by Kevin Lewis and Richard Sheinfeld (PRTM)
To remain competitive in today's environment, companies need to learn to rapidly manage an increased level of complexity driven from both internal and external sources. External complexity drivers include:
- Increasing numbers of mergers, acquisitions and joint ventures to achieve geographic coverage and market penetration
- Broadening supplier footprint spanning different geographic areas
- Rising rate of new product launches to combat commoditization and meet increasingly segmented customer needs
- Customers demanding higher delivery service levels in terms of speed, reliability and flexibility
Successfully managing supply chain complexity enables companies to capture a powerful operational competitive advantage through improved top-line and bottom-line financial performance. Lower supply chain complexity drives shorter lead times, improved forecast accuracy, higher on-time delivery to request rates and higher perfect-order fulfillment rates.
Looking to further examine these business dynamics, PRTM launched the 2006 Supply-Chain Complexity Study in conjunction with the Supply-Chain Council and the MIT Supply Chain Strategy newsletter. The study's objective was to enable companies to understand what the impact of supply chain complexity was across their supply chains, and what leading firms are doing to capture an increased operational advantage in their industries.
The study confirms that companies perceive their supply chains as highly complex, regardless of their size or industry. Roughly 80 percent of the participating firms believe their supply chains are highly complex. In addition, almost 60 percent of the participants believe their supply chains also have a high infrastructure cost basis.
Proliferation of products/services tops list
The study highlights the perceived impact of product and service proliferation across the supply chain by all participants, regardless of industry or size. Almost 40 percent of all participants identified the number of products and services provided as either their top or second most significant complexity driver.
Participants confirmed that understanding, measuring and managing supply chain complexity drivers is important to them because such management enables them to achieve:
- Cost savings
- Improved on-time delivery
- Reduced inventory and work in process
- Quality
However, there is a significant gap between what companies perceive as important complexity-management practices and their ability to identify and track effective metrics for those practices. Less than 60 percent of the participants track performance for complexity management practices that they consider important.
Complexity Management Measurement |
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| Rank | Complexity Management Practice | % of Participants Tracking Performance |
| 1 | New Product introduction Process | 54 |
| 2 | Product Life cycle management | 59 |
| 3 | Transport and distribution | 35 |
| 4 | Cost complexity | 37 |
| 5 | Supplier rationalization | 58 |
| 6 | Material/ component rationalization | 38 |
| 7 | Product portfolio rationalization | 35 |
| 8 | Offshore production | 37 |
| 9 | Lean manufacturing | 44 |
| 10 | Customer base segmentation | 33 |
Importance of S&OP process
Leading firms achieve a 17 percent lower total supply chain management cost infrastructure, on average. Our hypothesis is that these companies achieve this cost advantage through fewer SKUs, customers and ship-to addresses—all of which significantly simplify the order management process.We also believe these companies may be investing more in supply chain involvement earlier in product development to minimize complexity propagation and optimize for end-to-end total cost management.
The study also suggests that companies with lowcomplexity supply chains execute a superior S&OP process. They are able to fulfill customer orders in lead times that are significantly faster than their more complex counterparts. This phenomenon is borne out by their superior performance across five key metrics, shown in the table "S&OP Process Performance."
S&OP PROCESS PERFORMANCE |
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| Performance Metric | High Complex SCs (1) | Low Complex SCs (2) | Advantage (3) |
| On-time delivery to requests | 79% | 86% | 9% |
| Perfect order fulfillment | 74% | 83% | 12% |
| Total order fulfillment lead time: make-to-order | 81.5 days | 23.1 days | 72% |
| Forecast accuracy | 78% | 88% | 13% |
KEY:
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In summary, it's clear from this study that companies in all industries face significant cost and complexity challenges. Companies that distinguish themselves from their peers in terms of complexity management are achieving powerful competitive operational advantages.
Methodology of the Study
Seventy-nine companies participated in this study of the effects of complexity on supply chain performance. The breakdown by industry was: 32 percent from communications and electronics; 19 percent from advanced materials and chemicals; 18 percent from consumer packaged goods; 16 percent from aerospace and defense and industrial; and 15 percent from life sciences and medical equipment.
The majority of the companies (46 percent) were in the under $500 million revenue range, whereas 30 percent were in the greater than $1.5 billion range.
A company's overall score was derived from its normalized levels of complexity across the following drivers: product portfolio, customer base, supply base, distribution and logistics, manufacturing and systems.
The capability score for each company was based on the level of adoption of 13 business practices:
- Product life cycle management
- New product introduction process
- Transport/distribution network optimization
- Product portfolio rationalization
- Customer base segmentation
- Supply base rationalization
- Offshoring production
- Outsourcing production
- Material/component rationalization
- IT portfolio management
- Lean manufacturing
- Cost complexity management
- Business process outsourcing
The results shown here are excerpted from more extensive and detailed study results. The authors are principals at management consultants PRTM. Contact: rsheinfeld@prtm.com for more information on the study.. |
