Leveraging the Supply Chain: How Manufacturers Can Improve Profits
While many companies have grown from small local enterprises to become global leaders in their industries, more than 80 percent of them fail to capture the full returns of their global investments, according to a new study conducted by Deloitte Touche Tohmatsu (New York).
"Most global manufacturers focus on addressing the individual pieces of their far-flung global network--the complex web of suppliers, production and R&D facilities, distribution centers, sales subsidiaries, channel partners, and customers, and the flow of goods, services, information, and finance that link them--that comprise their supply chain," says Gary Coleman, global manufacturing industry leader.
"The negative impact of failing to take a holistic, global view of the business can be devastating," warns Coleman. "The result for a company is often suboptimal improvements, wasted resources and lackluster performance."
In its study, Deloitte Research analyzed data from nearly 800 companies, representing diverse industries, including aerospace and defense, automotive, industrial and consumer products, high technology, and telecommunications equipment, ranging in size from less than $50 million to more than $1 billion in revenues.
Only about one in 10 companies has undertaken significant efforts to optimize its global networks over the last three years. "So it is not surprising that supply chain cost structure is in last place among competitive capabilities in all of the industries we have studied," Coleman points out.
According to the study, the few manufacturers that have continuously invested resources to improve their global supply chain network as a whole--less than 15 percent of the most global companies studied--have been rewarded with significantly improved operational performance and profit levels that are 50 percent higher than those of their global peers. In one case, a leading industrial products manufacturer gained a 75 percent annual profit improvement by pursuing continuous optimization, through improved customer service and lower overall cost base.
"Optimizing a global operation is not an easy task," says Coleman. "Leading manufacturers have mastered this capability by building an optimization infrastructure to align people and organizational structures, business processes and technology platforms. They factor competitive drivers such as revenue growth, cost management targets, infrastructure and product innovation into their global network design." Other critical factors include global and local compliance drivers, such as local regulations and tax issues, and organizational issues.
"People issues are critical," adds Coleman. "Often, the biggest obstacle to optimizing networks is the role of the existing organization and incentive structures in the global organization. We observed a large company that had to forgo about 50 of the improvement opportunities they could have realized from global optimization because of people and organizational issues. This clearly affects future profitability--the linchpin of shareholder valuation."
According to Coleman, as companies expand around the world, creating the capabilities to ensure that existing and new investments are holistically and continuously optimized is crucial for unlocking the true value of globalization. Both competitive and compliance drivers must be considered. Competitive drivers include revenue growth, cost management targets and innovation. Compliance drivers include regulation, tax issues and intellectual property protection.
Failure to consider these drivers during global expansion can carry a high price tag. For example, one company outsourced its global manufacturing operations to reduce costs but ended up with a higher cost structure because of the impact of regulations and duties. Taking tax into consideration when optimizing a global supply chain, the bottom-line profit improvement is nearly 100 percent higher than if tax considerations are excluded, Coleman estimates.
Access to information on key metrics is important to enable decisions to be made. However, fewer than 12 percent of the companies studied were highly satisfied with the data they had relating to critical measures of performance, such as product profitability (9 percent), manufacturing cost (12 percent), distribution and logistics cost (6 percent) and customer profitability (4 percent).
"It is crucial that the CEO and the top executive team take the lead," concludes Coleman. "Successful optimization involves not only operational units, such as manufacturing, sales and product development, but also tax, human resources and legal departments across multiple countries. The vast majority of those manufacturers that are successfully optimizing their networks in a holistic fashion have one top executive in charge of the overall supply chain."