Globalization: Linking Supply Chain Transformation to the Profit and Loss Statement

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3 June 2013 Globalization: Linking Supply Chain Transformation to the Aberdeen Group's Chief Supply Chain Officer (CSCO) Survey (January 2011) collected data from 191 companies of which 56 claim to have active C-level support for supply chain process/technology investments. Findings from that survey were shared at Aberdeen s Supply Chain summit (March, 2011) and indicate that globalization is driving change and transformation across virtually every process step of the inbound-to-outbound supply chain for companies of all sizes and industry segments. This Analyst Insight will explore how the 56 companies with active C-level involvement are approaching the global expansion of their supply chains relative to their peers. It will examine the improvement areas addressed by these C-level Supply Chain Executives. This examination will trace 21key inbound-to-outbound process steps through a process hierarchy and link these actions to the benefits they yield to the company profit and loss statement, balance sheet and cash flow statement. This document demonstrates the types of capabilities that companies are leveraging and highlights case studies and business results. This document is intended for use as a decision framework for supply chain transformations that yield positive net contribution to the company's bottom line. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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6 Page 6 Globalization / Complexity is Dominating the CSCO Agenda According to the study, Figure 1, the top business pressures facing the C-level Supply Chain Executives or the office of the CSCO are the impact of increasing supply chain complexity as well as rising supply chain management costs (55% and 43% respectively). Figure 1: Top Business Pressures: Globalization and Supply Chain Cost / Complexity C-Level Executives Growing complexity of global operations (e.g., longer lead times and lead-time variability, or increasing numbers of suppliers, partners, carriers, customers, countries, logistics channels) All Others 25% 55% Rising supply chain management costs (e.g., total landed costs, fuel, labor costs) 43% 51% 0% 20% 40% 60% Percent of Respondents, n=191 Source: Aberdeen Group, January 2011 The overseas supplier base (Figure 2) continues to grow relative to a given company's home country with up to 64% of all groups claiming suppliers in China and 56% claiming suppliers in Europe. Although the customer base is expanding globally, supply and demand remains unbalanced (e.g., China for represents 64% of supply but only 34% of customer demand). This imbalance increases complexity putting time and distance between source and customer.

7 Page 7 Figure 2: Global Sourcing and Customer Demand is Driving Supply Chain Complexity and Transformation Canada 35% / 48% USA 77% / 73% South America 25% / 38% Europe 56% / 55% Africa & Mid East 14% / 38% Asia Pac 64% / 31% Southeast Asia 29% / 37% Suppliers Black Customers Red Australia and Pacific 16% / 39% Percents equal numbers of all companies having suppliers or customers in each region. Source: Aberdeen Group, January 2011 For years companies have been transforming their domestic supply chains and have harvested double digit reductions in cost per unit handled in areas such as transportation (International Transportation: Optimize Cost and Service in a Global Market; July 2010). Supply chains that were once purely domestic have now gone international as an increasing number of shipments flow across borders and supply and demand imbalances increase. But the harvested reductions from supply chain transformation are largely tapped. What companies are realizing is that many of the benefits derived from their finely tuned / optimized domestic supply chains are being cancelled out by their poorly performing global supply chain (Figure 3).

8 Page 8 Figure 3: Global Complexity Degrades Cost/Service Compared to Domestic Supply Chains International visibility from satellites and cloud technology Improved Cost/Time Degraded Cost/Time DEMAND Global Air Customs Delay, Broker Customers (Forecasting) Plant (Mfg Planning/ Execution) Customs Delay, Broker Transportation (TMS) Ocean Freight Forwarder Retail Store (Forecasting) Global DC (Warehouse Mgmt) Ocean Component Supplier Raw Materials Supplier SUPPLY Longer lead-time and increased multi-party handoffs like customs degrade performance Source: Aberdeen Group, September 2011 In Figure 3 we can see that the efficiencies between parties and process steps that are optimized in the domestic supply chain (the green arrows) are now in imbalance and degraded by the new complexities of the global supply chain (the red arrows).

9 Page 9 Companies tend to optimize the process steps which they can see and over which they have direct control. The domestic supply chain has benefited from this fact with respect to the following advanced process methodologies: Just-in-Time (JIT) Lean and Six Sigma Internal and external process collaboration Automation: Supply chain and manufacturing planning and execution Inventory optimization and forecasting Transportation management systems Warehouse management systems The positive impact from these process and automation tools has been significant for the domestic supply chain. Unfortunately, many of the benefits they produced domestically have fallen out-of-balance and focus as the supply chain has become more global (Table 1). Globalization and supply chain complexity is opening up new avenues for optimization and transformation across the growing multi-tier global supply chain. The processes and technologies to manage the new global inbound-to-outbound flow of finished goods, parts or raw materials are much less mature / efficient than domestic operations, as are the processes and technologies to manage the outbound flow of goods. Islands of peak domestic performance are sandwiched between poorly performing global supply chains across each continent (Figure 3). In the next sections, we examine the areas of global supply chain improvement by tracing the flow of product and information through each process step in the extended supply chain and applying the same process and automation techniques across the new areas of imbalance that now exist.

10 Page 10 Table 1: Domestic vs. Global Supply Chain Performance / Complexity Imbalance Domestically Optimized Cycle Times Cost Global Breakdown Impacts Cycle Time Cost Optimized domestic transportation plan Mainly Improved Mainly Improved Expedited airfreight Failure to select low cost ocean carrier Degraded Degraded Just in Time (JIT) manufacturing plan Mainly Improved Mainly Improved Parts or raw materials being delayed at Customs Degraded NA Optimized inventory plan Mainly Improved Mainly Improved Excess safety stock required to offset lack of visibility into extended global supply chain Degraded Degraded Finding lowest cost supplier NA Mainly Improved Failure to take advantage of preferential duty programs NA Degraded Source: Aberdeen Group, September 2011

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12 Page 12 Capabilities by Process Step Inbound to Outbound The global landscape is changing and the new priority for the office of the CSCO has shifted to supply and demand synchronization across each linked process step in the extended supply chain. The level of capability the average company has when it comes to coordinating information and synchronizing operations across these process steps from source to end consumer has been explored in a recent study (Supply Chain Visibility: Fostering Security, Resiliency, and Efficiency, February 2011). In Figure 4 and Figure 5, we plot the degree of automation from the 183 companies mentioned in the February study across the Best-in-Class (top 20% of aggregate performance scorers), Industry Average (the middle 50% of aggregate performance scorers) and Laggards (the bottom 30% of aggregate performance scorers) - see sidebar on previous page. Examining these companies across 21 key inbound to outbound process steps we can better understand process weaknesses and isolate potential areas of improvement. As we discovered in prior studies, companies of all sizes and classes are hampered in their ability to track, monitor and synchronize supply chain process steps with trading partners. Generally, only about 30% (average of blue bars in Figure 4) of companies have automated data and event monitoring and/or have optimized process capabilities in place. From source to destination, the 13 inbound process steps or milestones needed to synchronize product and information flows are still being monitored manually (phone, fax and ) in up to 49% of all companies.

13 Page 13 Figure 4: Inbound Process Steps from Source to Destination/Country Monitor with our visibility software Monitor manually (e.g., via phone / fax / ) Order acknowledgment by supplier 38% 49% Order acknowledgment matches purchase order Supplier invoice status (for invoices we receive from suppliers) Raw material arrival at supplier 16% 38% 44% 28% 43% 42% Suppliers projected production plans 9% 43% Suppliers production in-process events 7% 43% Quality control passed Advance shipment notice (ASN) created by supplier ASN matches purchase order Carrier pickup of goods (INBOUND) In-transit status events at shipment level (INBOUND) In-transit status events at order line level (INBOUND) Customs clearance events (INBOUND) 23% 31% 30% 31% 31% 28% 25% 43% 39% 42% 43% 42% 42% 46% 0% 20% 40% 60% 80% 100% Percent of Respondents, n = 183 Source: Aberdeen Group, February 2011

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15 Page 15 The good news is that leading companies have superior financial and service metrics (see sidebar on the previous page for definitions) and also are several times as likely as their peers to automate many of these events. For instance, compared to the Industry Average and Laggard companies combined (all others), the Best-in-Class are more frequently measuring and automating events for inbound: Suppliers projected production plans times more likely to track than all others (68% of the Best-in-Class monitoring this milestone) Customs clearance events (inbound) times more likely to track than all others (90% of the Best-in-Class monitoring this milestone) In-transit status events at order line level (inbound) times more likely to track than all others (87% of the Best-in-Class monitoring this milestone) On the outbound side (Figure 5) eight additional linked process steps are plotted and the picture is almost identical. In the typical sequence of event flow (i.e., outbound from shipment/pickup to proof of delivery and settlement) the degree of visibility/collaboration and automated monitoring and control ranges from 24% to 45% (blue bars). So across warehousing, pickup, outbound transportation/delivery, and payment anywhere from 28% to 49% of respondents claim they are still manual (phone, fax and ).

16 Page 16 Figure 5: Outbound Process Steps from Receiving to Customer Delivery and Payment Monitor with our visibility software Monitor manually (e.g., via phone / fax / ) Warehousing events Carrier pickup of goods (OUTBOUND) In- transit status events at shipment level (OUTBOUND) In- transit - status events at order line level (OUTBOUND) Trucking (haulage) events 35% 37% 31% 27% 24% 42% 45% 47% 46% 48% Proof of delivery to customer Customer invoice status (for invoices we send to customers) Bank interactions 38% 45% 41% 51% 36% 31% 0% 20% 40% 60% 80% 100% Percent of Respondents, n = 183 Source: Aberdeen Group, February 2011

17 Page 17 Once again the good news is that leading companies are performing better and are several times as likely as their peers to automate many of these events. For outbound compared to all others the Best-in-Class from the study are more frequently measuring and optimizing: Trucking (haulage) events times more likely to track than all others (84% of the Best-in-Class monitoring this milestone) In-transit status events at order line level (outbound) times more likely to track than all others (84% of the Best-in-Class monitoring this milestone)

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20 Page 20 Linking Process Step Improvements to ROI Expectations by Investment Choice Today s CSCO has many choices to select from when it comes to improving product and information flows and synchronizing events from source to consumer in the extended global supply chain. From our research we see how the C-level Executives are ranking the various investment choices they have in terms of ROI or payback expectations. In our survey we asked the all respondents that were planning investments in one or more competing technology areas such as visibility, transportation, or trade compliance to indicate their interest in investment / improvement by technology type (Table 2).

21 Page 21 Table 2: Supply Chain Process Improvement ROI Investment Decision Matrix C-Level Executives - In 12 Months Planning to Enhance/Acquire Supply Chain Solutions C-Level Executives Expected ROI All Types Supply Chain Visibility or SCV Supply Chain Network Design Transportation Management or TMS Trade Compliance Percent Companies Planning 84% 82% 73% 33% 0-6 months months months months - 2 years years years More than 5 years Total Companies Planned Months to ROI Percent expecting less than 1 year ROI % 30% 27% 32% 35% C-Level Active companies (56 of 191companies) Source: Aberdeen's Chief Supply Chain Officer Survey, January 2011

22 Page 22 Across the top of the matrix are the various technology types ranging from Supply Chain Visibility (SCV) at 84% of the investment responses, or 43 interested C- level respondents, and ending in Trade compliance (GTC) or import/export initiatives at 33% of the responses (17 companies). In the middle section of the matrix, there are the ROI financial payback hurdles planned or justified for each solution type and company for the 56 respondents. These respondents claim that C-level Executives and the office of the CSCO are active in supply chain investment decisions. Overall, there is an average ROI expectation of 18.2 months to payback. Some of the companies are targeting paybacks in less than one year and the percent of companies with that expectation is in the last row. From the ROI matrix we can observe several key points: The popularity of a given investment choice is ranked from left to right and the first two items SCV through and supply chain network design are closely ranked within the 82% to 88% range and they each have a payback within one month of the overall average of 18.2 months until planned payback. Supply chain visibility the top ranked option at 88% compares favorably with the next ranked supply chain network design. Likewise 30% of the companies have a planned payback on SCV within the first year. This is promising indeed for companies wanting to justify the SCV investment choice. Transportation management, with 73% popularity, is the most mature software area within supply chain execution (40% to 60% of companies claim they use a commercial package already). The fact is, however, most of the transportation management solutions companies have deployed to handle their domestic transportation do not address global transportation (i.e., ocean, air, cross-border rail). For instance we know that over 86% of companies are global but only 20% can claim that their TMS can handle import/export documentation (see sidebar).

23 Page 23 Finally, the fact that Trade Compliance or Import/Export stands at (33%) further illustrates the imbalance between domestic and global supply chains. While 86% of companies surveyed are global, only 20% reported having a formal Global Trade Compliance program for their global shipments. Ironically, GTM is likely the most important enabler and requirement for global expansion, but the least understood or addressed. Generally C-level executives and CSCOs are less familiar with Trade Compliance than other supply chain areas, but those who do understand it expect strong returns. In fact Trade Compliance had the highest percentage of respondents (35%) expecting a payback in less than a year. As Appendix A highlights, Trade Compliance is the source of strong financial returns and can help organizations to overcome the domestic vs. global supply chain performance imbalance depicted in Table 1 and Figure 3.

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26 Page 26 Linking Process Step Improvements / Benefits to the Profit and Loss Statement We have shown in Figure 3 and Figure 4 how product and information are synchronized and flow across a series of 21 key process steps in the extended supply chain. We can also see the various solutions and investment choices that the supply chain executives have to choose from in bridging process and technology gaps (Table 2, ROI Decision Matrix). Each investment choice yields an expected payback and we have ranked those expectations in the decision matrix for comparison. However, even a top ranked choice like supply chain visibility or a regulatory requirement like global trade compliance have different financial implications from company to company (even from supply chain to supply chain). Each company has different operating profiles, technology infrastructure, and partnering requirements which should always be matched to the solutions that best fits their current operating needs. In this section, we introduce the reader to the detailed Global Supply Chain Process Steps Linked to Profit & Loss Hierarchy, in Appendix A. Compiled from analyst experience and numerous reference documents, customer interviews, and case studies (see Related Research Section) this table provides a chronology of supply chain Process Steps (2nd Column) across various dimensions (Process Area, Improvement Area and Financial Savings, and the Solutions or Investment Area). These dimensions are linked or matched to a particular category or benefit on the P&L Statement. In addition, sample savings calculations from our research across numerous research topics and insights from case study interviews are included. All in an effort to qualify the transformation efforts, and document the types of benefits companies have derived by improving various process steps in their global supply chain. The detail provided is comprehensive - covering the full range of inbound to outbound process steps - and links P&L benefits into an overall sequenced hierarchy of supply chain transformation options. Examined appropriately and in conjunction with the ROI Decision Matrix, this appendix provides a detailed primer for end-to-end supply chain transformations that can yield benefits that flow directly to the bottom line.

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28 Page 28 Recommendations and Summary Conclusions As the degree of global collaboration grows, and global supply chains become more expansive and complex, it is likely that collaborative processes, systems and platforms will gain added popularity. These trends also give rise to the growing complexity and multi-tiered nature of today's supply chain and in turn feed the next cycle of change and beget further global transformations. This document explores the capabilities and ranks the technologies that 56 companies that have active C-level support for supply chain process/technology investments are prioritizing for deployment. It demonstrates the manner in which supply chain executives can examine their options and derive supply chain value through a step by step assessment of each linked process step in their end to end supply chain. Aberdeen recommends that supply practitioners consider adopting the following three steps as they use this insight to identify supply chain transformation opportunities: 1. Start with process. Many companies jump right to technology first without taking careful consideration of the process first. Using this primer and the linked process step hierarchy identify your process gaps and streamline/reengineer them first with careful consideration given to where the P&L benefits are. Once you have identified which process steps remain in your transformation plan determine which of these can be enhanced and begin to quantify the specific cost/benefit they bring to your P&L and your value proposition. 2. Select technology appropriately. Using the cost benefit inputs developed in the first step, begin to link together areas of technology / service improvements that are required support the transformed supply chain. ROI analysis requires you estimate the costs of the technology investment offset by the benefits you quantified in isolation in the first step. In this step you can tie the specific benefits at each process step to an aggregated view of P&L benefits across all linked process steps to which the particular technology investment applies.

29 Page Equip and train your staff. Supply chain transformation is not simply the implementation of reengineered process or advance technology it requires people, who must be equipped. Train and build a center of excellence around people, process and technology that spans an understanding of fundamental process linkages and training in systems and technology. No transformation is complete if the people cannot properly leverage technology or do not utilize it properly. This document provides guidelines for ROI savings and transformational activates that can ultimately improve productivity and increase company profits. As companies adapt to the globalization of their supply chains these recommendations and guidelines can equip supply chain executives with actionable steps they can take to bolster performance and address each challenge. For more information on this or other research topics, please visit Appendix A: Global Supply Chain Process Steps Linked to Profit and Loss Hierarchy

30 Page 30 Related Research 2011 Transportation Contract, Tender and Spend Management; April 2011 Supply Chain Visibility: Fostering Security, Resiliency, and Efficiency; February 2011 International Transportation: Optimize Cost and Service in a Global Market; July 2010 State of Retail Logistics: Strengthening Cross- Channel Supply Chain Execution; March 2010 Supply Chain Visibility Excellence: Reduce Pipeline Inventory and Landed Cost; December 2009 Integrated Transportation Management: Improve Responsiveness with Real-Time Control of Execution; October 2009 Evaluating Logistics Outsourcing: Look Before You Leap!; October 2009 Tending the Fleet: Paving New Roads with Effective Fleet Management; September 2008 No Excuses! Why Optimizing Transportation Management is Within the Reach of Every Company; July 2008 Achieving Closed-Loop Transportation Spend Management; January 2008 Bob Heaney, Senior Research Analyst, SCM Practice (bob.heaney@aberdeen.com) For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen or call (617) , or to learn more about Harte-Hanks, call (800) or go to This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.