New_Rules_for_a_New_Decade_IBM_Nov_2010

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Unformatted text preview: IBM Global Business Services Executive Report IBM Institute for Business Value New rules for a new decade A vision for smarter supply chain management Supply Chain Management IBM Institute for Business Value IBM Global Business Services, through the IBM Institute for Business Value, develops fact-based strategic insights for senior executives around critical public and private sector issues. This executive report is based on an in-depth study by the Institute’s research team. It is part of an ongoing commitment by IBM Global Business Services to provide analysis and viewpoints that help companies realize business value. You may contact the authors or send an e-mail to [email protected] for more information. Additional studies from the IBM Institute for Business Value can be found at ibm.com/iibv Introduction By Karen Butner The complexities of today’s economic environment and ever- expanding global supply chains mandate new guidelines for peak performance. Volatile global market conditions and customer demand variability require optimal supply chain configurations to synchronize supply and demand. But lack of visibility into the myriad information sources inhibits supply chain response to these unpredictable swings. Those companies looking to outperform their peers in the hyper-competitive marketplace will need to adopt new guidelines to restore supply chain stability and create enterprise value. Today’s new economic environment is increasingly more volatile, complex and structurally different than in years past, and in few places is this more apparent than in the movement of goods and services. To ascertain the depth to which today’s uncertain environment impacts the global supply chain – what has been called the “lifeblood of economic and social progress” – the IBM Institute for Business Value surveyed 664 supply chain management executives in 29 countries around the world.1 What we discovered is that complexity exacerbates the host of challenges these executives must manage on a daily basis. Our findings, in fact, mirror in large part those of the 2010 IBM Global CEO study, in which top executives identified complexity as among the top organizational challenges they will face in coming years.2 Global economic turmoil and uncertainty underlie the most significant challenges supply chain management executives identified in our study. Chief among these challenges are: Volatility: Fluctuation in customer demand has been the leading challenge confronted by supply chain executives. Added to demand variances are increasing customer requirements for sustainable products and services, as well as heightened expectations for responsiveness, uncompromising quality and low cost. At the same time, though, supply chain managers are encountering poor quality and reliability performance from suppliers, which, along with logistics constraints and bottlenecks, hampers delivery performance and customer service levels. And, as more companies continue to globalize their operations and enter emerging markets, these issues may have no quick solution, as operations will become increasingly dependent upon a growing number of customers, suppliers, regulators and markets. 2 New rules for a new decade Visibility: As the number of supply chain partners increases, the need for accurate, time-sensitive information becomes more acute. But lack of collaboration and integration between supply chain and product development partners continues to be a major concern. Product lifecycle traceability in consumer products, pharmaceuticals and other industries is a growing requirement. Yet, despite continued technological enhancements, lack of visibility to worldwide, timely information to make in-stream decisions remains a significant issue. The bottom line is that the requirements for increased visibility require the dexterity to make fast decisions in response to constantly changing market conditions. Value: There is, and seemingly always has been, constant pressure for supply chain management and operations to create enterprise value. End-to-end supply chain cost and pipeline inventory optimization are predominant challenges, as well as the means for protecting margin and decreasing working capital. Securing and deploying the right talent and skills for global operations remains a critical concern. The talent vacuum is most acutely felt in emerging markets, with nearly nine out of ten executives citing this as a challenge. The business risks associated with insufficient leadership talent is exposed in decreased cost efficiencies, inventory deployment, and in managing regional and local operations with partners. Managing risks and disruptions with global partners at each node is increasingly important. As supply chains become more complex and interdependent, managers must find a way to offset growing complexity with increased flexibility. Demand variability 53% Cost optimization 47% Increasing customer expectations 44% Inventory optimization 43% Supply chain visibility 41% Integration and collaboration with partners 31% Globalization of supply chains 31% Supplier variability 26% Talent management 26% Sustainability 25% Risk management Product lifecycle management and traceability 24% 16% Source: IBM Institute for Business Value. Figure 1: Supply chain challenges expose volatility, driving a need for visibility to create value. Volatility: Complex market conditions causing constant flux in demand Visibility: Need for integrated, timely information to make rapid decisions Value: Constant pressure for the supply chain and operations to create enterprise value IBM Global Business Services New rules to optimize supply chain performance Overcoming the often-daunting obstacles that complexity and uncertainly introduce into the constant and seemingly relentless challenges of managing the supply chain will require three new rules: 1. Know the customer as well as yourself. Smooth volatility with predictive demand. Predict demand and be in a position to react to demand variability with rapid response and allocation of all global resources. 2. See what others do not. Unveil visibility with collaborative insight. Collaborate with visibility to events, with suppliers, service providers and customers in an open, action-oriented environment. 3. Exploit global efficiencies. Enhance value with dynamic optimization. Optimize pipeline inventory, the global supply chain network and cost structures. Create cost-efficient sustainable products and practices while hedging risks with partners. Visionaries employ enhanced supply chain visibility, collaboration and analytics to manage increased variability in demand. 3 Investment in new rules varies according to strategy Depending upon the strategic initiatives they have in place to build the capabilities outlined by our “new rules,” as well as their timetables for implementing them, we’ve segmented the 664 supply chain organizations that participated in our survey into three categories: Operators, Planners and Visionaries (see Figure 2). Operators: Representing 187 companies, Operators’ strategies reflect “back to the basics” with investments in warehouse management, transportation management, manufacturing execution systems and data management. They concentrate on cost reduction initiatives, process improvements and information linkages with key suppliers and logistics providers. Planners: Planners represented the largest group, 417, across a wide range of industries, geographies and company sizes. Their strategies and initiatives characterize planning (network analysis, enterprise sales and operations planning (S&OP), partner integration, performance scorecards) and operational efficiencies (outsourcing non-core functions, cost containment/ reduction programs and inventory optimization at critical control points). Visionaries: Only 60 companies fall into this elite group, representing high technology/electronics, telecommunications, consumer products, life sciences/pharmaceuticals, retail and industrial manufacturing. These enterprises operate in multiple regions of the world, with well over half having sales of more than US$10 billion. Their focused strategies and initiatives include supply chain visibility with partner collaboration, business intelligence and analytics, risk management, optimization of networks, cost structures and inventory, and customer demand management with networked S&OP. 4 New rules for a new decade Significant Visionaries • Predict demand and immediately respond across their networks • Use business intelligence and analytics • Collaborate with supply chain partners • Optimize inventory, cost and their global network • Utilize variable cost structures Financial returns Impressive Planners • Employ enterprise S&OP • Focus on cost reduction/containment • Enhance visibility to key partners with dashboards • Use network distribution planning Stable Operators • Use rudimentary planning • Emphasize cost reduction/containment • Employ fixed structures/processes • Focus on product flow with little integration None Never 5-10 years 3-5 years 1-2 years Now Strategic capabilities over time Source: IBM Institute for Business Value. Figure 2: Visionaries and planners are building strategic, smarter supply chain capabilities. Visionaries also enjoy enhanced return on their efforts and investments. Based on our analysis, these enterprises experience higher return on invested capital and higher revenue growth performance than the others (see page 13). New rule #1: Know the customer as well as yourself. Smooth volatility with predictive demand. From interviews conducted in our CEO study, we learned that 69 percent of top executives view volatility in the new economic environment as their largest concern.3 When CEOs speak of volatility they refer to deeper/faster processing cycles, such as order to cash and procure to pay. Volatility has been a serious challenge in the past several years for supply chain executives, as well. Responding to volatility in market conditions, and the resulting customer demand patterns, has proved to be the biggest challenge for supply chain executives and, not surprisingly, a key investment area. Still feeling the repercussions of the worst economic downturn in decades, many companies are currently focused on stabilizing their businesses against this volatility. Even though surveyed executives rated demand variability and changing customer expectations as their two biggest challenges – ahead of even cost containment – they are responding to these impediments in different ways. Some, such as operators, are hunkered down, focused on operational improvement and a return to “business as usual.” Operators are doing rudimentary IBM Global Business Services planning (sales forecast, production and supply plans), but with little-to-no consensus planning. A consensus plan is a single agreed-upon operational plan, which is developed by product development, sales and marketing, finance and supply chain executives. Planners, on the other hand, realize the primary objective of the S&OP process is to create a single consensus plan, translated into financial objectives, that is executed across the entire organization. They are setting up and positioning for growth through globalization and customer alignment in international and emerging markets and are fine-tuning their distribution networks and enterprise S&OP processes. Rapid response to market conditions 16% Networked sales and operations planning 21% Market analytics and insights 21% Responsive inventory allocation 25% Responsive allocation of resources 8% 22% 9% 10% 13% Not applicable/ Don’t anticipate having Visionaries focus on intelligent network planning. Visionaries carry these practices even further. They are moving beyond enterprise planning and are focusing on intelligent network planning. Visionaries are attacking marketing volatility with analytical intelligence for supply/demand synchronization and resource allocation (see Figure 3). 20% 37% 19% 19% 29% 22% 28% 22% 24% 6-10 years 19% 32% 23% 8% 5 3-5 years Next 2 years 17% 18% 19% Already have Source: IBM Institute for Business Value. Figure 3: Predictive demand intelligence can enable rapid response to constantly changing market conditions. 6 New rules for a new decade Top strategic capabilities for visionaries include: • • • • Rapid response to changes in market conditions and demand variability. Networked Sales & Operations Planning linked to actual demand signals (point-of-sale [POS], orders, continuous replenishment). Use of market analytics and customer collaboration to predict demand. In-process or in-stream reallocation of inventory in response to demand variation: resupply, redistribute, reroute. Responsive allocation of all resources: human, assets, supply. Visionaries are designing strategies that enable them to rapidly respond to constant changes in market conditions and demand variability. In this quest, Visionary leaders are directing their investments toward demand management/forecasting, business intelligence and analytics, S&OP planning and customer collaboration. To better synchronize supply and demand actions, notifications and signals, Visionaries are improving demand management and forecasting by taking S&OP beyond the “four walls” of the enterprise. Not only are they building consensus from sales and marketing through operations, integrating sales statistics with operational planning, but they are moving toward networked S&OP. They are sharing forecasts, production, supply and replenishment plans with key suppliers and service providers to help make sure that all are on the same page. They have increased their emphasis on getting customer and channel input into the S&OP process, reinvigorating their efforts to refine and align plan versus actual with market analytics and insights and actual customer demand information. This intricate synchronization of supply and demand requires intelligence across all of the supply chain functions and partners to bring products to market – while, at the same time, meeting more demanding customer requirements. Visionary leaders are investing significantly more in advanced analytics and market intelligence to support customer collaboration (76 percent) than other companies (52 percent). Visionaries are collaborating with customers for true demand-driven S&OP, while making adjustments based upon real-time signals for synchronization. They are using market intelligence, advanced analytics and varied customer communications tactics to better predict demand. Then, based upon this predictive demand, they are making in-stream corrective actions, reallocating inventories, making supply and resource decisions mid-stream and even redistributing in-transit products. For example, a shipment may be rerouted because a store is nearing stock-out levels of an advertised promotion. Customer replenishment, vendor-managed inventory and other tactics ensure that the right products are where they should be, when they should be. Those who are following a predictive and demand-driven model include customer considerations, interaction and performance criteria in all of their supply chain activities. A predictive, demand-driven supply chain model smoothes volatility with optimal product positioning. IBM Global Business Services 7 Case Study avarto: Predictive demand and replenishment for entertainment media The fast-moving entertainment media market requires a responsive supply chain – capable of capturing all movement of goods while automatically maintaining appropriate replenishment levels. avarto digital services is challenged to have more timely, accurate information on its global flow of goods for efficiency, risk reduction and rapid reaction to changing demands and market requirements. avarto digital services, a division of Bertelsmann AG, handles all inventory management flows on behalf of its customers, from order management and procurement, to distribution and finance. The entertainment services division manages the distribution of entertainment media. So how does avarto overcome these challenges? The company has implemented retail inventory management (r.i.m.), which responds rapidly, automatically and according to demand signals, managing replenishments based on sales variations in stores. Top media titles and promotions are identified and sufficient stocks ensured to meet demand, while a lower priority is placed on slower moving titles. The system integrates financial considerations (retail outlet credit), marketing campaign data and predictive product lifecycle sales. Business intelligence, with advanced analytics consolidated across different data sources, provides a wide range of analysis and evaluation capabilities. Business benefits include lower inventory costs, rapid availability of reliable and detailed POS data, fast response to shifts in market demand, and flexible analyses for tactical and strategic decision making. But the bottom line is: retail vendor inventory management with predictive demand enabled by business intelligence equates to no more empty shelves and missed sales. “Our leading position in the logistics services market is based to a great extent on the retail inventory management capabilities.” 4 Jochen Bremshey, Vice President Entertainment Services New rule #2: See what others don’t. Unveil visibility with collaborative insight. Supply chain visibility was the leading challenge identified in the 2009 IBM Chief Supply Chain Officer Study and continues to be a major concern today, as companies seek agility and responsiveness in their global operations.5 Although supplanted by demand variability in our latest survey, visibility, integration and collaboration with network partners still demand the attention of supply chain executives. At a time when the free flow of information is readily available to most of the world through the Internet, supply chain managers still struggle with getting accurate and timely information to run their global operations. Effectively capturing, managing, and analyzing information – and collaborating with global partners to make real-time decisions – are major concerns and require substantial effort. 8 New rules for a new decade Executives are at different points in building smarter collaborative visibility capabilities (see Figure 4). Operators are still struggling with transactional level exchanges and breaking down the silos among supply chain functions within the enterprise. In sharing information with their supply chain partners, they rely primarily on electronic data interchange (EDI) and are working through standardization and data management approaches to make sense of the information. Planners have taken things a step forward with integration. They are integrating their strategies, plans and operational capabilities with visibility, both across functions and business units within the enterprise. They are building more integrated visibility capabilities with key partners (suppliers, service providers, contract manufacturers and customers) that are focused primarily on supply chain planning and logistics functions. They are implementing dashboards and scorecards to better monitor on-going performance against targets and manage exceptions and disruptions. But once again, the Visionary leaders are pushing ahead (see Figure 4). They are using collaboration among their network partners with business intelligence to make collective and fast decisions. Business intelligence and analytics • • • • • Use of business intelligence and analytics on key control point indicators (forecasts versus orders, schedules versus production capability, inventory in transit, shipment status). Performance management, dashboards and alert notification for exception management. Collaborative planning and execution with partners Resourceful integration and visibility acros...
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