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Figure 1 : We are facing the worst recession in recenthistory, with a base case estimate of 5% decline in GDP

-10

0%

0 25

6%cumulative

GDPcontraction

GDP (Real) avg annualized % change

'29-'33

'57

'80

'90

'69'01

6%cumulative

GDPcontraction

Months 50

'08-09 (Worst case)

'08-09 (Downside)

'08-09 (Base)'73

'81

53

48

'60

'45

* Total aggregate decline from maximum GDP expansion to the end of contractionNote: NBER recorded current recession as starting in December 2007; Projection updated as of March 23, 2009Source: NBER; Bureau of Economic Analysis; "The Current Economic Recession: How Long, How Deep, and How Different From the Past?, Marc Labonte; "Monetary Policy in

the Great Depression: What the Fed did, and why", David Wheelock; Bain Analysis February 16, 2009

Base case: -5%

Down side: -7%

Worst case: -9%

GDP, cum ula t i ve dec l ine*

Pu l l i ng Aw ay : Manag ing and Sus ta in ing ChangeBy Miles Cook

The Vende Globe sailing race, which started in November 2008 and justwrapped up in March, is one of the most brutal in the world. Competitors sailaround the globe, single-handedly, without assistance and without touchingland, starting and ending on the coast of France. The fastest path is straight southto Antarctica, around that continent and back north to the finish. Eachcompetitor spends months in the southern ocean dodging mountainous waves,icebergs, tornadoes and gale-force storms. The fastest sailors in the calmernorthern waters are often not the same ones in the lead after the turbulence of theAntarctic seas. In fact, 64 percent of the competitors who started the most recentrace never even finished.

Thats not a bad metaphor for the current economic climate, except that thesevere turbulence has lasted a lot more than 4 months. Almost every forecastupdate has extended the projected duration of the recession, and the depth. Thebest current guesses anticipate no real recovery until 2010. That would make thisdownturn the longest since the 1930s.

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Figure 2 : In the last recession, more than 50% of topperformers fell to the average and bottom buckets

0

20

40

60

80

100%

Number of companiesColor represents 2000 performance

2000

Bottom

Average

Top

782

2002

782

Bottom

Average

Top

2002performance

Source: Sustained Value Creator Database/Worldscope; Bain Analysis

As with the Vende Globe, some companies in promising up front positions mayend up trailingor, in some cases, not even finishingthe competition. Figure 2lays out the fortunes of public companies in the 2001 recession. Surprisingly, thechances of a market leader ending up trailing its competitors were greater than

remaining in the lead. On the other hand, many companies in the second andthird tiers of their industries moved up to the top. The reshuffling in thedownturn period was much more significant than in normal timesin fact abouttwice as many companies in the group of top performers lost their leadershipposition during the 20012002 downturn compared with the subsequent boomperiod.

Much of this share change happened toward the end of the downturn, whenhealthier companies started taking steps to gain altitude faster than theircompetitors, or where investments sustained through the downturn started topay off in improved customer revenues. That is what makes the end of adownturn an excellent time for companies to be thinking about performanceimprovements and preparing themselves to gain position in the recovery.

Supply chain improvements are powerful ways to make gains both in the shortterm and the long term. Since a huge amount of cost and capital is usually tiedup in supply chain activities, any improvements drive cash savings in the short

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Figure 3 : Most change initiatives fail to achieve the resultsidentified upfront

0

20

40

60

80

100%

56%

Percent of identified fullpotential actually achieved

Analys is o f change in i t i a t i v es show s thatmos t fa l l sho r t o f ach i ev i ng ta rge t resu l t s

Note: N=96Source: Bain analysis

0

20

40

60

80

100%

Opportunitysmaller than

believed

Opportunity notpursued

Implementationfell short

Reasons for not achievingfull potential

I mp l emen t a t i on sho r t fa l l s a re the ma i n reasoni n i t i a t i ves fa il t o reach ta rge ted r esu lt s

term. At the same time, leaner supply chains should lead to faster growth laterdue to better in-stock positions and less diversion of potential growth capital intounnecessary inventory and facilities.

H ar d t o I m p r o v e

Obviously, a company must know what to attack in order to make gains, andmost supply chain executives probably have a good idea about areas wheresavings need to come fromif not, 6 to 8 weeks of diagnostic work usually canflag the biggest opportunities. A less discussed but often harder problem formany supply chain leaders is capturing the savings they have identified. In onesurvey, executives reported that their average cost reduction project onlyreturned 56 percent of the estimated savings, a pretty disappointing statistic.Most executives say the savings estimates up front were fine. They blame the gapon a failure to execute the required changes.

Even when companies manage to implement some changes, the biggestchallenge remains: making them stick. The CFO at one large company kicked offa recent efficiency project saying, Weve had three major efficiency programs inthe last 10 years. Each was successful. In fact, if you added up the claimedsavings, our company would have negative costs. But our costs are higher than

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Figure 4 : Most industries have a runaway performer

0

20

40

60

80

100

9

3732

5357

89

23

31

CVS

48

72

PACCAR

21

78

Dell

Computer

hardware

average

Cisco

Communication

equipment

average

Target

General

merchandise

average

Whole

Foods

Food

retail

average

Drug

retail

average

Construction

and farm

machinery

average

Inventory conversion period (days)

Note: Inventory conversion period = inventory/(COGS/365); Based on Bain benchmark database of ~1000 US companies. Sectoraverage does not include the best in class benchmark (e.g.: Computer HW average does not include Dell)

Source: Company financials; Capital IQ 2008 data

Sector averageRunaway performer

ever. Can supply chain leaders take steps to make improvements stick, insteadof seeing excessive inventories, out of stock items and costs creeping back?

There must be, since some companies are able to hold onto their winnings and

deliver impressive gains, year after year. Their reward is improved performancethat far surpasses gains by the average company. Not 5 to 10 percent betterperformance, but 50 to 100 percent better. In fact, we have found in almost everyindustry at least one runaway supply chain leadera company that has openedup an overwhelming gap in performance versus their average competitor. Thefigure below highlights standout examples in inventory conversion.

Th r ee St r a t eg ies f o r M anag ing Change and Pu l l ing Aw ay

Without pretending to capture every action that helped these companies pullaway from the industry average, here are three things we have found to be

important:

1. Set improvement targets that are both competitive and strategicAn amazing number of companies set fairly arbitrary performance targets eachyear. Maybe they are based on percentage improvements over last years

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Source: IC Insights (2004); ICE Status (1992)

0.001

0.01

0.1

1

10

100

0.01 0.1 1 10 100 1,000 10,000

Cumulative Experience (Cum. Bit Volume 10^15)

DRAM Price per bit (2005 Millicents)

2002

2000

1988

2004

1998

1996

1993

1992

19901987

1985

1983R = 0.96Slope = 57%

Figure 5a: Experience curves can be used to set realistictargets

US DRAM example

Figure 5b: Understanding changes to the experience curvehelps to keep ahead of competitive trends

Note: R squared is 98% for 1984-1997 and 96% for 1997-2001.Source: Analyst reports

0.1

0.2

0.5

1

2

$4

100 500 2,000 10,000 50,000 200,000 1,000,000

Cumulativeminutesof use(MOU)inmillions

PriceperMOU

97

9594

93

91

90

8988

86

85

200 1,000 5,000 20,000 100,000 500,000 2,000,000

02

01

00

99

9896

92

87

84

15% price reductionfor doubling of MOU

38% price reductionfor doubling of MOU

2 P layers

6 P layers

WI RELESS OPERATOR examp le

numbers. Or, they pick a goal that sounds ambitious, but essentially is pulledfrom thin air, such as double-digit revenue and earnings growth. That doesntwork in sports competitions like the Vende Globe, and it doesnt workparticularly well in business either. Such targets are often demotivating if leaders

cant provide context on why they are necessary or should be achievable.Moreover, if they are not anchored in competitive and external realities,organizations can mistake forward progressor partial successfor victory.

Planning to pull away from the pack requires a different approachknowingyour competitors and setting targets based on external performance standardsand a clear view of what has to be achieved to beat competitors.

Two highly effective tools can help set these targets: the experience curve andreturns earned relative to competitive position. The experience curve tracksimprovements in cost performance, over time and relative to total units

produced. Bain has found that in almost every industry, competition drivesdown inflation-adjusted prices and costs every year. Two classic examples areshown below.

As a manager, if you collect this information on your own industry, and assessyour companys rate of efficiency gains versus the industry trend, you will beable to set targets that are both realistic and aggressive enough to keep up withor beat your competitors. This approach can be used to set goals for inventories(days of inventory on hand), asset productivity, logistics spend per unit, andmany similar supply chain metrics. For instance, one of our clients, a marketleader in specialized apparel, projects industry cost and price declines and setstargets for sourcing costs to stay ahead of this competitive trend.

Plotting returns earned versus your market position is another way to useexternal competitive data to set performance targets. Returns earned need to bein line with relative scale. In most industries, relative market shareyour marketshare divided by the share of your largest competitorhas a high correlation

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Weak Strong

High

LowRela t i ve Marke t

Share

Retu rns

earnedBelow-band leaders

Over-performers(leaders or followers)

Distant or below-band followers

4

1

In-band leaders

3

In-band followers

2

5

Figure 6a: Returns vs. Relative Market Share analysis helpsdetermine should be performance level in line with yourmarket position

-5

0

5

10

15%

0.1 0.2 0.5 1 2 5

$20BSales

SalesWeightedLocalRMS forU.S. retail grocery(2006)

EBITMargin

Company8

Company10

$20BSales

Company9

Company7

Company

4

Company1

Company6

Company2

Company5

Company3

Company11

Note: Includes all major public grocery chains except for one that does not break out its pure grocery EBIT.Company 2 EBIT margin is estimated.

Figure 6b: Example of Returns vs. Relative Market Shareanalysis

US FOOD STORES exam ple

with profitability. (It is important to define markets properly; for retail anddistribution, it usually is share by city, while for manufacturers it may benational or global market share. See the figures below for examples.)

Knowing your companys relative market share should give you a good idea ofyour performance level target. Such target setting keeps market leaders honestand helps them avoid the trap of satisfactory underperformance.

Once these strategic targets are set, we have found it is critical to detail three tofive initiatives that allow a company to move from point A to point B. The key isto keep it simple: limit the number of initiatives and communicate them, againand again, across the organization. Then typical goal deployment tools can beused to implement them in specific functions and assign direct accountability toindividual managers for targeted performance gains. Functional staff should find

these goals much more meaningful, since they are based on hard facts about themarket and competition, not just management intent.

2. Use left-brain tools to spot right-brain barriersFor the supply chain, a major challenge in managing change is maintaining bothmomentum and focus among individuals who are scattered throughout thecompany. After all, most major supply chain initiatives affect distribution,sourcing, finance, marketing and sales, manufacturing, and IT at a minimum.Many critical staff members dont report to the project sponsor, and efforts towin hearts and minds and manage details can quickly consume a normal workschedule. Obviously it wont work to spread leadership time evenly.

But it is essential to do more than just putting out the biggest fires and dealingwith squeaky-wheel employees. Some employees may not speak loudly, but maypassively undermine progress. And some have more of an impact on gains thanothers, making their commitment to change more important.

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Note: High performers = top quintile of decision multiplier scoresSource: Bain/eRewards decision and org effectiveness survey 2008(n=761); Client survey (n=20)

Benchmark: High performers n=151

Benchmark: Low/average performers n=610Company X average responses

Prio r i t ies

Ro les

Processes

People

Cu ltu re

St ructu reHard-

ware

Software

1 42 3Out-

performingSatisfactory

Under-

performing

Individuals who personally engage

Effective, integrated management processes

Decision disciplines that make roles work

Winning culture values and behaviors

Superior operational and support processes

Right people in right jobs will and skill

Objectives & incentives focused on performance

Clarity on priorities and principles

Cohesive leadership team aligning full org

Clear roles & authorities for critical decisions

Structure aligned with sources of value

Detailed structure as lean & simple as possible

Figure 7a: Sample readout of a Readiness to Executesurveycomparison to external benchmarks

Figure 7b: Sample readout of a Readiness to Executesurveyinternal distribution of responses

-75

-50

-25

0

25

50

75

100%

% of respondents

Disagree

Strongly disagree

Strongly agree

Agree

67

-33

83

-17

56

-44

We have clear roles and authorities for critical decisions

Execut ive team Directors Managers

To help our clients, we have created some left-brained tools to figure outwhich parts of the organization will have the hardest time changing. Executivesponsors can then focus their leadership energy in these areas. We call this areadiness to execute diagnostic. Think of it as creating the equivalent of some

good sailing charts, instead of simply setting sail and dealing with whatever youencounter.

The diagnostic accomplishes two things: on the one hand, it surveys a range ofcurrent employees on such issues as perceptions, concerns and beliefs, and itplots the results to flag major areas of disconnect with top management. Thoseareas require more substantial intervention. On the other hand, analysis is doneto understand who is forced to change more, based on factors like level ofcompensation change, shift in their time allocation or changes in theirperformance metrics and standards. People that are affected the most by thesechanges are the most likely to resist. The same approach often uncovers

corporate cultural challenges that affect communications content and strategies.A sample output is included below. The core idea is to not leave culture andmotivation issues to the corporate psychologists, but instead to use objectivefacts to measure where the risk is greatest, so managers know where their timewill have the highest performance payback.

3. Decide who decidesMost supply chain leaders hate bureaucracy, but they live with it every day.Simple decisions like whether to add or remove a SKU, what products to stockwhere, or setting production forecasts can paralyze progress. This decisioncongestion is one of the key reasons change initiatives have such a low rate ofsuccess. For example, a supply chain manager in one Global 50 companycomplained about a non-decision regarding a new replenishment system,estimated to have a three-month payback. After a year of discussions, he threwup his hands: I cant even get someone to say no, he said. I spend all my

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energy debating, and none of it doing. He ultimately left to take a job with amore dynamic company.

One of the best tools used to zero in on this problem and create higher-yielding

change programs is a decision management tool we call RAPID. The idea is toclearly map out who plays what role in each critical decision and use that toenable swift decisions, without endless debates, second-guessing or pocketvetoes. It determines the captain of the boat, so to speak, but in a more nuancedway that deals with the different teams needed for different problems.

To try this approach, start by writing down 10 to 20 of the critical decisions thathave to be made on a regular basis and that are fundamental to supply chainperformance. It can include questions like: Should we introduce a new SKU?What is our forecasted volume for next month? or What level of product Yinventory should I carry in facility X? Then, use a grid to identify all the

management positions that touch that decision and assign a letter indicatingtheir role today. R = recommend, A = approve/veto, D = decide/choose, I =inform, P = perform/execute after the decision. (The figure below illustrates anexample).

Most companies find that the RAPID process is a stunning way to highlight theproblem we call Who has the D? On many important decisions, there typicallyis either no one with formal authority to decide, or more often several peoplewho each think they get to choose and who end up interfering with each other.The result is endless meetings, decisions that are delayed or dont stick and aslow pace of change.

The solution is simple: Rewrite the map, and for every decision, make sure thereis no more than one D and no more than one A. Eliminate any unnecessaryinput. Then publish this document and distribute it throughout yourorganization.

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Person

4

Figure 8 : Clarifying decision-making roles materiallyimproves execution capability

RDID/ AIIIntroduce new SKU?

IIDDIRNext monthsforecasted volume?

IIAADIRLevel of inventory

carried in Facility X?

I / PIIAAIRVendor selection?

Person

1

Person

2

Person

3

Person

5

Person

6

Person

7

1 & 2 : Multiple Ds: Toomany felt they haddecision rights

3 : Too many As: Vetorights across multiplegroups for eachdecision

4 : No D: Nobody was

taking accountability forthe decision

Sample decis ions:

I LLUSTRATI VE

A DIR P

Rec ommendApp rov a lPe r fo rm

I n p u tDec ide

RAPID roles and responsibilities

1 .

2 .

3 .

4 .

Drivers of decision-making complexity

The positive reaction that many companies have to this process is amazing. Theyfind that suddenly meetings disappear as large groups are pared down to thefew who really need to be involved in key decisions. Those who are assigned the

D (decision authority) know it and can act quickly without worrying aboutbeing second-guessed. One client told me that the single-best thing that came outof a project together was the concept of RAPIDs, which dramatically acceleratedactions and, frankly, took a lot of pointless meetings off of his calendar.

Conclus ion

Over the next year or two, companies will face substantial challenges. As therecession deepens, the battlefield will shift from great ideas and strategies tostrongest execution. Like competitors in the Vende Globe race, some companiesaccustomed to swiftly navigating calmer waters wont rise to the occasion.Theyll fall back in the pack, be acquired or face bankruptcy. But companies that

are able to stay the course will be equipped with action plans grounded inpractical targets and tools to overcome key obstacles and inefficiencies. Beingwell prepared not only improves their chances of making it to the finish line, itallows them to emerge from the turbulence stronger than ever.

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Miles Cook is a partner at Bain & Company in Atlanta and a leader in the firms GlobalPerformance Improvement practice. He can be reached at miles.cook@bain.com.

Sugges t ed add i t i ona l r ead ing

The Breakthrough Imperative; How the Best Managers Get Outstanding Results(HarperCollins, 2008), by Mark Gottfredson and Steve Schaubert,Bain & Company

Who Has the D? How Clear Decision Roles Enhance Organizational Performance,(Harvard Business Review, 2006), by Paul Rogers and Marcia Blenko,Bain & Company