizations, we find that these structures are still evolving. The good news for companies that may still be developing their supply chain organizations is that they can jump-start their efforts by learning from history.
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