Supply Strategy Implementation: Current State and Future Opportunities 2009

Transcription

1 Supply Strategy Implementation: Current State and Future Opportunities 2009 Robert M. Monczka, Ph.D. Director-Strategic Sourcing and Supply Chain Strategy Research CAPS Research, and Distinguished Research Professor of Supply Chain Management W. P. Carey School of Business Arizona State University Kenneth J. Petersen, Ph.D. Professor, and First Community Bank Faculty Fellow Colorado State University, and Visiting Senior Fellow Manchester Business School CAPS Research December, 2009

2 Supply Strategy Implementation: Current State and Future Opportunities Robert M. Monczka, Ph.D. Director-Strategic Sourcing and Supply Chain Strategy Research CAPS Research, and Distinguished Research Professor of Supply Chain Management W. P. Carey School of Business Arizona State University Kenneth J. Petersen, Ph.D. Professor, and First Community Bank Faculty Fellow Colorado State University, and Visiting Senior Fellow Manchester Business School CAPS Research December, 2009 Copyright 2009 Institute for Supply Management and W. P. Carey School of Business at Arizona State University. All rights reserved. Contents may not be reproduced in whole or in part without the express permission of CAPS Research.

3 Acknowledgements The lead researchers for this study would like to acknowledge and thank the following individuals for their contributions to this effort. Kathleen A. Chester of the Institute for Supply Management (ISM) provided general administrative support and draft report development to the research team. Debbie Maciejewski of CAPS Research managed the solicitation process for the Web survey and administered the ongoing communications with survey respondents. Steve Koch, Director of Information Technology Services at CAPS Research, developed the database and Web-based assessment application and provided data analysis and reporting tools. Tammy Schwerman, Senior Technical Analyst at CAPS Research, supported the design and testing of the Web-based assessment application and reporting tools. Gregory R. Gay, Research Associate, reviewed and analyzed qualitative assessment responses related to obstacles to implementation of supply strategies. ISBN Supply Strategy Implementation: Current State and Future Opportunities 2009

4 Author Biographies Robert M. Monczka, Ph.D., is Director of Strategic Sourcing and Supply Chain Strategy Research at CAPS Research. He is also Distinguished Research Professor of Supply Chain Management at Arizona State University s W. P. Carey School of Business. Dr. Monczka focuses on sourcing and supply strategy development and implementation, and provides leadership of major supply strategy research initiatives at CAPS Research. He has authored more than 100 articles and books and has consulted with numerous Fortune 500 firms. Kenneth J. Petersen, Ph.D., is Professor of Supply Chain Management and First Community Bank Faculty Fellow at Colorado State University and Visiting Senior Fellow at Manchester Business School in Manchester, England. He has authored more than 50 articles, reports and book chapters and has consulted with numerous firms in strategic sourcing and supply management. CAPS Research 3

5 Table of Contents Acknowledgements Author Biographies Table of Contents Index of Figures and Tables Executive Summary Research Background Key Findings Changes: 2009 vs Guidance for Senior Management Chapter 1: Introduction and Research Approach Transforming Purchasing/Supply What Will the Next 10 Years Look Like? CAPS Executive Assessment of Supply (EAS): Development and Objectives.. 11 Supply Strategies Included in EAS EAS and Value-Add to Company Competitiveness Research Approach Respondent Profile Overall Research Framework Report Organization Chapter 2: Supply Strategies: Importance, Implementation and Gaps Introduction Overall EAS Findings Supply Strategy Importance Ratings and Rankings Supply Strategy Implementation Ratings and Rankings Supply Strategy Gap Analysis Overall Importance/Implementation Gap Analysis Comparison Between High and Low Implementation Firms Observations: High and Low Implementation Firms Conclusions: Current State of Supply Strategies Chapter 3: Industry Analysis Introduction Industry Sector Difference Findings Industry Difference Conclusions Average Ratings by Industry Sectors Chapter 4: Strategy Implementation and Supply Performance Introduction Supply Performance Supply Strategy Implementation: Current State and Future Opportunities 2009

6 Conclusions Industry Performance Differences Correlation Analysis Chapter 5: What Has Changed? 2007 to Introduction Overall Changes: Supply Strategy Changes: Firms Common Between 2009 and Chapter 6: Obstacles to Supply Strategy Implementation Introduction Overall Findings Conclusions Selected Obstacles Chapter 7: Summary and the Path Forward Introduction Summary: Key Findings The Path Forward: Supply Transformation 2010 and Beyond Clear Goals Establish Priorities Resources and Capabilities Supply Transformation Process and EAS Application The Decade Ahead : Supply Strategy Imlementation Strategy Enhancement Supplier Focused Strategies Supply/Value Chain Integration Concluding Comments Appendix One: Supply Strategy Definitions Appendix Two: Statistical Analysis Appendix Three: Strategy Implementation Obstacles CAPS Research 5

7 Index of Figures and Tables Figure 1.1 Sourcing and Supply Chain Maturity Model Table 2.1 Overall Importance Strategy Ratings Figure 1.2 EAS Application Figure 1.3 Responding Company Profile Figure 1.4 EAS Participating Industries Figure 1.5 Supply Leadership Model Figure 2.1 Assessment Example with Rating Scales Figure 2.2 Overall 2009 EAS Findings Figure 2.3 Figure 7.1 Figure 7.2 Figure 7.3 Figure 7.4 Strategy Segmentation Analysis: Importance/Gap Improving Economic Value-Add (EVA) Building Blocks for Supply Transformation Strategic Supply Strategy Priorities & Capabilities Assessment Framework Supply Strategy Transformation Process Figure 7.5 Critical Supply Strategies: 2010 and Beyond Table 2.2 Overall Implementation Strategy Ratings Table 2.3 Overall Strategy Ratings Gaps.. 22 Table 2.4 Implementation: Highest 25 Companies vs. Lowest 25 Companies Table 2.5 Table 3.1 Table 3.2 Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7 Overall Implementation Ratings for Top/Bottom 25 Firms Strategy Importance Differences by Industry Strategy Implementation Differences by Industry Average Ratings by Industry Sector Implementation Ratings for Top/ Bottom Firms by Industry Sector for 23 Strategies Top 6 Strategy Gaps by Industry Sector Discrete Manufacturing Importance Strategy Rankings/Ratings Discrete Manufacturing Implementation Strategy Rankings/ Ratings Supply Strategy Implementation: Current State and Future Opportunities 2009

8 Table 3.8 Discrete Manufacturing Strategy Gap Rankings/Ratings Table 4.4 Performance Improvement: Overall and by Industry Sector Table 3.9 Table 3.10 Table 3.11 Table 3.12 Table 3.13 Table 3.14 Table 3.15 Table 3.16 Table 3.17 Table 3.18 Implementation: Highest 10 Discrete Manufacturing Companies vs. Lowest 10 Discrete Manufacturing Companies Discrete Manufacturing: Implementation Ratings for Top/Bottom 10 Firms Process Manufacturing Importance Strategy Rankings/Ratings Process Manufacturing Implementation Strategy Rankings/ Ratings Process Manufacturing Strategy Gap Rankings/Ratings Implementation: Highest 10 Process Manufacturing Companies vs. Lowest 10 Process Manufacturing Companies Process Manufacturing Implementation Rankings/Ratings for Top/Bottom 10 Firms Service Importance Strategy Rankings/Ratings Service Implementation Strategy Rankings/Ratings Service Strategy Gap Rankings/ Ratings Table 5.1 Comparison of 2007/2009 Implementation/Importance Gaps. 48 Table 5.2 Table 5.3 Table 5.4 Table 6.1 Differences in Overall Implementation Between 2007 and Difference in Overall Importance Between 2007 and Importance, Implementation & Gap Strategy Ratings for Companies Participating in BOTH 2007 & Summary of Obstacle Responses by Supply Strategy Table 3.19 Implementation: Highest 10 Service Companies vs. Lowest 10 Service Companies Table 3.20 Table 4.1 Table 4.2 Table 4.3 Service Implementation Ranking/ Ratings for Top/Bottom 10 Firms.. 42 Supply Performance Results (2007, 2009) Performance Ratings (2007 and 2009) Actual Performance: Overall and by Industry Sector CAPS Research 7

9 Executive Summary Research Background Supply management has been undergoing transformation from an administrative function to a strategic contributor to organizational competitiveness over the past 20 plus years. The success or failure of supply to establish and lead a competitive supply base and work with other functions can drastically impact a firm s success. In addition, supply positively or negatively affects cost, assets, and revenue generation, all critical to the financial performance of the firm. Currently, the strategic direction of many firms is being supported by supply strategies. For example, P&G s click and connect open innovation focus, purchasing s savings contribution presented to Wall Street analysts by various companies, General Mills holistic margin management requiring significant contribution from supply, globalization of the supply base across industries, increasing collaboration with suppliers and dramatic efforts by firms during the economic downturn to cut costs and gain back raw material price increases. To continue positive supply transformations, firms worldwide need to regularly assess the degree of implementation of supply strategies they consider most important to the success of their organization. With this in mind and with the experience gained over the past 10 years in developing, providing and conducting supply assessments, CAPS Research executed the Executive Assessment of Supply (EAS). The primary objective of the 2009 EAS was to determine the importance organizations worldwide place on critical supply strategies, their level of implementation and performance results from these strategies. Data about 23 supply strategies and performance results were collected from 130 supply organizations across 26 industries to further develop a baseline for current and future analyses, which was initialized with the 2007 EAS. Key Findings The 2009 EAS shows that firms are lagging in implementing supply strategies that they consider important to the competitive success of their firms. Firms rated the importance of the 23 strategies between being functionally required to an operational necessity to compete. Implementation of the strategies was not complete. For all organizations, supply strategies were implemented at a limited number of supply locations and were being accepted as best practice with initial positive results. In addition, there was a large gap between strategy importance and implementation. There was also a large implementation difference between those firms where supply strategies were most and least implemented. The 10 most important and implemented supply strategies were: Vision, Mission and the Strategic Plan Commodity & Supplier Strategy Process Strategic Cost Management Engagement by Corporate Executives and Business Unit Leaders Human Resource Development Procurement & Supply Organization Structure & Governance Measurement & Evaluation Total Cost of Ownership Functional & Business Processes, Practices & Systems 8 Supply Strategy Implementation: Current State and Future Opportunities 2009

10 Structuring & Maintaining the Supply Base and Cross-Functional/Location Teaming These strategies focus on both the building blocks required to achieve an effective supply organization and strategy, and those specific purchase category and supplier strategies critical to achieving year-over-year supply performance improvement. However, implementation of these strategies also lags behind their strategic importance. Overall, the largest gaps between supply strategy importance and implementation were found for commodity/supplier strategy development, strategic cost management, human resource development, structuring/maintaining a world-class supply base, measurement and evaluation, total cost of ownership, world-class quality, accelerated change management, and supplier assessment, measurement and communication. These strategies should provide an implementation focus at most firms. Industry sector differences were quite limited. However, the discrete industry sector had a somewhat higher degree of implementation overall than the process and service sectors. Supply performance, on average, showed improvement for key performance areas. Purchase prices were reduced by 4 percent on average; transportation and logistics costs were reduced by 5.1 percent and total cost of ownership reduced by 4.3 percent. Compared to 2007, price improvements were similar but transportation and logistics and total cost of ownership improved somewhat. Supplier flexibility and responsiveness was also somewhat improved in Changes: 2009 vs There was a significant reduction in the overall gap between strategy importance and implementation, generally indicating a higher degree of implementation since The most significant increases in strategy implementation between 2007 and 2009 were for strategic cost management; strategic supplier alliances; total cost of ownership; procurement and supply organization structure and governance; engagement by corporate executives and business unit leaders; innovation and accelerated change management; and structuring and maintaining the supply base. For firms participating in both the 2009 and 2007 EAS, major gap reductions were for strategic supplier alliances; supplier integration into customer order fulfillment; e-sourcing and supply chain strategies; collaborative buyer/supplier development and continuous improvement; supplier integration into new product development; and innovation and accelerated change management. The two most significant obstacles to implementation were executive engagement and support with resources and alignment and integration of business; and manufacturing/operations, technology and supply strategies. Guidance for Senior Management Although supply is becoming more strategic at firms worldwide, implementation of critical supply strategies is still lagging. We also found that strategies that may take longer to implement and require more resources and cross-functional support were not viewed as being most important, nor were they the most implemented. However, more robust strategies such as standardization of purchases to reduce complexity and collaboration will likely be very important to the future success of many organizations. Based on this research, we believe that firms should be working two supply buckets concurrently. First, there is need to ensure high implementation and effectiveness for core strategies such as category and supplier strategy development (with risk management), structuring the supply base, total cost of ownership, strategic cost management, and people acquisition and development. These strategies deliver supply performance today. Second, leading supply organizations and their supply and business unit leaders need to invest in the longterm success of the firms by accelerating transformation of e-systems for supply, supplier integration into both new product development and customer order fulfillment, standardization of specifications and purchases to reduce complexity, supplier innovation through effective collaboration, and environmentally sustainable supply chains. These strategies will be necessary to deliver future performance improvements. CAPS Research 9

11 Chapter 1: Introduction and Research Approach What supply strategies are viewed as most important by supply organizations? To what extent have these strategies been implemented? How do supply strategies relate to supply performance? What supply strategies are likely to be the focus of future transformations? This research provides answers to these questions. Transforming Purchasing/Supply Beginning in the early to mid-1980s, purchasing began transforming from a back-office transaction dominated function to a critical part of a firm s competitive strategy. This transformation process began with Xerox gaining insight into new purchasing and supply strategies from its Japanese counterpart, Canon, followed by transformations in the automotive, appliance, electronics, computer and other industry segments worldwide. This transformation can be illustrated by the maturity model shown in Figure 1.1. This multiyear transformation journey has frequently been characterized as price-focused. Strategies such as Figure 1.1 Sourcing and Supply Chain Maturity Model 10 Supply Strategy Implementation: Current State and Future Opportunities 2009

12 strategic sourcing, low-cost country sourcing, e-reverse auctions and supplier consolidation to gain scale advantage have had price improvement as a major objective. It appears that most firms are in Stage II or III, with a limited number of firms in Stage IV. Most firms are at Stage II or III because they were price focused; may have only recently begun the supply transformation journey; reflected company and functional executive directions focused on shorter-term improvement objectives; avoided greater difficulty and larger investment required to transform supply strategies, practices and structures, and supplier working relationships across functions and across the entire supply chain. In addition, there is anecdotal information that purchasing and supply transformations may have stalled in adjusting to the realities of a more complex environment. This slowing of transformations may again be caused by narrow price versus value-driven supply objectives, limited e-system integration, and difficulties in achieving cross-functional integration and company re-organizations. Over the past 12 to 18 months, the severe worldwide economic recession has also slowed supply transformation initiatives. What Will the Next 10 Years Look Like? To achieve continuing progress and movement toward Stage IV, supply strategies critical to a firm s success require identification, establishment of their current state of importance and definition of a desired state. A resulting transformation strategy must then be established with measurement of implementation progress and results. To position this report in terms of the future competitive environment and resulting desired state, we are drawing on Succeeding in a Dynamic World: Supply Management in the Decade Ahead. 1 This report suggests turbulent times are ahead. Significant forces of change will impact organizations. Some of these forces include globalization, changes in worldwide consumption patterns, demographic changes, regulation and activism across countries throughout the world, and increasing pressure to maintain natural resources and the environment. In addition, there will be significant changes in technology and increasing requirements for innovation. Wildcards which cannot be generally predicted will also come into play. All of these changes will drive business models and strategies to change, and innovation will strongly impact a firm s supply mission goals and performance expectations. In addition, as firms look for ways to improve their revenue streams, they will likely move up the value chain, enrich customer relationships and embrace emerging markets. From a cost perspective, the structural cost of conducting the business will have to be addressed and optimized while firms pursue ongoing variable cost reduction. On the balance sheet, more efficient and effective use of fixed assets will be required. There will also be a need to increase cash flow. These requirements will impact the business models and all functionally driven strategies, including supply management. These drivers have a cascading effect on the supply mission, goals and performance expectations. The above research found that more innovation will be required from suppliers, there will be an increased need to contribute to revenue generation through effective sourcing and supply, there will have to be further risk mitigation in the supply strategies and an expanded cost management focus. Overall the strategies and processes that have worked in the past will require significant transformation to be effective in a changing world in the future. Even though the above paragraphs were written in 2007, they still ring true today. Therefore, every supply organization worldwide must continually examine itself and the transformation strategies being employed to ensure effective world-class supply organizations over the next five, 10 and 15 years. Continuous change and transformation is required, although not necessarily natural to all organizations. Therefore, supply organizations must develop a mindset embracing change and then develop the processes to drive continuous, and sometimes, breakthrough renewal. CAPS Executive Assessment of Supply (EAS): Development and Objectives The CAPS Executive Assessment of Supply (EAS) was developed to help firms address the changing world of supply management. EAS builds on the knowledge gained in deploying Project 10X at CAPS Research and follows the development of about 350 supply assessment questions based on experience with worldwide firms over the past 10 years. These 350 questions were 1 Succeeding in a Dynamic World: Supply Management in the Decade Ahead, CAPS Research Report, CAPS Research 11

13 modified and reduced so as to provide 23 strategically focused supply strategy questions and one question focused on performance. For each of the 24 assessment questions, specific attributes were included which describe leading-edge practices. These attributes provide the basis for rating the current state of the strategy for strategic importance to the firm and degree of implementation. From these ratings, gaps can be determined between importance and implementation. Transformation progress also can be measured over time through comparison between past, current and future assessments. In addition, supply and firm performance questions were also included. An assessment question example is shown in Chapter 2, including rating scales. This Executive Assessment of Supply report also provides respondents with a capability to compare themselves with other firms. In addition to the information provided in the report, each participating company will receive additional EAS data enabling comparative analysis across the 130 responding companies organized by various industry segments. Supply Strategies Included in EAS The following purchasing/supply strategies were included in the 2009 CAPS Executive Assessment of Supply and were meant to be strategically, rather than tactically, focused. Vision, Mission and the Strategic Plan Strategic Insourcing/Outsourcing Commodity & Supplier Strategy Process Structuring & Maintaining the Supply Base Supplier Assessment, Measurement & Communications Supplier Integration into New Product/Process/Service Development Supplier Integration into Customer Order Fulfillment Strategic Supplier Alliances Collaborative Buyer/Supplier Development & Continuous Improvement Establishing World-class Supplier Quality Global Sourcing & Supply Strategy Strategic Cost Management Total Cost of Ownership Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Environmentally Sustainable Supply Chain Management Procurement & Supply Organization Structure & Governance Cross-Functional/Location Teaming Measurement & Evaluation E-Sourcing & Supply Chain Strategies Human Resource Development Engagement by Corporate Executives & Business Unit Leaders Functional & Business Processes, Practices and Systems Innovation & Accelerated Change Management Sustainable Competitive Performance Each strategy area includes a definition and critical attributes which are shown in Appendix One. EAS and Value-Add to Company Competitiveness The value of the EAS is two-fold. First, an industry wide report (and separately more detailed data) is provided so that you can benchmark your firm s transformation progress. Second, your firm can determine its current state through EAS deployment and establish the goforward transformation plan to achieve an ideal state. The ideal state should provide value creation through enhanced supply strategies. In addition, by applying the EAS across strategic business units and key facilities on a worldwide basis, the firm can establish where change is taking place and determine what may have led to improvements in performance. Conducting an EAS may also be a key element in supply strategy development and implementation, and leveling-up the entire supply organization. Figure 1.2 illustrates the application of EAS. The application can be both companywide one response per company or tailor-made conducted across multiple business units and supply locations within a firm. This report is based upon the worldwide assessment across firms, which includes only one response per firm (i.e. where multiple responses were received, they were averaged into one response for the purpose of this report). Research Approach Approximately 926 companies were asked to participate in the 2009 EAS study. Companies solicited to participate were CAPS Research Donor Companies, selected members of the Institute of Supply Management and firms that have participated in prior CAPS Research projects. The request to participate in EAS was generally sent to supply management executives. Once a company agreed to participate, information about accessing a Web-based EAS tool was ed to participants. 12 Supply Strategy Implementation: Current State and Future Opportunities 2009

14 Figure 1.2 EAS Application Data collection took place between January and May Respondent Profile Completed assessments were received from 130 companies (approximately 14 percent of those who were originally asked to participate). The current state of supply strategy importance and implementation is based on the 130 companies responding to the CAPS Executive Assessment of Supply. Thirty percent of respondents were from the discrete manufacturing industry, 35 percent of respondents were from the process manufacturing industry, and 35 percent of respondents were from the service industry. Figure 1.3 Responding Company Profile CAPS Research 13

15 The respondent profile was: Twenty-six industries were included as shown in Figure 1.4. Sixty-one percent of the firms had sales of more than $5 billion. Twenty-four percent had sales between $1 billion and $5 billion. The remaining 15 percent of firms had sales less than $1 billion. The annual direct and indirect spend of these firms were: Annual Spend Direct Indirect Greater than $5 billion 24% 15% $1 billion to $5 billion 40% 38% Less than $1 billion 36% 47% A little more than 76 percent of respondents represented a companywide view, while slightly more than 17 percent represented a strategic business unit/division view. Just more than 5 percent of respondents represented a geographic view. About 67 percent of the responses reflected responsibility for both direct and indirect purchases, with direct and indirect approximately equal. Overall Research Framework Figure 1.5 shows the overall Supply Leadership Model driving supply transformation and the critical strategy areas around which the EAS was developed. Report Organization The remainder of the report includes: Chapter 2 Supply Strategies: Importance, Implementation and Gaps Figure 1.4 EAS Participating Industries 14 Supply Strategy Implementation: Current State and Future Opportunities 2009

16 Figure 1.5 Supply Leadership Model Introduction Commodity & Supplier Strategy Process Example Question Overall EAS Findings Supply Strategy Importance Ratings and Rankings Supply Strategy Implementation Ratings and Rankings Supply Strategy Gap Analysis Overall Importance/Implementation Gap Analysis Comparison Between High and Low Implementation Firms Observations: High and Low Implementation Firms Conclusions: Current State of Supply Strategies Chapter 3 Industry Analysis Introduction Industry Sector Difference Findings Industry Difference Conclusions Average Ratings by Industry Sectors Chapter 4 Strategy Implementation and Supply Performance Introduction Supply Performance Conclusions Industry Performance Differences Correlation Analysis Chapter 5 What Has Changed? Introduction Overall Changes: Supply Strategy Changes: Firms Common Between 2009 and 2007 Chapter 6 Obstacles to Supply Strategy Implementation Introduction Overall Findings Conclusions Selected Obstacles Chapter 7 Summary and The Path Forward Introduction Summary: Key Findings The Path Forward: Supply Transformation 2010 and Beyond The Decade Ahead : Supply Strategy Implementation Strategy Enhancement CAPS Research 15

17 Supplier Focused Strategies Supply/Value Chain Integration Concluding Comments Appendices Appendix One Supply Strategy Definitions and World-class Attributes Appendix Two Statistical Analysis Appendix Three Selected Strategy Implementation Obstacles 16 Supply Strategy Implementation: Current State and Future Opportunities 2009

18 Chapter 2: Supply Strategies: Importance, Implementation and Gaps Introduction Supply and other executives regularly raise the question, How are we doing compared to other leading firms? This report provides some answers. The data collected from 130 worldwide firms provides insights into the current state of importance, implementation and gaps for 23 critical-to-success supply strategies. In addition, this chapter includes discussion of the strategy ratings and rankings for the highest and lowest rated firms. An assessment question example and rating scale is shown in Figure 2.1 to assist in the interpretation of the findings. In this example, the strategy being examined is Commodity & Supplier Strategy Process. The definition for this strategy is: A commodity and supplier strategy process is a written, systematic plan to achieve both shortand long-term commodity/purchase family goals over at least a one- to three-year horizon. Strategies are developed for the important commodities/categories. Elements include supply base structuring, sourcing, contracting, supplier development, product/process design/specifications characteristics and value chain considerations. The strategy combines various elements into an executable plan with timelines, accountabilities and measurable performance expectations. The view includes the total supply chain or network. Overall EAS Findings Figure 2.2 shows the range of average ratings across all companies for the 23 supply strategies for Importance, Implementation and the resulting Gaps between implementation and importance. A gap is the difference in ratings between importance and implementation for a specific strategy. The following overall 2009 findings are most interesting: 1. Importance ratings are at least 1.5 higher than implementation at both the high and low ends. However, the highest implementation rating is only slightly greater than the lowest importance rating. The range of ratings for importance and implementation are similar. 2. The gap range is large, from a low of to a high of between implementation and importance. 3. Average importance, implementation and gap ratings were 7.57 (high importance), 5.68 (moderate implementation) and 1.89 (major gap), respectively. When compared to the 2007 data, the following observations are important: 1. Average importance in 2009 is similar (but slightly less) than Average implementation is greater by.46, which demonstrates considerably greater implementation. 3. The average gap has been reduced by a considerable amount. A number of conclusions can be drawn from the overall data. First, we are seeing a greater degree of supply CAPS Research 17

19 Figure 2.1 Assessment Example with Rating Scales 18 Supply Strategy Implementation: Current State and Future Opportunities 2009

20 Figure 2.2 Overall 2009 EAS Findings strategy implementation in 2009 than in 2007 with a resulting reduction in the gap between importance and implementation (both as a product of decreasing importance of some strategies and increased implementation of the same or other strategies.) Second, even though the average gap is being reduced, it and overall implementation is far lower than the corresponding importance as can be seen by rating ranges and averages. In addition, firms probably rated supply strategies more highly on Importance because many strategies can be strategically important to the success of the firm. However, Implementation may lag because a firm is just beginning or is partially along its transformation journey; resources have been limited in support of the transformations, especially in difficult economic times; some strategies are not the focus of the implementation; and strategies which are being implemented have taken considerable time and resources to complete. Supply Strategy Importance Ratings and Rankings Table 2.1 provides insight into the overall ratings and rankings for the 23 strategy areas by importance. In addition, a difference in the average rating score of more than.43 between strategies is statistically significant. For example, the group of seven strategies most highly rated is significantly different than the nine lowest rated strategies. See Appendix Two for description of methodology used to determine statistical significance. A number of observations can be drawn from the importance ratings, including: The overall average strategy ratings range around High/Critical (operational necessity; required for operational effectiveness; necessary to gain market leadership; achieves competitive viability a necessary consideration to compete) The top six rated strategies all focus on the initial building blocks of an effective supply function (enablers) and/or are critical to achieving cost improvement. Vision, Mission and the Strategic Plan Commodity & Supplier Strategy Process Strategic Cost Management Engagement by Corporate Executives & Business Unit Leaders Human Resource Development Procurement & Supply Organization Structure & Governance In addition, these top six highest rated strategies all revolve around supply management leadership, and building appropriate governance and strategy to carry out the supply vision, mission and strategic plan; which is rated highest of all strategies. Clearly having the best possible human resource talent is an enabler to success in all 23 supply strategy areas. The six lowest rated strategies require engagement of executives and key persons working collaboratively across functions. These strategies are frequently more difficult because more functions need to be aligned to achieve measurable results. CAPS Research 19

21 Table 2.1 Overall Importance Strategy Ratings Strategy Area Implementation Vision, Mission and the Strategic Plan 8.32 Commodity & Supplier Strategy Process 8.29 Strategic Cost Management 8.19 Engagement by Corporate Executives & Business Unit Leaders 8.19 Human Resource Development 8.10 Procurement & Supply Organization Structure & Governance 8.07 Measurement & Evaluation 7.93 Structuring & Maintaining the Supply Base 7.87 Total Cost of Ownership 7.79 Functional & Business Processes, Practices and Systems 7.62 Cross-Functional/Location Teaming 7.53 Supplier Assessment, Measurement & Communications 7.51 Establishing World-Class Supplier Quality 7.47 Innovation & Accelerated Change Management 7.45 Strategic Supplier Alliances 7.40 Global Sourcing & Supply Strategy 7.38 Supplier Integration into New Product/Process/Service Development 7.24 Collaborative Buyer/Supplier Development & Continuous Improvement 7.20 Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications 7.13 E-Sourcing & Supply Chain Strategies 7.13 Strategic Insourcing/Outsourcing 7.02 Environmentally Sustainable Supply Chain Management 6.96 Supplier Integration into Customer Order Fulfillment 6.41 Average Importance 7.57 Collaborative Buyer/Supplier Development & Continuous Improvement Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications E-Sourcing & Supply Chain Strategies Strategic Insourcing/Outsourcing Environmentally Sustainable Supply Chain Management Supplier Integration into Customer Order Fulfillment Supply Strategy Implementation Ratings and Rankings Table 2.2 provides insights into the overall ratings and rankings for the 23 strategy areas by degree of implementation. A difference in average rating greater than.36 means that one strategy is significantly different than another. See Appendix Two for description of methodology used to determine statistical significance. For example, the 10 most implemented strategies are significantly different than the eight least implemented strategies. In addition, vision, mission and the strategic plan, and engagement by corporate executives and business unit leaders have a higher degree of implementation than every other strategy except procurement and supply organization structure and governance. A number of observations can be drawn from the implementation ratings, including: The overall average strategy ratings range from Moderate to somewhat less than Extensive, which suggests limited implementation. The top 10 implemented strategies were primarily focused on establishing the foundation for effective supply strategies, and commodity and supplier strategy development, and were somewhat aligned with the importance rankings. The lower-implemented strategies generally focus around strategies requiring significant investment 20 Supply Strategy Implementation: Current State and Future Opportunities 2009

22 Table 2.2 Overall Implementation Strategy Ratings Strategy Area Importance Vision, Mission and the Strategic Plan 6.78 Engagement by Corporate Executives & Business Unit Leaders 6.77 Procurement & Supply Organization Structure & Governance 6.55 Commodity & Supplier Strategy Process 6.22 Strategic Cost Management 6.12 Functional & Business Processes, Practices and Systems 6.04 Measurement & Evaluation 5.98 Human Resource Development 5.97 Cross-Functional/Location Teaming 5.96 Total Cost of Ownership 5.95 Structuring & Maintaining the Supply Base 5.71 Strategic Insourcing/Outsourcing 5.67 Strategic Supplier Alliances 5.64 Global Sourcing & Supply Strategy 5.63 Establishing World-class Supplier Quality 5.37 Innovation & Accelerated Change Management 5.32 Collaborative Buyer/Supplier Development & Continuous Improvement 5.13 Supplier Assessment, Measurement & Communications 5.12 E-Sourcing & Supply Chain Strategies 5.08 Supplier Integration into New Product/Process/Service Development 5.07 Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications 5.06 Environmentally Sustainable Supply Chain Management 5.04 Supplier Integration into Customer Order Fulfillment 4.52 Average Implementation 5.68 or those that require truly cross-functional implementation, and are similar to the strategies rated lowest in importance. Strategies associated with extended supply chains, aligning and linking organizations, and achieving collaboration with suppliers were moderately implemented. Other cross-functional and crossenterprise strategies also lagged in implementation. Environmentally sustainable supply chain management was substantially less implemented, probably due to the significant financial and costreduction pressures firms were under due to the economic downturn as well as the fact that it is a relative newcomer to the set of available supply strategies. Supply Strategy Gap Analysis The ratings data were also analyzed to determine the gaps between strategy importance and implementation. On average, the overall gaps across all 23 strategy areas were between and (negative numbers reflect greater importance than implementation). The rankings for all gaps are shown in Table 2.3. The largest gaps were for: Supplier Assessment, Measurement & Communications (7.51/5.12)* Supplier Integration into New Product/Process/Service Development (7.24/5.07) Structuring & Maintaining the Supply Base (7.87/5.71) Innovation & Accelerated Change Management (7.45/5.32) Human Resource Development (8.10/5.97) Establishing World-Class Supplier Quality (7.47/5.37) The smallest gaps were for: Functional & Business Processes, Practices and Systems (7.62/6.04) CAPS Research 21

23 Table 2.3 Overall Strategy Ratings Gaps Strategy Area Gap Supplier Assessment, Measurement & Communications Supplier Integration into New Product/Process/Service Development Structuring & Maintaining the Supply Base Innovation & Accelerated Change Management Human Resource Development Establishing World-class Supplier Quality Collaborative Buyer/Supplier Development & Continuous Improvement Strategic Cost Management Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Commodity & Supplier Strategy Process E-Sourcing & Supply Chain Strategies Environmentally Sustainable Supply Chain Management Measurement & Evaluation Supplier Integration into Customer Order Fulfillment Total Cost of Ownership Strategic Supplier Alliances Global Sourcing & Supply Strategy Functional & Business Processes, Practices and Systems Cross-Functional/Location Teaming Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Engagement by Corporate Executives & Business Unit Leaders Strategic Insourcing/Outsourcing Average Gap Cross-Functional/Location Teaming (7.53/5.96) Vision, Mission and the Strategic Plan (8.32/6.78) Procurement & Supply Organization Structure & Governance (8.07/6.55) Engagement by Corporate Executives & Business Unit Leaders (8.19/6.77) Strategic Insourcing/Outsourcing (7.02/5.67) * Note: Numbers in ( ) show the importance and implementation ratings. The data suggest that the largest gaps were driven by high-to-critical importance ratings with implementation only achieved to a moderate degree. The smallest gaps had ratings approaching extensive for implementation with importance being high to more critical. Overall Importance/Implementation Gap Analysis Additional analysis was done to compare the gaps with importance and implementation to assist firms in comparing themselves against all respondents and for priority setting. Figure 2.3 establishes quadrants by taking the median of importance ratings and midpoint of gap ratings and then plots where the strategies fall. From Figure 2.3, commodity/supplier strategy development, strategic cost management, human resource development and structuring/maintaining a world-class supply base clearly fall in quadrant 2 higher importance and larger gaps. In addition, measurement and evaluation, total cost of ownership, world-class quality, accelerated change management, and supplier assessment, measurement and communication fall on the margins of quadrant 2. These strategies are a potential transformation priority and can be characterized as a Priority 1 a must-do focus. In addition, quadrant 4 in Figure 2.3 shows a number of strategies that are somewhat lower in importance but still have larger gaps. They include: Supplier Integration in New Product/Process Development 22 Supply Strategy Implementation: Current State and Future Opportunities 2009

24 Figure 2.3 Strategy Segmentation Analysis: Importance/Gap Collaborative Buyer/Supplier Development & Continuous Improvement E-sourcing and Supply Chain Systems Standardization of Systems, Components and Processes These strategies require priority consideration by organizations, depending of their current transformation focus and industry competitive requirements. Quadrant 1 strategies in Figure 2.3 require a continuing focus, looking for opportunities to enhance. Depending on the firm s focus and strategy implementation, the strategies in quadrant 3 may be currently viewed as appropriate and a lower priority. Overall, establishing the supply strategy transformation priority focus at a firm depends upon position on the maturity curve and the anticipated and quantified benefits from further implementation of a specific strategy(s) in a specific industry sector. Detailed analysis of the potential return and the logic supporting anticipated benefits is required to establish clear priorities by each firm. Your firm s supply strategies by quadrant may not be the same as the overall set of respondents and should reflect your firm s actual current state. However, applying similar analyses, combined with anticipated benefits and implementation complexity, can assist in developing your firm s supply strategy implementation path. Comparison Between High and Low Implementation Firms A comparison was also done comparing the top and bottom 25 firms based on implementation ratings to determine the magnitude of the rating differences and relative ranking of each strategy between the two groups of firms. The results are shown in Tables 2.4 and 2.5. CAPS Research 23

25 Table 2.4 Implementation: Highest 25 Companies vs. Lowest 25 Companies Observations: High and Low Implementation Firms The implementation range for the top 25 companies was from a high of 8.4 for executive engagement; and procurement and supply organization structure and governance to a low of 6.4 for e-sourcing and supply chain strategies. This was considerably higher than the overall range for all companies of 6.78 to 4.52 for implementation, as would be expected. The bottom 25 company implementation range was from 2.7 for supplier integration into new product/process/service development to 5.1 for vision, mission and strategic plan, substantially lower than the top 25. Substantial differences exist for all strategies between the highest and lowest companies, ranging from a difference of 4.9 to 2.9. The 25 highest companies have most implemented executive engagement; procurement and supply organization structure and governance; human resource development; global sourcing and 24 Supply Strategy Implementation: Current State and Future Opportunities 2009

26 Table 2.5 Overall Implementation Ratings for Top/Bottom 25 Firms Highest 25 Lowest 25 Companies Companies Rank Average Rank Average supply; and vision, mission and strategic plan. In the highest implemented companies, these strategies have been extensively implemented, while at the lowest 25 companies they have achieved moderate implementation, at best. These differences ranged from 4.7 to 2.9. The largest implementation differences were between supplier integration Into new product development; global sourcing and supply; innovation and accelerated change management; and supplier assessment, measurement and communication. For the top and bottom 25 firms, engagement by executive leaders; vision, mission and the strategic plan; and procurement and supply organization structure and governance were common for both groups top-five most implemented strategies. In addition, further analysis was done comparing the highest and lowest 25 firms based on average implementation ratings for all 23 strategies. The results are shown in Table 2.5. The highest ranked firms have an average implementation rating of 7.6 while the lowest ranked firms have an average of 3.7, indicating significant differences in strategy implementation. On average, the firms with the highest degree of supply strategy implementation are far ahead of their counterparts. Conclusions: Current State of Supply Strategies The strategic importance of 23 critical supply strategies was, on average, rated as High: Operational necessity; required for operational effectiveness; necessary to gain market leadership; achieves competitive viability a necessary condition to complete. Implementation, however, was on average between Moderate: Multiple CAPS Research 25

27 attributes implemented and becoming accepted as effective means of doing business in at least one business unit, sites or organizations and Extensive: Most attributes implemented across multiple business units, sites or organizations; attributes demonstrated as the best way of doing business; results are beginning to show improvement in line with plans. The maximum rating for strategic importance is critical and for implementation the maximum is complete. It appears that there is considerable need for firms to further implement supply strategies critical to their company s overall competitiveness than has been achieved to date. However, the data also suggests that considerable progress has been made in implementation of supply strategies since Additional analyses also indicated a number of key strategies that should be considered as priority areas based on combining the magnitude of gaps and the strategic importance of the strategies. These include: longest view and generally require integration across functions and cross-functional collaboration. These strategies may offer the greatest contribution to supply value creation during the next one to five years. For example, a continuing focus on e-supply systems as a critical enabler will be required. Without e-systems to provide important data and a means to communicate and collaborate within and across organizations, supply value creation may be limited. Innovation and accelerated change management also needs to be an integral part of supply transformation efforts. This analysis of more than 130 respondents provides insight into the current state of supply strategy importance, implementation and gaps. The information also provides the opportunity for firms to compare their supply strategy ratings against other firms. It also allows firms to deploy EAS worldwide and to measure change over time that results from the implementation of supply transformation strategies. Category (commodity) and Supplier Strategy Development Strategic Cost Management Human Resource Development Structuring & Maintaining the Supply Base Measurement & Evaluation (functional) Supplier Assessment, Measurement & Communications Total Cost of Ownership World-Class Quality Accelerated Change Management Naturally, each firm will have to evaluate its own needs, its current state and the opportunities to establish priorities and transformation strategies. All firms also should consider how they can accelerate their supply transformation efforts and goal achievements. By comparing the top and bottom 25 firms, based on implementation, we found large strategy implementation differences between these two groups, overall and by strategy area. Lagging implementation, without a transformation focus and resources could prove costly to firms over time, given the reported achievements of various organizations. Finally, in our opinion, the strategies that are generally rated less important are relatively harder to implement, and companies may be focusing on easier to implement strategies. On the other hand, for some companies, the relative importance is lower because they have implemented these strategies and have now moved on to implementing new higher priority strategies. In addition, the least implemented strategies require the 26 Supply Strategy Implementation: Current State and Future Opportunities 2009

28 Chapter 3: Industry Analysis Introduction This chapter provides findings that show the differences among three industry sectors discrete manufacturing, process manufacturing and services. The results are organized by industry sector and then by importance, implementation and gap. In addition, top and bottom 10 firm implementation differences by industry sector are also provided. Specifically, this chapter provides data in the following sequence: 1. Industry differences for importance 2. Industry differences for implementation 3. Discrete, process and service data for importance, implementation, gaps and top/bottom 10 company ratings 4. Conclusions Industry Sector Difference Findings A few differences in implementation and importance were found among discrete, process and service industry firms. Those differences by strategy area and by industry sector are shown in Tables 3.1 and 3.2. Industry Difference Conclusions There is a high degree of similarity in strategy importance ratings between the discrete, process and service sectors. Discrete manufacturing firms are further along the implementation transformation journey and have higher importance ratings. Generally, discrete manufacturing had higher importance (7 strategies) or implementation (5 strategies) ratings than process or service as shown. However, meaningful conclusions versus hypothesis would only be conjecture. Implementation rated lower than importance across all industry sectors. In addition, statistically significant differences between industry sectors were not found for any of the other supply strategy areas. Even though there were absolute differences, they were not found to be statistically significant. However, they may be of practical interest as you review the industry tables. Average Ratings by Industry Sectors The following tables show cross-industry sector comparisons for average importance, implementation and gap ratings across the 23 supply strategy areas. Ratings are then provided by each strategy area. We organized the following tables by industry sector because readers are most likely to be interested in their own industry. Tables 3.3 and 3.4 provide some interesting data: The discrete industry has an overall higher average importance rating than either process and service. Implementation of supply strategies is lowest, on average, in the service industry sector, which also has the largest gap. The implementation difference between the top and lowest 10 firms across industry sectors is CAPS Research 27

29 Table 3.1 Strategy Importance Differences by Industry Strategy Area Strategic Insourcing/ Outsourcing Supplier Integration into New Product/Process/Service Development Supplier Integration Into Customer Order Fulfillment Collaborative Buyer/Supplier Development & Continuous Improvement Establishing World-Class Supplier Quality Global Sourcing & Supply Strategy Strategic Cost Management Significant Differences* D > P & S D > P D > S P > S S > D or P X X X X X X X *Differences significant at the.10 level (see Appendix Two) D = Discrete industry P = Process industry S = Service industry Table 3.2 Strategy Impementation Differences by Industry Strategy Area Vision, Mission & the Strategic Plan Commodity & Supplier Strategy Process Supplier Assessment, Measurement & Communications Supplier Integration Into Customer Order Fulfillment Establishing World-Class Supplier Quality Measurement & Evaluation Significant Differences* D > P & S D > P D > S P > S S > D or P X X X X X X *Differences significant at the.10 level (see Appendix Two) D = Discrete industry P = Process industry S = Service industry 28 Supply Strategy Implementation: Current State and Future Opportunities 2009

30 Table 3.3 Average Ratings by Industry Sector Industry Sector Importance Implementation Gap Discrete Process Service Overall Table 3.4 Implementation Ratings for Top/Bottom Firms by Industry Sector for 23 Strategies Industry Sector Top 10 Bottom 10 Difference Discrete Process Service quite large, indicating there are truly leading and lagging firms within all industries. The discrete industry appears to be further along in strategy implementation, at least compared to service. Table 3.5 shows the supply strategies with the biggest gaps by industry sector. They were somewhat different across the industries. Table 3.5 Top 6 Strategy Gaps by Industry Sector Rank Discrete Process Service 1 Supplier Integration into New Supplier Assessment Supplier Assessment Product Development (-2.74) Measurement & Measurement & Communication (-2.46) Communication (-2.80) 2 Human Resource Standardization (-2.17) Structure & Maintain Supply Development (-2.39) Base (-2.56) 3 Innovation & Accelerated Establishing World-Class Strategic Cost Management Change Mgmt (-2.35) Supplier Quality (-2.04) (-2.42) 4 Strategic Cost Management Supplier Integration into New Innovation & Accelerated (-2.32) Product Development (-1.93) Change Mgmt (-2.33) 5 Collaborative Buyer/Supplier Environmentally Sustainable Human Resource (-2.27) Supply Chain Mgmt (-1.91) Development (-2.31) 6 Commodity and Supply Structuring & Maintaining Commodity and Supply Strategy (-2.26) the Supply Base (-1.91) Strategy (-2.31) CAPS Research 29

31 Discrete Manufacturing Ratings/Rankings Table 3.6 Discrete Manufacturing Importance Strategy Rankings/Ratings Strategy Area Implementation Importance Gap Strategic Cost Management Establishing World-Class Supplier Quality Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Commodity & Supplier Strategy Process Measurement & Evaluation Human Resource Development Engagement by Corporate Executives & Business Unit Leaders Supplier Integration into New Product/Process/Service Development Global Sourcing & Supply Strategy Supplier Assessment, Measurement & Communications Total Cost of Ownership Structuring & Maintaining the Supply Base Innovation & Accelerated Change Management Collaborative Buyer/Supplier Development & Continuous Improvement Functional & Business Processes, Practices and Systems Strategic Supplier Alliances Cross-Functional/Location Teaming Strategic Insourcing/Outsourcing Environmentally Sustainable Supply Chain Management E-Sourcing & Supply Chain Strategies Supplier Integration into Customer Order Fulfillment Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Average Importance Supply Strategy Implementation: Current State and Future Opportunities 2009

32 Table 3.7 Discrete Manufacturing Implementation Strategy Ranking/Ratings Strategy Area Implementation Importance Gap Engagement by Corporate Executives & Business Unit Leaders Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Measurement & Evaluation Strategic Cost Management Functional & Business Processes, Practices and Systems Establishing World-Class Supplier Quality Supplier Assessment, Measurement & Communications Commodity & Supplier Strategy Process Global Sourcing & Supply Strategy Cross-Functional/Location Teaming Total Cost of Ownership Structuring & Maintaining the Supply Base Human Resource Development Strategic Supplier Alliances Strategic Insourcing/Outsourcing Environmentally Sustainable Supply Chain Management Collaborative Buyer/Supplier Development & Continuous Improvement Innovation & Accelerated Change Management Supplier Integration into New Product/Process/Service Development E-Sourcing & Supply Chain Strategies Supplier Integration into Customer Order Fulfillment Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Average Implementation CAPS Research 31

33 Table 3.8 Discrete Manufacturing Strategy Gap Ranking/Ratings Strategy Area Implementation Importance Gap Supplier Integration into New Product/Process/Service Development Human Resource Development Innovation & Accelerated Change Management Strategic Cost Management Collaborative Buyer/Supplier Development & Continuous Improvement Commodity & Supplier Strategy Process Establishing World-Class Supplier Quality E-Sourcing & Supply Chain Strategies Total Cost of Ownership Supplier Integration into Customer Order Fulfillment Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Global Sourcing & Supply Strategy Structuring & Maintaining the Supply Base Strategic Insourcing/Outsourcing Strategic Supplier Alliances Measurement & Evaluation Supplier Assessment, Measurement & Communications Environmentally Sustainable Supply Chain Management Cross-Functional/Location Teaming Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Functional & Business Processes, Practices and Systems Engagement by Corporate Executives & Business Unit Leaders Average Gap Supply Strategy Implementation: Current State and Future Opportunities 2009

34 Table 3.9 Implementation: Highest 10 Discrete Manufacturing Companies vs. Lowest 10 Discrete Manufacturing Companies CAPS Research 33

35 Table 3.10 Discrete Manufacturing: Implementation Ratings for Top/Bottom 10 Firms Highest 10 Lowest 10 Companies Companies Rank Average Rank Average Process Manufacturing Ratings/Rankings Table 3.11 Process Manufacturing Importance Strategy Ranking/Ratings Strategy Area Implementation Importance Gap Commodity & Supplier Strategy Process Vision, Mission and the Strategic Plan Engagement by Corporate Executives & Business Unit Leaders Human Resource Development Procurement & Supply Organization Structure & Governance Strategic Cost Management Structuring & Maintaining the Supply Base Measurement & Evaluation Total Cost of Ownership Cross-Functional/Location Teaming Global Sourcing & Supply Strategy Functional & Business Processes, Practices and Systems Strategic Supplier Alliances Supplier Assessment, Measurement & Communications Establishing World-Class Supplier Quality Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications E-Sourcing & Supply Chain Strategies Supplier Integration into New Product/Process/Service Development Innovation & Accelerated Change Management Environmentally Sustainable Supply Chain Management Collaborative Buyer/Supplier Development & Continuous Improvement Strategic Insourcing/Outsourcing Supplier Integration into Customer Order Fulfillment Average Importance Supply Strategy Implementation: Current State and Future Opportunities 2009

36 Table 3.12 Process Manufacturing Implementation Strategy Ranking/Ratings Strategy Area Implementation Importance Gap Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Commodity & Supplier Strategy Process Engagement by Corporate Executives & Business Unit Leaders Cross-Functional/Location Teaming Strategic Cost Management Total Cost of Ownership Human Resource Development Functional & Business Processes, Practices and Systems Measurement & Evaluation Strategic Insourcing/Outsourcing Structuring & Maintaining the Supply Base Global Sourcing & Supply Strategy Strategic Supplier Alliances Innovation & Accelerated Change Management Establishing World-Class Supplier Quality E-Sourcing & Supply Chain Strategies Supplier Integration into New Product/Process/Service Development Environmentally Sustainable Supply Chain Management Collaborative Buyer/Supplier Development & Continuous Improvement Supplier Assessment, Measurement & Communications Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Supplier Integration into Customer Order Fulfillment Average Implementation CAPS Research 35

37 Table 3.13 Process Manufacturing Strategy Gap Ranking/Ratings Strategy Area Implementation Importance Gap Supplier Assessment, Measurement & Communications Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Establishing World-Class Supplier Quality Supplier Integration into New Product/Process/Service Development Environmentally Sustainable Supply Chain Management Structuring & Maintaining the Supply Base Collaborative Buyer/Supplier Development & Continuous Improvement E-Sourcing & Supply Chain Strategies Innovation & Accelerated Change Management Human Resource Development Global Sourcing & Supply Strategy Supplier Integration into Customer Order Fulfillment Commodity & Supplier Strategy Process Measurement & Evaluation Strategic Supplier Alliances Strategic Cost Management Total Cost of Ownership Cross-Functional/Location Teaming Vision, Mission and the Strategic Plan Functional & Business Processes, Practices and Systems Engagement by Corporate Executives & Business Unit Leaders Procurement & Supply Organization Structure & Governance Strategic Insourcing/Outsourcing Average Gaps Supply Strategy Implementation: Current State and Future Opportunities 2009

38 Table 3.14 Implementation: Highest 10 Process Manufacturing Companies vs. Lowest 10 Process Manufacturing Companies CAPS Research 37

39 Table 3.15 Process Manufacturing Implementation Ranking/Ratings for Top/Bottom 10 Firms Highest 10 Lowest 10 Companies Companies Rank Average Rank Average Service Ratings/Rankings Table 3.16 Service Importance Strategy Ranking/Ratings Strategy Area Implementation Importance Gap Engagement by Corporate Executives & Business Unit Leaders Strategic Cost Management Vision, Mission and the Strategic Plan Human Resource Development Commodity & Supplier Strategy Process Structuring & Maintaining the Supply Base Procurement & Supply Organization Structure & Governance Total Cost of Ownership Measurement & Evaluation Innovation & Accelerated Change Management Functional & Business Processes, Practices and Systems Supplier Assessment, Measurement & Communications Cross-Functional/Location Teaming Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Strategic Supplier Alliances E-Sourcing & Supply Chain Strategies Strategic Insourcing/Outsourcing Collaborative Buyer/Supplier Development & Continuous Improvement Establishing World-Class Supplier Quality Supplier Integration into New Product/Process/Service Development Global Sourcing & Supply Strategy Environmentally Sustainable Supply Chain Management Supplier Integration into Customer Order Fulfillment Average Importance Supply Strategy Implementation: Current State and Future Opportunities 2009

40 Table 3.17 Service Implementation Strategy Ranking/Ratings Strategy Area Implementation Importance Gap Engagement by Corporate Executives & Business Unit Leaders Vision, Mission and the Strategic Plan Procurement & Supply Organization Structure & Governance Human Resource Development Strategic Cost Management Commodity & Supplier Strategy Process Functional & Business Processes, Practices and Systems Total Cost of Ownership Cross-Functional/Location Teaming Strategic Supplier Alliances Measurement & Evaluation Structuring & Maintaining the Supply Base Strategic Insourcing/Outsourcing Innovation & Accelerated Change Management Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Global Sourcing & Supply Strategy E-Sourcing & Supply Chain Strategies Supplier Integration into New Product/Process/Service Development Collaborative Buyer/Supplier Development & Continuous Improvement Establishing World-Class Supplier Quality Environmentally Sustainable Supply Chain Management Supplier Assessment, Measurement & Communications Supplier Integration into Customer Order Fulfillment Average Implementation CAPS Research 39

41 Table 3.18 Service Strategy Gap Ranking/Ratings Strategy Area Implementation Importance Gap Supplier Assessment, Measurement & Communications Structuring & Maintaining the Supply Base Strategic Cost Management Innovation & Accelerated Change Management Human Resource Development Commodity & Supplier Strategy Process Measurement & Evaluation E-Sourcing & Supply Chain Strategies Total Cost of Ownership Collaborative Buyer/Supplier Development & Continuous Improvement Establishing World-Class Supplier Quality Environmentally Sustainable Supply Chain Management Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Supplier Integration into Customer Order Fulfillment Functional & Business Processes, Practices and Systems Supplier Integration into New Product/Process/Service Development Procurement & Supply Organization Structure & Governance Engagement by Corporate Executives & Business Unit Leaders Strategic Insourcing/Outsourcing Strategic Supplier Alliances Vision, Mission and the Strategic Plan Cross-Functional/Location Teaming Global Sourcing & Supply Strategy Average Gap Supply Strategy Implementation: Current State and Future Opportunities 2009

42 Table 3.19 Implementation: Highest 10 Service Companies vs. Lowest 10 Service Companies CAPS Research 41

43 Figure 3.20 Service Implementation Ranking/Ratings for Top/Bottom 10 Firms Highest 10 Lowest 10 Companies Companies Rank Average Rank Average Supply Strategy Implementation: Current State and Future Opportunities 2009

44 Chapter 4: Strategy Implementation and Supply Performance Introduction What supply performance improvements have firms been achieving? Are there apparent relationships between supply strategy implementation and performance? These two questions are the focus of discussion in Chapter 4. Supply Performance Each respondent was asked to provide supply performance information for 11 performance areas. Specifically, they were asked: For your most important purchases (80/20 rule) over the past twelve (12) months, indicate the magnitude of measurable performance improvements and/or business unit contribution achieved through sourcing and supply chain strategies at your business unit. The 11 performance areas and results are shown in Table 4.1 and include both 2007 and Conclusions Supply performance improvements were achieved in difficult economic times. Table 4.1 Supply Performance Results (2007, 2009) CAPS Research 43

45 Unit purchase price, transportation and logistics costs and total cost of ownership all improved by at least 4 percent over the past 12 months. Improvements also were achieved in all other performance areas, including supplier payment terms, quality, order cycle times, on-time delivery, responsiveness, flexibility and achievement of supplier diversity. The ranges between maximum improvement and worsening were quite large, indicating significant variability between firms and industries. Compared to 2007, 2009 data shows period-toperiod improvements in the transportation and logistics cost, and total cost of ownership with slippage in supplier quality and on-time delivery In addition, performance rating responses were requested for 22 performance areas shown in Table 4.2, which also shows rating results for both 2009 and The question asked whether performance stayed the same, got better or worse. These performance areas are organized by three major categories including (1) overall sourcing and supply chain process improvements, (2) overall supply value-add, and (3) overall relationships and satisfaction. These ratings were respondent perceptions. Overall, we see some improvement across all of the 22 performance areas. However, on average it does not Table 4.2 Performance Ratings (2007 and 2009) 44 Supply Strategy Implementation: Current State and Future Opportunities 2009

46 appear that major improvements were achieved. The biggest improvements ( ) were for standardization of the sourcing process, application of e-systems, executive satisfaction with supply (although the improvement rate was slightly less than in 2007), unit purchase price, achieving purchase price/cost objectives, supplier relationships and client/stakeholder satisfaction with supply. Industry Performance Differences In addition, statistical analyses were performed to determine whether there were significant industry sector differences for both the objective and qualitative performance measures. The results of the analyses showed few differences between industry sectors and included: ratings by each performance area overall and for the industry sectors. Correlation Analysis Correlation analysis was also conducted among all 23 supply strategies and performance metrics. The results were non-conclusive for practical guidance. Although some correlations at the.10 level were found indicating a relationship between a strategy area and performance factor, no meaningful conclusions could be established as cause-effect, or a directional rationale could not be definitely established. The discrete industry sector had higher supplier quality performance than did services. When rating performance change (qualitatively); discrete had greater improvement in paymentterms-to-suppliers than did service, and procureto-pay and transportation/logistics transportation efficiency improvement were greater in the process than in the service sector. The process and service sectors both had greater improvement in minority and women business spend than did the discrete sector. Tables 4.3 and 4.4 show the actual reported performance averages and performance improvement Table 4.3 Actual Performance: Overall and by Industry Sector Overall Discrete Process Service Performance Area (N~92-121) (N~32-36) (N~37-45) (N~32-40) Unit Purchase Price 4.0% 4.1% 4.5% 3.4% Transportation & Logistics Costs 5.1% 4.6% 6.0% 4.5% Total Cost of Ownership 4.3% 2.8% 5.3% 4.4% Performing to Purchasing Price/Cost Objectives 4.2% 4.7% 3.3% 4.8% Inventory Investment Cost for Purchased Goods 1.7% 2.5% 1.7% 0.5% Payment Terms With Suppliers (# Days) Supplier Quality 2.2% 4.2% 2.0% 0.6% Supplier Order Delivery Cycle Time 3.2% 2.5% 3.9% 3.0% Supplier On-Time Delivery 3.1% 4.0% 3.7% 1.5% Supplier Responsiveness/Flexibility 5.4% 4.9% 7.3% 3.5% Supplier Diversity 3.8% 1.1% 5.1% 4.8% CAPS Research 45

47 Table 4.4 Performance Improvement: Overall and by Industry Sector 46 Supply Strategy Implementation: Current State and Future Opportunities 2009

48 Chapter 5: What Has Changed? 2007 to 2009 Introduction This chapter highlights differences between the 2007 and 2009 EAS responses and includes: Overall strategy importance, implementation and resulting gap differences Differences in rank order for importance and implementation ratings Differences in performance: actual and perceptions Differences in ratings by companies who participated in both the 2007 and 2009 EAS Overall Changes: Tables 5.1, 5.2 and 5.3 provide insights about the supply strategy importance, implementation and gap changes that have occurred between 2007 and The overall gap reduction between 2007 and 2009 was.53, which is large. The top six gap reductions were for: Engagement by Corporate Executives and Business Unit Leaders (greater engagement) Total Cost of Ownership (more implementation) Innovation and Accelerated Change Management (more implementation) E-sourcing and Supply Change strategies (more implementation with importance reduction) Strategic Supplier Alliances (major implementation move) Strategic Cost Management (major implementation move) In addition, the most significant increases in strategy implementation between 2007 and 2009 were for: Strategic Cost Management Strategic Supplier Alliances Total Cost of Ownership Procurement and Supply Organization Structure and Governance Engagement by Corporate Executives and Business Unit Leaders Innovation and Accelerated Change Management Structuring and Maintaining the Supply Base Overall, it appears that the above strategies were a focus of supply transformation efforts over the past two years. Executive leadership, cost and innovation, collaboration, and enabling e-system improvements were the driving themes. In addition Tables 5.2 and 5.3 show difference rankings of ratings for the 23 strategy areas by implementation and importance. These tables may provide the reader additional insights. The decrease in importance ratings may be explained by the relative transformation focus on selected strategies and/or different responding companies between 2007 and Supply Strategh Changes: Firms Common Between 2009 and 2007 Analysis was also conducted to determine supply strategy changes for firms that participated in both the 2009 and the 2007 EAS. Thirty-eight companies participated in both assessments. Results are shown in Table 5.4 and are ranked by the largest gap reduction between 2007 and CAPS Research 47

49 Table 5.1 Comparison of 2007/2009 Implementation/Importance Gaps As can be seen, the top six strategy gap reductions* were for the following strategies and undoubtedly were a focus of transformation efforts over the past two years: Strategic Supplier Alliances (.99)* Supplier Integration into Customer Order Fulfillment (.87) E-sourcing and Supply Chain Strategies (.76) Collaborative Buyer/Supplier Development and Continuous Improvement (.71) Supplier Integration into New Product Development (.67) Innovation and Accelerated Change Management (.66) Four of the six strategies with the biggest gap closure required more cross-functional focus across the supply or value chain (supplier integration into both customer order fulfillment and new product development, e-sourcing and supply chain strategies, and buyer/ supplier collaboration efforts.) The strategies are more complex to implement and generally require additional investment, but they may result in significant returns. These four strategies were different from for the overall sample. Strategic supplier alliances, and innovation and accelerated change management were common with the total sample. For five of the 23 strategies, there was both an increase in implementation and a small reduction in importance. For collaborative buyer/supplier development we saw both an increase in importance and implementation. The smallest gap reductions were for those supply strategies which were generally rated higher in importance and had greater implementation for both 2007 and Overall it appears that the driver for gap reduction was primarily an increase in implementation. For those strategies with the smallest gap closure from 2007 (even though highly important), the major reason were similar reductions in both importance and implementation. The only exception was commodity and supplier strategy process, which increased in both importance and implementation. It should be noted that even for the companies participating in both 2007 and 2009, we likely had different respondents. Individual differences may explain some of the rating differences. In addition, 48 Supply Strategy Implementation: Current State and Future Opportunities 2009

50 Table 5.2 Differences in Overall Implementation Between 2007 and 2009 Strategy Area Strategic Cost Management Strategic Supplier Alliances Total Cost of Ownership Procurement & Supply Organization Structure & Governance Engagement by Corporate Executives & Business Unit Leaders Innovation & Accelerated Change Management Structuring & Maintaining the Supply Base Commodity & Supplier Strategy Process Collaborative Buyer/Supplier Development & Continuous Improvement Supplier Integration into Customer Order Fulfillment Vision, Mission and the Strategic Plan Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Global Sourcing & Supply Strategy Supplier Integration into New Product/Process/Service Development Establishing World-Class Supplier Quality Measurement & Evaluation E-Sourcing & Supply Chain Strategies Functional & Business Processes, Practices and Systems Strategic Insourcing/Outsourcing Supplier Assessment, Measurement & Communications Cross-Functional/Location Teaming Human Resource Development Environmentally Sustainable Supply Chain Management 5.04 Average Implementation 2009 Implementation Difference: Increased Implementation implementation is moderate, indicating the journey continues, probably with greater insights into critical success factors. Note: Supply performance comparisons between 2007 and 2009 were not made because the number of common responses for both 2007 and 2009 were too small to be meaningful. Overall supply performance comparisons were discussed in Chapter 4. Number of firms participating in 2007 and 2009 = 38 CAPS Research 49

51 Table 5.3 Differences in Overall Importance Between 2007 and Supply Strategy Implementation: Current State and Future Opportunities 2009

52 Figure 5.4 Importance, Implementation & Gap Strategy Ratings for Companies Participating in BOTH 2007 & 2009 CAPS Research 51

53 Chapter 6: Obstacles to Supply Strategy Implementation Introduction Based on the results of the 2007 EAS, implementation lagged strategic importance for the 23 supply strategy areas. Therefore, we wanted to determine the primary obstacles that were limiting implementation. For each strategy area in 2009, we included the following openended question: What two primary obstacles are limiting further implementation of your firm s (for each of the 23 strategy areas) strategy? More than 1,000 short-sentence responses were provided which were judgmentally placed into the following eight broad obstacle categories after content review of the individual responses. 1. Lack of Executive Engagement and Support with Resources 2. Inappropriate Organization and Governance 3. Business/Manufacturing/Operations/Technology/ Supply Strategies Not Aligned and Integrated 4. Limiting External Economic Environment Impact 5. People- and Culture-limiting Change 6. Lack of Information Systems and Data Availability 7. Internal/External Communications 8. Inadequate Measurement and Evaluation Overall Findings Based on our content analysis for the 23 supply strategies, we found that: The two most identified obstacle categories limiting further strategy implementation were lack of executive engagement and support with resources; and alignment and integration of business, manufacturing, operations, technology and supply strategies. Both were part of the 75 percent or more of obstacle category responses for 20 of the 23 supply strategy areas.* Organization structure and governance, measurement and evaluation, people and culture, and information systems and data availability were the next most prevalent obstacles. They negatively impacted 10 to 13 supply strategy areas. A limiting economic environment and internal/external communication obstacles impacted two and four strategy areas, respectively. It was also interesting to note the obstacle categories that most negatively impacted various supply strategy areas, where more than 33 percent of the obstacles identified by respondents were in one obstacle category. They were: Executive Engagement and Support with Resources was the major obstacle for: Collaborative Buyer/Supplier Development Environmental Sustainability Cross-Functional/Location Teaming Human Resource Development Aligned and Integrated Business/Manufacturing/ Operations/Technology/Supply Strategies was the major obstacle for: Insourcing/Outsourcing Strategy *Obstacle categories were considered as major limiters to a strategy area only if the obstacle category was part of the categories making up 75 percent of the total obstacle responses for the strategy. 52 Supply Strategy Implementation: Current State and Future Opportunities 2009

54 Supplier Integration into New Product Development Strategic Cost Management Standardization In addition, specific obstacles were found to be the primary limiters of a number of supply strategies and included: Organization Structure and Governance obstacles (33 percent) limited Functional and Business Processes, Practices and Systems People and Culture obstacles (41 percent) limited Innovation and Accelerated Change Management E-Information Systems and Data Availability obstacles limited (a) Supplier Integration into Customer Order Fulfillment (48 percent), (b) Strategic Cost Management (28 percent), (c) Total Cost of Ownership (38 percent), and (d) E-Sourcing and Supply Chain Strategies (42 percent) Conclusions 2. To achieve major innovation and accelerate change, personnel may have to be changed, and supply and company culture modified for significant innovation and change to occur. 3. Lack of appropriate data and information e-system is still limiting broad-based implementation of integrated end-to-end supply chain systems, strategic cost management and total cost of ownership. 4. Supply management should look at the specific obstacles related to specific supply strategies and then develop tailored and unique versus general approaches to overcoming the implementation obstacles, as shown above. In addition, Table 6.1 provides a summary count of obstacle responses by supply strategy. Selected Obstacles Appendix Three provides insights into selected specific obstacles identified by respondents. Given the qualitative nature of the open-ended responses, it is difficult to say with certainty what the exact cause-effect relationship between specific obstacles and the magnitude of their negative impact on implementation of the 23 supply strategies assessed. However the following conclusions are reasonable and include: 1. Executive engagement and support with resources combined with business, manufacturing, operations, technology and supply strategy alignment is a necessity to implement supply strategies most critical to overall firm success. This includes at least those strategies with the most significant gaps discussed in Chapter 2 which were: Supplier Assessment, Measurement & Communications (7.51/5.12)* Supplier Integration into New Product/Process/ Service Development (7.24/5.07) Structuring & Maintaining the Supply Base (7.87/5.71) Innovation & Accelerated Change Management (7.45/5.32) Human Resource Development (8.10/5.97) Establishing World-Class Supplier Quality (7.47/5.37) CAPS Research 53

55 Table 6.1 Summary of Obstacle Responses by Supply Strategy 54 Supply Strategy Implementation: Current State and Future Opportunities 2009

56 Chapter 7: Summary and the Path Forward Introduction This chapter provides a summary of key findings and broadly discusses a path forward approach to be considered by supply executive for their continuous transformation journey. Summary: Key Findings Supply organizations are continuing their transformation efforts, showing greater supply strategy implementation than in 2007 and also a reduction in the gaps between supply strategy importance and implementation. However, significant gaps continue to exist. Even at those firms with the highest degree of implementation, there are opportunities to further enhance supply strategies. The largest supply strategy gaps between importance and implementation were for category and supplier strategy development, strategic cost management, human resource development, structuring/maintaining a world-class supply base, measurement and evaluation, total cost of ownership, world-class quality, accelerated change management, and supplier assessment, measurement and communication. Similar supply strategies were being implemented at both the most and least implemented 25 firms overall, and by the top/bottom 10 by the three industry sectors (discrete, process and service). However, the top firms overall and by industry sector were significantly more advanced in implementation, and the differences were large. The research findings also show that the most implemented strategies are critical enablers to worldclass supply strategies. They include the vision, mission and strategic plan; engagement (in supply) by corporate executives and business unit leaders; and procurement and supply organization structure and governance. In addition, the least implemented supply strategies include those that require significant investment (e-systems for sourcing and supply chain) and considerable cross-functional alignment and linkage of goals, strategies and resources (supplier integration into new product development and customer order fulfillment; standardization of systems, components and processes versus creation of unique designs, and environmentally sustainable supply chains). In addition, supply management was achieving positive supply performance improvements for Given these findings and recognition that firms are at different stages of maturity, two transformation observations are important. First, there is need to ensure high implementation and effectiveness for core strategies such as category and supplier strategy development (with risk management); structuring the supply base; total cost of ownership; supplier selection; strategic cost management, and people acquisition and development. These strategies need to deliver supply performance today. Second, leading supply organization and business unit leaders need to further invest in the long-term success of their firms by accelerating transformation of e-systems; supplier integration into both new product development and customer order fulfillment; standardization of specification and purchasers to reduce complexity; achieving supplier innovation through effective collaboration, and establishing environmentally sustainable supply chains. These strategies are necessary to deliver future performance improvements. CAPS Research 55

57 The Path Forward: Supply Transformation 2010 and Beyond Based on the research, the supply transformation journey can be long and perilous. However, our research and prior experience suggest a number of elements critical to success including (1) clearly articulated goals important to the business, (2) transformation priorities, (3) the resources and capabilities to implement significant change, and (4) a transformation process. Due to the economic crisis of , priority setting and goal clarity (especially related to cost reductions) become more important as resources for transformation may have become more limited. In addition, new supply strategies may be emerging requiring greater focus. Clear Goals It is important to create and clearly articulate the value contribution to be achieved from a supply transformation. For example, supply organizations are focusing on various approaches to achieve cost reduction such as negotiation, price reduction based on raw material price decreases, achieving supplier cost reduction ideas, cost modeling, best country sourcing and so forth. In addition, some firms are also increasing the longer-term focus on obtaining supplier innovations. For any of these initiatives, capital investment, people and time may be required. Increasingly, firms are requiring that return-on-investment be determined, including personnel capacity and capabilities to implement the transformation. To be effective, clear-cut goals and how they will be achieved need to be well thought out and effectively communicated throughout the firm. Figure 7.1 illustrates different value contributions that can be made through effective supply management and transformations. Supply transformation results must focus on the overall financial and market contributions to be made to the firm and not be limited by functionally driven objectives. The links between supply transformations and revenue, cost and asset improvement must be clear, logical and supported by the CFO. Establish Priorities Based on the EAS Assessment findings and prior experience, the strategy areas shown in Figure 7.2 should be clearly evaluated for transformation priorities. Priorities will be established based on your organization s current state and potential short- and longer-term benefits from the transformation. Figure 7.2, which was also discussed in 2007, continues to be relevant today, although slightly modified to include sustainability. Even though many firms are implementing some or all of these strategies, they are only partially implemented Figure 7.1 Improving Economic Value-Add (EVA) 56 Supply Strategy Implementation: Current State and Future Opportunities 2009

58 Figure 7.2 Building Blocks for Supply Transformation against the attributes shown for each of the 23 strategy areas. This was again confirmed by our 2009 research findings. Therefore, these strategies should be prioritized for implementation based on anticipated results compared to costs and complexity to implement. In addition, we earlier discussed those strategies with the largest gaps. They included category and supplier strategy development; strategic cost management; human resource development; structuring/maintaining a world-class supply base; measurement and evaluation; total cost of ownership; world-class quality; accelerated change management, and supplier assessment, measurement and communication. These strategies are a potential transformation priority and can be characterized as a top priority. Resources and Capabilities Firms undertaking supply transformations must ensure the resources and capabilities to execute the transformation. Figure 7.3 provides a framework to help evaluate implementation capabilities for priority transformations. Considerations such as strategy complexity and the capability to actually implement require determination. Supply Transformation Process and EAS Application Supply transformations will sometimes fail. To minimize failures, a critical success factor is a process to achieve successful supply transformations. Supply transformations are often disjointed and lack a focus. Figure 7.4 shows a 10-step implementation process that can help achieve successful supply transformations. The Decade Ahead : Supply Strategy Implementation This section builds on the data gathered in the EAS, other research and consulting experience combined with the findings of Supply Management in the Decade Ahead. This discussion is similar to 2007, recognizing that supply strategy implementation progress has been achieved to some degree, but that considerable progress overall is still required. Figure 7.5 illustrates the likely next wave of supply strategy to be the focus of innovation at leading-edge companies. A brief discussion follows. These strategies combine further enhancement of the critical enablers and the development of supply strategies increasingly requiring cross-functional and cross-enterprise collaboration with a holistic supply chain and customer focus. The function only perspective will slowly fade. Strategy Enhancement Increasingly, expanded supply strategy vision with center-led approaches will be required to achieve CAPS Research 57

59 Figure 7.3 Strategic Supply Strategy Priorities & Capabilities Assessment Framework maximum supply performance in the future. Supply will be expected to contribute to not only cost reduction, but also to improved utilization of assets and revenue enhancement. This can be seen based on the increased emphasis on obtaining supplier innovations and open innovation approaches. People acquisition, development and retention strategies will require transformation. Salary grades and people capabilities will increase given the capabilities required in an increasingly complex and competitive world with extended supply lines. Recruitment and people location at all levels will be worldwide with a focus on creating strategic, challenging jobs and establishing a best-placeto-work environment, recognizing generation differences. E-sourcing without human touch will be achieved. The proportion of time supply management spends on clerical, administrative and routine tasks will be reduced. Procure-to-pay interfaces with suppliers will be automated. Supplier Focused Strategies A number of supply strategies that primarily focus on suppliers and supply networks will be enhanced and take on greater importance in the future. These include true cross-functional teams developing value-driven category strategies. For example, at one firm revenues were enhanced because supply determined that there would be insufficient capacity to meet demand for a very long lead-time product. Supply management then created a new supply chain able to provide the product. The firm also bought out capacity and was able to provide its business customers needed products earlier than the competition, thereby gaining high-value orders. Category strategy development will be resourced with highly capable people across functions for the most important purchase categories. The goal of the category strategies will be to provide value, going far beyond traditional cost-reduction goals. Increasing collaboration with strategic supply partners and networks will be required and achieved due to the global scope of business, limited investment capability, and the scale and know-how that other firms may possess. Firms will have to develop trust and more effectively share risk and rewards. Other CAPS Research has demonstrated that trust and risk/reward sharing are critical elements to successful collaboration. Supplier development activities also will increase. As suppliers worldwide are being utilized, especially in emerging markets, some may not have the full manufacturing or operations capabilities required. For example, automotive OEM s are using hundreds of technical and other personnel in supplier development. 58 Supply Strategy Implementation: Current State and Future Opportunities 2009

60 Figure 7.4 Supply Strategy Transformation Process CAPS Research 59

61 Figure 7.5 Critical Supply Strategies: 2010 and Beyond Value and demand analyses will also be more fully utilized at the product or service design stage. Standardization and product/service complexity reduction efforts will increase. At one manufacturing firm, engineering and supply are working closely together in teams, with executive engagement and support, to reduce product complexity at the raw material, systems and component levels. These activities are required to offer greater value to customers by providing differentiated features, while controlling costs. Implementation has been lower for these strategies. Supply/Value Chain Integration The integration of functions and firms making up the supply chain is one of the last frontiers. How well suppliers and customers are aligned and linked with your company will influence future success. Strategies to better integrate the supply chain are the most complex because they include numerous functions and organizations. However, alignment and linkage strategies across the supply chain will be increasingly important once supply strategy building blocks are in place. These strategies will drive alignment between functions and firms focused on collaborative innovation efforts, shared resources, standardization and complexity reduction, and sustainability. In addition, firms such as IBM, Cisco, Whirlpool and many others are driving toward end-to-end supply chain integration. Those who are first and who focus on holistic company versus narrow function only goals will likely achieve competitive advantage. Concluding Comments This report provides insights to firms about the supply strategies most important to the strategic success of the firm. The findings also suggest that firms are somewhat lagging with respect to full implementation of important supply strategies. The building block strategies shown in Figure 7.5 are the focus of Stages II and III in the Maturity Model presented in Chapter 1. To move to Stage IV, firms will have to implement supply strategies and their enablers that require additional collaboration, integration and customer-focused versus functional metrics. Each firm requires a supply transformation strategy, which is regularly updated and executed, to achieve high supply performance in a fast changing and increasingly complex world. Those 12 to 15 supply strategies identified as critical to success require complete implementation to move to the next level of performance. 60 Supply Strategy Implementation: Current State and Future Opportunities 2009

62 Although the recent economic crisis may have slowed the rate of implementation, the lessons learned can help firms prioritize those supply strategies most important in the new economy. For example, risk management will be of increasingly significant importance as part of category and supplier strategy development. Companies will have to re-examine their focus and ensure that the correct supply strategies are targeted for implementation to provide maximum future benefits. CAPS Research 61

63 1 APPENDIX Appendix One: Supply Strategy Definitions Vision, Mission and the Strategic Plan Definition Sourcing and supply chain vision, mission and strategic plan sets direction for the development and management of a supply network that creates value and leads to competitive advantage. Vision and mission articulates how the supply network will create value. The strategic plan provides a blueprint for implementation and execution. The vision, mission and strategic plan are documented. Strategic Insourcing/Outsourcing Definition This strategy is a strategic sourcing process that evaluates internal capabilities, competencies and capacity versus external sources and capabilities to identify opportunities to better focus on core competencies, improve product/service differentiation and develop and sustain competitive advantage. Commodity & Supplier Strategy Process Definition This process is a written, systematic plan to achieve both short- and long-term commodity/purchase family goals over at least a one- to three-year horizon. Strategies are developed for the important commodities/categories. Elements include supply base structuring, sourcing, contracting, supplier development, product/process design/specifications characteristics, and value chain considerations. The strategy combines various elements into an executable plan with timelines, accountabilities and measurable performance expectations. The view includes the total supply chain or network. Structuring & Maintaining the Supply Base Definition A properly structured supply base includes the appropriate number and quality of suppliers to significantly contribute to companywide EVA and to maintain a competitive sourcing advantage. Suppliers are categorized as strategic, preferred, improve, eliminate and other appropriate categories. The maintenance of the supply base reflects changing external economic risk and market/competitive conditions worldwide. It also aligns with the overall current and future sourcing program and specific commodity/purchase family strategies to meet companywide requirements. Supplier Assessment, Measurement & Communications Definition This is a process of continuously measuring and providing feedback to suppliers about performance to ensure that the supply base is a source of competitive advantage. The objectives are to identify outstanding suppliers and reward them with additional business; to identify substandard suppliers and eliminate or strengthen them through development efforts; to align supplier/buyer goals through joint metrics, and to establish a performance baseline to track trends. 62 Supply Strategy Implementation: Current State and Future Opportunities 2009

64 Supplier Integration Into New Product/Process/ Service Development Definition This strategy is the systematic process of involving external suppliers into the design, development and introduction of new products, processes or services, including product, process and service innovations. Integration occurs at any stage in the process. Supplier responsibilities range from black box, where supplier owns primary responsibility for the process, to white box, where the supplier may be consulted. Supplier Integration Into Customer Order Fulfillment Definition This strategy involves customer-driven synchronization of supply chain physical, financial and information flows from customer needs through post-sales service and disposal to enhance asset velocity, value creation and competitive advantage. The cross-enterprise supply chain verses a single business unit is the competitive unit. The objective is to optimize capability of the total value chain. Strategic Supplier Alliances Definition Strategic supplier alliances are long-term, cooperative relationships designed to leverage the strategic and operational capabilities of individual participating companies to achieve significant ongoing benefits to each party. The relationship is based on mutual business interest and does not involve the formation of a separate legal entity. Successful alliances require high levels of coordination, trust, information sharing, creativity and senior management support to fully exploit joint opportunities. Collaborative Buyer/Supplier Development & Continuous Improvement Definition This is a strategy is for developing and improving strategic and tactical processes and relationships with key suppliers to maximize cross-enterprise performance. Formalized development efforts and continuous improvement processes ensure performance targets are established with appropriate metrics and progress reporting for critical value chain processes. World-class APPENDIX efforts will be characterized by greater focus on bilateral improvements, commitment of joint resources to development activities and more risk/reward sharing. Lean practices are applied. Establishing World-Class Supplier Quality Definition Supplier quality management is the process of managing the entire supply chain to obtain comprehensive quality process controls using traditional and innovative quality management strategies. These strategies are both internal and external, at every stage of the supply chain process, with the objective of attaining a competitive advantage and long-term success through customer satisfaction and overall stakeholder loyalty. Global Sourcing & Supply Strategy Definition Global sourcing and supply strategy includes strategies and practices enabling firms to effectively coordinate information and decisions about customers, company needs, commodities/purchase families and suppliers on a worldwide basis. Globalization of a firm s procurement/sourcing and supply chain strategy requires global leveraging of suppliers and internal resources and processes. Strategic Cost Management Definition This is the identification and proactive management of all costs and associated cost drivers throughout the product/service supply chain. It requires development, prioritization and implementation of strategies and processes to control, reduce or eliminate costs during each phase of the life cycle. Cost categories include but are not limited to design, purchase item costs, quality, inventory, delivery and end-of-life costs. Total Cost of Ownership Definition Total Cost of Ownership (TCO) is a cost analysis technique used in support of a company s strategic cost management strategies. TCO analysis involves the identification and categorization of all cost elements and associated cost drivers related to a sourcing/procurement decision. TCO includes all costs, direct and indirect, incurred throughout the life cycle of 1 CAPS Research 63

65 1 APPENDIX an asset, including acquisition and procurement, operations and maintenance, and end-of-life management. Standardization of Systems, Components & Processes vs. Creation of Unique Designs & Specifications Definition Standardization strategies include companywide determination of those products, services, processes and/or technologies that can be defined to company or industry standards for simplification and cost savings. Differentiation is only applied when it provides value to the ultimate customer and justifies higher pricing and greater margins. Differentiation is commonly established around core competencies. Environmentally Sustainable Supply Chain Management Definition This strategy is a written systematic set of supply management strategies that incorporate environmentally sustainable processes to make both short- and longterm performance improvements in supply management at the firm level and/or across the supply network. Procurement & Supply Organization Structure & Governance Definition Firms operate in a globally coordinated environment with companywide or strategic business unit (SBU) center-led leadership with purchasing authority and coordination with decentralized purchasing execution. Purchasing or supply reports to a top-level executive. Much of the sourcing/supply strategy development is increasingly performed by global commodity teams, recognizing the direct needs of customer-facing organizations and the ultimate customers. Cross-Functional/Location Teaming Definition World-class teaming involves proactively forming, managing and supporting cross-functional/location teams with the objective of achieving competitive advantage through purchasing/supply strategies. Teams pursue tasks and assignments that link to and directly support the attainment of business and/or corporate objectives. Teams are the correct organizational response when faced with complex or large-scale decisions or tasks that span functions, geographies, product/service lines, etc. Measurement & Evaluation Definition Strategic and supply chain performance measurements include metrics for commodity/purchase family sourcing effectiveness. The measurements also can be used to gauge supplier performance, overall functional strategies and processes, cross-functional team performance, and cross-enterprise performance. Metrics are used within a balanced scorecard performance measurement and evaluation methodology against specific measures and objectives. The metrics are integrated with the company/business unit performance evaluation system. E-Sourcing & Supply Chain Strategies Definition E-sourcing and supply chain strategies are a series of practices that involve automating supply chain process and/or conducting supply chain activities electronically and via the Internet to optimize inherent efficiencies. E-sourcing and supply chain strategies streamline processes including procurement, supply/demand planning and logistics as well as supplier relationship management, design/development, and customerrelationship management. E-systems are substituted for tactical operations where possible. Human Resource Development Definition Human resource development is a continuous process of attracting, acquiring, developing and retaining knowledgeable and skilled personnel to achieve increasing competitive advantage worldwide. The evolution to a virtual organization makes highly effective human resource development practices imperative as personnel are provided with significant place and time flexibility. Ongoing knowledge management and development are a priority. 64 Supply Strategy Implementation: Current State and Future Opportunities 2009

66 Engagement by Corporate Executives & Business Unit Leaders Definition Executive engagement includes company executives participating in, and sometimes leading and providing organizational and budgetary support for critical sourcing and supply chain strategies and initiatives. This engagement signals to the organization the strategic criticality of sourcing and supply to sustaining the competitive advantage of the firm. Functional & Business Processes, Practices & Systems Definition To achieve strategic sourcing and supply chain worldclass excellence, it is critical that functional and process leadership be integrated within the business. Nearly every sourcing and supply chain business process, practice and/or system has an impact on more than one other functional organization within the company. Strong functional and process leadership within the sourcing and supply chain organization is required to drive companywide change through integration and collaboration with other major functional areas and across enterprises. Innovation & Accelerated Change Management Definition Accelerated change management is a process that enables rapid, innovative change from the existing state APPENDIX to a new paradigm. The new paradigm, which is now the existing environment, is again shifted to a new paradigm with increasing speed. This continuous improvement process combines an organization s system, structures and culture. Project and process implementation speed are measured, communicated and reinforced throughout the organization. Sustainable Competitive Performance Definition Strategic sourcing and supply chain strategies achieve competitive performance by creating and enabling a competitive network of supplying firms that produce superior results. Key elements of competitive performance include direct and measurable economic value-add (EVA) or return on invested capital (ROIC) contributions to the overall business unit performance and for specific sourcing and supply chain metrics. The following quantitative and qualitative performance areas will generally show results related to the implementation of different supply strategies and are considered important to supply organizations in varying degrees. Instructions Direct & Quantitative Improvement Areas For your most important purchases (80/20 rule) over the past twelve (12) months, indicate the magnitude of measurable performance improvements and/or business unit contribution achieved through sourcing & supply chain strategies at your business unit. NA=Not Applicable. 1 CAPS Research 65

67 1 APPENDIX Instructions Indirect & Qualitative Improvement Areas Please indicate the overall results achieved by your business unit over the past 12 months from your business unit s strategic sourcing and supply chain strategies for each of the following: 66 Supply Strategy Implementation: Current State and Future Opportunities 2009

68 APPENDIX 1 CAPS Research 67