The Business Units Want a True Partner–Can Your Supply Chain Step Up?

Editor’s Note: Greg Gerstenhaber is a Bain & Company partner in Dallas, where he leads the firm's Americas Supply Chain Management group. Peter Guarraia is a partner based in Chicago and the leader of Bain's Global Supply Chain Management group.

When financial performance tumbled well below the expectations of shareholders at a US-based manufacturer of industrial parts, the new head of supply chain saw ways to make the supply chain part of the solution.

The firm was struggling to manage costs and still meet commitments on multiyear contracts with customers. It did business with thousands of suppliers, even though only a handful accounted for the vast majority of spending. Decision making to award new work to suppliers was fragmented among individual product lines, undercutting the firm's scale advantages.

With the backing of the leadership team, the new head of supply chain took action quickly. The company pared back the base of suppliers chosen by each product line to create a small number of strategic relationships. That action reduced the overhead of managing a long tail of smaller suppliers. The leadership team aggregated spending from product lines, and the higher volumes of purchasing led to immediate savings in direct costs. The team integrated functions that formerly worked in silos—procurement, quality, logistics and so on—to work closely together and to provide a single contact for each of the product lines served.

As a result of these steps, the company tripled the annual net productivity rate of the supply base over the course of two years—from near zero to about 3% above inflation—and reduced indirect procurement costs by 12%. The commercial programs benefit from single-point accountability and now view the supply chain function as a true business partner. Investors, meanwhile, have rewarded the company with a steady rise in its stock price.

Many firms would like to make similar strides, taking a standalone, sometimes-reactive collection of support functions and making the supply chain a close partner with the business units. At its best, the supply chain can become a true competitive weapon that yields several beneficial outcomes. These include high satisfaction among customer segments that contribute most to profits, the ability to adjust quickly to external events, a high return on capital for supply chain assets employed and consistent productivity improvements that enable reinvestment back into the business.

Finding the value
To determine where the value-creating opportunities lie, we have seen leading companies use three distinct lenses on the supply chain.

The first lens looks at how the supply chain performs along basic output metrics to be competitive in the marketplace. Metrics include total landed cost, perfect order and predictability and asset efficiency.

The second lens looks at how well the supply chain integrates with other parts of the business. Companies can often find large sources of potential value in the mismatches and misalignments in the organizational seams. The opportunities include the following:

• Simplifying excessive complexity caused by too many product SKUs, or gaining a better understanding of the profitability of different SKUs.
• Stemming the value leakage in the organizational seams caused by excessive rework or expediting. Often, high-level metrics mask the underlying cost and capabilities required to achieve service goals. The dirty secret of “perfect order” capabilities, for instance, is the large amount of money required to expedite an order.
• Better integrating the supply chain with other processes, such as sales and operations planning (S&OP), or sharing costs or capabilities across product lines.

The third lens checks the agility of the supply chain to respond to changes in the external environment. Companies can examine whether and how profit pools shift from one type of customer to another, and whether growth will come from new countries or new products. They can scan for disruptive technologies and evaluate how customers' adoption of digital tools is changing their research and buying behavior. They also can anticipate legal and regulatory changes that will require adjustments to the supply chain model.

Capturing the value
When companies use these three lenses, they typically uncover many opportunities to create value —often too many to realistically pursue at one time. It's usually more effective to sort them by potential value and the effort required to realize them. Executives can use three paths to capturing value.

Quick hits. Companies don't need to spend a fortune to make a difference. Working capital adjustments or minor fixes to the sales and operations planning process can rapidly free up capital that can be reinvested to improve broader supply chain capabilities.

Multiple contained, quick hits made a real difference at an electronics equipment manufacturer. The firm had long run a standard S&OP process but increasingly saw poor outcomes. A diagnosis identified three weaknesses:

• The manufacturer had not tempered its overreliance on aspirations and quotas with hard analysis, so the forecasts were consistently too optimistic.
• S&OP meeting participants rushed through topics rather than focusing on exceptions and big issues.
• A cultural tendency to avoid conflict masked the extent of challenges uncovered by the data.

Within three months, the electronics company moved to a process that relied more on quantitative data than gut instinct and focused on identifying and rectifying potential challenges. One early win occurred in the run-up to a global product launch, when the new data-driven approach indicated that demand for the product in Europe was well above previous forecasts, while the Americas forecasts were too optimistic. With this insight, the S&OP team was able to make timely decisions to reallocate supply. As a result, the company avoided a stock-out in Europe and increased sales 25% over the original forecast. In the Americas, the new process limited inventory risk, reducing overproduction by 75%.

Step-function improvements. Some opportunities involve more effort for a greater return, including redoing a cross-functional process or improving how people make decisions.

A specialty materials company, for instance, had been using the same 98% fulfillment level for all customers. After analyzing the overall profitability of each customer, the company realized that providing the same standard added unnecessary cost to low-margin customers in a way that the customers did not value. By revising service levels accordingly, the company was able to direct the top service to the highest-value customers while improving the profitability of other customers.

Supply chain reinvention. Very ambitious supply chain programs cost more and take more time, but they can unlock huge value and transform the economics of a business. Such programs include changing the plant network structure or scale, improving production assets, moving suppliers closer or simplifying the product assortment.

Consider the case of a global food company. The company grappled with a large number of SKUs, formats and formulas; a fragmented supplier base; and many subscale manufacturing plants with low asset efficiency.

The senior team decided to redesign the entire supply network and made aggressive productivity improvements in order to free up cash for other investments to generate growth. The supply chain group worked with each business unit and with marketers to refine demand forecasts, including price elasticities and go-to-market timetables, by country. Those forecasts informed a new, smarter selection of food package sizes and prices—a level of SKU complexity that responded to market demand yet would optimize profitability.

Through scenario planning, including the more rigorous demand forecasts, the company was able to optimize its entire supply network worldwide. It understood where to build capacity, where it made sense to exit production, where suppliers should relocate and the mix of SKUs each plant should produce. This reinvention has paid off with hundreds of millions of dollars in annual net savings from productivity improvements and additional cash flow over three years.

In the right hands, the supply chain becomes a competitive weapon that can adapt to the inevitable changes in strategy and competitive circumstances that lie ahead.

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