operations excellence: the transition from tactical to

Year 2003 Report on Trends and Issues in Logistics and Transportation

Cap Gemini Ernst & Young, Georgia Southern University, and the University of Tennessee are pleased to present this report,based on the results of our 2003 research on trends and issues in supply chain, logistics, and transportation. The report marksour 12th annual examination of the ongoing challenges that managers face in the conduct of their business.

The changes in the economic climate since our 2001 report, Transforming Logistics: A Roadmap to Fulfillment Excellence,could not have been more profound. No one could have predicted the terrorist attacks, or the extent to which the economywould soften, or the corporate governance issues that continue to impact our business environment. All of these factors havecreated a climate in which many CEOs are realizing that visibility in the supply chain is a critical element in managinguncertainty. Furthermore, they understand that this capability is a critical driver in achieving world-class excellence.

As early as 2000, we advocated transforming organizations into more adaptive, flexible entities. The findings of our 2003 studyindicate that much work remains to be done. In last year’s report, we stated that the fundamental starting point was visibility. Inthis year’s report, we are building on this foundation by examining the role and significance of operations excellence in adaptivesupply chains.

Briefly, we distinguish between functional excellence and operations excellence. Optimizing a particular supply chain process orkey business driver achieves functional excellence. This is necessary but not sufficient; managers must be able to leverage suchtactical efficiencies to support strategic objectives, such as customer satisfaction and profitability. Operations excellenceintegrates top performance across multiple functional areas of the supply chain, in order to meet or exceed customerrequirements at minimal cost. Operations excellence is about effectively and efficiently keeping the promise made to thecustomer. Functional excellence is still important; it is a prerequisite for operations excellence. In turn, operations excellence isa key enabler and prerequisite of adaptive supply chains, which allow companies to meet customer expectations and adapt tounforeseen circumstances.

One of the key learnings from this year’s study is that supply chain managers need to more fully understand the impact theirday-to-day initiatives have on the firm. In the past, such efforts were “point solutions” that were not integrated with the rest ofthe firm’s infrastructure. The results of this year’s study show that some progress has been made toward integration. While this isgood news, especially given the current economic environment, there is much left to be done.

This report is written for top management as a call to operations excellence by developing supply chains that are both tacticallyefficient and customer service effective. Supply chains—not just individual companies—must do the right things, and do themright. How companies are performing is at the heart of this report.

This research and the resulting report would not be possible without the continued support of the study’s participants. Wewould like to thank these professionals for taking time out of their busy schedules to share their expertise and insights.

We hope you find this report helpful as you continue the process of devising, reviewing, and improving your own supply chainmanagement initiatives. All such initiatives should be evaluated against the end-goal of an adaptive, cross-enterprise supplychain—one whose efficiency is only matched by its effectiveness.

Sincerely,

Tony Ross Mary C. Holcomb, Ph.D. Karl B. Manrodt, Ph.D.Senior Manager Associate Professor Assistant ProfessorCap Gemini Ernst & Young U.S., LLC University of Tennessee Georgia Southern University

Executive Summary:

How does my supply chain measure up tothe competition? Am I investing too muchin “point solutions” to specific problemswhen I should be integrating solutions toget end-to-end efficiency? How can Imanage my firm’s resources in a mannerthat meets stringent and changingcustomer service requirements?

The changes in the economy and businessenvironment over the last year have beenprofound. Economic uncertainty has combinedwith rising customer expectations to put enormouspressures on every business. The result is anextraordinary focus on meeting customerexpectations while minimizing cost, in order tocompete in a global market. The key is an efficientand effective supply chain.

The report assesses the degree to which firms haveimproved their supply chain processes, and howwell resources are being utilized to achieve thatgoal. It can help you answer critical questionsabout your business.

It gives you information about key characteristicsthat drive the transformation to greater efficiency. Itpresents the case for understanding operationsexcellence, a concept that leverages tacticalefficiencies to achieve strategic business objectives.It offers expert perspectives, and makes suggestionsfor achieving future success.

SCM managers at every level need to betterunderstand the impact of their decisions on theircompany’s success in today’s businessenvironment. The report is a major contribution tothat understanding. The reward is world-classperformance and sustainable growth, now and inthe future.

Operations Excellence: Is YourSupply Chain in Order?

This study is an analysis of current trends inlogistics and supply chain management. Based onsurvey responses from more than 185 logisticsprofessionals, it emphasizes the benefits ofcreating visibility in the firm through key supplychain processes.

The results of the study have been arranged inthree sections. The first section, Six Drivers ofAdaptive Supply Chain Excellence, brieflyexamines six key characteristics that drive thetransformation to greater efficiency in supply chain,logistics, and distribution processes. Thesedrivers—collaboration, optimization, connectivity,execution, speed, and visibility—are thebenchmarks we used to evaluate our survey partic-ipants’ progress in achieving logistics excellence.Last year’s report focused on the need for increasedvisibility in the supply chain. This year’s emphasisis on operations excellence, the foundation of anadaptive supply chain.

The second section of this report, Getting YourSupply Chain in Perfect Order, presents the casefor understanding operations excellence. Thissection consists of four parts: meeting customerexpectations, responding to changingrequirements, performance management, andresource management. We report on the currentstatus as it relates to operations excellence, aswell as describing some of the gaps firms arenow experiencing.

Finally, we conclude with our Point of View, whichhighlights the authors’ perspectives on the resultsof the past year and offers recommendations for thefuture. This year’s Point of View is presented fromtwo perspectives: the managerial and the academic.Both of these perspectives provide an assessment ofthe current state and, more importantly, suggestfuture direction for achieving the desired end statein logistics and supply chain excellence.

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This year’s study offers abasis for assessing thedegree to which firmsare achieving operationsexcellence, and how wellresources are beingutilized to createefficient and effectivesupply chains.

Participant Profile Aggregated as a profile group, half of thecompanies who responded to our survey haveannual revenues under $1 billion (48%), whilethose with annual sales of $1–3 billion accountedfor 25.5% of the sample. Firms with sales greaterthan $3 billion made up 26.6% of totalrespondents. Compared to last year, there was anincrease in the percentage of firms with revenuesgreater than $1 billion completing the survey.

Previous analysis indicated that revenue base as ameasure does significantly differentiate firms interms of logistics and supply chain strategicinitiatives. In general, “larger” firms are noted fortaking the lead in developing and growinginnovative capabilities in logistics and supply chainmanagement. In many cases, it is their financialwherewithal that enables them to amass the criticalresources to do so.

The companies that participated in this year’sstudy also command a great deal of attentionbecause together they spend more than $18.6billion on transportation annually.Collectively, they have a significantimpact on current and future trendsin logistics and supply chainmanagement.

While all industrial sectors arerepresented in this study, manufac-turers led in survey responses,comprising 61% of the surveysample. This is an increase ofapproximately 3% from the 2002study. The next largest sector wasRetail, at 9.8%.

Six Drivers of Fulfillment Excellence

A Look BackIn our 2000 report, Logistics @ Internet Speed,we introduced the six drivers necessary forachieving logistics and supply chain managementexcellence (Figure 1). These drivers are the keycomponents found in adaptive supply chains. Theresearch indicated that customer demand andtechnology advances would drive the implemen-tation toward adaptive networks in order toprovide greater visibility and control in supplychain, transportation, and distribution activities. Inthe 2000 report, we predicted a continuedmigration toward the application service providermodel (ASP), in which providers host andmaintain leading software applications on theInternet, enabling firms to collaborate withsuppliers and logistics partners on a common,ubiquitous platform.

Our 2001 study, Transforming Logistics: ARoadmap to Fulfillment Excellence, reported aslower than expected migration toward the

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Operations Excellence: Is Your Supply Chain In Order?

Collaboration• Share real-time data with key

customers, suppliers, and partners• Align individuals and organizations• Standardize processes and practices

Optimization• Implement new tools and processes• Eliminate inefficiencies• Leverage cost savings across

communities

Connectivity• Standardize applications and

platforms• Foster many-to-many collaboration• Enable trade exchange

Execution• Improve transportation, distribution,

inventory and other management• Expedite financial settlements• Measure performance results

Speed• Increase responsiveness• Improve adaptability• Access information in real time

Visibility• Track inventory flow• Update order status in real time• Manage incidents

Six Drivers of Fulfillment Excellence

FulfillmentExcellence

Figure 1

application service provider (ASP) model, as wellas the implementation of newer tools andmethods in the discipline. Technological advancesin logistics continued at a dramatic rate, andseemed unaffected by the changes in economicconditions. As we predicted in our 2000 report,the rate of alliances and partnerships amongtechnology and service providers increased, andwe saw increased consolidation through 2001 andcontinuing to date.

As we closed out 2001, many asked if any of thesix drivers were more critical than another. In 2002,our response was that supply chain managersneeded to focus on visibility in their supply chain.Visibility is more than just a tactical supply chainissue; it has profound strategic implications for theentire organization. It sustains, accelerates, orenables the other drivers.

Without true visibility, the firm is hindered fromachieving agility in a volatile world. This lack ofagility leads to sub-optimal supply chain eventmanagement decisions—decisions that oftendiminish a company’s effectiveness and efficiency.To achieve agility, firms must learn to balance costand service. Below, we discuss how well thischallenge is being met.

Economic malaise exists across the globe.If a company’s goal is more than justsurvival, then supply chain strategy mustbe configured to simultaneously improvecustomer service and satisfaction whileincreasing profitability. Operationsexcellence provides that level of focus.

Getting Your Supply Chain in Perfect Order

Challenges in 2003As we go to press, the global economic conditionsremain flat, with little growth expected in the nearterm. Many industries are experiencing overca-pacity. Others, especially in Europe, are movingmanufacturing jobs farther east to minimize laborcosts. Interest rates are at all-time lows and can nolonger be counted on to stimulate growth.

While some argue that this is a temporarysituation, we must ask: what if it is not? In otherwords, what if the “new economy” is the one weare experiencing today?

Security issues remain on the front burner. C-TPAT,DHS, ACE, and 24-hour rule are all becoming partof today’s supply chain lexicon. Expenses areexpected to increase due to barred or detainedgoods, the cost of compliance, and the cost ofincreased inventories to minimize risk. Managingall of this is part of surviving in the new reality.

Technology drives on. Mergers, acquisitions, orbankruptcies seem to be common. Newertechnology is being introduced in a depressedmarket, making adoption of more efficient methodsdifficult to secure. The promise of collaboration issought by many, but obtained by few.

Yet, in all of this, there is one constant: customerswant more for less.

The challenge facing companies today is to buildsupply chain processes that can be tacticallyefficient and, at the same time, effective incustomer service. As this report shows, customersare becoming more demanding, and suppliersmore capable.

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Operations Excellence Defined

In order to define operations excellence, we needto take a step back to define its prerequisites.

Functional excellence is the result of optimizing aparticular supply chain process or business driver.It might be reducing inventory, or acceleratingcycle times, or increasing visibility into suppliers.These are necessary but not sufficient. If the supplychain is still divided into silos, individual managerscan optimize a number of such drivers withoutimproving the firm’s ability to satisfy customers. Afirm must be able to achieve the right balance oftactical efficiencies to support strategic objectives,such as customer satisfaction and profitability. Thecritical factor is integration.

Operations excellence integrates top performanceacross multiple functions, sharing information andleveraging excellence in specific areas, in order tomeet or exceed customer requirements at minimalcost. It cuts across silos and business processes. Itmeans knowing as much about the customer’sneeds and expectations as about the supply chain.Operations excellence is the ability to effectivelyand efficiently “make the promise” and “keep thepromise” to the customer.

Functional excellence is still a critical prerequisite.It’s impossible to achieve strategic objectivesefficiently without efficiencies in tactical areas. Thekey is to focus on achieving the right efficienciesand combining their effectiveness. Operationsexcellence in turn is a prerequisite for an adaptivesupply chain, which must balance adaptability withthe capacity to meet customer expectations atminimum cost.

Operations excellence is founded on theobservation that customers directly experienceoperations quality, and that they increasingly factorthat experience into their perceptions of vendors

and their buying preferences. It recognizes theessential implication of the current businessclimate: The shift to product-plus strategiesrequires companies to be very good at providingsuperior customer service and minimizing theiroperating costs.

Operations excellence is founded on theobservation that customers directlyexperience operations quality, and thatthey increasingly factor that experienceinto their perceptions of vendors and theirbuying preferences.

This represents a new and daunting set of rules formany firms. Until recently, companies could relyon establishing a foothold within a market niche.They could function either as a high-service firmthat charged more for its superior service, or as alow-priced commodity firm that could undersellcompetitors but was not particularly tolerant ofspecialized customer needs.

Consequently, not so long ago being superior ateither customer service or functional efficiency wassufficient for success. Such "either/or" strategies areno longer tenable. The power shift from manufac-turers to retailers and demanding customers hasraised the customer service ante considerably foreveryone. And sustaining "every-day low pricing,"clearly requires "every-day low operating costs."

Operations excellence leverages tacticalefficiencies to support strategic objectives.

During the 1990s, companies that maintainedparity with competitors in terms of service and costwere able to achieve good profitability and, inmany cases, grow their markets. These samecompanies realize that the 2000s will not yield thesame results. Keeping abreast of the competition isnot sufficient in today’s business climate. Instead,this decade will be characterized by strategies thatincrease market share and profitability throughoperations excellence.

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“One is not wise to turnhope into strategy. Onething has become clearduring the past threeyears. We are not goingto succeed solely bypursuing the promise ofcollaboration.”

Bob Delaney14th Annual “State of Logistics Report” June 2, 2003

Implementing this strategy in the supply chainrequires focusing on the four key areas outlined inthis report. “Getting Your Supply Chain in PerfectOrder” is about delivering on promises and beingable to rapidly react to events and situations toensure that customer requirements are always met.The challenge is to do this while reducing supplychain costs through excellence in performance andresource management.

A supply chain consists of multiple, complexsystems that are interdependent with regard to thecreation and distribution of goods, services, cash,and information. Each system is comprised ofprocesses that have their own challenges, goals,and operating strategies. Our research suggests thatoperations performance can be measured by fourattributes:❑ How successful is the company in terms of

meeting (or exceeding) customer requirementsin delivery performance?

❑ How responsive is the supply chain to changesin requirements—both internal and external?

❑ How efficient is the company in meeting (orexceeding) customer requirements? How doesincreasing the level of responsiveness changesupply chain costs?

❑ What are the factors that determine how wellthe company uses its resources in meetingcustomer requirements?

The combination of these attributes determines thetotal value created by the supply chain.Performance on these attributes is discussed below.

Exceeding Customer Expectations?

The evolution of physical distribution into logisticsand supply chain management was enabled byinnovation from a variety of sources. Change wasnecessitated by rapid shifts in global and techno-logical environments. The economic conditions ofthe last three years have added to the complexity ofdoing business in the logistics and supply chainarena. For many firms, this has created a seeminglyunpredictable and often volatile climate forconducting day-to-day business.

Yet, even in a sea of change, there remains oneconstant: the basic requirement of meeting theneeds of the customer. Effective and efficientorder fulfillment is only possible throughoperations excellence. The core of operationsexcellence is the marriage of customer relationshipmanagement (CRM) and supply chainmanagement (SCM). Like any marriage, bothparties must work together and communicateeffectively to make the relationship work.

How should we define efficient and effective orderfulfillment? A good definition might be:Providing the right amount of the right material inthe right condition, in the right sequence, in theright orientation, at the right place, at the righttime, and at the right cost using the right methods,right partners and right information.

All of the “rights” in the definition are madepossible by knowing the customer, understandingtheir needs, providing the correct level of priority,and ultimately fulfilling the order. As indicated inthe figure below, business growth can only beachieved by “making the promise” and “keepingthe promise” (Figure 2).

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What Value Does Your Supply Chain Provide toBusiness Performance?

1. Meets or exceeds customer requirements ondelivery performance

2. Responsive to internal and external requirements3. Efficient in meeting or exceeding customer

requirements, inclusive of cost-efficiencies4. Able to track, measure, and manage resources

used in meeting customer requirements

Figure 2

The essence of operations excellence is toeffectively and efficiently “keep the promise” tocustomers. The cycle highlighted below (Figure 3)must continue in order to achieve operationsexcellence today and in the future. It requiresoperations to continuously learn and adjust to thechanging needs of customers. Likewise, the CRMoperations need to incorporate capabilities thatcontinue to enhance the customer experience (e.g.,available to promise, order tracking, order visibility,distributed order management, purchase history orshopping lists, up sell and recommendedpurchases, and quantities based on price andexpected need). Adaptive CRM and SCMcapabilities will be required to ensure that thedesign of the strategy, solution, and deploymentadjust to the changing needs of the customers.

Operations excellence is about effectivelyand efficiently “keeping the promise.”However, only by “making the promise”that can be kept can you grow thebusiness.

When asked to identify the attributes mostimportant to serving their customers, respondents’top four answers were: (1) on-time delivery(2) correct invoice(3) ability to match POs, invoices, and BOLs

(bills of lading)(4) over / short / damage

These findings reinforce theacceptance around measuringand utilizing the perfect order.A perfect order has beendefined as “complete, on time,damage free, and contains acorrect invoice.” The perfectorder measures what acustomer experiences, notwhat they were promised.Faultless execution leads to aperfect order; if one element ismissing, the perfect ordersuffers. Faultless execution of the basics willdetermine whether a company will survive, grow,or go the way of the Crosby automobile.

Impressively, compared to last year’s results, overallscores have improved (Figure 4). This wouldsuggest that meeting customer expectations isimproving, but it is still far from perfect. Theattribute that experienced the greatest improvementwas the ability to send a correct invoice. Thissuggests that internal processes and informationflows are slowly starting to improve.

What keeps a customer satisfied? It is notsurprising that the participantsin our study noted that thesame service elementsdiscussed earlier also led tomeasurable results in customersatisfaction. However, thefollowing should also be noted:❑ On-time delivery was

essential to keeping thecustomer.

❑ Responsiveness to changingrequirements and order fillrate enabled the firm tosatisfy and retain theircustomers.

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Figure 5 also highlights a gap yet to be bridged bylogistics and supply chain professionals: leveragingfunctional excellence to acquire new customers.Perhaps marketing has yet to fully appreciate theperformance of logistics; perhaps functionalexcellence is a prerequisite for bidding on newwork.

Some have argued that theintegration of processes andsystems are enablers forfunctional excellence. If so, howwell integrated are today’stechnologies? According to ourrespondents, most firms haveachieved some degree ofsuccess in tying together thefront-and back-end operations.With ERP as the backbone,order management is linked toboth transportation andwarehousing.

Even more important in termsof functional excellence,

transportation and warehousing are beginning toreport higher levels of integration than in previousyears. As noted in last year’s report, event visibilityallows supply chain managers to see the flow ofmaterials and orders, and therefore to bettermanage capacity and resources. As shown in Figure6, this area is the least integrated of key supplychain software.

Responding To ChangingRequirements

While companies have made improvements indemand forecasting and planning, it is still achallenge to get the right products to the rightplace at the right time, and in the right condition.In the ideal supply chain, demand would be metby “pulling” from the point of raw materials orcomponent parts with minimal inventory and ashort cycle time.

Maintaining the ideal supply chain, however, is nota reality for most firms. Instead, supply chainsmust develop the ability to react quickly to satisfycustomer requirements that may change daily.Changes may occur in the middle of the ordercycle. Regardless of how late a change occurs,today’s customers expect their strategic suppliers toprovide excellent performance at all times.

Building a responsive supply chain that willefficiently and effectively manage changingrequirements has proven to be quite a challenge.Visibility is a key driver in building a supply chainthat will drive down costs, improve service, andcreate value for all supply chain members. The levelof visibility in the supply chain will either enable orhinder the company’s ability to accommodatechanging customer requirements.

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Figure 5

Figure 6

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Currently, visibility is somewhat limited—“fourwalls and the truck is on the way.” As distancefrom the plant or warehouse increases, visibilitydecreases. As illustrated in Figure 7, visibility islacking for tracking inbound shipments (64%)compared to respondents’ ability to trackoutbound shipments (80%). Just over half ofrespondents have alerts to late or delayedshipments, leaving the rest at the mercy of variationin the process.

The ability to respond to changing requirementshinges on visibility. As noted earlier, it is one of thekey attributes that leads to customer satisfaction; itis an ability that is important to customers.

Unfortunately, the current state for most freight ischaracterized by the inability to tella customer precisely where theirshipment is. And groundbreakingwork done by FedEx has raisedcustomer expectations, socustomers now expect everyone tobe at least as good as FedEx.

While the data in Figure 7 may suggest thatvisibility has been achieved, this is not the case.Respondents were asked to rank several keyinitiatives in their distribution process, based onthe level of emphasis they planned to place onthem. As Figure 8 suggests, order visibility—bothinternal and external—will be receiving significantattention this coming year.

Operations excellence depends on theability of the company to align organi-zations and departmental units withbusiness processes. In other words,operations excellence is dependent onfunctional excellence.

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“I’m sorry – we’re notFedEx…..”

Response to a customer bythe account manager for aleading LTL carrier


Figure 8

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There are, however, a few roadblocks to developingadaptive supply chains. Given the heavy relianceon information technology to provide visibility,one might expect firms to have a formaltechnology strategy as it related to logistics andsupply chain management. Yet, as Figure 9indicates, only 57.6% have developed such astrategy. Given the volatility in the technologyspace, this is somewhat surprising. The good newsis that, for those that have a technology strategy, astrong majority have linked it to their overallbusiness strategy (Figure 10).

Another impediment to a company’s ability torespond to changing requirements can be summedup in a single word: culture. Respondents weregiven a set of attributes to describe various businessdimensions in their firm. Organizationally, most ofthese firms are very departmental; over one thirddescribe themselves as functional silos when itcomes to integration. Decisions are typically madeat the departmental level. And over 40% of therespondents utilize point solutions instead ofintegrated solutions.

Responding to changing requirements isn’t allabout technology. The ability to respond requiresnot only having the technology in place, but alsohaving processes aligned and people trained andrewarded to respond in an appropriate manner.Having two out of three of these may be good, butit is not responsive.

Finally, the true measures of responsiveness in asupply chain are execution and speed. In part,these can be measured by the level of inventorykept on hand, and how quickly it is turned duringthe year. For the past three years, the results werestatic; this year, the trend shows an improvement.

In spite of a challenging business environment, itappears that logistics and supply chain profes-sionals have achieved improved overall supplychain performance. For our respondents, the dayssales in inventory dropped by 25% from 2002 to2003. The reduction in the amount of inventoryheld was also was reflected in the improvement inthe number of turns, which increased from 12 to14.5 from 2002 to 2003. This 21% increase is

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Figure 9

Figure 10

High Level Implementation Plan SpansPeople, Process and Technology

People• Stewardship & Accountability• Communication Program• Business Process Integration

Process• Regional validation• Definition & Capability• Gap Analysis• Target Setting• Detailed Plan

Technology• Advanced Planning Systems• Performance Measures Reporting

People

Process

Technology

Figure 11

“Our biggest issue—our biggest source ofpain—is ourselves.”

Senior Vice President

further evidence that firms are becoming moreresponsive. A lean supply chain optimally deploysfinished goods inventories on a day-to-day basis tofulfill customer requirements while minimizingoperating costs.

The trend toward improvement in turns andinventory management is also highlighted bycomparisons between the amount of inventoryheld in 2000 compared to this year (Figure 12). Itis interesting to note that the average amount ofinventory held is falling, as is the range (themaximum amount minus the minimum amount ofinventory held) when comparing the two years.Firms are cutting inventory and expecting to keepless on hand in the future. Making this changepermanent requires greater collaboration betweencustomers and suppliers.

Performance Management –Managing SC Costs

Getting a group of logistics professionals to bequiet is not hard—one only needs to start talkingabout ways to reduce supply chain costs. Thistopic seems to remain a high priority, regardless ofeconomic conditions.

In 2002, we reported that thelargest-ever percentage of firms(54%) named reducing costs as theprimary objective or goal for thebusiness unit. While a similarpercentage of respondents in thisyear’s study are still focused on costreduction, a larger proportion offirms are concentrating onmaximizing profitability: 27% for2003 vs. 15% for 2002 (Figure 13).

Some might suggest that the emphasis on reducingcosts in the supply chain is a direct result of afirm’s overall strategy, or that is it linked to howlogistics is perceived by the top management team.Respondents were asked about both.

Less than a quarter of the respondents are focusingon cost leadership as their strategy to compete inthe market place, which is unchanged from lastyear. Also unchanged is thepercentage of companiesusing customer service astheir core strategy. Regardlessof the strategy chosen, inthree of the four cases—withcustomer service as theexception—the primaryobjective of the division wasto reduce costs (Figure 14).In other words, strategymatters, but it must achievelower costs at the same time.

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Inventory Improvement (Averages)

Days Sales in Inventory(finished goods only)

Average Days SalesOutstanding (A/R)

Number ofTurns

2001

46.7

40.3

10.5

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42.1

42.2

16.0

2003

37.0

40.0

14.5

2002

49.4

45.7

12.0

Figure 12

Figure 13

Figure 14

“In our business, inventory can be a goodthing, especially given our products, andthe volatility of the current environment.Yet, holding inventory isn’t the answer.What we are working on is beingresponsive to changing needs, and meetingthose needs by being adaptive.”

Pete MooreVice President-Supply ChainBacou – DallozInternational safety products manufacturer

Redu

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costs

0%

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Business Unit Objective

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This linking of supply chain management to costreduction is reflected in the boardroom. More thanone third of respondents report that their C-levelteam views them as a cost center. Yet, there is goodnews: logistics is viewed as a strategic componentby a larger percentage of executives, regardless ofthe management level (Figure 15).

Has this emphasis onsupply chain costs paid off?Comparing actualperformance to budgetedtargets reveals thatrespondents met orexceeded their targets,especially in the case oftransportation costs andtotal logistics costs (Figure16). This contrasts withcompanies’ overall financialperformance, which onlymet expectations. Thestandard continues to be

raised; functional excellence must translate tobottom-line results in order for logistics profes-sionals to distinguish themselves.

Resource Management – Managing the Asset Base

This focus on the importance of cash is also seenas one of the ways of creating working capitalefficiency. Working capital efficiency has beenidentified as one of the major drivers of marketvalue, along with fixed capital efficiency, taxminimization, profitable growth, and costminimization. These drivers, when appropriatelyaligned and optimized, lead to increasedshareholder value.

This research project takes the area of orderfulfillment to a new level by including an additionalcomponent. Previously, order fulfillment onlylooked at the time from which the customer placedthe order. Now it must capture where all of theassets are located and where a logistics managermay actually control product. This new level ofinformation in the area of order fulfillment hasbeen termed “Made to Cash.” Made to Cash(MTC) is the time it takes to convert finishedgoods to cash. For a retailer, MTC starts at thepoint in an organization where products arereceived into the system, and ends at payment. Fora manufacturer, the cycle starts at the end of theproduction line and ends at the receipt of fundsfrom the customer. In both cases, MTC takes intoaccount how long a product is stored, picked,packed, and in transit, and tracks it until paymentis received from the customer.

Made to cash is the time required to convertfinished goods to cash.

Why should a firm begin to look at their Made toCash process? The biggest advantage of MTC isthat it looks solely at throughput of finishedgoods, and measures the firm’s ability to manageits finished goods assets and convert them tocash. Benchmarking based on MTC is moreeffective than traditional order fulfillment metrics.

12

A cos

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Logistics Is Viewed by Management Teams As:

10%

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CEO/CFO/COOBusiness Unit management

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21

710 8

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Average Rating of Performance Over Last Year

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Figure 15

Figure 16

One of the major components of MTC is how wellinventory flows through the firm’s supply chain.That is, MTC reflects how much is stored at themanufacturing plant, or the series of warehousesused by the firm. Each stop in the flow addscost—and time—to the supply chain.

On this one component, respondents havedemonstrated a significant improvementcompared to our previous study. First, thetrend for lower levels of inventory in thesupply chain is real. Second, and moreimportant, the level of variation is alsodeclining. That is, there is less of a bull-whip effect taking place; information isstarting to replace inventory.

This is not to suggest that the answer forasset management in supply chains isalways to reduce inventory. There must beenough inventory to meet customerdemands, and it must be accessible tocustomers in a timely fashion.

Inventory can be held at a manufacturing plant, acentral warehouse, or a regional warehouse (orsome combination of the three)(Figure 17). When

we compared the percentage of inventory held ateach node, we found that, on average, inventorywas more likely to be stored in regional warehousesthan centrally managed. If firms are actuallyimproving on both efficiency and effectiveness,

there should be a shift in where inventory is heldand the amount of inventory in the supply chainwill be lower. As noted in Figures 18 and 19, this iscurrently the case. Since 1999, significantimprovements have been realized.

To continually meet orexceed the financial targetsset by the firm, effective andefficient use of resourcesmust occur. Efficiencycomes after effectiveness infunctional excellence. Thefirm must focus on doingthe right things before itconcentrates on doingthings right.

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1999 2003 1999 2003 1999 2003

0

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Improvement in Inventory Management — 1999 vs. 2003

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1999 2003

9.4 6.419.4

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34

Average days inventory held

Minimum days on hand

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Percent Decreased 1999 Compared to 2003

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Figure 17

Figure 18

Figure 19

Technology is not the only tool available to managethe asset base. Another strategy is to reviewproducts, look at customer profitability, streamlineofferings, and undertake product and supplierrationalization studies. While the number of firmsthat have completed rationalization projects overthe last two years has increased substantially sincelast year, a significant number of firms still have

not begun the process of identifyingtheir key suppliers, customers, orproducts. To continually obtain orexceed the financial targets set by thefirm, effective and efficient use ofresources must occur. Efficiencycomes after effectiveness in functionalexcellence. The firm must focus ondoing the right things before itconcentrates on doing things right(Figures 20 and 21).

Our Point of View

After the much anticipated and successfulmigration to a new century of business in 2000,many firms anticipated continued marketexuberance and growth into the future. Incombination with technology advances, wepredicted in the 2000 report Logistics @ InternetSpeed that these conditions would drive theimplementation of adaptive networks to creategreater visibility and control over supply chain,transportation, and distribution activities. In 2000,only a few firms fully understood the compellingneed to transform their supply chains. Even fewerfirms had begun the process of developing andimplementing the processes and infrastructure thatwould lead to adaptive supply chain performance.After all, business conditions were still very goodfor most firms.

The six drivers introduced in 2000 as key factorsfor producing unprecedented advances in customerservice and driving sustainable cost reductionswere largely viewed as an academic and consulting-based “theoretical model” for the ideal supplychain. The softening economy throughout 2001,however, could not be ignored. Actual implemen-tation of newer tools and methods fell short ofexpectations set during year 2000. Many firmsadopted a cautious approach to investing in newerlogistics systems. The study results for 2001indicated that many firms had taken a “wait,watch, and learn” approach to logistics and supplychain transformation.

In 2001, multiple leading companies invested moreaggressively in newer systems and technology in aneffort to reduce costs, improve efficiency, and, moreimportantly, position themselves to respond fasterto changes in market conditions. Those investingmost heavily viewed the economic condition—which was thought to be temporary—as a vitalopportunity to widen the gap on competitors who

14

Prod

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20%

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Percent of Companies

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54

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Initiatives Completed in the Last Two Years

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Figure 20

Figure 21

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had halted or substantially slowed investment inthis area. These representative firms embarked onchanges well before the softening economicconditions; they had a vision of logistics systemsand supply chains that would respond morequickly and profitably to changes of any kind.

The changes in theeconomic climatesince the 2001 reportTransformingLogistics: A Roadmapto FulfillmentExcellence could not

have been more profound. In the 2002 report, were-stated that it was time to develop newer,adaptive supply chain networks that would lead tounprecedented advances in customer service, driveless-responsive firms out of business, and posesignificant barriers to market entry. The compellingneed to achieve this adaptive state is now quiteapparent to all businesses. The six drivers thatconstitute the fulfillment (or functional) excellencemodel are being implemented by a much broadergroup of firms than in 2001. Over the last twoyears, we began to address the order in which thedrivers should be implemented for leveraging thefirm’s efforts in achieving an adaptive state. Whileeach of the drivers plays a critical role in the

development and sustainability of a world-classsupply chain, one driver stood out as the mostcritical: visibility. Visibility was noted as the enablerand accelerator for all of the others.

At a tactical level, visibility allowssupply chain managers to see fromend to end. The impact ofvisibility on execution and speed isquite dramatic. Yet, the state ofvisibility has not yet matured, andwill require leadership at the Clevel of the firm. While somenoted that progress had beenmade, a large percentage of firmsstill struggle to implement thisdriver to the level necessary formaximizing their efforts in terms ofexecution and speed.

What if the current economy is the new economy?This would mean that businesses can’t wait forthings to get better; the need to act today isparamount. If deflation takes hold, it will be evenmore critical for firms to focus on operationsexcellence. In the current economic climate, it ismore important than ever for suppliers tounderstand that customers at all stages in thesupply chain expect increased efficiency. The

results of this year’s studyindicate that, to a certainextent, this message is beingheard: supply chainperformance has improved.Yet, a great deal of workremains to be done before anadaptive supply chain state isreached. From 2001, progresswas seen in the integration ofprocesses and technologies,with TMS and WMSintegration reporting thelargest improvement.

15


An adaptive supply chain ischaracterized by thefollowing characteristics:

1. Read and respond2. Plug and play3. Learn and leverage

High

Low

Static DynamicSupply chain responsiveness

AdaptiveSupply Chain

OperationsExcellence

Functional

Degr

ee o

f col

labo

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n

The Transition From Tactical to Adaptive Supply Chains

Levels of Management & Execution

Strategic

Operational

Tactical

Figure 22

Figure 23

This integration enables visibility both internallyand externally, and, more importantly, will leveragethe firm’s efforts in execution and speed.

At the core of this year’s focus on operationsexcellence is “getting back to the basics.”

Our point of view can be summarized as follows:❑ Firms seeking operations excellence first must

achieve functional excellence. Functionalexcellence is not an end in and of itself; its goalis collaborating internally to achieve operationsexcellence.

❑ Operations excellence is the foundation onwhich to build an adaptive supply chain. Theability to respond to changes—and not simplyreact to them—requires adaptable processesand information flows.

❑ Technology that is not integrated or quicklyadaptable may hold back significant growth.Technology should enable growth, not hinder it.This means that today’s technology solutionsmust be capable of integrating with currentsolutions and processes, as well as being easilyadapted to market changes.

Each of these issues is about managing the firm’sresources in a manner that meets stringent andchanging customer service requirements, minimizesthe costs of manufacturing and distribution, andattains the fullest possible return on assets ininventory. The driving force in meeting thischallenge is operations excellence. Stay tuned fornext year’s report to see how well this goal hasbeen understood and achieved.

What does it mean? – CGE&YPerspective

“What Gets Measured Gets Done, WhatGets Rewarded Gets Repeated”

More than ever, the customer of the fulfillmentprocess is making greater demands on the supplier.Most large companies, from Wal-Mart to Dell andGlaxoSmithKline, are basing their long-termcommitment to suppliers on tighter and tighterfulfillment metrics, because their own customers’expectations are increasing. Satisfying suchdemands certainly requires functional excellence –the ability to continually drive down costs andimprove performance in specific areas of business.

But functional excellence is just the foundation.Truly “keeping the promise” to customers requiresoperations excellence, the ability to leverageefficiencies in specific processes across the entiresupply chain. It’s a combination of managementpolicies and practices, organizational operationsand structure, and processes and technologies thatsupport fulfillment of demand at the lowest costwhile meeting or exceeding customer requirements.

Just as important, operations excellence requiresknowledge of the customer’s needs andexpectations, and the ability to segment services tomeet those needs. That’s why we’re working withour clients to bridge the gaps between supply chainmanagement (SCM) and customer relationshipmanagement (CRM). We’re moving them from“make the promise” to “available to promise” to“capable to promise” to “profit to promise”.

16

Of course, to be rewarded and grow the business,companies must still must meet or exceed thepromise made. To generate that growth, everyemployee at every level must have ownership oftheir company’s efforts to achieve operationsexcellence. As was found in this year’s study, SCMmanagers (at all levels and in all functional areas)need to more fully grasp the impact that SCM hason their company’s success.

Functional excellence enables operations excellence;only by achieving operations excellence can webuild a foundation for evolution and adaptation,which are the keys to sustainable growth.

What does it mean? – Academic Perspective

At the beginning of our research on fulfillmentexcellence, we took every opportunity to asklogistics and supply chain professionals to rank theimportance of the six drivers in creating an adaptivesupply chain. On a consistent basis, the resultsindicated that the majority felt that executionand/or speed—not visibility—were the toppriorities. With last year’s study, we believe that wesufficiently made the case for visibility as the criticalenabler for the remaining five drivers. Withvisibility in place, the next critical elements of anadaptive supply chain are execution and speed. Asstated throughout this report, the desired outcomefrom these two drivers is operations excellence.

Why is operations excellence the goal? Quitefrankly, it is because too much time, energy, andresources are being used by firms on “pointsolutions.” Point solutions address problems, notprocesses; they also tend to be siloed in nature.Operations excellence puts the focus on solutionsthat are integrated with the rest of the firm’sinfrastructure, and, even more importantly, withthe firm’s supply chain partners. Operationsexcellence is an end-to-end perspective, with tacticsand strategy aligned to accomplish this goal.

Supply chain leaders in the area of operationsexcellence are continually raising the bar. Theincreasing demand for efficiency and customerresponsiveness is in fact a measure of how fastcompanies are evolving. The message is loud andclear: if you don't reach functional excellencequickly, and then integrate those capabilities intooperations excellence, you will be left behind.History has taught us that the environment is notkind to those who do not evolve. Eventually theycease to exist. In this dynamic, complex, and globalenvironment, supply chain leaders are beginning toheed this lesson. Survival requires it.

How does your company measure up?

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The Participants

Tony RossMr. Ross is a Senior Manager with Cap GeminiErnst & Young, where he manages large-scale,global supply chain projects in the pharmaceuticaland retail industries and acts as the Logistics &Fulfillment Leader for the Americas across allsectors. He has over 28 years of experience incorporate supply chain management andconsulting, and has held management positions indistribution, engineering, sales, and consulting.Mr. Ross has been quoted in leading supply chainperiodicals such as Supply Chain ManagementReview, Inbound Logistics, Transportation &Distribution, and Logistics Management, and haspresented at numerous conferences, including theCouncil of Logistics Management, WERC, andGeorgia Tech Logistics Institute.

Dr. Karl B. ManrodtDr. Manrodt is an Assistant Professor in theDepartment of Information Systems & Logistics atGeorgia Southern University. His research interestsrevolve around the role of information in logisticssystems, performance measurement, the role oflogistics in health care, and customer valuedetermination in a logistics setting. Hispublications have appeared in such journals as theSupply Chain Management Review, TransportationJournal, the International Journal of PhysicalDistribution and Materials Management, Interfaces,and the Journal of Business Logistics. His researchon top shippers has appeared in LogisticsManagement for the last eleven years. Dr. Manrodthas recently coauthored a second book, KeepingScore: Measuring the Business Value of Logisticsin the Supply Chain for the Council of LogisticsManagement.

Dr. Mary Collins HolcombDr. Holcomb is Associate Professor of Logistics andTransportation in the College of Business at TheUniversity of Tennessee. Her research interestsfocus on two related areas of strategic logisticsmanagement: process design for quality andcustomer service measurement. Dr. Holcomb’sprofessional career includes eighteen years at theOak Ridge National Laboratory in transportationresearch for the U.S. Department of Energy, U.S.Department of Transportation, and the U.S.Department of Defense.

The authors would like to thank John White andRenee Duvall for their efforts in making this reporta reality.

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About Cap Gemini Ernst & Young,Georgia Southern University, andThe University of Tennessee

Cap Gemini Ernst & YoungThe Cap Gemini Ernst & Young Group is one ofthe world's largest providers of Consulting,Technology, and Outsourcing services. Thecompany helps businesses implement growthstrategies and leverage technology. As of early2003, the organization employed approximately53,000 people worldwide and reported 2002global revenues of 7.047 billion euros. Moreinformation about individual service lines, offices,and research is available on our global website atwww.cgey.com.

Supply Chain Management ServicesWith specialists based in the Americas, Europe,and Asia Pacific, Cap Gemini Ernst & Young U.S.LLC (CGE&Y) is a recognized leader in supplychain consulting. In addition, we provide blurredsolutions across Customer RelationshipManagement (CRM), Information Technology (IT),and Strategy Transformation to deliver true valueacross the enterprise. This significantly differen-tiates us from our competitors. CGE&Y helpsclients build adaptive supply chains by enablingthem to get closer to customers, collaborate moreeffectively with suppliers, leverage digital market-places, and optimize the use of information. Our suite of supply chain management servicesranges from supply chain strategy and architecturedevelopment to business and technologyintegration to full-service process and technologyoutsourcing. In addition, we have developed newofferings to address the current market's customer-centric business challenges and to help companiesbuild dynamic, adaptive supply chains. For furtherinformation, please visit www.cgey.com

Georgia Southern UniversityGeorgia Southern University is a growing nationallyrecognized logistics program located in Statesboro,Georgia. The university is a major teaching andresearch institution. The faculty publishes on awide range of topics and is invited to speak atevents across the globe.

The University of TennesseeThe internationally recognized logistics program atThe University of Tennessee, Knoxville, is one ofthe most comprehensive and contemporaryprograms in the nation. This university is a majorresearch entity. The faculty publishes widely ontopics of current industry concern and exploresfuture trends through research and studies. Theuniversity has been ranked as the top school in thecountry for educating logistics/distributionmanagers, and its Logistics and TransportationProgram has been ranked as the best program of itskind in the United States.

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Contact Information

For more information on how to address thechallenges and opportunities discussed in thisreport, or to obtain additional copies of thispublication, please contact:

Tony RossSenior ManagerCap Gemini Ernst & Young7701 Las Colinas RidgeSuite 600Irving, Texas 75063Direct: 972.556.7486Fax: [email protected]

Karl B. Manrodt, Ph.D.Assistant Professor of LogisticsDepartment of Management, Marketing & LogisticsP.O. Box 8154Georgia Southern UniversityStatesboro, GA 30460Direct: 912.681.0588Fax: [email protected] http://www.manrodt.com

© 2003 Cap Gemini Ernst & Young U.S. LLC

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operations excellence: the transition from tactical to

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