managing supply chains for growth and efficiency

A joint survey and research summary by IBM and IW Custom Research

MANAGING SUPPLY CHAINS FOR GROWTH AND EFFICIENCYTrends and competencies for leading Globally Integrated Enterprises

>

METHODOLOGYThe overall objective of the IBM/IW Custom Research Value Chain Survey was to gain insight into how manufacturers manage assets, develop new products, manage supply chains, source materials globally and conduct strategic planning for supply chains. Invitations to participatewere e-mailed to about 25,000 subscribersto IndustryWeek magazine on Sept. 12, Sept. 19 and Oct. 17, 2007. Field research was closed for data analysis and reportingon Oct. 17.

This research report is based upon data from this research, anecdotal information and previous research conducted by IBM.

ABOUTIBM GLOBAL BUSINESSSERVICESWith business experts in more than 160 countries, IBM Global Business Services provides clients with deep business process and industry expertise across 17 industries, using innovation to identify, create and deliver value faster. We draw on the full breadth of IBM capabilities, standing behind our advice to help clients implement solutions designed to deliver business outcomes with far-reaching impact and sustainable results.

ABOUTIW CUSTOM RESEARCHIW Custom Research is an operating unit of IndustryWeek and provides insights into executives’ opinions and manufacturing trends. IndustryWeekconnects decision-makers within manufacturing enterprises to share ideas and tools that inspire action. In print, online and in person, the IndustryWeekcommunity is the leading resource for manufacturing operations knowledge. IndustryWeek is a property of Penton Media, Inc. For more information, go to www.industryweek.com.

1 Participant profile

2 Global integration:Opportunities and challenges

3 Managing assets for peak performance and effectiveness

6 Differentiating capabilities for local markets

7 Balancing supply as demand changes

9 Incorporatingsustainability into processes and planning

10 Evenly distributing risk among supply-chain partners

11 Using tools and processes to foster collaboration

13 Conclusion

CONTENTS

A joint survey and research summary by IBM and IW Custom Research > 1 <

>

Most respondents are in a manager/supervisor role.

RESPONDENTS BY TITLE

Vice president/C-level 19%

Director17%

Individualcontributor8%

Other 2%

54%Manager/Supervisor

The top three sectors represented are fabricated metals, machinery, and motor vehicle and related parts.

INDUSTRY GROUPS

Fabricated metal

Machinery

Motor vehicles and related parts

Plastics and rubber 3%

Pharmaceuticals 4%

Aerospace4%

Primarymetal 5%

Chemical5%

16%

9%9%

Electrical equipment and appliances 6%

Other39%

HEADQUARTERS LOCATION*

Central/SouthAmerica 5%

75%North America

*Figures do not add up to 100% due to rounding.

Asia Pacific 11%

Europe 4%

Africa/MiddleEast 3%

Most parent companies are based in North America.

PARTICIPANT PROFILE

Annual revenues for parent companies of survey respondents

range from $2.1 billion to under $300,000. Median revenue

for the business units that responded is $70 million. In addition:

> 2 < Managing Supply Chains for Growth and Efficiency

>

Global economic flows have increased

significantly in the past decade. Trade

volume is exploding, and global cross-border

mergers and acquisitions are reaching

new heights. An expanding and improving

communication infrastructure is enabling

multidirectional business relationships, which

span the supply chain from end-to-end. In one

dramatic example, foreign manufacturers built

60,000 plants in China between 2000 and 2003.

The impact of globalization is widespread.

Fewer than one in 10 manufacturers responding

to the IBM/IW Custom Research Value Chain

Survey said global sourcing of direct (7%)

and indirect (9%) materials are not impacting

their supply chains. Conversely, 44% said

global sourcing of direct materials is having

a great or significant impact on their supply

chains, while 25% said the same of globally

sourced indirect materials.

Many manufacturers have benefited from

globalization, but oftentimes this is accompanied

by increasing lead times, expanding risk and

deteriorating service levels. For instance, 29%

of survey respondents said globalization has

improved margins, but 37% said it has also

increased lead times.

GLOBAL INTEGRATION: OPPORTUNITIES AND CHALLENGES

In order to remain market leaders, globally

integrated manufacturers must excel at:

• Managing global assets for peak performance

and effectiveness;

• Differentiating capabilities for local markets;

• Balancing supply as demand changes;

• Incorporating sustainability into strategic

planning and processes;

• Evenly distributing risk among supply-chain

partners; and

• Using tools and processes to foster collaboration.

This report looks at each of these competencies

in depth, comparing the ideal state for optimal

competitiveness with the current state of

multinational manufacturers and their supply

chains based on survey-respondent data.

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>

Leveraging global assets allows multi-

national manufacturers to take advantage

of differences in cost, capabilities, regulations

and skills. Different regions or countries tend

to have their specific strengths, i.e., cost,

quality, logistics, skills or tariffs. Best results

can be achieved when relying on the best mix

and positioning of all assets globally.

Multinational manufacturers should leverage global

resource pools, facilities and infrastructure by:

• Building geographically diverse R&D practices;

• Optimizing networks for all flows – product,

people, information and cash;

• Locating processes in best locations for

manufacturing, finances and logistics; and

• Developing an ongoing process to identify

best-of-breed resources and facilities within

the corporation.

Maintaining hard assets such as facilities and

machinery is important because, in a globally

integrated enterprise, production capability and

capacity change frequently. Assets must be

ready for adjustments to maximize strengths as

conditions change. However, about one-third

of surveyed manufacturers are not using

predictive and preventive maintenance, and

one-fifth are not empowering operators to

maintain equipment, according to this survey.

Also, at most manufacturers using these three

practices, the results are reported as only

“somewhat effective.” Using these practices

more often and more effectively increases

competitiveness by improving machine availability,

machine efficiency, changeover times and

process flexibility. For example, respondents

who are using predictive maintenance and

reliability-centered maintenance very effectively

have shorter median manufacturing cycle times

than the group average (17.5 hours versus

MANAGING ASSETS FOR PEAK PERFORMANCE AND EFFECTIVENESS

HOW EFFECTIVE HAS EACHPRACTICE BEEN IN REACHINGYOUR SITE’S TOP OBJECTIVES?

23.2%Very

effective

Somewhat effective35.2%

Not effective7.2%

Not used 34.4%

19.2%Very

effective


Not effective15.2%

Not used 31.2%

Somewhat effective46%

Not effective8.7%

Not used 19.8%

25.4%Very

effective

Predictive maintenance and reliability-centered maintenance

Preventive maintenance and maintenance planning

Operator-based maintenance*



25 hours), as do those using preventive

maintenance and maintenance planning

very effectively (14 hours versus 25 hours).

Those using operator-based maintenance very

effectively have better production-schedule

attainment (94% median versus 90% in the

group at large).

Equipment maintenance is not the only

hallmark of a best-of-breed facility. To achieve

excellence on a global scale requires disciplined

and consistent standard work processes and

ongoing continuous improvement. Cascading

strategic goals to the tactical level at diverse

locations is perhaps the most important job

of leaders of globally integrated enterprises.

All employees must understand and adhere

to tactics that support strategic goals on a

daily basis with each singular activity they

undertake. Without such understanding and

adherence, local priorities can overtake top-

level metrics and goals, breeding inefficiency

in the form of non-value-creating activity.

While manufacturers use many different

practices to measure performance to goals and

promote continuous improvement, surveyed

companies are not using these practices as

often or as effectively as they could.

Of the two most common management

methods, Six Sigma is viewed as more effective

than lean enterprise principles. However,

when looking at the granular level, process-

management practices that are part of lean

enterprise principles are as often or more often

ranked as effective as Six Sigma.

Outsourcing Asset Management Is Effective

One way surveyed manufacturers are effectively managing plants and machinery is by outsourcing. Two-thirds of survey participants outsource some or all plant maintenance, and of that group, only 6% say the practice is not effective (11% say outsourcing this function is extremely effective, and 35% say it is somewhat effective).

FOR THOSE PRACTICES IMPLEMENTED, HOW EFFECTIVE ARE THEY?

20.2%Very

effective


Not effective6.5%

Not used 24.2%

13.8%Somewhat effective32.5%

Not effective8.1%

Not used 45.5%

Very effective

Six Sigma*

Lean enterprise principles*



IBM Case Study: Optimizing Networks for Flows

A $4.2 billion global manufacturer of industrial automation products wanted to grow revenues but was hampered by a 30-year-old home-grown ERP system that each site had customized. This promoted disparate processes, system and divisional boundaries, and a lack of resource-sharing. IBM identified the need for a more integrated ERP architecture and improved communications. An implementation of an SAP system at nine plants, three engineering sites and back-office operationsis contributing to the client’s goal of doubling revenues by 2010. Additionally, internal metrics are improving, including a drop in past-due-to-promise backlogs at all sites.

FOR THOSE PRACTICES IMPLEMENTED, HOW EFFECTIVE ARE THEY?

Cellular manufacturing

28.8%Very

effective


Not effective8.0%

Not used 20.8%

Value-stream mapping

28.6%Very

effective


Not effective12.7%

Not used 11.9%

Pull system/Kanban messaging

Somewhat effective35%

Not effective6.5%

Not used 31.7%

26.8%Very

effective


>

One size does not fit all. Success on a

global scale depends on serving distinct

global markets with differentiated capabilities.

Customer requirements are key, and they

are different depending on the region.

Also, developments in the world economy

have different effects in different geographies,

providing opportunities for growth and

targeted offerings.

The supply chain must be capable of matching

the customer segmentation with the corresponding

offering by:

• Segmenting products and services to meet

unique customer requirements;

• Using global demographics to segment

the market;

• Optimizing “buy-make-sell” decisions in

a dynamic supply-chain environment; and

• Leveraging a global ecosystem of partners

to deliver customized solutions.

Achieving these competencies could prove

challenging for manufacturers sourcing

from low-cost countries, according to survey

respondents. Fifty-five percent of respondents

say they are having difficulty evaluating and

managing new suppliers in low-cost countries,

and the same percentage has had quality

problems. Other issues cited as major challenges

include making delivery commitments (63%),

complying with regulations and legal issues (41%),

and maintaining virtual relationships (40%).

To create unique offerings on a global scale,

multinational manufacturers need to build

differentiated capabilities with partners.

Commoditization of products is a byproduct of

globalization, and differentiation is key to the

success of a business. Differentiation requires a

network of specialized supply-chain partners.

DIFFERENTIATING CAPABILITIESFOR LOCAL MARKETS

IBM Case Study: Supply Chain Transformation

A life sciences company was expecting business to double in five years. Preparations for such growth can be daunting for a company with multiple products in multiple markets, especially in a highly regulated sector such as pharmaceuticals. The company needed to establish an IT infrastructure that would connect 2,000 users in 26 different countries to business process functions based in Europe. Additionally, the solution had to be simple and efficient. The company had determined that too many manual processes were impeding rapid-response capabilities.

IBM’s transformation services included integrating new SCM and ERP capabilities into existing systems using multiple-language forms. Benefits so far include:

• SRM shopping cart and invoice approval with workflow to 2,000 users. Within the first month, the network processed 8,500 carts, 7,700 purchase orders and more than 10,000 paid invoices.

• Access to a single, faster, more accurate source of business intelligence (i.e., real-time visibility to key inventory and operational data).


>

Global integration of the supply chain

requires multinational manufacturers

to closely synchronize supply and demand.

Global integration often means longer and

more complex supply chains. High premium

freight ratios are an indicator of discrepancies

in supply and demand.

These practices can be effective in synchroniz-

ing supply and demand at globally integrated

enterprises:

• Continuous replenishment programs for

customers;

• Customer interaction with production

employees;

• Management of inventory at customer site;

• Shared, real-time electronic demand/inventory

data; and,

• Integrated returns management/reverse

logistics.

BALANCING SUPPLY AS DEMAND CHANGES

Multinational manufacturers have a great

opportunity to improve on these practices,

as less than 20% of those using these

practices have implemented them extensively.

Of these programs, the three that are most

effective in achieving forecast accuracy are

using shared, real-time electronic demand and

inventory data; customer inventory planning

and deployment; and collaborative demand

planning, forecasting and replenishment

programs. Respondents using these programs

extensively report an average monthly forecast

error (measured by mean absolute percentage

error) of 10, while the average for the surveyed

group at large is 15.

To what extent have the following been implemented?

RESPONSE EXTENSIVELY SOME NONE

Continuous replenishment programs for customers 13.1% 56.8% 30.2%

Customer interaction with production employees 13.2% 52.8% 34.0%

Management of inventory at customer site 15.7% 40.9% 43.4%

Shared, real-time electronic demand/inventory data 17.4% 46.3% 36.3%

Collaborative demand planning, forecasting and replenishment programs with customers (CPFR) 16.5% 49.5% 34.0%

Customer inventory planning and deployment programs (e.g., vendor-managed inventory) 10.3% 53.3% 36.4%


For those customer practices implemented, how effective are they?

To what extent have the following been implemented?

RESPONSE EXTENSIVELY SOME NONE

Formal distribution strategy (location, number, mission, mix) 25.3% 51.1% 24.2%

Differentiated logistics services for discrete customer segments 16.8% 52.1% 30.5%

Supply chain visibility for managing exceptions 16.8% 52.1% 28.4%

Collaboration and integration among customers and suppliers 28.4% 52.6% 20.0%

Cross-docking, flow-through 13.5% 44.2% 42.7%

Optimization tools 22.1% 51.1% 28.4%

Formal returns management 32.6% 56.4% 12.6%

EXTREMELY SOMEWHAT NOTRESPONSE EFFECTIVE EFFECTIVE EFFECTIVE

Formal distribution strategy (location, number, mission, mix) 18.1% 50.5% 7.4%

Differentiated logistics services for discrete customer segments 7.4% 52.6% 9.6%

Supply chain visibility for managing exceptions 14.9% 54.7% 7.4%

Collaboration and integration among customers and suppliers 13.7% 51.6% 12.6%

Cross-docking, flow-through 18.1% 43.8% 5.3%

Optimization tools 7.4% 49.5% 13.8%

Formal returns management 14.9% 54.7% 7.4%


>

Meeting a variety of environmental regulations

from disparate markets makes attention

to “green” practices crucial. Many companies set

compliance to the highest current standard as a

way to ensure compliance in all markets.

Being a green company is no longer a marketing

mantra. It is a necessity for a globally integrated

enterprise, and should be incorporated into

every step in the procurement, manufacturing

and distribution processes.

Product Development: Only 14% of

respondents have extensively implemented

green programs in product development.

Fifty-five percent report “some” implementation,

while 31% report no implementation.

Procurement: Twenty-three percent of surveyed

manufacturers have a green procurement program,

and 38% plan to start one within the next two

years. Unfortunately, that same percentage has

no plans to start such a program.

Operations: About 23% of respondents

have extensively implemented environmental

programs at their sites, while 43% report

some integration. Thirty-eight percent have

no environmental programs.

Certainly, manufacturers are finding implementation

of green techniques to be a challenge. About 70%

said such programs in the manufacturing area are

challenging them, while 72% said the same about

such programs within logistics management.

Looking at the trend in energy consumption,

the cost of energy – and thereby its impact on

the bottom line – is likely to increase. Reducing

a firm’s carbon footprint by limiting its energy

consumption will become a prerequisite to

remaining competitive. This is especially the

case for globally integrated enterprises where

different efficiency standards, varying regulations

and diverse customer expectations are in effect

within the company at the same time in its

different geographies. Also, logistics costs to

maintain globally distributed operations will

clearly be affected by rising energy prices and

increased regulations on emission standards.

On the other hand, globally integrated enterprises

are in the unique position to leverage “green”

technology within the organization and reuse

energy-efficient approaches and solutions

worldwide. Being globally integrated is the

best prerequisite to finding an optimum trade-off

among cost, quality, responsiveness and

environmental impact.

INCORPORATING SUSTAINABILITY INTO PROCESSES AND PLANNING

SOU

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FORM

ATIO

N A

DMIN

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ATIO

N

TO WHAT EXTENT ARE HIGH ENERGY COSTS IMPACTING YOUR SUPPLY CHAIN?

15.0%To a very great extent

31.5%To a significant extent

34.0%Some extent

16.0%To a little extent

3.5%To no extent

U.S. ENERGY CONSUMPTION BY FUEL(1980-2030)

60

50

40

30

20

10

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YEAR

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UA

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2004

HISTORY PROJECTIONS

Petroleum

Coal

Natural Gas

NuclearNonhydro renewablesHydropower


>

Complex, globally integrated supply chains

make it necessary to share risk and address

control. The more globally diverse supply chains

are, the more dependencies and risks exist. By

sharing risks among stakeholders in the network,

the negative effects for each single firm are limited.

Share risks and limit the effect of increased

complexity of a globally integrated supply

chain by:

• Implementing end-to-end visibility in real time;

• Balancing the benefits of cost reductions

versus customer satisfaction and aligning

performance accordingly;

• Developing variable cost structures that

fluctuate with market demand;

• Outsourcing non-differentiating functions

to share risks across the global network and

create variable structures; and

• Using tools and processes to foster collaboration.

EVENLY DISTRIBUTING RISKAMONG SUPPLY-CHAIN PARTNERS

To what extent have the following supply chain practices been adopted at your site?

Most multinational manufacturers responding to

this survey have widely or partially adopted many

of these practices. More than half have achieved

some real-time transparencies and are using event

management and alert notification. These companies

are in a good position to share risk and address

control as their supply chains expand globally.

Additionally, responding companies are

starting to realize the value of outsourcing

non-differentiating functions, such as

transportation, warehousing and management

of logistics payment process and customs.

Companies with extensive transportation

outsourcing tend to have higher annual raw

material turn rates (12.5 versus 8 for those

that don’t outsource transportation) and

finished-goods turn rates (15.5 versus 12).

WIDELY PARTIALLY NOTRESPONSE ADOPTED ADOPTED ADOPTED

Sharing risks across a network, rather than concentrating them in a single enterprise 20.3% 40.6% 39.1%

Rapid response to changes in market conditions 27.1% 51.2% 21.7%

Maximizing variable supply chain costs to be aligned with revenues 12.1% 51.5% 36.4%

Real-time information transparency inside and outside the enterprise 10.4% 48.0% 41.6%

Event management and alert notification 14.7% 49.7% 35.5%


Which of the following business functions has been outsourced at your site for logistics functions?

> USING TOOLS AND PROCESSESTO FOSTER COLLABORATION

Collaboration in new product development

is effective in serving a global marketplace.

Supply chain visibility and information sharing

are key factors to enable collaboration and thereby

allow a rapid response. In order to achieve these,

multinational manufacturers must:

• Use collaborative processes and information-

sharing practices with all supply chain

members in the global network;

• Have visibility into demand, supply, logistics

and manufacturing signals; and

• Implement dynamic decision-making,

event-monitoring and alert notification.

Survey results show that more than two-thirds

of firms are applying collaboration across

functions and company borders to at least

some extent. Roughly 10% of leading firms are

even relying to a great extent on collaborative

approaches. Improvement potential can still be

found with IT support as planning applications

show a significantly lower implementation rate.

For globally integrated enterprises,

collaboration is the key to success. Without

close cross-function and cross-country

collaboration, local islands and duplicate

processes and resources will evolve, thwarting

the whole concept of global integration.

Establishing collaboration, in contrast, will

lead to gains from inherent efficiencies and

synergies. As a prerequisite, processes

and systems must be in place to guarantee

visibility, alerts and monitoring, and enable

collaboration in the first place.

OUTSOURCED OUTSOURCED NOTRESPONSE EXTENSIVELY SOME OUTSOURCED

Transportation (multimodal inbound and/or outbound, carrier management) 28.9% 38.9% 32.2%

Warehousing and/or distribution centers 12.2% 38.9% 48.9%

Audit and payment services for freight bills 17.6% 19.8% 62.6%

Transportation management services (planning) 8.8% 28.6% 62.6%

Customs/Export management 20.0% 40.0% 40.0%

Customer order and call operations 5.5% 15.4% 79.1%

Field services/Warranty management 5.6% 24.4% 70.0%

Returns management/Reverse logistics 5.5% 20.9% 73.6%


GREAT SIGNIFICANT SOME LITTLE NORESPONSE EXTENT EXTENT EXTENT EXTENT EXTENT

Formal meetings with sales, marketing and supply chain operations 12.9% 35.6% 23.2% 22.2% 6.2%

Demand and supply plans are formally aligned and agreed- upon across business functions (consensus-based forecasting) 10.8% 25.3% 28.9% 24.7% 10.3%

External demand collaboration with customers 6.2% 24.2% 34.0% 25.8% 9.8%

External supply planning collaboration with suppliers 7.2% 30.4% 37.6% 19.6% 5.2%

Supported by integrated demand and supply planning applications 4.2% 19.0% 34.4% 24.3% 18.0%

Transportation management is optimized based upon the integrated demand/supply plan 9.7% 14.5% 30.1% 28.5% 17.2%

Other 0.0% 100.0% 0.0% 0.0% 0.0%

SUPPLY CHAIN PLANNING: To what extent do the following statements describe your site’s planning process?

NEW PRODUCT DEVELOPMENT: How much does each of the following groups participate in new product development?

EXTENSIVE SOME NORESPONSE PARTICIPATION PARTICIPATION PARTICIPATION

Research and development/Engineering 77.8% 18.5% 3.7%

Marketing and/or sales 60.4% 35.8% 3.8%

Manufacturing 51.9% 43.5% 4.6%

Procurement/Purchasing 27.1% 55.1% 17.8%

Finance 21.2% 54.8% 24.0%

Logistics 6.5% 52.3% 41.1%

Customers 43.1% 52.3% 4.6%

Suppliers 13.0% 73.1% 13.9%


>

As technology expands capabilities and

communications open new markets

everywhere, global integration will become

the standard for successful manufacturers.

Companies that excel in a global marketplace

will be able to:

• Manage plants, machinery and people for

peak performance and effectiveness;

• Differentiate capabilities for local markets;

• Balance supply as demand changes;

• Make sustainability a strategic priority;

• Evenly share risk among supply-chain

partners; and

• Use tools and processes to foster collaboration.

Certainly, manufacturers will face challenges

such as reining in expanding lead times and

maintaining quality standards. Becoming a

globally integrated enterprise is a journey of

change that requires mastering the competencies

in this report.

IBM Becoming a Globally Integrated Enterprise

In addition to helping clients master the competencies of global integration, IBM is becoming globally integrated. Here is what we are doing:

Business Strategy• Realigning the portfolio to optimize

expertise and openness through divestitures, acquisitions and new areas of focus for innovation

• Investing in India, China and Brazil as growth markets – and as key engines of globalization and specialization

Operations• Integrating global operations – from

procurement led out of China to services delivery from India

• Building shared services and centers of excellence to improve efficiencies – and innovate new products and service

Management and Culture• Creating a values-based management

system to form decisions and build relationships

• Lowering the center of gravity – pushing decision-making closer to the work and the client

CONCLUSION

Most aspects of global integration are still

evolving, such as the multiple laws and

regulations that vary by government. This

should not stop companies from becoming

as competitive as possible now, however.

One aspect of buying, making and selling in

a global marketplace will not change: Those

companies that are prepared to respond to

changes fastest will be market leaders.

managing supply chains for growth and efficiency

Documents

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