The Race For Supply Chain Advantage

Operations Practice
The Race for

Supply Chain Advantage:
Six practices that drive
supply chain performance
In conjunction with Georgia Tech College of Management
The Race for
Supply Chain Advantage:
Six practices that drive supply
chain performance
Excellent supply chain management helps leading companies around the world
achieve better service, lower costs, lower inventory, and ultimately competitive
advantage. Our research shows that the best organizations are creating this
advantage by using six valuable practices
Today’s corporations are struggling with their

supply chains. Supply base globalization on the
one hand, and product/channel diversification on
the other, mean that supply chains are now more
complex than ever. Many companies report
rising inventory levels and increased service
pressure at the same time as they are impacted
by rising fuel and commodity costs.
Against this backdrop, however, a select cadre of

companies has succeeded in turning their supply chains into a strategic weapon.
For example, Jones Soda beat major softdrink manufacturers to win an exclusive
contract to provide beverages during the Seattle Seahawks NFL games using a
unique supply chain that allowed consumers to print their favorite game photos
on bottles in real time, creating a beverage souvenir in around 10 minutes. In
another case, Cisco Systems discovered it needed to reduce unnecessary product
complexity across its product portfolio in order to capitalize on its outsourcing
ambitions. These companies and many others are using their supply chains to
create true competitive advantage.
4 The Race for Supply Chain Advantage: six Practices that Drive Performance
What really transforms supply chains from a liability to an asset? Many studies
have measured excellent performance through cost, availability and inventory
benchmarks, but few have linked company performance to the practices that
underlie it. Now, new research by McKinsey & Company and Professors Vinod
Singhal and Soumen Ghosh of the College of Management at the Georgia Institute
of Technology, into the supply chain practices of more than 60 companies delivers
that essential insight (see Exhibit 1).
EXHIBIT 1: Breakdown of companies surveyed
Exhibit 1—Breakdown of companies surveyed
Retail Automotive
15
21
Pharma 15 5 High-Tech
44
Packaged
Source:McKinsey; Georgia Tech College of Management
Goods
Senior supply chain executives from participating companies took part in in-
depth structured interviews covering more than 50 aspects of supply chain
management. At the same time, data on their actual supply chain performance
(service, cost, and inventory) was crunched to distinguish leaders from laggards.
With a rich database covering both practices and performance, we were finally
able to analyze the key question: ‘What practices truly drive performance?’
The results of these analyses are compelling. Only six supply chain practices
matter most to company performance, while two of the usual suspects are not
as consistently valuable as reported. Companies that have built strength in
the practices that matter most are 1.4 times more likely to have strong service
performance, 1.7 times more likely to have strong D&L (distribution and
logistics) cost performance, and 2.7 times more likely to have strong inventory
performance (see Exhibit 2). Strength in these supply chain metrics is key to
driving sales, margin, and return on capital. It also helps sustain competitive
advantage.
The remainder of this article shares our research and experience on what drives
supply chain performance and where companies might focus to create advantage
for their organization.
The Race for Supply Chain Advantage: six Practices that Drive Performance 5
Exhibit 2—Companies that excel at the most important practices are building
EXHIBIT 2: Companies that excel at the most important practices are building real advantage over their peers
real advantage over their peers
Companies that excel at the most . . . are much more likely to be top service, cost, and inventory
important practices . . . performers creating real advantage over their peers
Average survey score (1-5 scale)
across the most important practices Improved likelihood of being a top performer vs. bottom
3.8
Service 1.4x
2.7
Cost 1.7x
Inventory 2.7x
Top performers create advantage over their peers through greater

timeliness and completeness of delivery to their customers with lower
Bottom third Top third supply chain operating costs and greater inventory efficiency
* Absolute difference in distribution and logistics cost as a percent of sales

Source: Team analysis; McKinsey; Georgia Tech College of Management
IT and organization: No silver bullets

Our survey indicates that two of the strategies commonly employed to improve
supply chain performance – IT investment and organizational restructuring (e.g.,
centralizing or decentralizing the supply chain organization) – are often not as
useful as managers expect. In fact survey results indicate that companies with
more formal IT systems and more or less centralized supply chains perform no
better than others.
Top-performing companies in our survey were as likely to use a mixture of

formal and home-grown IT tools like spreadsheets to operate parts of their
supply chains as they were to invest in comprehensively formal IT solutions. We
found that many organizations tend to expect IT solutions to drive improvement
without putting the right processes and capabilities in place first. Systems can
be useful tools, but cannot replace sound decision making. Good companies use
IT to inform decisions but do not depend on IT to drive those decisions. In fact,
companies in our survey that had fewer formal IT systems performed slightly
better on average in cost and service than those that had invested in a high
degree of formal IT systems.
The second area that has received much attention in recent years is the degree of
centralization of the supply chain organization. Many companies have established
centralized supply chain functions, taking control of the supply chain away from
individual business units to try to maximize overall efficiencies. According to
“
our survey results, there seems to be no
advantage to centralizing or decentralizing
Top-performing
supply chain control across business companies in our survey
units. Top-performing companies were were as likely to use a
equally likely to centralize their supply mixture of formal and
chain management across business units, home-grown IT tools like
devolve it to individual business units, or spreadsheets to operate
use a mixture of both approaches. Again, parts of their supply chains
it seems that the underlying processes as they were to invest in
”
and incentives really drive performance, comprehensively formal IT
coupled with a functional organizational solutions.
model that supports them.
Six practices for success

Some supply chain practices, however, do appear to have a powerful effect on
supply chain performance. We analyzed the impact of practices on the probability
of a company achieving top service, D&L cost, and inventory performance to
understand which practices drive performance and which do not. As a result,
we found six levers that significantly improve the likelihood of a company
having a high performing supply chain (see Exhibit 3). In addition, these results
were confirmed by the collective experience of Georgia Tech and more than
1000 supply chain engagements completed by McKinsey & Company in the last
five years.
1 Supply chain strategic alignment

Leading companies align their supply chain strategy with the corporate
strategy, and then drive alignment throughout the supply chain on objectives
and aspirations. In the very best companies, supply chain colleagues from the
shop floor to the most senior managers clearly understand the supply chain
strategy and aspirations.
2 Segmentation to embrace the complexity that matters

Leading companies actively manage product and service complexity. They
design multiple supply chains within a network to capitalize on the complexity
that delivers competitive advantage. They take steps ruthlessly to eliminate
complexity where it does not.
3 A balanced and forward-looking design

Leading companies create a top-down and forward-looking vision of their
overall supply network. They ensure that the network balances productivity,
flexibility, and risk to deliver great service without excessive cost or risk.
4 A lean, end-to-end value chain

Leading companies task their supply chain managers with optimizing end-to-
end value chains, and drive true collaboration across functions. They typically
deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma),
which they have made their own.
5 World-class integrated planning

Leading companies use disciplined integrated planning processes to ensure the
organization executes in synchronization, without the need for ‘heroes.’ They
focus their planning efforts where it matters – using sophisticated and robust
techniques where they are valuable and using unaided computer predictions
elsewhere.
6 The right talent, accountable for performance

Leading companies make supply chain talent development and acquisition an
organizational priority. Supply chain positions form part of the top management
career track. Once the right people are on board, companies hold talent fully
accountable for their contribution to supply chain performance.
The race for supply chain advantage

No one company excelled at all six practices, though 10% did combine them to
create simultaneous service and cost advantage (see Exhibit 3), challenging the
notion that supply chain managers must make tradeoffs. These supply chains,
which spanned all industries surveyed, have created true competitive advantage
for their organization.
The gap between top and bottom performers is wide and likely to widen as a
new class of super-competitors emerges that is moving on to the next horizon
of practices such as sustainability and full integration of supply chains across
suppliers and customers. Thus the race for advantage is intensifying. Top
performers are racing to create even more advantage over their peers while others
are racing to catch up (see Exhibit 4).
Exhibit 3—10% of companies are using the levers that matter most to
EXHIBIT 3: 10% of companies are using the levers that matter most to simultaneously outperform on service, cost and inventory
simultaneously outperform on service, cost and inventory
ALL SECTORS
Percent of companies
Top third performance
Top
Better service performance
performers Top performers achieve both cost,

10% service, and inventory advantage . . .
• Top performing companies were found
in every sector studied
• Over 85% of these leading companies
Others also have top-third inventory
90% performance
. . . challenging the notion of a cost,
service, and inventory trade-off
Better cost performance
Source:Team analysis; McKinsey; Georgia Tech College of Management
Exhibit 4—The gap is widening as leading companies move on to the next

EXHIBIT 4: The gap is widening as leading companies move on to the next horizon of supply chain management
horizon of supply chain management
EXAMPLES
Next horizon . . . The race is real for

• Sustainability in supply chain companies to master
6 practices that • Speed as a source of competitive advantage the drivers of
drive • Cross-enterprise supply chain optimization performance as a basis
performance • Flow-through logistics and distribution for tackling even more
• RFID-driven supply chain visibility advanced opportunities
Source:McKinsey
Thinking carefully about where to focus

As companies race to close the gap between top performers and others, they need
to think carefully about where they invest their energy as individual practices
have different benefits (see Exhibit 5). For example, companies using strong
segmentation and complexity management practices are 2 times more likely to
be a top service and 2.5 times more likely to be a top inventory performer, but see
little distribution and logistics cost advantage. In another example, companies
taking an ‘end-to-end’ approach to their supply chain benefits are more likely
to see the benefits in distribution and logistics cost, and inventory (1.3 and 2
times more likely respectively to be a top distribution and logistics cost and
inventory performer). Companies attempting to drive improved performance
should therefore focus on the practices that are most likely to improve the type
of performance that matters most to their business strategy
Exhibit 5—Top companies are selectively using 6 levers to drive performance

where it companies
EXHIBIT 5: Top is most needed
are selectively using 6 levers to drive performance where it is most needed
Improved likelihood of
Benefit of having practices that score in the top third of companies surveyed vs. bottom third* 9 being a top third performer
vs. bottom third*
Key practices driving performance Service Cost Inventory
Explicitly link the supply chain strategy to the corporate

1 1.9X 1.3X 1.4X
strategy and set clear, well understood aspirations
2 Use segmentation to embrace the complexity that matters 2.0X 2.5X
In addition, our
Design and build forward looking networks that meet research strongly
3 1.8X 2.3X indicates that
service, cost and risk aspirations
companies with
strong network and
Create a lean, end-to-end value chains by optimizing end to end practices
4 1.3X 2.0X
across functions are much more likely
to have lower COGS
Execute world-class integrated demand and production
5 1.3X 2.6X 4.0X
planning processes with discipline
6 Get the right talent on board and hold them accountable 1.7X 1.6X
* Not additive
In addition, organizations should consider their starting capabilities when

prioritizing their improvement efforts. In particular, our survey showed that 2
of the 6 practices that matter require strong performance on other practices to
achieve best practice (see Exhibit 6). First, companies that successfully implement
segmentation and complexity management practices also have strong network
and planning processes. Second, aligning the supply chain strategy with the
corporate strategy and building alignment around that strategy within the supply
chain seems to require strong talent. On the other hand, the survey showed that
for the other 4 practices, companies are capturing the benefits without much
need to be strong at any additional levers suggesting a few natural starting points
for companies early in the supply chain transformation journey.
Regardless of the current performance of an organization’s supply chain,

however, these six practices and the nature of their impact show managers where
they should be focusing their supply chain improvement effort for the biggest
impact, and where it is likely to be wasted. The rest of this article looks at each
practice in turn, in more detail.
Exhibit 6—Our research indicates that several practices require strength

EXHIBIT 6: Our research indicates that several practices require strength elsewhere to achieve best practice while others have low
elsewhere
dependencies to achieve best practice while others have low dependencies
Prerequisites to achieve best practice

Practice (dependencies)*
Practices that require 1 Explicitly link the supply chain strategy 6 Get the right talent on board and hold them
strength in other to the corporate strategy and set clear, accountable
practices well understood aspirations
3 Design and build forward looking networks

that meet service, cost and risk aspirations
2 Use segmentation to embrace the
complexity that matters
5 Strictly adhere to world class demand and
production planning processes
Practices with little 3 Design and build forward looking

dependency networks that meet service, cost and
risk aspirations
4 Create a lean, end-to-end value chains

by optimizing across functions
5 Execute world-class integrated demand

and production planning processes with
discipline
6 Get the right talent on board and hold

them accountable
* Based on conditional probability analysis
Practice 1
Supply chain strategic alignment
Leading companies align their supply chain strategy with the corporate strategy,
and then drive alignment throughout the supply chain on objectives and
aspirations. In the very best companies, supply chain colleagues from the shop
floor to the most senior managers clearly understand the supply chain strategy
and aspirations.
In our survey, supply chains having an intimate

link to their company strategies outperform
those that lack this link. Similar to Jones Soda
and Cisco, these companies explicitly consider
both cost and revenue opportunities from their
supply chain in their strategic planning sessions.
In over 70 percent of companies, the supply chain
manager is a full-time member of the corporate
strategy development team and is responsible
for creating the link between strategy and
operations.
These high-level strategic links work in both directions. They help supply chain
managers align their efforts with the strategic goals of the business units they
serve and help business unit managers understand the opportunities available to
them through clever use of their supply chain capabilities.
Alignment in theory must also be translated into alignment in practice. Fifty-

one percent of companies in our survey excel at turning strategies into tactical
change plans that drive results. They do so by first setting and communicating
clear aspirations and ensuring all colleagues – from the shop floor to the most
“
senior managers – clearly understand
the strategies. They then translate the In over 70 percent of
aspirations into strategic initiatives and companies, the supply chain
ultimately deploy and monitor tactical manager is a full-time
change plans. member of the corporate
strategy development team
Companies in our survey that achieved and is responsible for creating
”
best practice in strategic alignment are the link between strategy and
much more likely to achieve top service, operations.
cost, and inventory performance. In
particular, top practitioners are 1.9 times
as likely to be a top service performer.
Two of the world’s largest retail operations illustrate how different strategic
objectives translate into radically different supply chain approaches. Wal-Mart,
with its relentless focus on cost reduction, has made extensive efforts to reduce
labor in its distribution centers. It uses its size and scale to force suppliers to
adopt standardized case and unit packaging to streamline its processes as much
as possible. Amazon, on the other hand, has prioritized ensuring its warehouses
have the flexibility to handle products of all shapes and sizes over a strategy that
minimizes cost alone.
Practice 2
Segmentation to embrace
the complexity that matters
Leading companies actively manage product and service complexity. They

design multiple supply chains within a network to capitalize on the complexity
that delivers competitive advantage. They take steps ruthlessly to eliminate
complexity where it does not.
Increasing product and customer complexity

has been one of the most significant challenges
for many organizations in recent years.
Globalization produces geographically diverse
customer groups, while within the same markets
the growth of small, more demanding consumer
niches call for different products, different levels
of service, and different routes to market. Some
companies have chosen to tackle this challenge
by ignoring it, despite the complaints of those in
the supply chain. They struggle to find an acceptable compromise to meet these
diverse requests, using a single set of supply chain processes, often leading to
higher cost.
The best companies in our survey by contrast, have grasped the complexity
challenge. Sixty-seven percent of these best companies, as opposed to 35 percent
of all companies surveyed, use effective segmentation techniques to identify the
specific product and service demands of different customer groups. They then
build their production and distribution networks specifically to meet these
demands, ultimately enabling complexity at a lower cost than a one-size-fits-all
approach.
The key to these companies’ success, however, is their ability to meet the demands
of their different customer segments without excessively increasing supply chain
costs. They use a variety of methods to achieve this, starting by considering
supply chain design concurrently with product and portfolio development
processes. They are able to influence others to use common platforms to ensure
that different products can share as much content as possible at minimum overall
supply chain cost. They also take regular steps to rationalize their product
portfolio to eliminate low value-added complexity wherever possible.
“
Companies that have mastered segmentation
still make use of standardized supply chain The key to these
processes wherever possible. They do this by companies’ success,
defining standard processes for each supply however, is their ability
chain segment based on the unique product to meet the demands of
or customer needs. By doing so, they avoid their different customer
the costs of a one-size-fits-all approach,
segments without
”
excessively increasing
while still using processes that are well
supply chain costs.
understood across the organization.
Based on our research, the case for best practice is compelling. Companies
that achieve best practice in segmentation and complexity management are 2
times as likely to be a top service performer and 2.5 times as likely to be a
top inventory performer. The best companies manage to keep the cost of this
additional flexibility under control, however. Overall distribution and logistics
cost levels for best practice companies were just as likely to be a top D&L cost
performer as a bottom.
For example, a consumer goods company with high and increasing supply chain
complexity used supply chain segmentation and portfolio management tools to
improve ROIC, service, inventory, and profitability. Initially, the company had
a one-size-fits-all supply chain to handle the varying needs and demand patterns
of its products. In addition, the organization continued to add SKU’s to their
portfolio, while very rarely eliminating unprofitable SKU’s or SKU’s that had a
high degree of overlap in the product portfolio.
To remedy the situation, the company began by defining different material

and information flows based on the unique demand patterns of its SKU’s. For
example, its higher volume, more stable products were produced in a rhythmic
fashion and the planning team rarely modified the computer generated forecasts.
On the other hand, the higher volatility products were given more flexibility
in the plants and a significant portion of the planning department’s time was
focused on better predicting the demand fluctuations.
At the same time, the organization implemented a series of cross-functional

monthly review meetings to cross-functionally manage the portfolio of SKUs in
each category. Leads from functions such as manufacturing, engineering, sales,
and marketing reviewed the category performance to identify opportunities to
improve the positioning or contribution of problem SKU’s. Ultimately, if the
issues could not be resolved, the SKU was eliminated.
The results of their effort are compelling. The organization’s service levels
increased by 1 percent point while inventories decreased by over 35 percent.
In addition, the organization improved the profitability of its target SKU’s by
10–20 percent.
Practice 3
A balanced and
forward-looking design
Leading companies create a top-down and forward-looking vision of their overall

supply network. They ensure that the network balances productivity, flexibility,
and risk to deliver great service without excessive cost or risk.
While many of the companies we spoke to are

working hard to make incremental decisions
on where to place new assets, the very best
organizations make their decisions using a
comprehensive and forward looking network
strategy. They first design an overall supply
chain strategy to deliver the right service levels
to their different customer segments at the right
cost and at the appropriate levels of risk, and then
optimize their network structure, transport links
and inventory levels to match.
Keeping cost, customer service, and risk in mind during every stage of the supply
chain design allows these companies to make the best tradeoffs for overall
supply chain performance. They control costs by keeping asset utilization
high, for example, but not so high that they lose the flexibility needed to serve
unpredictable customers.
The companies that achieve best practice in supply chain design are much more
likely to have better service and lower inventory, without incurring additional
cost. Top performers were 1.8 times more likely to have top service levels and
2.3 times more likely to have to inventory levels without any apparent impact
on D&L cost.
A global chemical company used effective network optimization to improve

its service to two very different customer groups. Initially the company had a
single supply chain design for all its markets, keeping inventories low by pushing
product steadily into the market. This approach
“
worked well for its North American customers,
The very best who mostly bought predictable quantities on a
organizations make contract basis; but it was failing in Asia where a
their decisions using spot market operated. The push system could not
a comprehensive and respond quickly enough to meet demand peaks
”
forward looking network in the Asian market and it often found itself
strategy. having to sell at a discount to keep from building
excessive inventories when demand slowed.
To fix the problem, the company segmented its network. They kept the low-cost,
low-inventory push system in place for North America, but reorganized supply
to Asia on a pull basis and replenished larger local inventories on demand.
The cost of the additional stock was considerable, but using the new system
meant the company could respond to demand peaks, eliminating the need for
discounting and greatly improving customer satisfaction. Keeping local stocks
also allowed better control of transport. Finally, by utilizing capacity on vessels
traveling to Asia more effectively, the company cut its transportation costs by
10 percent.
Practice 4
A lean, end-to-end value chain
Leading companies task their supply chain managers with optimizing end-to-
end value chains, and drive true collaboration across functions. They typically
deploy a standard toolkit for continuous improvement (e.g., Lean or Six Sigma),
which they have made their own.
The geographically and functionally diverse

nature of the supply chain function can lead
companies to optimize locally at the cost of
overall efficiency. Concentrating on solely on
improving the performance of the planning
function or manufacturing, for example, risks
introducing additional costs or poorer service
elsewhere in the chain.
The best companies in our survey take extensive

steps to avoid this problem. By giving supply chain managers control and ownership
of end-to-end supply chain costs, the best companies ensure that management
decisions improve the total business, not just functional performance. They even
extend this end-to-end perspective beyond the boundaries of the organization, by
involving suppliers in supply chain decision-making processes and systematically
aligning supplier incentives with supply chain objectives.
Such a broad, cross-functional approach inevitably involves complex tradeoffs

and the need for problem solving. Using standard “lean” and other continuous
improvement problem-solving tools, these companies ensure that all functions
have a common approach for resolving such issues and driving end-to-end
improvement. In addition, they align metrics across the organization to drive true
collaboration.
“
End-to-end thinking has a powerful effect
Companies that use on supply chain cost. Companies that use
end-to-end thinking can this approach can capture savings that are
capture savings that are simply not accessible to those that only
simply not accessible to optimize within functional or regional
those that only optimize silos. In our research, companies that use
”
within functional or regional best practice end-to-end approaches are
silos. 1.3 times more likely to have better D&L
cost, and 2 times more likely to have better
inventory performance than those that do
not. Even more encouraging, our data strongly indicates that best practice end-
to-end performance leads to lower COGS.
A large CPG in Europe and North America took a lean, end-to-end approach
to improving its business. The CPG previously had success building a strong
continuous improvement program in manufacturing, and desired improvements
in margin, service, and inventory. The company drove improvement through
a combination of improved cross-functional processes such as innovation, and
applying lean techniques with a perspective across functions such as transportation
and planning. Interestingly, they found that capturing the economic value in one
function often required the cooperation of other functions that did not directly own
the cost. For example, approximately 50 percent of the transportation opportunity
they identified required changes outside of the direct control of the transportation
team (e.g., warehouses needed to load trucks differently, engineering needed to
redesign pallet heights to better utilize trucks). As a result of these changes, the
company saved hundreds of millions in cost, improved service levels to industry
best practice rates, and reduced targeted inventory by 30 percent.
Practice 5
World-class integrated planning
Leading companies use disciplined integrated planning processes to ensure the

organization executes in synchronization, without the need for ‘heroes.’ They
focus their planning efforts where it matters – using sophisticated and robust
techniques where they are valuable and using unaided computer predictions
elsewhere.
Even the most agile supply chains must execute

against a plan. The quality of the integrated
planning processes used by the companies in our
survey played a key role in determining the overall
effectiveness of their supply chains at meeting
customer needs without excessive inventories or
D&L costs such as expedited freight.
The best companies in our survey execute strong

cross-functional planning processes that integrate
actions across functions in the business. They execute the S&OP process in
regular meetings with active participation from senior leaders across the business
including sales and finance. During these forward looking meetings, the senior
leaders agree on one future view of demand for the business, and may need to
allocate product to certain customers to develop a feasible capacity constrained
production plan. Capacity planners use real-time visibility of inventories and
production lead times across the supply chain to inform these decisions. In
addition, the senior leaders use the meeting to agree on a long term demand plan
that feeds the network and capacity planning processes.
Of course, strong demand plans are required to have an effective S&OP meeting.
To do effective demand planning, companies start by understanding the unique
demand patterns of their products and customers. These demand patterns form
the basis of the overall supply chain segmentation strategy referred to in practice
six. Then, the organization defines different planning processes for each of the
segments. For example, a company might use unaided statistical forecasting for
products with long lifecycles and stable demand – it is typically very hard to
improve on the unaided output. For a different segment that is highly promoted,
the same company might invest to build very collaborative demand planning
processes with its customers. They then use these demand plans as inputs for
robust and cross-functional sales and operations planning processes that ensure
alignment between current purchasing, production and distribution activities and
the latest forecasts.
Strong processes are only good if they are consistently executed. Top companies
in our survey described exceptional discipline in execution while many others
described ‘heroic’ efforts that work around the system to deliver to a particular
customer. Unfortunately, ‘heroic’ efforts often cause problems elsewhere in the
system, which can leave an organization in a constant state of fire-fighting.
Companies in our survey that built world-class integrated planning systems were
much more likely to be a top supply chain performer. In fact, they were 4 times
more likely to achieve top third inventory performance, 2.6 times more likely to
achieve top distribution and logistics cost performance, and 1.3 times more likely
to achieve top service performance. Building a world-class integrated planning
system is clearly critical to drive strong supply chain performance.
IT storage maker SanDisk took a series of steps to world-class integrated planning

skills.1 The company built formal cross-functional demand management processes
and established a new demand-management function with its own leadership to
coordinate the process. It then changed responsibilities and incentives to ensure
that every function was motivated to improve overall demand-management.
Finally, it augmented its existing statistical forecasting techniques with input from
customers. As a result of the changes, the company reduced excess retail inventory
by 40 percent and channel inventory by 20 percent. Customers benefited too.
On-time delivery performance improved by 30 percent and product in stock rose
by 40 percent.
1 McKinsey’s Supply Chain Management Practice; Oliver Wight, 2006; Aberdeen, 2005; literature
searches
Practice 6
The right talent, accountable
for performance
Leading companies make supply chain talent development and acquisition an

organizational priority. Supply chain positions form part of the top management
career track. Once the right people are on board, companies hold talent fully
accountable for their contribution to supply chain performance.
The best companies in our survey take a

strategic approach to acquiring and developing
talent in the supply chain function. They also
place great emphasis on making the best use of
their talented people by holding them accountable
for performance improvement.
The best companies also work hard to tie talent

development in the supply chain function with
that of the wider organization. Supply chain roles
become part of the career path for general managers and staff regularly moves
between supply chain roles and other functions.
While it is common for supply chain functions to recruit new talent only when
positions become vacant, the best companies use talent gap analyses to identify
future capability needs. They then take steps to fulfill those needs, developing
training and mentoring programs to build internal capabilities and recruiting
people with a broad range of backgrounds and experience.
In the best companies, each and every member of the organization is responsible
and accountable for the supply chain’s contribution to business success. Companies
achieve this by building a comprehensive series of aspirations that cascade as
metrics from strategic requirements for overall supply chain performance to
every part of the organization. Critically, these metrics express performance
requirements in terms that are directly relevant to each function.
“
By building alignment with the business
strategy, these metrics help every function
In the best
understand their own direct impact on
companies, each and
supply chain performance. Metrics drive
every member of the
appropriate tradeoffs – between cost, organization is responsible
service and inventory levels, for example – and accountable for the
”
and to ensure that functions work together supply chain’s contribution
to deliver the best result for the business to business success.
as a whole.
Metrics must be used to be effective, of course, and best-in-class companies ensure

that all managers are held accountable for the performance of their function
against supply chain metrics. Metrics are also reviewed constantly to keep them
aligned with business needs.
Companies in our survey that achieved best practice in talent and performance
where 1.7 times as likely as poor practitioners to be a top service performer. They
delivered this performance with better inventory levels at the same time (they were
1.6 times as likely to be a top inventory performer). Just as important, strong
talent management is important to the overall ability of the organization to create
and sustain advantage, and to race for the next horizon of opportunities.
In 2003, IBM 2 achieved a “best-in-class performance management system” by

creating the Integrated Supply Chain (ISC) group. The ISC contained 19,000
employees in 56 countries and was responsible for over $45 billion in annual
spend. The organization was charged with optimizing end-to-end supply chain
performance. Its impact was sizable – customer satisfaction increased 1 percent,
cycle time dropped 6 percent and IBM achieved its lowest inventory levels in 30
years. A key part of the success of this process was the company’s development
of a comprehensive set of KPIs, covering both the internal performance of the
supply chain group and its interactions with other functions. Critically, these
metrics were then used to manage performance. The objective, said the leader
of the group, was to produce a situation where individual functions were not
“mesmerized by their own internal metrics.”
2 “Global Logistics and Supply Chain Strategies,” World Trade Magazine, Venture Outsource.Com
***
Excellence in supply chain management has become a critical differentiator

for many companies today. As some leading organizations have built world-
beating businesses on fast, cost-effective and flexible supply chains, others have
been brought to their knees by an inability to supply increasingly complex and
dispersed markets. The companies in our survey with high-performing supply
chains all used a combination of the practices described in this article to achieve
that performance.
For companies whose supply chains do not currently meet best practice standards,
these findings are cause for significant optimism. Selective focus on a few key
levers – and avoiding expending undue energy on others – can make a big
difference in performance. Indeed some of the best companies in our survey seem
to have increased their supply chain performance dramatically by focusing on
a few practices that mattered most. However, the gap between top and bottom
performers is only likely to widen as top performing organizations leverage their
capabilities to race for even more competitive advantage.
For those that are doing well, however, there is no opportunity for complacency;
competitors are racing to catch up and a new horizon of opportunities exists
to drive even more advantage potentially creating the next generation of super-
competitors.
About the Research
The Supply Chain Best Practice research project, designed in conjunction with
Professors Vinod Singhal and Soumen Ghosh of the College of Management at
Georgia Institute of Technology, measures the link between supply chain practices
and performance across a broad range of industries. To test this hypothesis,
companies shared quantitative performance data and participated in one or
more 2-hour structured interviews, during which over 50 supply chain practices
were assessed.
While many indicators can measure supply chain performance, we decided to

focus on three dimensions: cost, service, and inventory. Cost used distribution
and logistics (D&L) cost in percent of sales and inventory as percent of cost
of goods sold. Service examined delivery performance using the on-time-in-full
(OTIF) level or its closest available KPI. Inventory performance was measured in
terms of days on hand (DOH).
To ensure that differences in levels of supply chain performance between industries

did not disguise the superior performance of some companies, we scored individual
companies against the appropriate industry average for cost and inventory, and
accepted industry standard for service. These indices also allowed us to better
estimate the best practice advantage across sectors with smaller sample sizes.
To date, over 60 large multinational companies or large business units

have participated in the survey. They came from four different industries:
consumer goods and retail, automotive and assembly, pharmaceuticals, and the
process industry. Participants had yearly revenues up to $66 billion with up to
300,000 employees.
McKinsey Contacts:
Brian Ruwadi, Principal, Cleveland

Brian_Ruwadi@McKinsey.com
Joshua Wine, Associate Principal. Tel Aviv

Joshua_Wine@McKinsey.com
Bruce Constantine, Engagement Manager, Boston

Bruce_Constantine@McKinsey.com
Martin Lösch, Principal, Stuttgart

Martin_Lösch@McKinsey.com
Alex Niemeyer, Principal, Miami

Alexander_Niemeyer@McKinsey.com
Operations Practice
Copyright © 2008 McKinsey & Company

The Race For Supply Chain Advantage

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The Race For Supply Chain Advantage

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Operations Practice

The Race for

Today’s corporations are struggling with their

Against this backdrop, however, a select cadre of

Top performers create advantage over their peers through greater

* Absolute difference in distribution and logistics cost as a percent of sales

IT and organization: No silver bullets

Top-performing companies in our survey were as likely to use a mixture of

Six practices for success

1 Supply chain strategic alignment

2 Segmentation to embrace the complexity that matters

3 A balanced and forward-looking design

4 A lean, end-to-end value chain

5 World-class integrated planning

6 The right talent, accountable for performance

The race for supply chain advantage

performers Top performers achieve both cost,

Better cost performance

Source:Team analysis; McKinsey; Georgia Tech College of Management

Exhibit 4—The gap is widening as leading companies move on to the next

Next horizon . . . The race is real for

Thinking carefully about where to focus

Exhibit 5—Top companies are selectively using 6 levers to drive performance

Explicitly link the supply chain strategy to the corporate

2 Use segmentation to embrace the complexity that matters 2.0X 2.5X

In addition, organizations should consider their starting capabilities when

Regardless of the current performance of an organization’s supply chain,

Exhibit 6—Our research indicates that several practices require strength

Prerequisites to achieve best practice

3 Design and build forward looking networks

Practices with little 3 Design and build forward looking

4 Create a lean, end-to-end value chains

5 Execute world-class integrated demand

6 Get the right talent on board and hold

In our survey, supply chains having an intimate

Alignment in theory must also be translated into alignment in practice. Fifty-

Leading companies actively manage product and service complexity. They

Increasing product and customer complexity

To remedy the situation, the company began by defining different material

At the same time, the organization implemented a series of cross-functional

Leading companies create a top-down and forward-looking vision of their overall

While many of the companies we spoke to are

A global chemical company used effective network optimization to improve

The geographically and functionally diverse

The best companies in our survey take extensive

Such a broad, cross-functional approach inevitably involves complex tradeoffs

Leading companies use disciplined integrated planning processes to ensure the

Even the most agile supply chains must execute

The best companies in our survey execute strong

IT storage maker SanDisk took a series of steps to world-class integrated planning

Leading companies make supply chain talent development and acquisition an

The best companies in our survey take a

The best companies also work hard to tie talent

Metrics must be used to be effective, of course, and best-in-class companies ensure

In 2003, IBM 2 achieved a “best-in-class performance management system” by

Excellence in supply chain management has become a critical differentiator

About the Research

While many indicators can measure supply chain performance, we decided to

To ensure that differences in levels of supply chain performance between industries

To date, over 60 large multinational companies or large business units

Brian Ruwadi, Principal, Cleveland

Joshua Wine, Associate Principal. Tel Aviv