Creating a stronger voice for Australia s FMCG supply chain practitioners. Supply Chain Strategy and Capability Assessment 2015

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1 Supply Chain Strategy and Capability Assessment 2015 Creating a stronger voice for Australia s FMCG supply chain practitioners Supply Chain Strategy and Capability Assessment

2 About AFGC and the industry The Australian Food and Grocery Council (AFGC) is the leading national organisation representing Australia s food, drink, and grocery manufacturing industry. The membership of AFGC comprises more than 180 companies, subsidiaries, and associates which constitute in the order of 80 percent of the gross dollar value of the processed food, beverage, and grocery products sectors. With an annual turnover in the financial year of $114 billion, Australia s food and grocery manufacturing industry makes a substantial contribution to the Australian economy and is vital to the nation s future prosperity. Manufacturing of food, beverages, and groceries in the fast-moving consumer goods sector is Australia s largest manufacturing industry. Representing 27.5 percent of total manufacturing turnover, the sector accounts for more than one-quarter of the total manufacturing industry in Australia. The diverse and sustainable industry is made up of more than 27,469 businesses and accounted for more than $55.9 billion of the nation s international trade in These businesses range from some of the largest globally significant multinational companies to small and medium enterprises. The industry spent $541.8 million in on research and development. The food and grocery manufacturing sector employs more than 299,731 Australians, representing about 3 percent of all employed people in Australia, paying around $12.1 billion a year in salaries and wages. Many food manufacturing plants are located outside the metropolitan regions. The industry makes a large contribution to rural and regional Australia economies, with almost half of the total persons employed being in rural and regional Australia. It is essential for the economic and social development of Australia, and particularly rural and regional Australia, that the magnitude, significance, and contribution of this industry is recognised and factored into the government s economic, industrial, and trade policies. Australians and our political leaders overwhelmingly want a local, value-adding food and grocery manufacturing sector. Visit for more information. About A.T. Kearney A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions, and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world s leading corporations in all major industries. A.T. Kearney has offices in major cities in more than 40 countries, including Sydney and Melbourne, Australia. A.T. Kearney consults on a wide range of consumer and retail issues for national and global companies. Our capabilities include: Growth and channel strategy Retail operations Manufacturing operations and complexity reduction Supply chain strategy and operations Procurement solutions Organisation and transformation Strategic information technology Visit for more information

3 Table of Contents Executive Summary 1 Viewing Supply Chain Strategy for Australia s FMCG Manufacturers Through a Different Lens 2 The Supply Chain Capability Tool: Focused on Relevancy and Transformation 3 State of the Industry Survey Results 7 A Detailed Look at Capabilities and Priorities 13 Realities and Trends: What They Mean for AFGC Members 26 Appendix 31

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5 Executive Summary The Australian Food and Grocery Council (AFGC) has developed a Supply Chain Capability Tool (SCCT) for its members that provides a unique opportunity for supply chain practitioners to examine the maturity of Australian supply chain practices. It allows them to compare the industry to their own operations, helping them uncover opportunities for improvement and growth and create a stronger voice for themselves at their companies leadership level. The tool enables a self-assessment of members supply chains against four strategies and 11 capabilities. Based on the tool and a survey in which it was used, the AFGC can safely say that the current capability in the fast-moving consumer goods (FMCG) industry in Australia is biased toward a responsive supply chain, with 56 percent of respondents favoring this strategy. The primary driver for this strategy is the industry s excelling at and prioritising risk management, which greatly impacts the overall supply chain strategy. At the same time, the industry s future priority is biased toward a competitive supply chain. However, adapting to changing regulations and markets, being flexible to customers demands, and managing emerging risks is diverting scarce capital and resources away from this goal. The industry s investment in capabilities to be leaner and faster will help it achieve a more competitive focus. Interestingly, the industry recognises that collaboration with suppliers and customers is key for achieving gradual improvement in performance. Thus, significant development of the capabilities for collaboration, systems, and processes that will help run sustainable programs is important. Yet, the SCCT tells us that collaboration is a top priority only for companies with revenues above $1 billion; the rest of the industry is focusing on improving from within. AFGC members who used the tool also mentioned that increasing complexity is a major upcoming trend in the industry, yet only 13 percent of respondents included the capability to manage complexity as a top-three current priority for their organisations. Finally, the tool tells us that voice of the supply chain in executive leadership has a clear impact on the weight given to supply chain priorities. Without executive leadership s consideration, supply chain is seen largely as a cost center that needs to be optimised for cost alone. Supply Chain Strategy and Capability Assessment

6 Viewing Supply Chain Strategy for Australia s FMCG Manufacturers Through a Different Lens The Australian FMCG industry continues to challenge supply chain practitioners, who are tasked with maintaining service levels, responding to increasing customer demands, and enhancing cost competitiveness. In this environment, it is more important than ever for members of the AFGC to understand their current capabilities and priorities, which will help them invest in the most effective areas for future success. Existing performance-based benchmarks are a useful starting point, but are not sufficient. Members lack a method to assess their current capabilities against strategic intent, and to formulate long-term capability improvement programs. Nor do they have a means to assess their capabilities within the Australian market. To provide this invaluable insight, the AFGC conducted the 2015 Supply Chain Strategy and Capability Assessment, which was driven by the Supply Chain Capability Tool. Specific to each company s business strategy and corresponding supply chain strategy, the tool helps members identify their biggest capability gaps, consider what is relevant in the industry, identify opportunities to learn from others, and develop an actionable plan without time-consuming data collection. Ultimately, it enables participants to gain comparative insights despite pursuing nuanced strategies, with unique trade-offs made between capabilities, costs, and performance. (For more information about and access to the tool, see the sidebar: About the Survey and the Tool.) Based on the study and the analysis of SCCT results, AFGC has generated an industry-level assessment of each supply chain capability, all of which are discussed in detail in this report. The consolidated results provide a unique opportunity for supply chain practitioners to examine the maturity of Australian supply chain practices. They can compare them to their own operations, all while uncovering opportunities for improvement, growth, and creating a stronger voice for themselves at their company s leadership level. About the Survey and the Tool The Supply Chain Strategy and Capability Assessment is a survey that the Australian Food and Grocery Council (AFGC) conducted during the first two quarters of The survey was driven by the Supply Chain Capability Tool (SCCT). The objectives of the tool and the survey are to understand AFGC members strategy in terms of supply chain priorities, evaluate their capabilities against strategic intent and future challenges, provide local capability benchmarks and best practices, determine industry trends, and identify overarching capability gaps to address. Mid- to upper-level supply chain executives from 18 major food and grocery manufacturers throughout Australia used the SCCT to complete the survey. The tool continues to be available to AFGC members. Those who complete the process receive a detailed assessment of their company s capabilities, along with industry benchmarks and best-practice opportunities. For more information, visit webhost2.atkearney.com/ Surveys/AFGC_SupplyChain/ Intro.aspx. Supply Chain Strategy and Capability Assessment

7 The Supply Chain Capability Tool: Focused on Relevancy and Transformation Fundamental to the AFGC s survey on supply chain strategy, the SCCT provides a context for viewing the supply chain as a vital component of overall business strategy. AFGC asked each participant to provide information about three major sections of their supply chain strategy (see figure 1). Figure 1 SCCT Key areas surveyed 1 Current supply chain capability 2 Current supply chain priorities 3 Future supply chain priorities Each business in the industry has a unique combination of characteristics that ideally informs the supply strategy, including brand and product portfolio, customer focus, distribution channels, and growth and investment mix. To link supply chain and business strategies with the capabilities required to execute them, the tool uses 11 fundamental capabilities, and what the business intends for the future for each. This provides a framework that clearly assesses the capabilities against detailed analyses of stages of excellence. Supply chain executives receive a language to use with functional peers and leadership teams that takes the business value of the supply chain beyond cost and service and relates it to other business areas. The tool s most important consequence is the strategic approach it provides companies for identifying priorities for supply chain transformation. In order to build out a view on the first element the current supply chain capability the tool uses the Capability Assessment Framework (see figure 2 on page 4). The SCCT s end goal is to provide manufacturers with a unique competitive advantage by design. In contrast, a traditional approach assumes that performing at a benchmark for all supply chain metrics is the key goal. However, supply chain managers often find that the current status and future goals for their capabilities need to look different than those of their competitors. If everyone is implementing conventional wisdom about supply chains, then the only attainable advantage is derived from superior execution. AFGC and A.T. Kearney believe as borne out by successful use of the survey s results that there is far more potential for transforming supply chains through focused and aligned strategies. Supply Chain Strategy and Capability Assessment

8 Figure 2 Supply chain strategy, capabilities, dimensions, and stages of excellence Supply chain strategy Supply chain capabilities Dimensions Stages of excellence Competitive Lean Fast Lean Measurement Empowerment 4 Competitive advantage Partnered Reliable Transparent Collaborative Fast Reach Inbound Outbound Metrics measured: Yield Facilities with supply chain metrics: Extended supply chain Responsive Sustainable Risk-managed Flexible Adaptive Complexitycontrolled Accurate Green Reliable Information flows Definition of internal and external service agreements Tracking of promise and performance Proactively dealing with service issues 3 Sophisticated, yet simple Metrics measured: Operating equipment/ assets effectiveness Facilities with supply chain metrics: Office-based supply chain processes 2 Coordinated Metrics measured: Working capital Facilities with supply chain metrics: Logistics facilities 1 Basic Metrics measured: Productivity Facilities with supply chain metrics: Manufacturing Supply chain strategies in theory and reality The SCCT was developed around four main supply chain strategies that typify the approach of most companies: competitive, partnered, responsive, and sustainable (see table 1 on page 5). While a business s overall strategy incorporates elements of the four supply chain strategies, the tool identifies spikes in capabilities to determine the primary focus and overarching strategy that it actually is pursuing. For example, one participant stated that its supply chain strategy was to develop a competitive supply chain that is underpinned by a series of investments and a program of work. However, its day-to-day operations of managing a complex set of suppliers and customers actually indicated it was following a responsive strategy. Supply Chain Strategy and Capability Assessment

9 Table 1 Supply chain strategies Strategy Competitive Partnered Responsive Sustainable Definition A competitive supply chain strategy favours efficiency. This typically translates as a supply chain that is both lean and fast, however it is also important that reliability is maintained. A partnered supply chain strategy is one where the players within the chain work together for advantageous outcome for all participants. This means working together collaboratively and transparently. A responsive supply chain is defined as being able to quickly and adaptively respond to retailers and suppliers, whilst ensuring risks are managed throughout the supply chain. A sustainable supply chain is one that has a high likelihood of continued existence without a high degree of management. This is typically due to the lack of complexity within the supply chain as well as the accuracy of information throughout the chain. Linking strategy to capabilities A handful of key capabilities within the organisation underpin each strategy (see table 2 on page 6). The business s capability for being lean, fast, and reliable, for example, will underpin a competitive supply chain. Each capability requires individual focus and often trade-off decisions to develop a truly competitive supply chain. For instance, the reliability thresholds a company establishes have a direct impact on how lean the supply chain can be. The supply chain capability tool helps members understand where their biggest capability gaps lie and achieve an actionable plan without painful data collection. Dimensions of each capability Each capability is further defined by a set of measurable dimensions that form the most detailed decision-making and investment levels. For example, to develop capability as a lean supply chain, for example, it is essential to (a) develop systems and processes that allow for accurate measurement (both depth and breadth), (b) empower people to act on the information available to reach a stated ambition, and (c) ensure that the capability is spread widely in the organisation, rather than isolated in silos (see table 3 on page 6). All the capabilities and their respective dimensions are outlined in the appendix on page 30. Supply Chain Strategy and Capability Assessment

10 Table 2 Supply chain capabilities Supply chain strategy Competitive Capability Lean Fast Reliable Definition The degree to which the supply chain efficiently uses resources (such as assets, staff, and materials) and minimises waste end to end The ability to minimise the absolute lead time throughout the inbound and outbound supply chain and adjust speed without major implications using the smart design of physical and information flows The ability of the supply chain to define appropriate service levels and to consistently deliver against them internally and externally, with regard to products, services, and information Partnered Transparent The degree to which information of the right granularity is shared with and accessible to stakeholders end to end Collaborative The ability to establish suitable relationships vertically (suppliers, customers), horizontally (other companies), and internally to capture and share short- and long-term value Responsive Risk-managed The ability to proactively identify and evaluate risks across the supply chain and translate them into an effective risk-mitigation plan Sustainable Flexible Adaptive Complexitycontrolled Accurate Green The degree to which events and unforeseen circumstances triggered by changes in customer, supplier, product, and processes can be managed on short notice The ability to respond to more structural internal and external changes brought by the overall strategy, as well as product and customer requirements The degree to which complexity that is driven by the product and service portfolio, and customers and suppliers, is managed across the supply chain end to end The degree to which relevant supply chain information is timely and correct The degree to which the end-to-end supply chain is environmentally responsible Table 3 Supply chain dimensions Example Strategy Capability Dimension Definition Competitive Lean Measurement How well does the supply chain measure and track its efficiency in the use of resources (such as headcount, productivity, utilisation, and waste)? Empowerment How well does the supply chain measure and track its efficiency in the use of resources (such as headcount, productivity, utilisation, and waste)? Reach How thoroughly, effectively, and widespread (in depth and breadth) does the supply chain implement lean activities from end to end? Supply Chain Strategy and Capability Assessment

11 Applying stages of excellence To develop an understanding of the organisation s current capabilities across the dimensions, we incorporated stages of excellence (SoE) into SCCT. By asking a series of objective questions, the tool helps us classify current performance as being basic, coordinated, sophisticated, or a competitive advantage (see table 4). Table 4 Stages of excellence Example Stage 1 Basic Stage 2 Coordinated Stage 3 Sophisticated Stage 4 Competitive advantage Traditional productivity metrics (such as labour) measure efficiency Measurement limited to manufacturing facilities Metrics reviewed annually during the budgeting period Productivity and working capital metrics measure resources used in the supply chain Measurement applies to manufacturing and logistics facilities Metrics reviewed every six months Productivity, working capital, and overall equipment effectiveness (OEE) metrics measure resources used in the supply chain Measurement applies to manufacturing and logistics facilities as well as office-based supply chain processes Metrics reviewed every quarter Productivity, working capital, OEE, and yield metrics measure resources used in the supply chain Specific metrics measure environmental dimensions (such as CO2 emissions) Measurements apply to the extended supply chain, including partners Metrics reviewed every month A summary of these SoE scores aggregated at the dimension, capability, and strategy levels helps us understand an organisation s current performance. Supply chain priority Finally, to understand an organisation s supply chain priorities now and for the future, we developed a forced ranking framework across the 11 capabilities. The tool provides 110 points to be allocated to each capability. A higher score indicates a higher-priority capability and vice versa. The result is a clearer picture of survey respondents actual priorities. State of the Industry Survey Results Current capabilities: Investing in responsiveness at what cost? It is clear from the survey results that Australia s food and grocery manufacturers have structured and invested in their supply chains to respond to the country s dynamic retail environment. More than half of respondents place greater emphasis on a responsive supply chain than the other capability groupings. Supply Chain Strategy and Capability Assessment

12 This result is spread evenly across the revenue ranges of businesses. Companies with revenue greater than $1 billion exclusively rate this capability highest (see figure 3). Figure 3 Supply chain strategy in Australia Current capabilities (% of respondents, based on highest capability areas) 0% 100% 25% 56% Responsive Competitive Partnered Sustainable Total Large companies (>$1 bn in net sales) Medium-sized companies ($0.4-1 bn in net sales) Small companies (<$0.4 bn in net sales) One in four respondents points toward higher capabilities for a competitive supply chain, with an even split between small and medium-sized businesses and no representation from the larger companies. The balance of the survey respondents, specifically the medium-revenue companies, have higher capabilities as a partnered supply chain, with no companies represented in the sustainable supply chain. When the capabilities are examined individually against the stages of excellence, patterns of behaviour emerge. Figure 4 on page 9 shows that the Australian FMCG industry excels at managing risks, which greatly impacts overall supply chain strategy. More than half of respondents recorded their risk-managed capability in the highest level of excellence. Adaptive performance also is high; however, we can easily conclude that the primary driver of the industry s responsive strategy is a high degree of focus and capability for managing and containing risks. Conversely, three out of four respondents indicated that their green capability was the least mature. Capabilities for being fast, flexible, lean, and complexity-controlled were also less developed. What emerges is a clear pattern: Australia s FMCG industry is investing in responsiveness at the cost of a sustainable and competitive supply chain. Interestingly, this is consistent with what trading partners believe the industry is focusing on today. When asked, they cited capabilities for being flexible, lean, and reliable as the industry s top three and the capacity to be green, collaborative, and fast as the bottom three (see figure 5 on page 9). They concur with the survey results that risk management is handled well across the industry and view it as an essential capability for maintaining a healthy supply chain. Trading partners also see the complex relationships and trade-offs between having a reliable and a lean supply chain. Supply Chain Strategy and Capability Assessment

13 Figure 4 Spread of capability scores Stages of excellence Strategy Competitive Partnered Responsive Sustainable Capability Lean Fast Reliable Transparent Collaborative Flexible Adaptive Risk-managed Complexity-controlled Accurate Green Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Figure 5 The three leading top and bottom capabilities (% of respondents) Bottom 3 Top 3 25% Lean 63% Fast 0% 0% Reliable 69% 25% Transparent 38% 13% Collaborative 25% 38% Flexible 6% Adaptive 50% 13% Risk-managed 56% Accurate 25% Complexity-controlled 0% 75% Green 6% Supply Chain Strategy and Capability Assessment

14 Current and future priorities The SCCT asked users to prioritise the 11 capabilities into their organisations current and potential future needs (see figure 6). Two in three respondents ranked a competitive supply chain highly, now and in the future. Figure 6 Priorities for supply chain strategy Current priorities (% of respondents) 31% 0% 100% 6% 63% Responsive Competitive Partnered Sustainable Total Large companies (>$1 bn in net sales) Medium-sized companies ($0.4-1 bn in net sales) Small companies (<$0.4 bn in net sales) Future priorities (% of respondents) 25% 6% 100% 6% 63% Responsive Competitive Partnered Sustainable Total Large companies (>$1 bn in net sales) Medium-sized companies ($0.4-1 bn in net sales) Small companies (<$0.4 bn in net sales) Based on these results, we can infer that the industry intends to develop and run a competitive supply chain; however, adapting to changing regulations and markets, being flexible to customers demands, and managing emerging risks is diverting scarce capital and resources. Respondents indicated that a partnered strategy is second-most important to them, with nearly one in four prioritising it in the medium term. The growing consensus among these organisations is that the next change in supply chains will come about only through greater collaboration between customers and the industry. Comparing current and future priorities at a capability level produced two key insights (see figure 7 on page 11): A focus on developing lean and fast supply chains in the future is hindered without similar focus on developing complexity control. For a partnered strategy, both collaboration and transparency are the corresponding capabilities. However, while the focus on collaboration is increasing, the emphasis on transparency is decreasing. Supply Chain Strategy and Capability Assessment

15 Figure 7 Priorities for supply chain capability Current priorities (% of respondents) Bottom 3 Top 3 88% 63% 50% 31% 13% 25% 31% 38% 0% Lean Fast Reliable Transparent Collaborative Flexible Adaptive Risk-managed Accurate Complexity-controlled Green 6% 13% 6% 38% 44% 44% 38% 56% 88% Future priorities (% of respondents) Bottom 3 Top 3 88% 81% 63% 38% 38% 50% 44% 25% 6% Lean Fast Reliable Transparent Collaborative Flexible Adaptive Risk-managed Accurate Complexity-controlled Green 0% 6% 6% 25% 25% 44% 56% 56% 81% 81% Contrasting current capabilities with priorities To get a better picture of what the tool revealed in the industry, it is important to look at current and future priorities together with current capabilities. A quick analysis suggests that the capabilities can be grouped under four archetypes (see figure 8 on page 12). High priority and high capability: Hygiene capabilities Reliability is the only priority ranked highly for the industry as a capability and also as a focus for supply chains now and in the future. In fact, it is the industry s highest priority and should lead to Supply Chain Strategy and Capability Assessment

16 Figure 8 Capabilities against priorities Capability Current importance Stage 1 Stage 2 Stage 3 Stage 4 Future importance None/ Low High some Most All Some Most All Some Most All Some Most All Low High Reliable Accurate Fast Lean Collaborative Transparent Risk-managed Flexible Complexitycontrolled Adaptive Green a measurable improvement in supply chain performance going forward. Major retailers concur with this and view reliability as synonymous with availability in their stores. High priority and mid-to-low capability: Recognised areas for improvement Three major capabilities fall in this area and resonate strongly with the industry s ambition to run competitive supply chains: Being accurate: Accuracy in measurement of current activity is fundamental to improve a supply chain. Systems and processes that ensure correct information is available when required will help facilitate improvements across the board. Retailers view current capabilities for accuracy as adequate, yet further investment and focus are needed to drive incremental change in performance. Being lean: Significant focus on and investment in the lean capability is critical for competitiveness. In the meantime, a step change in performance may require industry-wide collaboration. Being fast: Developing fast supply chains is a stated intent of the industry and resonates well with the retailers who value it greatly to help streamline operations. Mid-to-low priority and high capability: Past areas of focus The capability to be risk-managed is the highest-rated competency in the industry and drives the mid-to-low priority area. The consensus is that the industry has invested in and developed Supply Chain Strategy and Capability Assessment

17 the systems and processes required to manage risk and will now focus its efforts on improving competitiveness. Mid-to-low priority and mid-to-low capability: Limited focus areas Two major capabilities fall into this criterion. Controlling complexity: Limited focus on complexity management is a concern, as managing and controlling complexity will aid the industry significantly in developing competitive supply chains. Investments in lean and fast capabilities may fail to deliver expected results if complexity increases or is not managed effectively. Being collaborative: Limited focus on collaboration contrasts with discussions we hear in the industry that indicate collaboration will be the next step in the evolution to unlock additional supply chain performance. Collaborating effectively with suppliers and retailers will require significant investment in developing the commercial constructs that aid collaboration and the systems and processes that underpin it. A Detailed Look at Capabilities and Priorities Lean Definition: The degree to which the supply chain uses resources efficiently (including assets, staff, and materials) and minimises waste across the supply chain. Includes (a) measurement, (b) empowerment, and (c) reach. In terms of current priority, the lean capability is featured as a top-three priority for nearly two in five respondents and as a bottom-three priority for one in three respondents (see figure 9). Clearly, respondents are split on lean s importance, which may be a function of their pursuing different supply chain strategies. Figure 9 Lean Current and future priority 38% 31% 31% 56% % in top 3 6% Other 38% % in bottom 3 However, turning to the mid- to long-term future importance, we can see that organisations value lean as important. More than half of respondents believe that lean should be a top-three priority. This indicates that while respondents may not be concentrating on lean just now, it is something they clearly desire in the future. Current Future (3-5 years) This priority is mirrored in respondents current level of capability for being lean. The median SoE is within stage 3, at 2.7. This is a relatively low score compared to other capabilities and is in line with the earlier finding that to develop a competitive strategy, organisations will need to improve their lean operations. Looking deeper at the dimensions of lean (see figure 10 on page 14), we see that measurement is a key area that brings down the median score. Indeed, only four of five respondents measure and track the lead time of inbound supplies. This may reduce supply chains flexibility and the potential to optimise operations and resource utilisation. Also, one in three respondents has no Supply Chain Strategy and Capability Assessment

18 Figure 10 Lean Current capability Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Lean Measurement Empowerment Reach consistent measurement of supply lead time. All companies in the survey responded that they only measure basic productivity metrics, which are restricted to gauging performance in manufacturing facilities. The lack of consistent and automated measurement of higher-valueadded metrics with a more direct financial impact such as the effectiveness of operating equipment and assets, and yield metrics is a significant hurdle to developing lean supply chains. Fast Definition: The ability to minimise absolute lead time throughout the inbound and outbound supply chain and adjust speed without major implications through the smart design of physical and information flows. Includes (a) inbound, (b) outbound, and (c) information flow. Figure 11 Fast Current and future priority 44% 44% 13% Current 56% 25% Future (3-5 years) % in top 3 Other % in bottom 3 Currently, the fast capability is a top-three priority for nearly half of all respondents and a bottom-three priority for only one in eight respondents (see figure 11). This indicates that the majority of the industry considers it an important priority at present. It also appears to be a mid- to long-term focus. Well over half of respondents believe that the capability to be fast should be a top-three priority. However, it should be noted that one in five respondents made it a bottom-three priority. Supply Chain Strategy and Capability Assessment

19 This prioritisation should not reflect on current capabilities for being fast. The median score is within stage 3, at 2.4. This, like lean, is a relatively low score and is in line with the earlier finding that developing fast capabilities is essential to a competitive strategy. Looking deeper at the dimensions of fast, we see that inbound and information flows are pulling down the overall score (see figure 12). With respect to inbound, three out of four respondents reported having no flexibility of their inbound supply, not even by using express delivery at a premium. Figure 12 Fast Current capability Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Fast Inbound Outbound Information flows Turning to information flows, most respondents (two out of three) currently have poor information flow with internal and external stakeholders. Further, only two of five companies reported that internal stakeholders have seamless access to information. Half of survey respondents only share inbound and outbound delivery-performance information on an ad hoc basis, while only one company reported that it had the capability to provide online live information on order status and tracking to internal and external stakeholders. Clearly, increasing the speed of supply chains will come only with a greater focus on inbound and information flows. Reliable Definition: The ability of the supply chain to define appropriate service levels and to consistently deliver against these both internally and externally, with regard to products, services and information. Includes definition of a) Internal Service Agreement and (b) External Service Agreement. Supply Chain Strategy and Capability Assessment

20 Figure 13 Reliable Current and future priority 88% 13% 0% Current 81% Future (3-5 years) % in top 3 13% Other 6% % in bottom 3 In terms of current priority, the reliable capability is featured as a top-three priority for nearly nine in 10 respondents (see figure 13). It was not a bottom-three priority for anyone in the survey. As such, this is the most highly prioritised capability in the survey. As for the future, the focus on reliable drops, with respondents who feel that it should be a top-three priority falling to four in five. It should be noted, however, that it is still the most highly prioritised of all future capabilities. We can see a high level of focus on being reliable both now and into the future in the high current levels of capability (see figure 14). The median aggregated score is 2.9, one of the highest in the survey. The minimum aggregated score was 2.4 still well within stage 3. Looking to the dimensions, we see that only tracking of promise and performance pulls down the score. While most companies (six in 10) consistently track and solve most of the risks associated with underperformance of service delivery, only three in 10 have a structured and systematic issue-resolution system in place. Further, the tracking of promise and performance is an area within reliability that needs improvement. Seven out of 10 respondents track using a discrete set of key performance indicators (KPIs), and only four in nine use a comprehensive set of supply chain KPIs to achieve full transparency and identify root causes. Only two in five have key quality measure or comprehensive quality processes in place to avoid defects, customer complaints, and issues. From retailers perspective, a reliable supply chain is the highest priority and the cost of entry to having a partnership. Figure 14 Reliable Current capability Reliable Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Definition of internal and external service agreements Tracking of promise and performance Proactively dealing with service issues Supply Chain Strategy and Capability Assessment

21 Transparent Definition: The degree to which information of the right granularity is shared with and accessible to stakeholders across the supply chain. It includes information (a) available to suppliers, (b) received from suppliers, (c) available internally, (d) given to customers, and (e) received from customers. Figure 15 Transparent Current and future priority 44% 31% 25% Current 25% 38% 38% Future (3-5 years) % in top 3 Other % in bottom 3 Currently, the transparent capability is featured as a top-three priority for nearly half of all respondents and as a bottom-three priority for one-quarter of them (see figure 15). We see that the priorities change somewhat for the future, with the proportion of respondents who feel that transparent should be a top-three priority dropping to just one-quarter. The number who place it as a bottom-three priority increases to more than one-third. Thus, the transparent capability is not a focus area in three or more years. The relatively high score for transparent is in line with the capability s overall priority (see figure 16). The aggregated median score is 2.8, one of the highest in the survey. Figure 16 Transparent Current capability Transparent Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Information available to suppliers Information received from suppliers Internal information Information given to customers Information received from customers Supply Chain Strategy and Capability Assessment

22 Examining the dimensions of transparent, we see that information received from suppliers is the only one that strongly pulls the aggregated score down. Indeed, for this dimension, the majority of respondents actually scored just 2.0, meaning that the minimum and median scores are the same. Thus, it is clear that respondents feel that information received from suppliers is lacking, and improving it will increase transparency in the industry. Collaborative Definition: The ability to establish suitable relationships vertically (suppliers, customers), horizontally (other companies), and internally to capture and share short- and long-term value. Includes (a) supplier, (b) customer, and (c) internal. Figure 17 Collaboration Current and future priority 38% 44% Current 44% 25% Future (3-5 years) % in top 3 31% Other % in bottom 3 Currently the collaborative capability is featured as a top-three priority for more than one-third of respondents and as a bottomthree priority for just one in five (see figure 17). This indicates that a small set of respondents sees it as an emerging priority. However, when looking to the future importance of collaborative, we can see that organisations are increasing their focus on it, with only one in four placing it in their bottom three, and two in five placing it within the top three. When we examine the current capability of collaborative, we see that the median current score is 2.7, or in the third SoE (see figure 18). Looking more closely at the dimensions, we note that while supplier and internal have strong median scores, customer pulls down the overall score. Figure 18 Collaboration Current capability Collaborative Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Supplier Customer Internal Supply Chain Strategy and Capability Assessment

23 In fact, most respondents have an intermediate level of collaboration with suppliers. More than half mention strategic alliance with key suppliers, and seven in 10 have collaboration supported to some degree by governance structures (such as service-level agreements) or benefits sharing. However, the level of collaborative relationship with customers varies for each specific key retailer. Half of respondents noted an advanced or preferred supplier relationship with a leading supermarket, whereas almost the same percentage of respondents claim to have a basic or transitional relationship with another leading supermarket, thus pulling down the overall level of collaboration with customers. It also is worth noting that the respondents with larger turnovers typically scored higher on the collaborative capability. Yet, overall the collaboration with customer score is one of the lowest in the tool. From retailers perspective, a reliable supply chain is the highest priority and the cost of entry to having a partnership. Retailers currently view collaboration as being poorly conducted at present, with one stating that a lack of trust and understanding of what good looks like is a major hindrance today for both sides. In the future, though, retailers are hoping for a much higher degree of collaboration. One told us that true end-to-end and long-term supply chain collaboration drive(s) true value to our shared customer/shopper. Ultimately, the industry needs to work with its customers to develop a model for collaboration in Australia. Risk-managed Definition: The ability to proactively identify and evaluate risks across the supply chain and translate this into an effective risk mitigation plan. Includes (a) risk recognition and evaluation and (b) supply chain mitigation. Figure 19 Risk-managed Current and future priority 44% 38% Current 25% 31% 44% Future (3-5 years) % in top 3 Other % in bottom 3 Currently the risk-managed capability is a top-three priority for one in five respondents and a bottom-three priority for nearly two in five respondents (see figure 19). Respondents seem to feel that this capability ranks fairly low. Yet, when we examine their priority for its future, we can see that organisations are increasingly split, with nearly half placing it in their bottom three, and one-quarter placing it in their top three. The industry is highly capable of managing risk, leading to its low prioritisation (see figure 20 on page 20). With a median aggregate score of 3.5, this represents the highest capability score of all areas, and companies may feel that they have the appropriate systems and processes in place to manage it effectively. Supply Chain Strategy and Capability Assessment

24 Figure 20 Risk-managed Current capability Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Riskmanaged Risk recognition and evaluation Supply chain mitigation The risk recognition and evaluation dimension is high, with a median score well within stage four. Indeed, half of the respondents recognise standard supply chain risks and assess their impact on business continuity every six to 12 months. The supply chain mitigation score is higher still, with a median score of 4.0. Here we note that more than two out of every three respondents have network risk-mitigation plans in place, with established processes to manage different risk types across the supply chain, including suppliers and third parties. It also is worth noting that the respondents with larger turnovers typically scored higher on the risk-managed capability. The industry is highly capable of managing risk, leading to its low prioritisation. Flexible Definition: The degree to which events and unforeseen circumstances triggered by changes in customer, supplier, product, and processes can be managed on short notice. Includes (a) supplier, (b) customer, (c) products, and (d) processes. The capability for flexible is featured as a top-three priority for just one in five respondents and as a bottom-three priority for one in three, indicating that the majority of respondents placed low emphasis on it (see figure 21 on page 21). When we turn to the future, the view is even more negative, with half of respondents placing it in their bottom three, and nearly no one placing it in their top three priorities. Supply Chain Strategy and Capability Assessment

25 Figure 21 Flexible Current and future priority 50% 31% 6% 44% 50% % in top 3 Other % in bottom 3 When we examine the current capability of flexible, we see that the median current score is 2.6, or in the third SoE (see figure 22). This is a surprisingly high score given the relatively low prioritisation. To a large extent, this may be driven by reaction to major Australian customers demand for flexibility, rather than sustained investment to improve this capability. Current Future (3-5 years) This phenomenon is elaborated upon further in the dimensions, where all four pull from both sides on the overall flexible score, with the supplier and products dimensions placing negative pressure on the aggregate score, and the customer and processes dimensions raising the score (see figure 22). Respondents had an overall negative view of supplier flexibility, with nearly half of the companies reporting that significant effort and notice are required to manage changes in supplier specifications, and four of five stating that the supply chain is dependent on a singlesourced supplier for critical materials or services. Thus, the capability to be flexible is more a by-product of customer behaviour rather than a sustained investment to develop a flexible supply chain. Figure 22 Flexible Current capability Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Flexible Supplier Customer Products Processes Supply Chain Strategy and Capability Assessment

26 Adaptive Definition: The ability to respond to more structural changes (internal and external) produced by the overall strategy as well as product and customer requirements. Includes (a) changes in corporate, (b) product and customer, and (c) operations strategies. Figure 23 Adaptive Current and future priority 6% 31% 6% 13% Only one respondent ranked the adaptive capability as a current top-three priority; it was a bottom-three priority for more than three in five, ranking low overall (see figure 23). Regarding the future, we note that respondents became even more negative, with more than four out of five placing it in their bottom three priorities. 81% 63% Current Future (3-5 years) % in top 3 Other % in bottom 3 The median current score is 2.9 for adaptive, nearly placing it in the fourth SoE (see figure 24). This is unusually high for a capability and explains the low prioritisation, which is mirrored by retailers who state that adaptability is interesting, but not core to our strategy with suppliers. Figure 24 Adaptive Current capability Adaptive Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Changes in corporate strategy Product and customer strategy Operations strategy Supply Chain Strategy and Capability Assessment

27 Complexity-controlled Definition: The degree to which complexity driven by the product and service portfolios, customers, and suppliers is managed across the supply chain. Includes (a) product and services portfolios, (b) customers and channels, and (c) suppliers. Figure 25 Complexity-controlled Current and future priority 13% 38% 50% 0% 13% 88% % in top 3 Other Currently the complexity-controlled capability is featured as a top-three priority for just one in six respondents and as a bottom-three priority for about half of all respondents (see figure 25). We gather this to indicate that the majority believe that controlling complexity is a relatively low priority. Looking to its future importance, we can see that organisations are not increasing their focus on this area, with nearly all respondents placing it within their bottom three priorities. Current Future (3-5 years) % in bottom 3 Turning to the current levels of capability, we can see that with a median score of 2.4, the control of complexity is not a strong capability for most organisations (see figure 26). From the retailers perspective, the complexity-controlled capability also rates low both today and as a future focus, indicating that both manufacturers and retailers are aligned on this capability. This is not necessarily good news, however. The industry as a whole is not focusing on complexity control, which is fundamental to developing a lean supply chain. Figure 26 Complexity-controlled Current capability Complexitycontrolled Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Product/service portfolio Customer and channels Suppliers Supply Chain Strategy and Capability Assessment

28 Accurate Definition: The degree to which relevant supply chain information is timely and correct. Includes (a) performance, (b) transactional, and (c) static. Figure 27 Accurate Current and future priority 56% 25% Current 81% Future (3-5 years) % in top 3 0% Other % in bottom 3 More than half of the tool s users ranked the capability to be accurate as a top-three priority, while nearly one in five placed it in their bottom three (see figure 27). Overall, accurate is a high-priority area. Turning to the future for this capability, it is ranked even more strongly, with four out of five respondents placing it in their top three, making it the second-most prioritised future capability. When we turn to the current capability for accurate, we see that the median score is 2.6, or in the third SoE, a relatively low overall score for a high-priority capability. Examining the dimensions sheds more light on the SoE score (see figure 28). More than half of companies reported that it is rare to have accuracy-related issues and concerns regarding the information provided to a customer. Indeed, while three-quarters of companies review and revise production parameters and four out of five review replenishment parameters regularly, it is important to note that nearly no companies surveyed go through the same process for contract parameters. Furthermore, three-quarters of respondents have clearly defined performance accountability to monitor the accuracy of operational KPIs, and two in five have manual control processes in place rather than automated ones. Retailers see accuracy as a foundational capability: beefing up systems and processes for a high degree of control is important. Figure 28 Accurate Current capability Accurate Stage 1 Stage 2 Stage 3 Stage Industry min/max Median Performance Transactional Static Supply Chain Strategy and Capability Assessment

29 Green Definition: The degree to which the end-to-end supply chain is environmentally responsible and uses natural resources effectively. Includes (a) reduction of pollution and (b) end-of-life management. Figure 29 Green Current and future priority 6% 6% 88% Current 63% Future (3-5 years) % in top 3 Other % in bottom 3 The capability to be green has yet to take root with food and grocery manufacturers. Essentially no respondent ranked it in the top three, and nine out of 10 placed it in their bottom three (see figure 29). Indeed, it is the absolute lowest priority for two of every five respondents to the survey. Looking to the future importance of the green capability, we can see that organisations hope to make their supply chains slightly greener, with the number of respondents placing it in their bottom three falling to six in 10. The low priority for being green is clear in the current capability as well, with a median score of just 2.3 (see figure 30). However, it is important to note that there is opportunity for the industry here, considering we are in an era when consumers increasingly value ecologically friendly products. Regulatory action may force the industry s hand as well. Figure 30 Green Current capability Stage 1 Stage 2 Stage 3 Stage 4 Industry min/max Median Green Effective and responsible use of natural resources Reduction of pollution End-of-life management Supply Chain Strategy and Capability Assessment

30 Realities and Trends: What They Mean for AFGC Members As we noted early on in this report, food and grocery manufacturers that used the survey s tool admit that they have broadly pursued a responsive supply chain strategy but are planning to move toward a competitive supply chain based on their priorities (see figure 31). They see partnering with customers to a certain extent, a trend that is further reinforced in the long-term prioritisation of their capabilities. Figure 31 Trends in supply chain strategy (% of respondents) Competitive Partnered Responsive 25% 56% Sustainable 0% Competitive Partnered Responsive 63% 6% Sustainable 31% 0% Competitive Partnered Responsive 63% 6% Sustainable 25% 6% Current capability Current priority Future priority Collaboration An enabler of future performance A shift toward a partnered strategy even a limited one requires collaboration, a fact that everyone acknowledged is important for taking the next evolutionary step in supply chain performance in Australia (see figure 32). Consequently, it would benefit AFGC members Figure 32 Collaboration dimensions Supplier Customer Internal The performance score for customer collaboration rated at 2.0, the second-lowest score in the survey Only of respondents rated collaboration as a top-three capability, with 50% rating it as a top-three priority for development This is one of the widest gaps between current collaboration capability and priorities for the future Customers continue to see an opportunity for improvement, even in internal collaboration, to enable a single voice from suppliers Supply Chain Strategy and Capability Assessment

31 greatly to work with their customers now, particularly in developing commercially viable ways to work together. In fact, customers have clearly stated a desire to collaborate, especially as a way to increase transparency. Ironically, the customer-collaboration dimension is the lowest-scoring element across the survey, outside of the capability to be green. It produced one of the widest gaps between current capability and priorities for the future. Yet, customers continue to see an opportunity for improvement, even in internal collaboration, to enable a single voice from the industry. Customers have clearly stated a desire to collaborate, especially as a way to increase transparency. Only large companies (with revenues greater than $1 billion) are planning to increase their focus on collaboration, however, which is a cause for concern (see figure 33). Smaller companies are more in step as they continue to focus on developing competitive supply chains, yet suppliers and their customers will likely need to prove the case and methodology for collaboration, so that smaller manufacturers can justify diverting more resources to alliances. Figure 33 Increasing focus on collaboration (% of respondents with top-three priority large vs. small companies) +34% 67% 33% 38% 38% Current priority Future priority Current Future Current Future Large companies (>$1 bn in net sales) Others ($0-1 bn in net sales) Controlling complexity A critical and undervalued capability The growing complexity of supply chains and their effect on flexibility is another area that survey respondents repeatedly acknowledged as a concern (see figure 34 on page 28). This trend is driven primarily by increasing: Complexity in stock keeping units, spurred by a strong demand for customisation to respond to the needs of customers, consumers, and specific channels Supply Chain Strategy and Capability Assessment

32 Figure 34 Complexity management Complexity capability Complexity priority Increase in complexity mentioned as a major upcoming trend in the survey Only 13% of the respondents have mentioned complexity as a top-three current priority No respondent has mentioned complexity as a top-three priority for the future Commentary is focused almost entirely on suppliers 0 Product and services portfolio Customer and channels Suppliers Preference for new channels (such as e-channel and OMNI channel) Complexity in the logistics network (including direct delivery to consumers and business-to-business shipments) Customer expectations for higher service levels Regulations, such as the Food and Grocery Industry Code of Conduct Despite the expectations for greater complexity, not a single company included its management as a top-three priority for the future. What s more, current performance in complexity management is highly inconsistent across the industry, with no company placing this capability among their top three, and 13 percent placing it as their lowest priority. Poor complexity management can increase risks and cost while significantly reducing a supply chain s speed. It is imperative that Australia s FMCG companies reconsider this area as a critical capability for the future. Leadership Voice of the supply chain Our analysis suggests that there is a high correlation between the priorities of the supply chain and the voice that it has in executive leadership (see figure 35 on page 29). The greater upper management s regard, the stronger precedence a supply chain has for developing reliability and transparency. On the flip side, without a strong voice and mandate, leadership does not see the supply chain as a vital pillar for its strategy, instead regarding it as a cost centre to be optimised to the lowest cost at the expense of long-term sustainability. Even in the mid- to long term, these companies are not actively looking at the opportunity to develop deep relationships with suppliers and customers in order to create more value for the industry. We see this trend even though, on the stages of excellence framework, companies with direct representation in executive leadership score higher on the competitive scale (2.7 versus 2.4) and on the partnered scale (2.8 versus 2.1). Supply Chain Strategy and Capability Assessment

33 Figure 35 Impact of voice in executive leadership Current priorities Future priorities 48% 31% 47% 31% 18% 18% 16% 20% 23% 26% Competitive Partnered Responsive Sustainable 16% 21% 24% 24% Competitive Partnered Responsive Sustainable Not represented Represented Not represented Represented Areas of opportunity A review Supply chain capabilities Supply chain strategy Competitive Capability Lean Fast Reliable Supply chain capabilities Developing consistent and automated measurement of key supply chain metrics can help create lean supply chains in the industry. Organisations can increase the speed of their supply chains by focusing on their inbound supply chains and information flows. Improve the tracking of promise and performance to fill the only gap seen by the industry in its capability to be reliable. Partnered Transparent Increasing the information received from suppliers is key to improve transparency. Collaborative Collaborating more with customers will greatly benefit the industry in the future. Responsive Risk-managed The industry is highly capable of managing risk, making other areas greater priorities. Sustainable Flexible Adaptive Complexitycontrolled Accurate Green The capability to be flexible is more a by-product of customer behaviour than a sustained investment in developing this area. While no company regarded this capability as a priority, that fact may create a currently unforeseen opportunity for someone insightful in the future. While most companies are not focusing on controlling complexity, those that do may avoid significant issues in the future, as it is an essential capability to develop lean supply chains. A strong focus on accuracy is important until companies put in place systems and processes that ensure a high degree of control. While no company made this capability a priority, consumers value it highly, which could pose opportunities for open-minded and creative managers of supply chains going forward. Supply Chain Strategy and Capability Assessment

34 Supply Chain Strategy and Capability Assessment

35 Appendix Supply chain dimensions All capabilities Capability Lean Dimension Measurement Empowerment Reach Definition How well the supply chain measures and tracks its use of resources (such as headcount, productivity, utilisation, and waste) How well the supply chain empowers its people with training, tools, and methodologies to minimise waste and effectively communicate its ambition at all levels of the organisation How thoroughly, effectively, and widespread (in depth and breadth) the supply chain implements lean activities end to end Fast Inbound How readily suppliers can be mobilised for quick replenishment whenever necessary Reliable Transparent Outbound Information Definition of service agreements Tracking promises and performance Proactively addressing service issues Information available to suppliers Information available from suppliers Internal information Information available to customers Information available from customers How well customers can be served within very short lead times How quickly and seamlessly information can be shared with internal and external stakeholders The extent to which supply chain promises to customers are in line with the ability to deliver How well the supply chain differentiates promises to various customers How well the supply chain tracks promises made to customers against their delivery The extent to which the supply chain communicates changes to customer promises, tracks revised delivery performance, and adjusts to improve performance How well information is passed to suppliers to improve the supply chain How well information is received from suppliers to improve the supply chain How well information is diffused within the organisation The extent to which information is passed to customers to improve the supply chain How well information is received from customers to improve the supply chain Collaborative Supplier Effective collaboration with key suppliers during planning or product development Customer Internal Other companies/ organisations Effective collaboration with key customers on demand planning or product development Effective cross-functional collaboration through sales and operations planning Effective collaboration with competitors, other companies, and research institutes on areas including new product development, product components, and shared logistics infrastructure Supply Chain Strategy and Capability Assessment

36 Appendix Supply chain dimensions All capabilities Capability Risk-managed Dimension Risk recognition and evaluation Risk-mitigation system Definition The effective recognition and evaluation of risks (including health and safety issues) in the extended supply chain The effective prevention of events and mitigation of their impact How well the supply chain responds to significant external events (such as earthquakes, embargos, and civil disruption) Flexible Customer How well the supply chain handles changes in customer requirements at short notice Supplier Product Processes How well the supply chain handles changes in raw-material or intermediate-goods specifications on short notice How easily the supply chain switches raw material or packaging How well the supply chain handles changes in product specifications How well location changes (such as for production) can be accommodated at short notice How well the supply chain handles internal logistics changes at short notice How well the supply chain manages changes to company processes at short notice Adaptive Corporate strategy How well the supply chain supports and drives the overall business and corporate strategy in the medium to long term (including market entry, geographic expansion, and mergers and acquisitions) Complexitycontrolled Product and customer strategy Operations strategy Portfolio management Customer How well the supply chain supports and drives changes in product and customer requirements in the medium to long term (including substantial product portfolio changes and new product introductions) How well the supply chain transforms to proactively adapt to mediumand long-term changes (such as those to the network, input costs, material availability, and new technologies) The presence and use of a structured portfolio-management process to limit the proliferation of raw materials, formulations, packaging, and SKUs Supporting this process with a strong fact base to understand the costs of complexity Having a high degree of standardisation in the product portfolio Having a high degree of standardisation in the customer portfolio The ability to handle the additional complexity of customer requirements with ease Having a process to approve and facilitate exceptions to standard levels Having a process to clean up exceptions over time Supply Chain Strategy and Capability Assessment

37 Appendix Supply chain dimensions All capabilities Capability Complexitycontrolled Dimension Supplier Definition Having a high degree of standardisation in the supplier portfolio The ability to handle the additional complexity of supplier requirements with ease The extent to which supplier requirements are brought back to a standard set The establishment of a process to approve and facilitate exceptions to standard levels Having a process to clean up exceptions over time Accurate Performance How well the supply chain controls the accuracy of KPIs Green Transactional Static Planning Effective and responsible use of natural resources Reduction of pollution End-of-life management How well the supply chain controls the accuracy of information given to suppliers and customers How well the supply chain controls the accuracy and relevance of master data How well production and sales match with production and supply capacity How effectively the supply chain measures, uses, and reduces waste of natural resources (such as water, raw materials, energy, and ecosystems) How effectively the supply chain measures and reduces polluting emissions (such as CO2) The extent to which product disposal is well-managed (including recycling instead of using landfills) Supply Chain Strategy and Capability Assessment

38 Supply Chain Strategy and Capability Assessment

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