Northeast Supply Chain Conference

For further information, please contact: Brad Householder, Director Supply Chain Management PRTM 1050 Winter Street Waltham, MA 02451 Tel: +1 781 434-1297 bhouseholder@prtm.com

Strategic Supply Chain Management: The Five Disciplines for Top Performance

September 20, 2005

Leading thinking for lasting results

Outline
Emergence of Strategic Supply Chain Management: The Five Core Disciplines The 5 Core Disciplines and Performance: Insights From Benchmark Data Adopting the 5 Core Disciplines Wrap Up / Q&A About PRTM

Copyright 2005 PRTM 10362MV / 09/20/2005

Northeast Supply Chain Conference

Emergence of Strategic Supply Chain Management: The Five Core Disciplines

Leading thinking for lasting results

Supply Chain Management Has Evolved From A Technology Focus To A Strategic Focus
80searly 90s
Functional SCM

1990searly 2000
Technological SCM Robust processes (plan, source, make, deliver, return) Adoption of new processes and technology Supply chain scorecard with efficiency focus

2003
Strategic SCM Adoption of new processes and technology Ability to rapidly align supply chains to new strategies anywhere ...anytime SCS integrated into corporate performance management

Price of Entry

Production and inventory control skills

Competitive Differentiator

Robust processes

Key Metrics

Functional efficiency

Copyright 2005 PRTM 10362MV / 09/20/2005

Trends Showed the Emergence of Five Core Disciplines of Strategic SCM

Observed Trends
Executive Team attention to SC Formal SC strategy processes SC process standards (e.g. SCOR) Focus on simplification Integration of SC and other enterprise processes Shift from transactions to business management Global SC core operations units SC career paths Formal SC scorecards Supplier and customer metrics SC on the corporate balanced scorecard Fewer one-off collaborative pilots Technology maturity and standardization Removal of the weakest links
Copyright 2005 PRTM 10362MV / 09/20/2005

Core Disciplines
View your supply chain as a strategic asset Develop an end-to-end process architecture Design your organization for performance Use metrics to drive business success Build the right collaborative model
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But Do Companies That Follow The Five Disciplines Have Better Supply Chain and Business Performance? How?

Copyright 2005 PRTM 10362MV / 09/20/2005

Northeast Supply Chain Conference

The 5 Core Disciplines and Performance: Insights From Benchmark Data

Leading thinking for lasting results

The Answer Starts With a Clear Definition of Supply Chain Practice Maturity Levels
The Performance Measurement Group (PMG) Supply Chain Maturity Model
Performance Performance

Low Maturity Practices

High Maturity Practices

Stage 3: Stage 2: Stage 1:

Functional Focus Internal Integration Integration External

CrossEnterprise Collaboration & Optimization

Operational Maturity

Degree of IT Enablement
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Stage 4:

Copyright 2005 PRTM 10362MV / 09/20/2005

PRTMs Benchmarking Has Long Shown That Practice Maturity Improves Performance Companies with high supply chain practice maturity have better supply chain performance
17% lower inventories 11% better delivery performance 16% lower supply chain management costs

which translates into better business performance

4x greater sales growth 40% higher profitability

Copyright 2005 PRTM 10362MV / 09/20/2005

Defining the Impact of Strategic SCM Practices on Performance

Collected Collected quantitative and quantitative and qualitative data qualitative data across 89 supply across 89 supply chains from 65 chains from 65 companies in PMGs companies in PMGs benchmark database benchmark database Evaluated maturity Evaluated maturity for selected for selected practices in the practices in the Maturity Model that Maturity Model that represent the 55 represent the Core Disciplines Core Disciplines Evaluated Evaluated quantitative quantitative performance of High performance of High Maturity vs. Low Maturity vs. Low Maturity companies Maturity companies using aaset of SCORusing set of SCOR compliant metrics compliant metrics
Delivery Performance

Strategy
Innovation Cost Service Quality

Process Architecture

Order Fulfilment Lead Time Production Flexibility

Relationship of Strategic SCM Practices to Quantitative Performance

R&D SALES FIN & ACCT MFG SUPPLY CHAIN

Total SCM Cost Total Returns Processing Cost Inventory Days of Supply Cash-to-cash Cycle Time Net Asset Turns

Performance Management

Organization

Collaborative Model

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The Core Disciplines Lead to Significant Performance Advantage in Key SCM Metrics
Companies that follow mature practices for:
Developing End-to-End Process Architectures

Achieve:
28% Lower Inventories

By Using These Best Practices:

Actively involve partners in planning processes Integrate IT integration with suppliers and customers Joint Service Agreements Actively identify key skills, develop and upgrade to get them Align org structure to key processes and incentives

Design Their Organization for Performance

10% Better Delivery to Requestddd

Developing Strong Collaborative Models Using Metrics to Drive Business Success

19% Shorter Cash Cycles

Align supply chain partners with Basis of Competition

13% Lower Supply Chain Costsddddd

Openly share performance data with suppliers, customers Regular external benchmarking

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Aligning the Supply Chain Strategy, and Maturity in All 5 Disciplines Drive Profitability
Strategic SCM companies use their supply chains as strategic assets to achieve almost double the profitability of their competitors
Profitability vs. Industry Average

Performance Management Collaboration

High Maturity
Low Maturity
Higher is Better

EBIT as % of revenue data were normalized to industry averages to remove effects of industry profitability differences. Overall, EBIT as % of revenues were: BICC All Others 12.7% 6.5%

Organization Process Architecture Strategy 60 70 80 90 100

Industry Average

110

120

130

140

Profitability as a % of Industry Avg.

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Northeast Supply Chain Conference

Adopting the 5 Core Disciplines

Leading thinking for lasting results

The Five Core Disciplines are the foundation for Strategic Supply Chain Management
1 2

View your supply chain as a strategic asset

Innovation Cost Service Quality

Develop an end-to-end process architecture

R&D SALES FIN & ACCT MFG SUPPLY CHAIN

Use metrics to drive business success

Design your organization for performance

Build the right collaborative model

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Discipline 1: View Your Supply Chain as a Strategic Asset

1

View your supply chain as a strategic asset

Innovation Cost Service Quality

Design the supply chain around a defined basis of competition to enable the overall business strategy
R&D SALES FIN & ACCT SUPPLY CHAIN MFG

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A Good Supply Chain Strategy Meets Four Basic Criteria

1. It is aligned with the business strategy
Each business strategy requires a distinct supply chain structure, processes, systems, and skills

2. It is aligned with customer needs

Understand each segments requirements and configure the supply chain appropriately If necessary, create separate or multiple supply chains

3. It is aligned with the companys power position

Before making big changes, understand who has the power in the supply chain

4. It is adaptive
Supply chains have a shelf life and should be continuously evaluated to see if change is needed

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Discipline 2: Develop an End-to-End Process Architecture

2

Develop an end-to-end process architecture

Innovation Cost Service Quality

Develop integrated supply chain processes and systems that interface efficiently with the rest of the enterprise
R&D SALES FIN & ACCT MFG SUPPLY CHAIN

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There Are Four Tests An Effective End-to-end Process Architecture Must Meet
1. 2. 3. 4. Strategic Fit Enables execution of your supply chain strategy End-to-end Focus Ensures end-to-end vision and management Simplicity Is composed of simple, streamlined processes Integrity Is highly reliable, with robust links between processes, data, and information systems Leverage SCOR to set the context for supply chain process improvement

Suppliers Supplier

Supplier

Customer

Customers Customer

Internal or External

Internal or External

Data, Applications, and Infrastructure

Source: Supply-Chain Council
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Discipline 3: Design Your Organization for Performance

Develop and maintain organizational structure and skills to define and manage the supply chain of the future
R&D SALES FIN & ACCT MFG SUPPLY CHAIN

Innovation Cost Service Quality

Design your organization for performance

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Follow Four Design Rules to Align Your Organization to Achieve Your Strategy

Know, grow, and keep your core capabilities

Organize around the skills you need, not the skills you have

High-Performance Integrated Supply Chain Organization

General General Manager Manager

Finance & Finance & Administration Administration

Marketing & Sales Marketing & Sales

R&D R&D

Supply Chain Supply Chain Manager Manager Supplier Management Supplier Management

Purchasing Purchasing Order Management Order Management

Every process needs an accountable function or individual

Form should follow function the organization should mirror the process

Order Fulfillment Order Fulfillment Manufacturing Manufacturing

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What Skills Will My Supply Chain Need In The Future?

The end-to-end supply chain will need new management skills that most companies do not possess today
Supply Chain Performance Analyst
Understand and know how to implement supply chain metrics and continuous improvement programs

Supply Chain Process Improvement Manager

Understand and know how to implement supply chain best practices

PLAN

SOURCE

MAKE

DELIVER

Outsourcing Partner Relationship Manager

Negotiate alliances and partnerships Inspire collaboration and best-in-class performance
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Global Commodity Manager

Manage key relationships and global supply at lowest cost

Customer Relationship Manager

Detailed understanding of customer requirements and supply chain process capabilities
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Discipline 4: Build the Right Collaborative Model

Understand core competencies and choose partners to maximize focus and profitability
R&D SALES FIN & ACCT MFG SUPPLY CHAIN

Innovation Cost Service Quality

Build the right collaborative model

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Four Basic Models of Collaboration Not One-Size-Fits-All

The Collaboration Spectrum
Extensive Collaboration Infeasible Synchronized Collaboration Coordinated Collaboration Cooperative Collaboration Limited Collaboration Transactional Collaboration Many Relationships Low Return Few Relationships

Transactional Efficient execution of transactions between partners Cooperative Higher-level information sharing Coordinated Reliance on each others capabilities Synchronized Information developed jointly with longer horizon

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Collaborative Partnerships Will Continue to Evolve Over Time

Most of todays collaborative relationships are transactional or cooperative As companies move away from traditional vertical integration, the need for deeper collaboration intensifies
s Hi al r ic to ua ct A l t Op im al T al t ic re eo h

Extensive Collaboration Required Limited Vertically Integrated

Synchronized
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Core Competency Focused

Cooperative Transactional Internal 24

Coordinated

Discipline 5: Use Metrics to Drive Business Success

Use metrics to measure the health of each core supply chain process and identify problem areas
5
R&D SALES FIN & ACCT MFG SUPPLY CHAIN

Innovation Cost Service Quality

Use metrics to drive business success

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Metrics Help Gauge The Health Of Your Supply Chain and Drive Desired Behaviors
Effective metrics are:
Linked to the business strategy Balanced and comprehensive Used as a continuous improvement tool Implemented via a formal implementation plan Highly visible and monitored at all levels of the company Based on both internal and external benchmarking Based on targets that are aggressive, but achievable

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SCOR Level 1 Metrics Provide A Starting Point For A Balanced Strategic Supply Chain Scorecard
Key Supply Chain Management Metrics
Delivery Performance Order Fulfillment Lead Time Production Flexibility Total Supply Chain Management Cost Value-Added Productivity Inventory Days of Supply Cash-to-Cash Cycle Time Net Asset Turns
Copyright 2005 PRTM 10362MV / 09/20/2005 Delivery Performance/ Responsiveness

Flexibility

Cost

Asset Management

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Northeast Supply Chain Conference

Questions?

Leading thinking for lasting results

This Presentation Was Based On Prtms Book: Strategic Supply Chain Management
Cohen and Roussel effectively capture and communicate the critical elements and roadmap of world-class supply chain management. Put into practice, this book will serve as a timeless tool for those looking to transform their organizations supply chain into a sustainable competitive advantage. Jim Miller Vice President, Operations Cisco Systems

McGraw Hill, August 2004 ISBN 0-07-143217-5

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PRTM Is An Innovator Of Practical And Highly-valued Supply Chain Solutions

Co-developed the Supply-Chain Operations Reference-model
SCOR, adapted by the 750+ member Supply-Chain Council
Plan Source Make Return Deliver

Founded The Performance Measurement Group, LLC the leader in Supply Chain Benchmarking
(www.pmgbenchmarking.com)

Founding member of the Supply-Chain Council in 1996

(www.supply-chain.org)

Conducted leading benchmarking studies since 1985

We wrote the book on supply chain management, Strategic Supply Chain Management
McGraw-Hill, August 2004

1200 1000 800 600 400 200 0

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More than 1000 supply chain improvement engagements over the last 10 years
Over $5 Billion in documented cost reduction/revenue enhancement

1028 806 626

19

40

69

99

161

242

344

467

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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PRTM Is the Leading Management Consulting Firm For Breakthrough Supply Chain Transformation
Background
Founded in 1976 with a unique focus
Product- and innovation-based companies Operational results through hands-on implementation
Glasgow Abingdon Paris Frankfurt Detroit San Francisco Chicago Waltham Mountain View Stamford Costa Mesa Washington DC Dallas

Global Footprint

Tokyo

Experience and Innovation

More than 1,200 technology-/ product-based clients
Over 6,000 successful projects 90% level of repeat business

Thought Leadership and Innovation

Product And Cycle-time Excellence (PACE) Supply-Chain Operations Reference-model (SCOR) PMGWeb-based benchmarking
Consumer Goods

Preeminent Reputation
Life Sciences Communications

Technical Competence
More than 450 consultants
Technical and business backgrounds Practical industry experience
Copyright 2005 PRTM 10362MV / 09/20/2005

Chemicals and Energy Automotive and Industrial

Product And Cycle-time Excellence and PACE are the registered trademarks of PRTM Supply-Chain Operations Reference-model and SCOR are the registered trademarks of the Supply-Chain Council and were developed by PRTM

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Northeast Supply Chain Conference

Thank You!

Leading thinking for lasting results