SCMR_Supply chain _2009_N533

S E P T E M B E R 2 0 0 9

FEATURES

14 From Guru to GM:Developing Tomorrow’s LeadersBy Pamela Culpepper and Terra Winston

20 Vested Outsourcing: A Better Way to OutsourceBy Kate Vitasek and Mike Ledyard

28 Is Supply Chain the Cure for Rising Healthcare Costs?By Mike Duffy

36 An Update on the State of Supply Chain EducationBy Stanley E. Fawcett

43 Is SaaS Right for You?By Sean A. Murphy

COMMENTARY

Insights .......................................4

Global Links ................................8

Technology ...............................10

Profiles in Leadership ..............12

SPECIAL SUPPLEMENTS50 S&OP: Now More Than EverBy William Atkinson

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FOCUS on the FUTURE

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�4 From Guru to GM: Developing Tomorrow’s LeadersTraditional supply chain education has focused on creating “gurus,” professionals that have deep but narrow expertise in both the discipline and industry. But in today’s environment, that approach no longer suffices. Pamela Culpepper and Terra Winston tell why leaders like PepsiCo are working to develop a new breed of supply chain leader—the general manager.

20 Vested Outsourcing: A Better Way to OutsourceWhy do so many outsourcing relationships fail to achieve their true potential? One big reason, say authors Kate Vitasek and Mike Ledyard, is that they are based on a “What’s in it for me” philosophy. Vested Outsourcing changes all that. It encourages both parties to act for mutual benefit—and in the process lays the foundation for sustained success.

28 Is Supply Chain the Cure for Rising Healthcare Costs?The cost of healthcare in the U.S. has been a white-hot topic for some time now. But seldom in that debate do we hear mention of the supply chain. That’s too bad because a smarter approach to supply chain management could hold the key to lowering healthcare costs overall. Veteran supply chain exec-utive Mike Duffy of Cardinal Health explains.

36 An Update on the State of Supply Chain EducationWhich are the top universities when it comes to supply chain education? What role should professional associations and publications play in the development of the modern supply chain professional? Find the answers in this article, based on new research conducted by Dr. Stanley E. Fawcett of Brigham Young University.

43 SaaS: Right for You?Software as a Service, or SaaS, is finally start-

ing to catch on after a few false starts. More and more users are finding benefit is sub-scribing to technology on an as-needed basis as opposed to building or buying it. SCMR Associate Editor Sean Murphy tells how to determine if SaaS is suited for your supply chain operations.

SPECIAL SUPPLEMENTS50 S&OP: Now More than Ever

S e p t e m b e r 2 0 0 9 � �Volume�13,�Number�6

FEATURES

COMMENTARY

4 Insights:Bursting the Other People’s BubbleBy Larry Lapide

8 Global Links:Fulfillment MastersBy Narendra Mulani

�0 Technology:Supply Chain and the CIOBy Kevin O’Marah

�2 Profiles in Leadership:Long-term Perspective: John MascaritoloBy John Kerr

54 Spotlight on Supply Management: Planning and the Process IndustriesBy Kish Khemani, Andrew Walberer and Oliver Zeranski

C3 SCMR.com Online

To subscribe: Visit Supply Chain Management Review online at www.scmr.com/sub or call (888) 343-5567. (Outside of the U.S., call (515) 247-2984). Email subscriber customer service at [email protected].

Author’s Guidelines: Interested in writing an article for possible publication in Supply Chain Management Review? See our Guidelines for Authors on www.scmr.com.

Reprints: Reprints of articles from this issue and past issues are available from The YGS Group. Contact Danielle Marsh (800) 290-5460 ext. 1550; [email protected]

Editorial Advisory Board

n Karen alber

H.J.HeinzCo.

n JacK T. ampuJa

NiagaraUniversity

n Joseph c. andrasKi

VICSAssociation

n donald J. bowersox

MichiganStateUniversity

n James r. byron

IBMConsulting

n John a. calTagirone

TheRevereGroup

n brian cargille

Hewlett-PackardCo.

n shoshanah a. cohen

PRTM

n roberT b. handfield

NorthCarolinaStateUniversity

n James T. hinTlian, Jr. Accenture

n nicholas J. lahowchic

LimitedDistributionServicesInc.

n hau l. lee StanfordUniversity

n roberT c. lieb

NortheasternUniversity

n clifford f. lynch

C.F.Lynch&Associates

n edward J. marien

UniversityofWisconsin-MadisonManagementInstitute

n John T. menTzer

UniversityofTennessee

n James b. rice, Jr. MassachusettsInstitute ofTechnology

n larry smiTh

WestMarine

Illustration by Theo Rudnak

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Building Blocks for the Future

I N T H I S i S S U E

With all of the business challenges of the past 18 months, it’s little wonder that everyone seems to be looking to the future. This is-sue of SCMR is no exception. In particular,

we’re assessing the future from three distinct, yet inter-related, perspectives: people, process, and technology.

Let’s take things in that order. The underpinning of any progress going forward

is people. But where will that talent come from? The universities are a big part of the answer and, as a new study on supply chain eduction suggests, they are doing their best to deliver. But they have to do even better, concludes Dr. Stanley Fawcett in his report on the State of Supply Chain Education, if they are to meet the rapidly changing needs of a new global economy.

Smart companies are not relying solely on the educational institutions to keep the talent pipeline flowing. Instead, they are assuming a large part of the burden themselves. PepsiCo is a prime example. As Pamela Culpepper, PepsiCo’s head of human resources for supply chain management, writes in her co-authored article, the company is aggressively moving to nurture a cadre of future “general man-agers”—moving beyond the traditional approach of developing specialized “gurus.”

The processes that have worked adequately in the past may not be well suited for the future, either. Take the way in which supply chain and logistics services have been outsourced, for example. In a typical scenario, the buyer of these services viewed

the arrangement as a one-way street—i.e., whatever direc-tion was best for the buyer. This was manifested in never-ending requests to cut rates, micro man-aging the provider’s operations, or poorly defined performance metrics.

But there’s a better way to outsource, insist Kate Vitasek and Mike Ledyard in their fea-ture article. It’s called “vested outsourcing.” And under that concept, the focus shifts from a “what’s in for me mentality” (mainly on the buyer’s part) to “what’s in it for we.” The buyer and provid-er of the services work in a collaborative manner to achieve desired outcomes that extend beyond cost cutting to include revenue enhancement, greater operational efficiency, higher asset utilization, and so forth. The authors make a convincing argument for vested outsourcing as the preferred way to go for-ward.

Finally, people and processes will be made more productive by advances in technology. One of the most promising is a technology known as Software as a Service (SaaS). SCMR Associate Editor Sean Murphy explains how SaaS works and tells why it’s poised for rapid adoption in the supply chain space.

No predictions here, but we do hope this September issue will help you prepare for whatever comes.

Frank Quinn, Editor(781) [email protected]

Editorial Offices

225 Wyman St. Waltham, MA 02451, (781) 734-8000, [email protected]

Francis J. QuinnEditor

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Sean A. MurphyAssociate Editor

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John KerrSpecial Projects Editor

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Mike RoachSenior Art Director

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Charles TannerDirector of Audience Marketing

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As I write this column, indicators are showing some bright spots in the economy that portend a recovery. This recession has been extremely hard on supply chain managers because they were charged with the responsibility to quickly reduce their companies’ costs and inventories to better align them with significantly reduced revenues. Some of them also lost their jobs in the process. However, whatever the future economy looks like—and there are many that believe it will be significantly different from the past decade’s—supply chain managers will be at the forefront in enabling the economy to grow again globally. After all, no matter what happens, goods and services are always needed because the basic necessities of life and busi-nesses require the movement of physical goods such as food, shelter, and clothing.

The Other People’s BubbleDuring the Internet Bubble (when I was a soft-ware analyst) I used to tell people that I was going to stay focused on supply chain manage-ment (SCM) because I’d rather be involved in moving physical goods than moving bits and bytes around, since there was more job security in doing that. Some thought me to be behind the times because there was a new economy coming and I was not going to be a part of it. In the end that bubble burst and showed that I had made the right decision. The so-called “new economy” never materialized because it was predicated on the bubble surviving indefi-nitely. Its major premise of e-business merely became an enabling part of the “old” economy and SCM was still important.

The recent recession comes after a decade that some people are calling the “Credit Bubble”

in which many overextended their debt to buy things they could not really afford and finan-cial firms took on more risk than they should have to reap huge bonuses. It manifested itself because the US was experiencing affluence and displaying conspicuous-consumption patterns that have never been seen throughout history. However, I prefer to use another term for this bubble, the Other People’s Bubble (OPB).

During this bubble the financial indus-try was taking big risks using other people’s money and consumers where taking on more debt assuming that when they sold their houses future buyers would, in effect, help pay it off. Supply chain managers were also culpable during the OPB as companies over-outsourced businesses and relied on other people’s manufacturing and service opera-tions, i.e., other people’s efforts.

This outsourcing trend has gotten to such an extreme level that I just read an article sug-gesting that we can save health care costs by outsourcing medical services. Patients would travel to other countries for procedures, since their doctors get paid less or we would import foreign doctors and pay them less; i.e., we would use other people’s doctors. Thankfully, we haven’t outsourced product innovation and started living off other people’s minds, as well!

The Recovery EconomyThe major changes we will see in the recov-ery economy will be the result of a backlash to the OBP, as well as an inflection point in some of the long-term trends I’ve discussed in prior Insights columns. The recession has been a drastic wakeup call for the U.S. to rely less on other people’s efforts, and to recognize

I n S I G H T S

Bursting the Other People’s Bubble

Many of our current economic woes are caused by dependence on others to solve financial problems for us.

B Y L A R R Y L A P I D E

Dr. Lapide is a lecturer at the University of

Massachusetts’ Boston Campus and is an MIT

Research Affiliate. He welcomes comments

on his columns at [email protected].

SCM090901_Insights 4 9/1/2009 10:24:55 PM

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S U P P L Y C H A I N I N S I G H T S

and take advantage of the new global trading landscape. Here are five aspects that I predict (or just wish) will

be part of the recovery economy:1. Fewer of the best and brightest will gravitate to

the financial industry. During the OPB, exorbitant com-pensation could be gotten by taking big risks with other people’s money, so smart college graduates went where the money was. Expect more of the best and brightest to put their brains to work on productive things, such as innovation, manufacturing and SCM.

2. Working in manufacturing and SCM will become respectable. I went to a Managing Automation confer-ence a couple of years ago and we discussed the fact that the younger generation had little interest in manufactur-ing. Boomer parents were not raising children to work in it when more money could be made doing something else. While the U.S. is still the largest manufacturing country in the world, recent estimates forecast China to catch up to the U.S. by 2015. This won’t happen as soon if this aspect is part of the recovery economy.

3. Being green, especially energy-efficient, will be in vogue again. During the recession oil prices dropped dras-tically from recent highs and many managers lost their focus on energy efficiency to focus instead on reducing

costs and inventories. Oil prices will rise again as the economy improves and being green will re-emerge.

4. U.S firms will learn to compete more effectively in other countries. The economies of other countries out-side the U.S. (and Western Europe) have been growing faster, leading to a long-term trend of diminished U.S. dominance in world trading. As the U.S. consumer con-tinues to be more frugal, displaying less conspicuous consumption, those U.S. companies that have come to rely on the consumers’ thirst for goods will by necessity learn to compete better for business in other countries.

5. SCM will get back on its evolutionary track toward optimized demand management. Prior to the recession, SCM was evolving toward becoming a competitive weapon that businesses could use to compete better, including lever-aging more profitable demand-shaping. When the economy improves supply chain managers will be able to change their focus from just holding down costs and inventories.

Many of these changes portend a brighter future for SCM. Whether or not all of them happen, the very fact that the recovery economy will be vastly different from the OPB represents a marked change, and change always bodes well for managers that are responsible for making and moving goods.

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G L O B A L L I N k S

“Fulfillment Masters” Enjoy Huge Advantage

Theleadersexcelaton-time,in-fulldeliverywithhalftheinventoryandathalfthetransportationcosts.

ByNarendraMulani

Narendra Mulani heads Accenture’s

Supply Chain Management

Service line. He can be reached

at narendra.p.mulani@

accenture.com

In a world where cus-tomers can change suppliers at the click of a mouse, fulfill-ment mastery—the ability to cost-effi-ciently receive, compile, and deliver

orders “on time and in full” (OTIF)—has become more vital than ever.

But what capabilities actually contribute most directly to fulfillment mastery? And if a company is able to build such a capability, what impact does that have on its financial performance? In short, is the gain worth the pain?

To learn the answers, Accenture recently surveyed 240 fulfillment executives from around the world. What we discovered is that compa-nies’ fulfillment performance might generally be termed “good but not great.” On the receiving end, sur-vey respondents get 90 percent of orders on time and in full. Respondents’ performance on behalf of their customers is slightly better: They deliver 95 percent of their customers’ orders in full and on time. Days of supply for finished goods inven-tory average 15 days.

Such accomplishments are decent to say the least. However, they fall well short of the perfor-mance levels attained by the roughly 10 percent of companies Accenture defines as “fulfillment masters.” According to our research, masters achieve 98 percent on-time, in-full delivery. And

they do so with 50 percent less inventory and outbound transportation costs that are less than half that of the respondent population as a whole (2 percent of total revenue versus 5 percent). Bottom line: Masters enjoy higher service levels for growing the business and lower costs for oper-ating the business.

It should also be noted that masters dem-onstrate high levels of sophistication in every element of fulfillment—from fulfillment strat-egy (how they design and adjust their fulfill-ment operations), through operational excel-lence (how well they execute the strategy),

and technology (how effectively they use IT to improve operations). In the remainder of this article, we examine the skills and capabilities associated with mastering fulfillment strategy.

How masters create dynamic fulfillment operationsOne of the key distinctions between fulfillment masters and laggards is the ability to build dynamic and responsive supply chains that can be adjusted rapidly to meet changing market conditions (shifting customer demands and

Oneofthekeydistinctionsbetweenfulfillmentmastersandlaggardsistheabilitytobuilddynamicandresponsivesupplychains.

SCM090901global 8 9/1/2009 10:55:00 PM

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G L O B A L L I N kS ( c o n t i n u e d )

competitive moves; changes in suppliers; fluctuations in fuel prices and interest rates, and so on.).

Toward this end, masters design their supply chains by continuously reassessing cost and service factors, adjusting their fulfillment methods, regularly reviewing their chan-nels to customers, emphasizing selectivity in their choice of supply chain partners, and actively modeling and managing their carbon footprint.

Consider flexibility as it relates to inbound flows: Masters typically pay close attention to the capabilities of transportation providers and supplier locations. As part of their inbound flow analysis, every one of the masters we sur-veyed regularly reviews both transportation firm capability

and supplier locations. By comparison, less than half of the laggards evaluate supplier locations and only 40 percent scrutinize transportation providers. Masters are also more rigorous than laggards about monitoring key elements of out-bound flow. One hundred percent of surveyed masters evaluate customer locations when ana-lyzing their outbound flow, compared to only half the laggards.

Fulfillment masters are also more likely to actively manage cost to serve in each distribu-tion channel (only a minority of laggards do this). And half the masters we studied regularly evaluate the tradeoff between cost to serve and value achieved, compared to only one-third of the laggards. In addition, masters are routinely involved in the R&D process—thus ensuring that efficiencies, constraints, and available value-adding activities are incorporated into product design.

Lastly, we determined that masters more fully leverage third party logistics firms. Some 80 percent said their 3PLs have boosted flex-ibility, while a lower percentage of the lag-gards—63 percent—said the same.

The case of a major elevator manufacturer illustrates the payoff from possessing sophis-ticated capabilities in fulfillment strategy. To improve operating margins, the company’s North American division moved U.S. production to Mexico, which forced a reassessment of its U.S. distribution network. After evaluating the net-work, the company designed a new supply chain that cut the company’s transportation costs by 13 percent. Total fulfillment savings reached

nearly $5 million while fulfillment service levels doubled. Clearly, fulfillment masters have reached a higher plane

when it comes to strategy development. It is also evident that a high level of enlightenment about cost and service benefits has resulted.

Next month, we plan to explore how fulfillment masters put their strategies to work, with operations and technolo-gies of karmic proportions.

The author’s column, “Mulani on Excellence,” regulary appears in Logistic Management magazine (www.logis-ticsmgmt.com). This article originally appeared in the magazine’s June 2009 issue.

0% 20% 40% 60% 80% 100%

Focus on Customer Locationsin Outbound Flow Analysis

Review Transportation ProviderCapabilities in Inbound Flow Analysis

Review Supplier Locationsin Inbound Flow Analysis

Design Channels for Needsof Products and Customers

Regularly Monitor and MeasureCost to Serve in Each Channel

Regularly Evaluate Tradeoff Between Cost to Serve and Value Achieved

Evaluate Outbound FlowsMore Frequently than Quarterly

Evaluate Inbound FlowsMore Frequently than Quarterly

Fulfillment Routinely Involved in R&D

Specific Focus on ProductLife Cycle and Inventory

Actively Model andManage Carbon Footprint

Masters

Laggards

EXHIBIT 1

Strategy Metrics Comparing Fulfillment Masters and Laggards

SCM090901global 9 9/1/2009 10:55:11 PM


T E C h N O L O GY

Supply Chain and the CIOITandthesupplychainfunctionsneedtogetintegrated—orevenbetterunited—iftheorganizationwantstoenhanceitsbusinessperformance.

ByKevinO’Marah

Kevin O’Marah is Chief

Strategy Officer at AMR

Research.

The past 20 years have seen a dramatic change in the supply chain dis-cipline from one essen-tially serving as a low-skill support function for manufacturing to something that mirrors the entire operational

footprint of the business. Where once supply chain meant simply purchasing to feed production or shipping of finished goods from the plant, today it is more likely to encompass everything from strategic sourcing through customer fulfillment, inclusive of manufacturing which increasingly reports to supply chain rather than the other way around. Further, the best supply chain organizations (Exhibit 1 shows AMR’s Top 25) also have some authority over new product development and launch, and other strate-gic functions like customer management and post-sales support.

The drivers behind this expansion of responsibility for supply chain include the rise of a truly global supply chain, especially manufacturing in China, which relies more on third-party pro-duction assets than company-owned factories. Also contributing is the shortening of product lifecycles across industries, which has forced businesses to think about engineering and prod-uct development in terms of design-for-supply chain. Even the increasing power of customers has played a role as consumer or market power has focused operations to lean inventories up and down the supply chain rather than sim-ply within the plant.

The one common thread uniting these drivers is information technol-

ogy. IT has given us scalable communication with contract manufacturers in low-cost coun-tries, automated engineering to sourcing integra-tion, and downstream demand visibility. Without enterprise information technology, there would be no global supply chain function as we know it today.

Yet, too often the office of the CIO seems out of touch with the business requirements of day-to-day users in the supply chain function. Why is this and what can be done to fix it?

What’s Wrong With IT?IT as a corporate function got its start as a data processing role, essentially managing site-specific computing equipment and the arcane program-ming languages needed to automate basic trans-actions and to query databases for reports. This function developed an urgent need to understand technology from the integrated circuit forward.

EXHIBIT 1

Top 25 vs. All Functional Supply Chain Stations

Deliver78%77%

1%

Plan67%68%

-1%

CustomerManagement

67%52%

29%

Source67%

63%6%

Make56%

40%40%

New ProductDesign and Launch

44%31%

42%Top 25AllDifferential

Top 25 n=9, All n=198

Post SalesSupport

33%25%

32%

SCM090901technology 10 9/1/2009 11:01:02 PM

www.scmr.com� S u p p l y C h a i n M a n a g e m e n t R e v i e w · S e p t e m b e r 2 0 0 9 ��11

T E C hN O L O GY ( c o n t i n u e d )

In other words, corporate IT started life as a “technology push” dynamic. Hot new minicomputers gave way to even hotter client-server architectures and the CIO’s mission was to stay on top of these waves of innovation.

Things really got bad during the mid-1990’s when a glo-balizing business environment forced corporate strategists in the developed U.S. and European markets to reengineer their companies. This movement meant a total overhaul of the information systems that had been set in place as isolated applications serving local masters. The resulting boom in Enterprise Resource Planning(ERP) deployments essentially promised that, once the rollout was complete, a new and radically more efficient system would reign. Unfortunately, the rollout took too long, cost too much, and largely missed the next wave of technology innovation, which was the rise of web applications.

The state of affairs today is largely one of misalignment at best, disillusionment at worst. IT departments are being reduced with a combination of outsourcing and budget cuts. The typical CIO in a supply chain intensive busi-ness today struggles to keep up with rising maintenance costs of existing systems. The CIO also feels pressure from operational users to find and deliver new and better appli-cations for critical processes. The heady days of leading selection teams choosing between SAP and Oracle or i2 Technologies and Manugistics are long gone.

What�Can�Be�Done�to�Fix�it?The first step in getting IT and the business realigned is to recognize that IT is an essential ingredient to success in supply chain. Consider the following typical IT inten-sive processes and how well they could run without a solid enterprise information architecture:

• Order management—especially in very high volume cases like consumer packaged goods manufacturers who may have millions of order lines every day with promo-tions, charge-backs and other special considerations add-ing complexity.

• Inventory optimization—whether this means simple inventory visibility, or a more sophisticated planning tool, companies sourcing, assembling and delivering hundreds of thousands of units daily across potentially hundreds of locations need to handle vast amounts of data.

• Configuration management—complex rules that gov-ern what can go with what, especially in engineering inten-sive industries, calls for enormous intelligence and speed, and generally with little margin for error.

These examples are but a few of the mission critical supply chain functions that simply cannot work at scale without well-designed and well-integrated enterprise infor-mation systems. Tying these top and bottom-line business processes to IT enablement is essential to general man-

agement’s understanding of such vital tasks as master data management or business process modeling.

A second step most companies need to take reverses the first: IT must appreciate the process needs of their busi-ness users. Plenty of lip service is paid to this principle, and yet, far too often the office of the CIO remains wed-ded to its project go live commitments at the expense of real business needs. This problem is especially bad when the supply chain functionality demanded by the opera-tional user is part of a future release or later rollout of the dominant ERP backbone vendor. Faced with the choice to wait for what could be years, and pay millions for the privi-lege, or break standards and buy a specialty application in a rogue project, many supply chain professionals struggle to choose the lesser of these two evils.

IT can solve this problem by governing all investments and projects according to the business process they are committing to enable. Manual workarounds, best-of-breed applications, and, increasingly web-based software-as-a-service deployments may suit the supply chain’s process needs faster, better, and cheaper than module X.X of your ERP vendor’s suite.

In an ideal world business and IT are united rather than just aligned. Increasingly we are seeing IT as a function owned by the supply chain organization. The chemicals industry in particular is one where many heads of sup-ply chain also own most of IT. The logic makes sense, as truly critical functions like the examples above become ever more deeply ingrained in the competitive strategy of the business while genuine back office functions like payroll, telecommunications networks, and archiving lend themselves to low cost outsourcing. Our survey data (see Exhibit 2) shows that while a minority of companies overall include technology enablement within the span of control of supply chain, leaders are much more likely to unite IT and operations as one. Looking ahead, one wonders if the office of the CIO and the head of supply chain will eventu-ally be behind the same door.

Strategyand Change

Management

100%

64%56%

PerformanceMeasurementand Analytics

78%69%

13%

TechnologyEnablement

56%

41% 37%

Governance

33% 31%

6%

Top 25AllProp_Diff

EXHIBIT 2

Top 25 vs. All Enabling Supply Chain Stations

SCM090901technology 11 9/1/2009 11:01:16 PM

12 S u p p l y C h a i n M a n a g e m e n t R e v i e w · S e p t e m b e r 2 0 0 9 � www.scmr.com

Long-term Perspective:John Mascaritolo

By John Kerr

P R O F I L E S i n L E A D E R S H I P

John Kerr is a special projects

editor for Supply Chain Management

Review

John Mascaritolo could never be accused of short-termism or blamed for having a blinkered world view. The former NCR executive, now a

college professor, has always kept an eye on tomor-row. And he constantly coaches his students to see the story behind the story.

One case in point: the class where he used the analogy of the orchestra conductor to depict the role of the supply chain leader. The students, invited at the start of the class to raise a hand when they saw a connection between Mascaritolo’s imagery and the bigger picture he was describ-ing, were attentive. And then one girl’s hand shot up. “It just clicked for me—your example of the orchestra conductor!” she declared.

The Clayton State University professor is delighted to see his protégés making those connec-tions. “A lot of students have told me ‘I look at trucks and airplanes differently now.’ That’s really the exciting thing,” he says. From his earliest days as a supply chain educator—asked to speak to a college economics class when he was still a practicing industry executive—he would get his students to explain the impact of a truck breakdown or a dock strike on the rest of the supply chain. “The ones who ask questions are the sharp ones,” he says.

A Lifetime of ConnectionsMascaritolo has spent a lifetime looking for connec-tions between big ideas—and he is still seeing big-picture patterns and possibilities beyond the status quo. He now wears two hats in academia—as the

director of logistics practices and assistant professor of supply chain at Clayton State in Morrow, Georgia, and as the director of supply chain programs at Atlanta Technical College. His views into two edu-cational arenas allow him to see ways to forge links between two-year and four-year schools and cor-porations across Georgia, with the goal of helping improve the economic well-being of the state.

How so? With the strong like-lihood that Savannah becomes the primary east coast port for supercontainer ships once the Panama Canal is open to those vessels, the region will need a very solid base of supply chain expertise to support the trans-portation and distribution net-works required by that “super port.” Specifically, Mascaritolo is helping the state’s Workforce Ready program at the two-year college level, opening the eyes of teens who have little concept of the career possibilities within the supply chain field, much less an interest in how goods move regionally or nationally.

Mascaritolo has seen his own career as a series of inter-

connected goals. “I always had that 20-25-year view of what I wanted to be,” he says. The exception: leaving his first job out of college, interestingly as a high-school music teacher. When state budget cuts loomed, he left teaching and was hired in 1976 as a temporary worker in the imports department at consumer electronics company Sanyo Electric.

Hired permanently as an import coordinator soon after, Mascaritolo soon saw a host of possibilities for career growth in a logistics field that he found

When it comes to professional development, John Mascaritolo always looks beyond the short term.

SCM090901_Leadership 12 9/1/2009 11:02:31 PM


fascinating.� He� also� made� a� promise�to� himself.� “Before� the� word� ‘logistics’�was�used,�everything�was�segmented—�warehousing,� import,� export.� I� had�specialized� in� music� education,� and�I� vowed� that� I� wouldn’t� specialize� in�my�career�again.”�Deciding� to�develop�as� well-rounded� a� career� as� he� could,�Mascaritolo� says� he� chose� to� become�expert�in�“the�opposite�of�imports,”�and�he�took�a�job�working�as�an�export�coor-dinator�at�The�Mennen�Co.��

Three� years� later,� he� saw� the� next�link� in� his� series� of� career� goals:� an�opportunity�to�gain�experience�in�traffic�management�as�assistant�traffic�manager�at�Dell�Publishing.�And�three�years�after�that,�another�step:�a�move�to�C.R.�Bard,�where�Mascaritolo�became�the�manager�of�distribution�services�for�the�warehous-ing� provider’s� urological� division.� Later,�in�1994,�when�the�Olympics�were�head-ed�to�Atlanta,�Mascaritolo�knew�he�had�to�get� involved.� “As�a� logistician,�I�said�‘I�can’t�not�be�part�of�this�when�it’s�here�in� Atlanta,’”� he� recalls.� Managing� 175�people�through�10�direct�reports,�he�was�responsible�for�the�design,�implementa-tion�and�management�of�logistical�func-tions�associated�with�the�distribution�of�assets�in�the�1996�Olympic�Games.�

Among�several�other�achievements�as� the� program� manager� for� facilities�and�special�projects,�he�designed�and�implemented� the� logistics� infrastruc-ture� for� all� 12� of� the� Games’� remote�venues� across� three� states.� One� of�the� most� interesting—and� nerve-wracking—tasks� was� the� design� and�management� of� the� logistics� network�that� supported� the� yachting� venue� in�Savannah.� Mascaritolo� and� his� team�were� on� the� hook� for� the� security� of�more�than�$7.5�million�worth�of�com-petition�boats�and�support�craft.�

With� his� Olympics� accomplish-ments,� Mascaritolo� had� amassed� an�enviable� track� record� of� leadership�experience.�But�he�soon�moved�again,�to� independent� logistics� provider�DSC�Logistics,�where�he�became�the�south-east� region� general� manager� of�

transportation.� “I� knew� I�had� to�have�third-party� exposure� to� round� out� my�experience,”�he�says.�

By� 1999,� he� had� made� the� last� big�move� to� a�position� that� tapped� into� all�of� his� experiences� and� skills� he� had�built:� heading� the� global� transportation�and�logistics�commodity�team�for�NCR�Corp.�Responsible� for�a�global� logistics�spend� of� $350� million,� Mascaritolo�and� his� team�designed,� imple-mented�and�drove�corporate� global�logistics� processes�to� ensure� consis-tency� in� solution�delivery,� smooth�supply� chain� execution� and� enhanced�customer� service� using� best-practice�and�Six-Sigma�methodologies.

Return to TeachingHowever,� teaching�was�never� far� from�his� heart.� As� a� senior� practitioner� in�the�Atlanta�area,�he�had�regularly�been�invited�by�local�academics�to�be�a�guest�speaker� in� their� classes—and� he� had�always�enjoyed�the�experiences.�When�a� professor� at� DeVry� University� was�moving� to� another� location,� he� asked�Mascaritolo� to� become� an� adjunct�professor�of� logistics�and�supply�chain�management,� a� role� the� executive�retained� alongside� his� NCR� responsi-bilities�until�the�DeVry�program�ended�in�2003.�“That�was�my�testing�ground—do�I�still�want�to�be�a�teacher,�and�do�I�really�have�the�skills�that�other�people�say�they�see�in�me?”�he�says.�

By� mid-decade,� John� Mascaritolo�had� enjoyed� a� full� career� in� supply�chain,�and�had�achieved�everything�he�had� set� out,� years� earlier,� to� achieve.�So�he�set�himself�new�goals�of�getting�his�MBA�and�switching�into�academia�to� teach� full-time.� His� extensive� net-work�in�business�and�education�worlds�brought� him� the� position� at� Clayton�State,�where�he�designed�and�grew�the�supply�chain�program�from�two�cours-es�to�five�and�from�35�to�over�147�stu-

dents.�At�Clayton’s�School�of�Business,�he�also�built�a�minor�course�in�supply�chain� management� and� established�the� foundation� and� executive� board�for�a�Center�of�Supply�Chain�there.��

Mascaritolo’s� broad� perspective�makes� him� a� believer� in� the� power�of� the� whole� to� benefit� the� parts.�As�such,�he�urges�senior�executives�to�not�only� have� their� managers� participate�

in� local�chapters�of�professional�asso-ciations�but�also� to� think�more�about�advancing�the�supply�chain�profession�and�their�own�companies�over�the�long�haul.�“Recognize�that�there�are�people�who�are�in�the�shoes�you�were�in�10-15�years�ago,”�he�says.�He�also�advises�managers� to� open� up� their� organiza-tions� to� internships� to� give�more� stu-dents� more� opportunities� to� exercise�what� they’re� being� taught� in� school.�He� notes� that� such� internships� often�expose�hiring�managers�to�great�talent�in�the�making.

And�with�his�Atlanta�Technical�cap�in�place,�he�cautions�business�leaders�not�to�fall�into�the�trap�of�recognizing�and�forging�links�with�only�the�“name”�schools—a� choice� that� he� believes�hurts�everyone�in�the�long�run.�

So� where� to� from� here� for� John�Mascaritolo?�Recently�he�was�elected�as� the� director� of� education� for� the�Warehousing�Education�and�Research�Council� (WERC).� He’s� still� the�education� chairman� for� the� Atlanta�Roundtable�of�the�Council�for�Supply�Chain�Management�Professionals.�

But� even� that� won’t� be� enough� to�keep� him� completely� occupied.� It’s� a�fair�bet�that�he’s�concocting�a�new�set�of�stretch�goals�for�himself�right�now.�“Short-term”� just� isn’t� in� this� man’s�vocabulary.�

P R O F I L E S in L E A D E R S H I P ( c o n t i n u e d )

Mascaritolo’s broad perspective makes him a believer in the power of the whole to benefit the parts.

SCM090901_Leadership 13 9/1/2009 11:02:38 PM

From Guru to GM: Developing Tomorrow’s

leaDersBy pamela Culpepper and Terra winston

Pamela Culpepper ([email protected]) is vice president of Human Resources for Supply Chain Management at PepsiCo. Terra Winston ([email protected]) is a principal at inTerract Consulting.

Traditional supply chain

education has been focused on

creating “gurus,” professionals

that have deep but narrow

expertise in both discipline and

industry. Today, the world is

changing rapidly with customers

demanding increased flexibility,

more customization, and quicker

time to market for innovations.

pepsiCo has discovered

that succeeding in this new

environment requires a new

breed of supply chain leaders:

the general manager.

As long as supply chain management has been studied as a discipline, the goals have been fairly consistent—produce quality products while minimizing costs. To do this, process-es had to be established and continuously improved to deliver consistent results and reduce margins for error. In this environment

the best supply chain leaders spent years cultivating knowledge and experiences in their chosen niche.

Reflecting this environment, traditional supply chain educa-tion has been focused on creating gurus; leaders that have deep but narrow expertise in both discipline and industry. University curriculum built students’ technical expertise but had few rigor-ous requirements for expanding soft skills like influencing oth-ers and collaborating successfully. Once on the job, employee development is often limited to a few days of in-class training that could quickly be forgotten. The real learning is done on the floor, where employees study at the feet of more senior leaders who have spent years working on these same processes in the same industries.

While gurus excel at building reliable processes and driving efficiencies, their siloed perspectives can result in rigid supply chain organizations that only change in reaction to pressure from the marketplace or the CEO. Without a broader understanding of the needs of other stakeholders, they sometimes develop solu-tions that work for their areas, but cause unintended impacts to other parts of the organization. They may work tirelessly to fix broken processes, but fail to proactively make the changes that help the system become more adaptable to future needs.


managemenT mUTUaliTY response sKills TeCHnologY

SCM090901guru_ID 14 9/1/2009 11:00:40 PM

Today, the world is changing rapidly with custom-ers demanding increased flexibility, more customization, and quicker time to market for innovations. International operations require the ability to provide locally relevant products while still maintaining the economies of scale to support the overall supply chain strategy. With flattened organizational structures and rapid advances in technol-ogy that have automated many tactical activities, strategic decision-making is being pushed to lower levels. If the goal is to greet these new organizational overtures with con-fidence, the supply chain must move beyond quiet, cost cutting function to a key player in achieving the company’s growth objectives.

Meeting this need requires a new breed of supply chain leaders—the general manager. General managers complement their technical know-how with broad cross-discipline and cross-functional experience. They under-stand end-to-end processes, can design comprehensive solutions, and have the interpersonal skills to gain sup-port for their ideas. They are willing to move around the organization, even globally, to expand their knowledge and are continuously learning.

Developing General Manager SkillsThere is an abundance of developmental resources for gurus, but those interested in supply chain general man-ager careers may need to be more creative. Regardless of where you are in your career, either student or experi-enced employee, you can begin to build the skills, expe-riences, and perspectives to move beyond guru status. We discuss the strategies that you can implement to encourage that development appropriate to your career stage—student, employee, manager.

Students: Broaden the HorizonThe quest to become a general manager can actually start before you ever step on campus, by choosing the right college or university. With the growing number of sup-ply chain and logistics programs available at top institu-tions, how do you decide which one will be best for you and your long-term career? There are so many factors to consider when choosing an undergraduate or graduate school. While your peers are busy comparing published rankings, looking for famous alumni, and perusing the list of recruiters in the career center, take some time to


James Yang

SCM090901guru_ID 15 9/1/2009 11:00:48 PM


Guru

look beyond the list of classes being offered in the supply chain or logistics department. Seek out forward-thinking schools that augment traditional deep technical educa-tion with more general engineering management cur-riculum. Take the time to speak with current students and learn how class work is done. As you make your final decision, give priority to those programs that emphasize teamwork, problem solving, and strong written and ver-bal communications skills.

The next opportunity that you have to build general manager skills is during registration. Your major/con-centration may have a very structured list of required courses, but you have the power to choose your electives wisely. Look for programs with the flexibility to use your elective hours to build knowledge in other areas like mar-keting or finance. You may not need to know the intricate details of cost accounting, but your electives are a great way to get a foundation in business basics. By taking an introductory marketing, finance, innovation, or general business course you can begin to understand the com-mon terms, concepts, and processes. A creative writing, debate, or extemporaneous speaking class can help you expand your communications skills. Even if your major workload is too heavy to accommodate a full elective, consider auditing a few interesting classes or getting a copy of the syllabus and checking some of the books out of the library. Take advantage of inter-disciplinary course offerings that partner engineering and business students to solve real world problems. This perspective and expe-rience can make you significantly more impactful as a future supply chain leader.

You may even find that some of your best lessons occur outside of class. On-campus clubs can be excel-lent resources for building your exposure to new per-spectives. Be an extracurricular explorer and join a few that are in the business department of your school. Pay attention to the various activities being offered by orga-nizations, even if you don’t become a member. Many groups host interesting speakers and sponsor field trips that are open to the general public. Don’t underestimate the value in even a short lecture. One engineering stu-dent noticed a flyer for a CEO presentation being given in the law school. By attending this event, not only did she benefit from the CEO’s point of view, but also after a great conversation with him, she landed a prime intern-ship offer.

There is no question that you should be seeking internship opportunities every summer that you can. These days, internships can be difficult to get, so don’t worry if your best offers are very technically focused or don’t allow you to work across disciplines or functions.

Although these opportunities may seem better for build-ing guru experience, you can still make the most of your time working for companies. During your summer there are plenty of ways that you can increase your knowl-edge of different supply chain disciplines and functions. Make friends with other interns, talk to them about their projects and how they interact with the supply chain organization. Speak with the full-time members of your department and learn about what they do. In addition to internships, many schools offer shorter work opportu-nities through externships or job shadowing over spring or winter breaks. These are wonderful opportunities to get a taste of a marketing, sales, or finance department. One last word on work experiences. There is tremen-dous value in having large, blue chip company names on your resume. However, you may find that an internship at a smaller organization may give you more chance to experience a variety of departments or to impact a bigger piece of the overall business.

By putting these core strategies into place, you will design an educational experience that makes you unique among your peer group. Not only will it give you an edge in the interview process, but it will also provide you a broader foundation upon which to build your career.

Trying to quickly build comprehensive business knowl-edge? Start with these popular and influential books.

• Execution: The Discipline of Getting Things Done by Larry Bossidy, Ram Charan, Charles Burck

• Influence: The Psychology of Persuasion by Robert B. Cialdini

• The Five Dysfunctions of a Team: A Leadership Fable by Patrick M. Lencioni

• The 22 Immutable Laws of Marketing: Violate Them at Your Own Risk! by Al Ries, Jack Trout

• The Art of Innovation: Lessons in Creativity from IDEO, America’s Leading Design Firm by Tom Kelley, Jonathan Littman

• Built to Last: Successful Habits of Visionary Companies by Jim Collins, Jerry I. Porras

• The Innovator’s Dilemma: The Revolutionary Book that Will Change the Way You Do Business by Clayton M. Christensen

• Emotional Intelligence: Why It Can Matter More Than IQ by Daniel Goleman

The Supply Chain General Manager’s

Bookshelf

SCM090901guru_ID 16 9/1/2009 11:00:55 PM

Employees: Plan Your MovesAfter being very hands-on in creating the right college or graduate school experience to get the best job, many people sit back, allowing their companies to decide what further development they need. This is not the behavior of a general manager! Even with a full plate of work, there are things that you can do to continue growing. The easiest strategy that you can implement is to keep yourself well versed in the latest supply chain strategy, leadership, and business thinking. Dust off your read-ing glasses and dive into relevant magazines and books. Interview some of your colleagues in other departments to see what publications and websites they frequent, and then invite them to discuss an interesting article over a cup of coffee. Listen to your senior managers and note what sources they tend to mention when sharing their ideas. See the sidebar for a starter list of books to expand your perspectives.

Another simple development strat-egy is to find a mentor from another discipline or function. Most people who say they are interested in getting a mentor are, in fact, in search of a spon-sor—someone of significant power who can help them get promoted. While there is no question that a sponsor is a critical piece of your personal board of directors, you need true mentors as well. Mentors are individuals that can provide a perspec-tive on the work that they are doing and give you coaching about your work and/or career. Even if your company does not have a formal mentoring program, you should take the initiative to build these relationships. One such mentoring relationship can be with an executive from another disci-pline or function. Share with them your interest in learn-ing about their area of expertise. Use your meetings to get the “procurement” or “marketing” perspective on some of your work and decisions. With your manager’s permission, ask if you can help with a project or attend a certain meet-ing, plant visit, or sales call with your mentor. Whether guru or general manager, you will find that a mentor will provide a huge benefit to your career.

PepsiCo has had tremendous success with both informal and formal mentoring, with mentoring circles being one of the more popular programs. In mentoring circles, a leader provides guidance to a small group of junior employees, either in person or virtually. The cir-cles allow participants to gain insights across functions, disciplines, and company departments. The structure

helps participants to get valuable knowledge from both the mentor and fellow group members.

Although it may require more time commitment, when possible, you should consider joining an employer-sponsored extracurricular activity. Many large compa-nies have internal interest groups that serve a variety of purposes. Some help with recruitment and retention of certain employee populations (woman, people of color, millenials, single moms), some execute key corporate responsibility related initiatives (such as environmental sustainability, community service), while others support culture and build employee morale (such as via employ-

ee-related event planning). Participation in any of these groups will expose you to more people across the organization, including key senior leaders. You will gain experience tackling company-wide issues that extend far past functional silos. As an added benefit it will also give you the chance to demon-strate and hone important leadership skills including influence, teaming, project management, strategic thinking, and conflict management.

For many PepsiCo employees, corporate-spon-

sored affinity groups are an excellent way to network, socialize, and grow their careers in exciting ways. For example, several years ago the PepsiCo Asian Network (PAN), an enterprise-wide employee resource group, decided to focus their energy on finding ways to better impact the company’s bottom line. Through this initia-tive, the group partnered with R&D to recommend new flavors that reflect Indian and Asian heritage, as well as with sales to suggest strategies to increase product avail-ability in select markets. Their work brought high value to PepsiCo while providing the members unique devel-opment opportunities to get hands-on exposure to inno-vation and the sales process.

Lastly, the most critical thing that you must do is to creatively and strategically plan your career moves. Everyone wants to move up the corporate ladder as quickly as possible; however, this is not the ideal way to build a general manager career. Instead, you should expect and look to make a series of lateral moves into other departments or teams to round out your experi-ence. Are there roles in logistics that can get you working


While gurus excel at building reliable processes and driving efficiencies, their siloed perspectives can result in rigid supply chain organizations.

SCM090901guru_ID 17 9/1/2009 11:01:03 PM


Guru

very closely with the sales team? What jobs involve par-ticipation in cross-functional innovation teams? A little creativity and ingenuity can go a long way in creating the career that you want. For example, one procurement specialist faced with dramatically increasing pricing for certain supplies, partnered with the R&D team to brain-storm how to integrate newer, cheaper products. When she was ready to make her next career move, doors were open in both R&D and marketing.

Managers: Take ResponsibilityIf you manage supply chain employees, you not only have a responsibility for your own personal development but also that of your team, and that may include building gen-eral management skills. Thankfully, you can do so by mak-ing small modifications to your current management prac-tices. First and foremost, take every opportunity to bring new perspectives to your team. Set aside a regular time in your team meetings on a monthly or quarterly basis to bring in relevant articles or speak-ers from other parts of the organiza-tion. When company announcements are made, have the group discuss not only the direct impact on your team, but also the implication for other stakeholders. Use your team building events to integrate some of these con-cepts. For example, instead of taking the team on a golf outing, conduct a market tour of one of your customers or let your employees go out with the sales team for part of the day.

When you need to develop specif-ic individuals, you should look to get more mileage out of current assign-ments. In today’s economic environ-ment, employee workloads are filled to the brim after rounds of layoffs and cost cutting initiatives. While everyone craves develop-mental opportunities, there are few that would appreci-ate more work, even if the purpose were to increase their skills. Instead, find ways to build more learning opportu-nities into current work assignments. Have your people solicit input on their projects from stakeholders in a larger variety of departments. Encourage them to collect best practices from across the organization before finalizing solutions. Whenever possible, allow them to participate in company-wide special teams. There is no education like battling through a complex company issue on a cross-functional taskforce. Even delegation can be an effective tool.

PepsiCo views employee development as a key responsibility of leaders at every level and has built this expectation into leadership competencies, succession planning, and performance management. Some supply chain managers use delegation to increase team efficien-cy and develop employee skills. The managers identify the “bottom third” of their tasks—those routine activi-ties that are critical to their jobs, but are no longer chal-lenging or developmental. They can then delegate these tasks. This simple process is powerful because work that is routine to the manager can be exciting and extremely developmental for the team members who aspire to one day be managers themselves.

Lastly, you need to get more comfortable taking cal-culated risks on talent. By far the best way to develop your employees is to put them in roles where they can learn on the job. Give your strong performers the chance to take on new assignments even if they don’t have the traditional levels of experience that would be expected.

Once stretch assignments have been made, be sure to provide adequate support and training to help the employee be successful in this new role. In the end, the improvement in the quality of your talent and the better solutions brought by a fresh set of eyes will more than make up for the risks. PepsiCo is commit-ted to providing stretch assignments for key talent, whether it is in-role or through new positions. As the organization adjusts to address business needs, inte-grate acquisitions, and develop new products, we pay significant attention to how the new work can create

stretch assignments. However, PepsiCo recognizes that the assignment alone is not enough. There must be an honest understanding of the employee’s strengths and weaknesses, and commitment from management to pro-vide the coaching, training, and tools that the employee will need to be successful.

Breaking Down the SilosThere are clearly lots of successful strategies that indi-viduals and managers can use to develop general man-agement skills, but what is the role of the corporation? How does an organization balance the need for the technical depth that gurus bring, while still encouraging

If you manage supply chain employees, not only do you have to continue your own personal development, you also have a responsibility for developing your team.

SCM090901guru_ID 18 9/1/2009 11:01:13 PM

the next generation of supply chain general managers? The key is to create an environment where people have the opportunity to learn outside of their chosen areas of expertise. Make sure that there are clear paths for career progression for both gurus and general managers. During staffing meetings and promotion decisions, senior lead-ers and human resources should be vigilant to root out biases and beliefs that make managers resistant to mov-ing talent outside of disciplinary silos. (See the sidebar to learn how PepsiCo has created a culture to develop supply chain general managers.)

After considering your strengths and your career goals, you may decide that you actually prefer the guru track. If this is the case, don’t worry; there will always be a need for talented specialists that continue to move supply chain disciplines forward. However, this does not mean that you are entirely excused from learning more about general management. Find ways to better under-stand how your department’s decisions impact your stakeholders and the broader organization. Use some of the strategies listed above to build your soft skills—to strengthen your ability to influence, motivate, and com-

municate. These skills are necessary for career suc-cess regardless of your path. Most importantly, as you climb the career ladder and become a leader yourself, recognize that some of your employees may need to be groomed as general managers. Be sure to provide them the development that they need, even when it is outside of your comfort zone.

But if you are interested in designing comprehensive solutions that provide long-term benefit to the entire enterprise, you must find ways to better collaborate internally, across functions and disciplines, and exter-nally with customers and suppliers. If you want to move beyond cost cutting and start contributing to the strate-gies that will drive growth, you must break down silos and expand your knowledge of, and influence on, rev-enue generating processes. If you aspire to take on the most senior roles in your company, you need to find ways to hone and demonstrate your influence skills, strategic thinking, and focus on adding customer value. And if you want to take the reigns of leadership and shape the future of your company, general management is the only path to take. jjj


PepsiCo�has�long�had�a�reputation�as�an�organization�that�grows�strong�leaders.�Within�Supply�Chain,�we�

have�implemented�a�number�of�initiatives�to�create�a�strong�pool�of�general�managers�that�can�help�us�meet�our�most�critical�business�needs.�

•�Re-thinking Career Movement.�Historically,�we�have�moved�people�through�the�organization�vertically,�with�a�focus�on�building�their�technical�or�discipline�depth.�As�a�result,�we�had�established�a�strong�and�experienced�leader-ship�team�but�had�limited�our�ability�as�an�organization�to�build�a�bench�of�supply�chain�talent�that�was�transferable�across�the�corporation.�Therefore�we�updated�our�internal�people�planning�process�to�incorporate�more�cross-disci-pline�assignments�within�supply�chain.�An�important�tool�in�this�process�is�the�“Experience�Plan,”�a�document�that�identifies�the�types�of�experiences�that�a�strong�leader�will�need�to�successfully�contribute�in�any�role�within�supply�chain.�During�this�process,�for�select�employees,�we�map�out�a�career�plan�that�encompasses�as�many�as�10�years�and�3-4�roles�with�accelerated�learning�as�the�objective.�We�also�created�liaison�or�integration�roles�that�connect�supply�chain�to�sales�and�marketing,�or�project�roles�that�integrated�R&D�and�global�procurement.��

•�Changing Mindsets. We�recognized�early�on�that�just�adjusting�the�planning�process�on�paper�could�not�create�

the�deep-seated�change�that�we�needed.�We�put�together�a�parallel�campaign�focused�on�facilitating�a�shift�in�our�managers’�minds�about�what�capabilities�are�required�in�Supply�Chain.�Until�then,�most�tenured�managers�believed�that�depth�was�good�and�breadth�was�bad.�Their�thought�was�that�if�you�did�not�“grow�up”�in�the�discipline�or�with�a�particular�set�of�technical�skills,�there�was�no�way�that�you�could�effectively�manage�or�lead�a�team�with�that�responsi-bility.�To�combat�this�thinking,�we�identified�and�are�devel-oping�transferable�leadership�skills�like�“learning�agility”�to�help�those�same�managers�accelerate�their�learning�of�new�technical�skills.�Getting�managers�to�trust�in�the�talent�that�they�received�from�other�disciplines,�ones�who�did�not�have�the�technical�depth�but�strong�leadership�competencies,�was�a�challenge�but�well�worth�the�effort.��

•�Adjusting the Hiring Profile.�Externally,�our�hiring�philosophy�has�changed�as�well.�No�longer�are�we�on�the�hunt�for�23�years�of�juice�extraction�experience.�As�business�requirements�began�shifting�and�the�pace�of�change�increased,�we�needed�to�bring�in�new�perspectives�and�fresh�thinking�to�bolster�process�and�equipment�innovation�and�to�avoid�becoming�sluggishness�in�our�ability�to�adapt.�Now,�when�we�go�to�the�external�market,�we�are�seeking�varying�consumer�products�experience,�time�spent�in�multiple�disciplines�within�supply�chain,�and�demonstrated�leadership�skills.

How PepsiCo Builds Supply Chain Leaders

SCM090901guru_ID 19 9/1/2009 11:01:20 PM

Vested Outsourcing: A Better WAy to outsource

By Kate Vitasek and Mike Ledyard

Kate Vitasek ([email protected]) is on the faculty of the University of Tennessee’s Center for Executive Education and is founder of Supply Chain Visions. Mike Ledyard, a co-founder of Supply Chain Visions, is an author and frequent speaker on process measurement and improvement. He can be reached at [email protected].

Almost all outsource arrangements—regard-less of what is being o u t s o u r c e d — h a v e room for improvement. Outsourcing as a large-scale business practice

simply has not been around long enough for companies to have worked out all the kinks. Many companies jumped in without fully understanding how to do it right. The result: Outsourcing deals that are structured with fundamental flaws in the business model and the relationship. And while there are more successes than failures, almost all com-panies still struggle with how to improve their outsourcing efforts.

For the past two years, the authors have participated in a University of Tennessee research program funded by the U.S. Air Force to study companies that were employing performance-based approaches for outsourcing. A key part of the research was to distill our obser-vations into courseware for the Defense Acquisition University. In addition, we worked on the implementation of actual defense projects to ensure that partici-pants had a deep understanding of how to develop a solid outsourcing agreement (known as a service acquisition in the

government sector). In this article, we will explore performance partnerships as a unique approach to outsourcing.

This article is based on our research and hands-on experience working with organizations that have adopted sym-biotic performance partnerships that truly unlock win-win solutions. While many believe “win-win” is just a buzz-word that’s largely theoretical in nature, our research has proved differently. We have uncovered a set of unwritten rules companies can use to develop perfor-mance partnerships that enable both parties to achieve much higher levels of performance and cost savings than previously thought possible. We have distilled our lessons and approach into what we call “Vested Outsourcing.” We selected this term because it under-scores the importance of both par-ties having a stake in maintaining the arrangement and working together to create a performance partnership. This type of partnership takes both the company outsourcing and the service provider to new levels of cost savings, service improvements and profitability.

In Search of a Better WayThought-leading companies have been challenging conventional outsourc-


MANAGeMeNt MutuALIty resPoNse sKILLs tecHNoLoGy

SCM090901VestedOut.indd 20 9/1/2009 10:49:52 PM

www.scmr.com S u p p l y C h a i n M a n a g e m e n t R e v i e w · S e p t e m b e r 2 0 0 9 21

Why do so many outsourcing relationships fail to

achieve anything near their real potential? One big

reason is that they are based on a “What’s in it for

me” philosophy. Vested Outsourcing changes all

that. It encourages both parties to act for mutual

benefit—and in the process lays the foundation

for sustained success. The five rules of Vested

Outsourcing presented here show how.

Gary Bates

SCM090901VestedOut 21SCM090901VestedOut 21 9/1/2009 5:04:53 PM9/1/2009 5:04:53 PM


Outsourcing

ing models for the past ten years. One result of this has been the emergence of Vested Outsourcing. And while no two Vested Outsourcing partnerships are alike, all good ones achieve a similar goal: A performance partner-ship based on optimizing for innovation and improved service, reduced cost to the company outsourcing, and improved profits to outsource provider. (See the Performance Pyramid depicted in Exhibit 1.) In suc-cessful performance partnerships, companies and their service providers work together to develop performance-based solutions that are aligned to their respective inter-ests. Importantly, both parties receive tangible benefits from the relationship.

At the heart of a Vested Outsourcing contract is an agreement on desired outcomes that both companies will achieve. The agreement clearly defines financial rewards for meeting or exceeding the agreed-upon outcomes and speci-fies the penalties for falling short. Simply stated, if the out-source provider achieves the desired outcomes (results), it receives a bonus. It is important to understand that Vested Outsourcing is not just gainsharing. Gainsharing is usually structured to return to the service provider a portion of cost savings that they bring to the relationship. It is based on productivity measures, and on reducing the cost of service for a specified range of activities.

Vested Outsourcing is much broader. While it certain-ly includes the cost reduction concepts of gainsharing, it also includes increases in revenue, service level improve-ments, process improvements, and so forth. Where prof-it-sharing is based on profitability or cost measures—or, managing one’s portion of the existing piece of the pie—Vested Outsourcing focuses on value creation, making the pie bigger so all parties can enjoy a bigger share.

This new approach challenges and encourages the outsource provider to apply innovative solutions and/or investments to solve a client’s problem and to create value. But in doing so, the outsource provider also takes on some risk, in essence putting “skin in the game.” The provider looks at how it can best apply world-class pro-cesses, technologies, and capabilities that will drive value. This commitment to deliver against the projected value for the company outsourcing (such as a commitment to reduce costs or improve service, or both) shifts risk to the outsource provider. In exchange for achieving this incre-mental value, the company outsourcing commits to allow the provider to earn additional profit—above and beyond industry average profits for their service area. The result is a win-win Vested Outsourcing partnership.

Going the Whole Nine YardsWhile the notion of partnerships is widely applauded in business, our experience and research has found that most organizations optimize “partnerships” for their own self interests. This typically reflects a “What’s In It for Me?”, or WIIFMe mentality. Western cultures are ingrained with “winning” from early childhood. Similarly, business schools and law schools focus much of their curricula on winning. Procurement and sales professionals, too, are trained in the art of negotiations to help them “win.”

Companies that embark on a Vested Outsourcing agreement must put aside WIIFMe in favor of WIIFWe (What’s In It For We). This latter approach seeks to unlock a greater opportunity than is currently realized by either party. Put another way, it increases the size of the entire pie vs. maximizing the size of the slice for any one party (for example, lower costs at the expense of the outsource provider’s profits). Only by working together can both parties succeed. WIIFWe effectively tosses the conventional win/lose mentality out the window.

Developing a WIIFWe relationship is easier to describe than to do. It’s not easy for most organizations to quickly transition from a culture of oversight and control to one of mutual respect. True win-win requires effort and commitment by both parties. Outsourcing does not mean abdication: it must be a partnership with regular, frequent communication to manage the expecta-tions as well as the work. One of the most pernicious problems infecting traditional outsourcing arrangements results from micromanagement. A different set of equal-ly destructive problems can emerge when a company hands over a process completely to the outsource provid-er, washes their hands of that process, and walks away. (The accompanying sidebar lists the ten most common ailments impacting outsourcing relationships.)

EXHIBIT 1

The Performance Pyramid

Source: Supply Chain Visions

Reduced Costto Company

Innovation,Improved Service

Improved Marginsto Provider

Goal:Performance

Partnership that Optimizesfor Mutual Desired Outcomes


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Outsourcing

A Vested Outsourcing relationship succeeds because both organizations work together to achieve mutually agreed upon, mutually benefi cial goals. In our experi-ence, only those organizations that truly set aside the WIIFMe for the WIIFWe mentality were able to achieve true Vested Outsourcing partnerships that delivered out-standing results.

The New Rules of OutsourcingOur research identifi ed fi ve principles that are embed-ded in sound outsourcing arrangements. We have come to view these principles as the “rules” of Vested Outsourcing. (See Exhibit 2.) When implemented in conjunction with a win/win What’s-in-it-for We philosophy, game-changing outsourcing relationships can happen.

Rule 1: Adopt an Outcome-Based vs. Transaction-Based Business ModelTraditionally, many outsource arrangements are built around a transactional model. (See also discussion of the Activity Trap in the sidebar.) Most often this transaction- based model is coupled with a cost-plus or a competitive-ly bid fi xed price per transaction pricing model to ensure that the buyer is getting the lowest cost per transaction. Under this conventional method, the service provider is paid for every transaction—regardless of whether or not it is needed. The more ineffi cient the entire process, the more money the service provider can make.

The conventional business model does achieve the lowest cost for transactions for the company outsourcing. However, it often does not help the company achieve what it really wants or needs. Why? The company that has out-sourced gets what they contracted; but what they needed is an effi cient and low-cost total support solution.

Vested Outsourcing, by contrast, operates under an outcome-based model in which the provider aligns its interests to what the company really wants (the effi cient, low-cost total solution).

A Vested Outsourcing model fundamentally shifts how a company buys services. The concept is fairly straight-forward. Instead of paying a provider for unit transactions for the various services provided—such as pallets in the warehouse, miles traveled, spare parts shipped, technical support hours, and so forth—the company and its ser-vice provider agree upon desired performance outcomes. Desired outcomes are still quantifi able, but take a differ-ent form: they can be availability, reliability, cost, revenue generation, employee or customer satisfaction, or even asset investment targets. For example, in a traditional outsource relationship the 3PL would be paid based on units received, pallets stored, units picked and packed,

orders processed, and so forth. In a vested outsourcing agreement, by comparison, the 3PL would be paid based on meeting the performance level for orders fi lled, prod-ucts available, or on time delivery. In essence, Vested Outsourcing buys outcomes, not individual transactions.

Rule 2: Focus on the WHAT not the HOWAdopting a Vested Outsourcing business model does not change the nature of the work to be performed. At the oper-ational level, there is still a need for material to be stored, orders to be managed and fulfi lled, calls to be answered, and goods to be delivered. What does change is the way in which the company purchases the outsourced services.

Under Vested Outsourcing, the buyer specifi es “what” they want; the provider is responsible for deter-mining “how” it gets done. Your in-house operations are either too expensive or ineffective (or both) and you’re looking outside for someone who can do the job better than you can do it. So when you fi nd that provider, you let them do the job, right? The problem that often aris-es here, however, is something we call the Outsourcing Paradox. By outsourcing, companies effectively concede that they are not in the best position to do a specifi c job or jobs. Yet when they turn the work over to someone more competent, they can’t resist telling that service pro-vider how to do the job.

The most effective Vested Outsourcing partnerships include minimal discussion of the processes the service providers must follow to meet the requirements. Instead, they focus on performance expectations. It’s up to the service provider to fi gure out how to put the supporting pieces together to achieve the company’s goals.

Performance partnerships let each fi rm do what they

3.Clearly Definedand Measurable

Desired Outcomes

EXHIBIT 2

Principles of Vested Outsourcing

Source: Supply Chain Visions

Win/Win(WIIFWe)

Relationship

1.Outcome-Basedvs. Transaction-Based Business

Model

5.Insight vs.Oversight

GovernanceStructure

2.Focuses on

the WHAT notthe HOW

4.Pricing ModelIncentives areOptimized forCost/Service

Tradeoffs


SCM090901VestedOut 24SCM090901VestedOut 24 9/1/2009 5:05:32 PM9/1/2009 5:05:32 PM

do best. Unless the outsourcing company has both the skills and the resources to keep up with the latest inno-vations in the service they are outsourcing, they should leave the details to the experts.

Rule 3: Clearly Define and Measure the Desired OutcomesThe third rule of Vested Outsourcing is to clearly define and measure desired outcomes. Both parties must be explicit in defining the desired outcomes. These out-comes are expressed in terms of a limited set (ideally, no more than five) of high-level metrics. Organizations should spend time during the outsourcing process, and especially during contract negotiations, to explicitly define how the relationship’s success will be measured. Attending to this upfront helps ensure that neither time nor resources are wasted pursuing the wrong objectives.

Once the desired outcomes are agreed upon and explicitly expressed, the service provider can propose a solution that will deliver the required level of perfor-mance at a pre-determined price. Under the purest form of Vested Outsourcing, the outsourcing company only pays for results (namely, orders shipped complete and on time), not transactions (picking, packing and shipping). The service provider is paid for the value delivered by its overall solution, rather than being paid for the activity performed.

We cannot stress enough the importance of getting this right. Carefully defining and measuring the desired outcomes will position the relationship for success, by assuring that the right things get done in the right way. Conversely, getting it wrong will result in potentially hundreds of thousands (if not millions) of dollars wasted in a relationship plagued by the common outsourcing ailments we have noted in the sidebar.

Rule 4: Optimize Pricing Model Incentives for Cost/Service TradeoffsThe fourth rule centers on a properly structured pricing model that incentivizes the optimal cost/service trad-eoff—or put another way, avoids the “Penny Wise and Pound Foolish” trap. The pricing model is based on the type of contract (fixed price or cost reimbursement) that will be used to reward the outsource provider.

When establishing the pricing model, businesses need to apply two principles. First, the model must bal-ance risk and reward for both parties. The agreement should be structured to ensure that the provider assumes risk only for decisions within its control. For example, a transportation service provider should never be penalized (or rewarded) for the changing costs of fuel. Second, the

agreement needs to require the service provider to deliv-er solutions—on time and complete shipments— not just perform pick, pack and ship transactions.

When properly constructed, Vested Outsourcing will incentivize the service provider to solve customer prob-lems proactively. Service providers are thus encouraged to develop and institute innovative and cost-effective methods of performing work to drive down total cost while maintaining or improving service.

Vested Outsourcing essentially is a strategic bet by the service provider that it can meet the service levels at the set price, for example 98 percent on time and complete shipments. Inherent in the business model is reward for the provider to make investments in process, service, or associated products that will generate returns in excess of contract requirements. Performance partner-ships are usually based on achieving the desired tradeoff either by achieving:

• Higher service levels at the same cost.• The same service levels at lower costs.• Higher service levels and lower service levels.If the service provider does a good job, it will reap the

rewards of greater profitability.Vested Outsourcing does not guarantee that service

providers will reap higher profits. However, it does give providers the authority and autonomy to make strategic investments in their processes and product reliability that can generate a greater ROI compared to conven-tional cost-plus or fixed price per transaction approach. Vested Outsourcing also typically seeks to encourage ser-vice providers to meet the desired performance levels at a flat or decreasing cost over time. Therefore, the service provider has to leverage its unique skills and capabilities to make the processes much more efficient. In addition, the provider may realize intangible benefits such as con-tract extensions or references from their clients.

Rule 5: Governance Structure Must Emphasize Insight vs. OversightIn the early days of outsourcing many companies made the mistake of simply throwing the work over the fence to their provider without clearly defining the require-ments or developing performance metrics or SLAs (ser-vice level agreements). As scary as it may seem, we still see some companies today that operate without ben-efit of a formal contract or any real agreement in place. Fortunately, this is a declining minority. Yet some have gone to the other extreme, succumbing to the measure-ment minutiae aliment. They often have a small army of people often referred to as “program managers” who micromanage the outsource provider.



Outsourcing

An effective Vested Outsourcing partnership out-sources processes to service providers that are real experts in those processes. The partnerships should be managed to create a culture of insight vs. oversight. Let’s look at the meaning of both words to get a better under-standing of the difference.

• Insight. Power of acute observation and deduction; penetration, discernment, perception.

• Oversight: Watchful care; superintendence; general supervision. Escape from an overlooked peril.

If you have done a good job picking the right out-source provider and you trust them and their exper-tise, why do you need a small army providing “general supervision” over them? A sound governance structure should establish good insight—not provide layers of oversight.

How Vested Outsourcing Rules Work Together In Vested Outsourcing, the organizations work together upon a foundation of trust and mutual accountability to achieve the outcomes. Supported by the careful align-ment of performance objectives and controls, the service provider is empowered to pursue improvements that will deliver higher performance, greater profits, and lower total ownership cost. Vested Outsourcing uses the power of free market innovation to improve the outsourc-ing relationship. This can be a challenging mindset to embrace. But participants should always keep in mind the ultimate goal: performance partnership that optimiz-es for mutual desired outcomes.

For the service providers, Vested Outsourcing is an

10 Common Outsourcing Ailments

1. Penny Wise and Pound Foolish When outsourcing, you need to think beyond the

short-term bottom line. The danger in focusing on the cheapest offer is that it inevitably leads to tradeoffs in qual-ity and/or service. Unfortunately, many executives view out-sourcing as a quick-fix solution to resolving balance sheet problems. Often companies suffering from a “Penny Wise and Pound Foolish” mentality, fall into a loop of frequently bidding out their work, picking the lowest price provider, and then transitioning to that supplier. This can lead to a vicious cycle of bid and transition, bid and transition, bid and transition.

2. The Outsourcing Paradox This ailment typically begins with the “experts” at the

outsourcing company developing the “perfect” set of tasks, frequencies and measures for the engagement. The result is an impressive document containing all the possible details on how the work is to be done. At last, the perfect system! However, this “perfect system” can actually sow the seeds of failure of the outsourcing effort. The reason: it’s the company’s perfect system, not one designed by the provider of the services, who’s supposed to be the experts at getting the job done.

3. The Activity Trap Traditionally, companies purchasing outsourced servic-

es have used a transaction-based model where the service provider is paid for every transaction—regardless of wheth-er or not it is needed. Businesses are in business to make money; providers of outsourcing services are no different. The more transactions they perform, the more money they

make. There is simply no incentive for them to reduce the number of non-value-added transactions because it would result in a reduction of revenue. Make sure your outsourcing agreement is not based on pushing the cash register button every time a specified activity is performed, especially when that activity is not value added.

4.The Junkyard Dog Factor When the decision to outsource comes down, it usually

means that jobs will be lost as the work and jobs transition to the service provider. This often results in employees hun-kering down and staking their territorial claim to certain processes that simply must stay in house. Even if the major-ity of the jobs are outsourced, many companies choose to keep their “best” employees on board to manage the new outsource provider. These employees are often the same ones who were asked to help write the statement of work (SOW). Is it any wonder then, that SOWs become rigid documents that dictate conventional and less-than-optimal ways of performing the tasks being outsourced?

5. The Honeymoon Effect At the beginning of any relationship, both parties go

through a honeymoon stage. Outsource providers will jump through hoops as they ramp up for their new client, who’s happy just to have someone else doing the job. But while the provider remains conscientious about meeting the com-pany’s expectations and service levels outlined in the con-tract, it never progresses beyond this point. The Honeymoon Effect lingers on, even while performance levels for the ser-vices provided may be improving industry wide. The prob-



opportunity to exercise greater flexibility in deciding how support is provided, to ensure cash flow stability through long-term contracts, and to increase revenue. For the company doing the outsourcing, it’s a chance to enhance performance while decreasing costs and assets employed. In short, vested outsourcing changes the fundamental business constructs of the typical out-sourcing approach.

Companies wanting to embark on a Vested Outsourcing partnership and thereby realize lower costs for the outsourcing company and higher profits for the service provider, neither of which can be attained by one organization working alone, will need to fully embrace the WIIFWe philosophy. Further, they will need to con-sistently live the five rules of outsourcing to ward off the common ailments that can weaken—and even destroy—

an outsourcing partnership. Vested Outsourcing is game-changing; it is the way to healthy and thriving outsourc-ing relationships. jjj

Authors’ notes: Our upcoming book, Vested Outsourcing, published by Macmillan, will offer a comprehensive guide for developing successful Vested Outsourcing partnerships. It is designed to help all companies begin their effort to take their outsourcing relationships to the next level.

The University of Tennessee offers a three-day open enroll-ment class at the school’s Center for Executive Education, titled Performance-Based Outsourcing: Buying Results, Not Activities! (See http://PBO.utk.edu) You can also contact Bric Wheeler at the University of Tennessee ([email protected]) for information on customized, in-house training on performance-based outsourc-ing. Also, readers are encouraged to visit the authors’ blog at www.vestedoutsourcing.com, which includes additional resources, suc-cess stories, and other material.

lem: while the honeymoon lasts, there’s no inherent incen-tive to raise service levels (or decrease the price) beyond what’s contained in the Service Level Agreements.

6. Sandbagging Let’s look at a typical outsourcing example of sandbag-

ging. Many times during contract negotiation, someone on the company side, often a senior manager, will ask, “Just how much can I save?” Rather than establish the highest level of savings achievable as early as possible (which would be most beneficial to the company outsourcing), the provider will sandbag and offer up the savings in smaller increments over time. Why deliver everything up front when you know that your hardnosed customer is just going to hammer you for more next quarter or next year? The providers know that total savings are made of up “low hanging fruit” and long-term savings. They often hold back some improvements in an effort to manufacture future savings opportunities in case they don’t perform well in a given quarter or year.

7. The Zero-Sum Game Companies that play this game believe, mistakenly,

that if something is good for the outsource provider, then it’s automatically bad for them. Providers feel the same way from the other perspective. Many organizations fail to understand that the sum of the parts, when combined effectively, can actually exceed the whole. This was proven by John Nash’s Nobel Prize winning research, commonly referred to as game theory. The theory’s basic premise is that when individuals or organizations play a game together (or work together to solve a problem) the results are always better than if they had played against each other (i.e., worked separately).

8. Driving Blind Disease The Driving Blind Disease afflicts companies

that have not done their homework in preparing for the outsourcing engagement. Specifically, it relates to the lack of a formal governance process to monitor the performance of the relationship. Research from the Aberdeen Group shows that one of the biggest challenges organizations face today is assuring that negotiated savings are actually realized on the bottom line.

9. Measurement Minutiae When companies try to measure everything,

they usually succumb to the malady of Measurement Minutiae. What’s remarkable is the scale of the minu-tiae that some organizations are able to create. We have found spreadsheets with 50 to 100 metrics on them. Measurement minutiae is often associated with companies that are suffering from the junkyard dog factor and with agreements that have fallen into the activity trap. If you find yourself micromanaging your service provider, you’re either bored or you don’t trust them.

10. The Power of Not Doing The saddest of all ailments is the one we call the

Power of Not Doing. This happens when a company falls into the trap of establishing measures for the sake of mea-sures, without thinking through how those measures will be used to manage the business. We’ve all heard the old adage that “You can’t manage what you don’t measure.” But if you don’t use your measures to make improvements, you should not expect results.



Is Supply Chain the By Mike Duffy

Mike Duffy is Executive Vice President of Operations at healthcare distributor Cardinal Health. He can be reached at [email protected].

If the U.S. healthcare sector

is to rein in its soaring costs,

it would do well to look to

the supply chain leaders

of the consumer packaged

goods industry. Specifically,

health care professionals need

to consider a “shelf-back”

collaborative approach that

involves increased trust among

partners, better alignment of

goals and incentives, and greater

transparency of information.

Cardinal Health’s Michael Duffy

explains.

Back in 2002, I didn’t realize how easy I had it when senior executives from my employer at the time, The Gillette Company, returned from a tense meet-ing with some of our largest customers. Our execu-tives had been forced to admit that we had failed to deliver effective customer service—and they did not come home happy. While our products were

constantly in demand, our company could not reliably ship to those big retailers’ requirements with case fill rates in the 80-90 percent range, falling far short of expectations of 98 percent rates.1

The executives had committed that we would fix the delivery prob-lems. Of course, it wasn’t easy to create a plan to make that commitment a reality. We needed to fix a number of processes that simply weren’t working the way we needed them to. More important to our success was changing how our organization viewed the supply chain. Our culture had to shift from one in which we pushed products into the market to one focused on improving product availability at the retailer’s shelf. That mindset had to permeate our organization and embed itself in all that we did—from developing our packaging to creating responsive supply-side systems that reacted quickly to changes in consumer demand.

But making the necessary fixes was easy in the sense that we had a burning platform from which to drive change: The retailers were threatening not to carry our new products unless we fixed our service issues. We also had several things working in our favor: unwavering support from our senior leadership team, full access to customer data, and control over the end-to-end processes required for supply chain optimization. As a result, over the next 18 months, we were able to increase customer service fill rates by 10 percent, cut inventory by 25 percent, and reduce costs by 3 percent.

Can It Work in Health Care?I moved from consumer products to the health care industry in 2006, and I’ve found that it’s easy to draw parallels between the situation we were in at Gillette in 2002 and the situation our industry is in today. (I now work for Cardinal Health, a global manufacturer and distribu-tor of medical and surgical supplies and technologies dedicated to making healthcare more cost-effective.) Like Gillette at the time, the


MANAGEMENT MUTUALITY RESPONSE SKILLS TECHNOLOGY

SCM090901_HealthCare 28 9/1/2009 10:52:40 PM


Cure for Rising

HEALTHCARE COSTS?

SCM090901_HealthCare 29SCM090901_HealthCare 29 9/1/2009 5:14:37 PM9/1/2009 5:14:37 PM


Healthcare

health care supply system operates largely as an “absorp-tion model,” moving products downstream without vis-ibility into demand at the point of use. An outcome of that model is similar to what we saw at Gillette prior to the transformation—products can be out of stock as much as 15 percent of the time.

Yet the supply chain transformation that occurred at Gillette and other consumer packaged goods (CPG) companies during the 1990s and early 2000s has yet to take root in healthcare. In fact, there is some sentiment that this transformation is not possible. The healthcare value chain—that is, the chains of activities that can create value for providers such as hospitals, for payers such as insurance companies, and most importantly for patients—is extremely complex. Consider the con-clusion reached by Dr. Lawton Burns and his Wharton School colleagues following their 42-month study of the healthcare value chain in 2002:

“Extended enterprises are not likely to emerge in healthcare for a host of reasons. The three key ingredi-ents in such enterprises—dedicated asset investments in one’s trading partners, effective knowledge management and information sharing, and trust—are all lacking.”2

I agree that there are some fundamental differ-ences between healthcare and the CPG industry that must be taken into account when determining wheth-er the “extended enterprise” that has been so success-fully applied in CPG can be applied to healthcare. Specifically:

1. The healthcare delivery system is very fragmented and regionalized, with no single national player capable of driving industry change as Wal-Mart did in consumer goods.

2. Pricing models indexed to inflation have histori-cally not created an incentive for trading partners to col-laborate and drive cost out of the system.

3. Healthcare lacks the technological sophistication found in other industries.

However, despite those differences, the conclusion that an extended enterprise model is “unlikely to emerge”

in healthcare must be challenged. The model is not only possible; it is essential. As supply chain leaders, we must break through silo thinking, challenge old paradigms and push ourselves to find solutions for the industry’s issues. In doing so, we will provide the necessary leadership for transforming our industry and helping restore the global competitiveness of American business.

The Mandate for ChangeFrom a macro perspective, the United States’ ability to compete in a global economy using domestic operations will be heavily influenced by our ability to reform health care and rein in cost, particularly in labor-intensive oper-ations. In its report, “The Economic Case for Health Care Reform,” the White House estimates that slowing the growth rate of health care spending by 1.5 percent a

year—a 20 percent reduction in the current projected rate of growth—would increase economic out-

put by more that 2 percent in 2020 and nearly 8 percent in 2030.3

The big question, of course, is how to do this. Supply chain leaders can play a central role in providing the answer. Let’s size up the healthcare supply chain issues, though. While every hospital is unique, it is reasonable to assume that the average hospital’s expenditure on supplies and on labor to manage supplies is approximately 25 percent of its total operating budget.

This assumption is based on the following:• A comprehensive study of the administrative cost

of health care published in The New England Journal of Medicine estimated that “the average U.S. hospital devoted 24.3 percent of spending to administration.”4

Included in the tasks categorized as administrative were accounting and ensuring that supplies are on hand.

• In their research published in Hospital Material Management Quarterly, Nathan and Trinkaus conclude that, “In most hospitals and medical establishments, about 35 percent of their budgets are spent on supplies and labor to manage the inventories, material, and infor-mation flows.”5

• The Healthcare Financial Management Association, a membership organization for healthcare financial man-agement executives and leaders, estimates that the average hospital spends 14 percent of its budget on supplies.6

It has been estimated that hospital health care costs will grow 6.2 percent per year through 2016.7 As Exhibit 1 illus-trates, a 100-200 basis point reduction in growth in supply-related costs would lead to a 24-48 basis points reduction in hospital expenditures by 2016. This is equivalent to a

An efficient healthcare supply chain will not only reduce costs, but also will increase patient safety by ensuring that the right product is available at the time the nurse needs it.


$20-40 billion annual reduction in hospital spend across the U.S. If we assume that this saving applies to all aspects of healthcare, such an effort can help reduce annual national health care expenditure by $60-120 billion.

Based on the results that have been achieved in other industries, it is reasonable to expect that changes in the healthcare value chain that are achievable in the next five years can dramatically slow the growth in supply costs. This will reduce supplies as a percentage of total spend while setting the stage for even greater reductions in the years that follow.

The State of Healthcare’s Value ChainIn many respects, healthcare in the United States has never been better. Hospitals are staffed by highly skilled, world-class professionals and equipped with sophisticated diagnostic and imaging systems. However, when it comes to the value chain, health care lags other industries in adopting best practices and optimizing operations.

In “The Economic Case for Health Care Reform,” referenced previously, the White House acknowledges that “our system is complex and we have high admin-istrative costs.” Yet there is little visibility into supply and not much sophistication in the systems and pro-cesses that control it. Many hospitals still rely on the bulk stockroom as the hub of their supply chain. In this

model, technicians set target stock levels for the various products stocked in the hospital’s units and laboratories. Expediting, “hot shots,” and rush orders are part of the everyday routine because, even though months or years of inventory may exist upstream in the extended value chain, products are often unavailable when the nurse needs them.

This, of course, contrasts sharply with the perfor-mance of a retail supply chain where product movement is closely monitored, as sophisticated inventory man-agement systems and point-of-use technologies have replaced dated legacy products. These systems have provided retailers and manufacturers alike with the data required to improve on-shelf product availability while lowering systemwide inventory and costs.

A Day in the Life of a Hospital OrderThe extent of the difference between CPG and health-care became obvious to me shortly after I moved into my current role at Cardinal Health. I decided to spend a night at one of our distribution centers to track the life of an order. The customer whose order I chose to observe was one of our more progressive partners, so I expected to see a fairly efficient process as I tracked the order from generation at the hospital through prod-uct put-away at the hospital supply station. To my sur-prise, that order was touched by nine people, and data had to move among six different information systems. By contrast, the most efficient direct store delivery (DSD) manufacturers utilize one system to generate and put away an order and have no more than three people touch the product.

The difference between what I observed and what occurs in retail highlights the opportunity that exists. From point-of-manufacture to point-of-use, there are redundancies and inefficiencies across the healthcare value chain (Exhibit 2). Although the lack of sophisti-cated technology solutions certainly contributes to this problem, technology should not be viewed as the pana-cea for the healthcare value chain. It will ultimately play a pivotal role if we are to match the efficiency of the retail supply chain, but it is not the starting point. Other foundational elements are needed if we are to maximize the benefits that technology will afford us.

A Plan for ChangeWhile progress is being realized in pockets across the healthcare value chain to address some of its inefficien-cies, there is a limit to the magnitude of impact these improvements will have without fundamental changes in how we—healthcare suppliers, distributors and provid-


EXHIBIT 1

How Reducing Supply Chain Costs Can Reduce Hospital Expenditures

Type of Expenditure

Total National Health Expenditures

Hospital Care

Supply Related Costs (25% spend assumption)

Hospital CareCurrent Projections (2009-2016)Assumed Reduction in GrowthRevised Growth Rate

Revised 2016 Supply CostsSavings

Revised 2016 Hospital Care CostsSavings (%)New CAGRChange in CAGR (%)

Extrapolating to Total National Health Expenditures2016 Total NHE Savings

2009

$2,509.5

$789.4

$197.4

6.2%1.0%5.2%

$281.0$19.2

$1,181.81.6%5.9%

-0.24%

$60.7

2016

$3,790.2

$1,201.0

$300.3

6.2%2.0%4.2%

$262.8$37.4

$1,163.63.1%5.7%

-0.48%

$118.1

(National Health Expenditures, $ billions)

Source: CMS

Projected

PROJECTED SAVINGS FROM IMPROVED SUPPLY CHAIN



Healthcare

ers—view the value chain. In much the same way that we undertook a mindset change at Gillette, professionals in this industry need to reorient their view of the supply chain and take a “shelf-back” approach.

We simply cannot be satisfied until we improve the availability of products at the point of use while reduc-ing end-to-end system costs. Although there will be chal-lenges in achieving the types of success seen in other industries, I firmly believe it can be done.

Admittedly, there are no easy fixes. But there are lessons we can apply from other industries to create improvements now. These lessons center on trust, align-ment and information transparency.

1. Building Trust and a Collaboration Mindset

In an AMR Research study of more than 275 life sciences and health care companies, participants were asked to identify the challenges they faced in working on joint opportunities across the healthcare value chain. One of the main impediments cited was “collaborating with trading partners.”

Additionally, participants were asked “Is there a lack of trust with your trading part-ners?” Almost three-quarters answered yes. Not surprisingly, AMR concluded that “the different industry segments in the health-care value chain do not trust each other. This has been a hindrance to information sharing and collaboration which drives sig-nificant costs and inefficiencies.”8

How important is trust and collabora-tion to improving supply chain performance? It’s hard to overstate it. For evidence, turn to a McKinsey and Company “Supply Chain Champions” study conducted to determine the characteristics of the leading consum-er goods supply chain leaders. McKinsey plotted the performance of 40 leading packaged goods companies based on service levels and cost, and then correlated the success of these leaders with various supply chain attri-butes. Supply chain collaboration surfaced as the lead-ing success factor (see Exhibit 3).

As these and other industry leaders have collaborat-ed more closely with their trading partners and taken a holistic look at their supply networks, they have driven

substantial cost and inventory out of the system while improving service levels and sales. (Exhibit 4 shows the savings achieved in three key indus-tries.) While much of the collabora-tion occurred between retailer and manufacturer, industry associations and exchanges such as the Grocery Manufacturers Association’s Logistics Committee, Transora and GS 1 pro-vided forums for CPG companies to develop and share best practices, tackle industry-wide issues, and deploy com-mon data standards. The goal of these associations is best illustrated by the GMA’s Logistics Committee mission statement: “The committee’s mission is to identify emerging logistics trends in

Performance of 40 LeadingPackaged Goods Companies

Key Success Factors of ConsumerPackaged Goods Supply Chain Leaders

Correlation with Supply Chain Success

EXHIBIT 3

Success Factors Associated with Collaboration

Source: McKinsey & Company

SC Collaboration

SupplyChain

ServiceLevel

High

LowLowHigh Supply

Chain Cost

0.40

Product Flexibity 0.35

Integrated SC Organization 0.30

Complexity Management 0.30

Planning Process 0.27

SC Controlling/Systems 0.22

Leaders

Followers

Manufacturers Distribution Consumers

EXHIBIT 2

Opportunities to Eliminate Redundancy and Reduce Complexity

Redundant warehouse assetsExcess inventories, leading to losses/writeoffsMismatched demand/supply locations-expedited shipping, poor serviceIncreased complexity, resulting in errors, increased costs, poor service

InternalWarehouse

WholesaleDistributor

Hospital

Care Provider

Patients

ExternalWarehouse

Manufacturing

1

1

2

2 2 2

3

3 4

4

4

1


the industry with the goal of promoting increased effec-tiveness and efficient business practices for serving our customers and consumers.”

In healthcare, we do not have the equivalent of a GMA Logistics Committee promoting the identification and sharing of best practices across the industry. But that is not to say there cannot be an equivalent cross-industry forum.

2. Aligning Goals and IncentivesWhile building trust takes time, there are some key

enabling elements that can be put in place immediately. The first is aligning the goals and incentives of participants across the value chain. Currently those goals are often not aligned: Manufacturers are concerned about sales, hospi-tal materials managers focus on purchase price and pur-chase price variances, and distributors work on keeping the two partners happy. These incentives cause the supply chain partners to add inefficiencies to the system.

In addition, many of the relationships in the health care value chain are governed by metrics that track the efficiency of the transaction between two trading part-ners. Instead, partners need to work together to clearly define the metrics that are important to the success of the system, not simply to the individual partners. Focusing on the metrics that matter will lead to a better and more complete understanding of the supply chain’s performance. In turn, this will lead to identification and dialogue around areas of opportunity, alignment on how best to close gaps, and improvement in overall perfor-mance. A simple example is focusing on service levels to the hospital, if not at the point of use. While it is

important to understand the service per-formance from the manufacturer to the distributor, what matters most is that the nurse has the product when it’s needed.

This evolution occurred at the time I was at Gillette and was critical to our turnaround. Historically, we had mea-sured service using two key metrics: dol-lar fill rate and on-time shipment. These two metrics were not customer-centric and only mattered to Gillette. Our cus-tomers did not order products in incre-ments of dollars; they ordered cases. Plus, they didn’t care when we shipped the product provided that it met their delivery expectation, which we didn’t know since we weren’t tracking delivery time. To help change our culture, we redefined our cus-tomer service metrics. Instead of looking at dollar fill rate, we began to measure case fill rate. Instead of measuring our

performance based on on-time shipment, we switched to on-time delivery. In addition, my entire organization added customer service metrics to their scorecard. In doing so, we ensured that internal functions were working toward the same end goal.

That same degree of organizational change is occurring here at Cardinal Health and is starting to impact how we work with our suppliers. For example, we had one supplier that has been a “gold” performer on our supplier scorecard for years. The supplier excelled in every category we mea-sured. Yet, when I visited with our selling organization, this supplier was routinely identified as an “issue” because our fill rates to the hospital for their products were low. As we matched the feedback we were hearing from the field with how we measured this and every other supplier, we identified gaps on our scorecard. Most notably, there was no measure for how well our mutual customer, the hospital, was being serviced. As a result, the supplier was unaware of the problem and couldn’t offer solutions.

Efforts like this are transforming the way we inter-act with our supply partners. We have established a sup-plier advocacy council that will identify areas where we can jointly improve supply chain efficiency. The coun-cil will also help ensure that Cardinal Health’s supply chain direction and corresponding technology platform are aligned with industry thinking and standards. We are introducing a new supplier performance scorecard that will focus on how we are servicing our mutual cus-tomer—the hospital. This will further drive alignment between Cardinal Health and suppliers on key future


EXHIBIT 4

Savings from End-to-End Collaboration in Other Industries

Consumer

Savings from Collaboration, % of Base Line

Source: McKinsey

20

30

5 2 1

Automotive

10

208

1 0

Electronics 20 20

30

2

Inventory Cost

Administration Logistics Production Spend



Healthcare

business initiatives that drive costs out of the supply chain while improving product availability.

We are also undergoing a comprehensive review of our current processes while aggressively tackling our legacy system issue. By reviewing our current processes through a “shelf-back” lens, we will identify opportunities to redesign, simplify and improve the performance of the end-to-end supply chain. In addition, we will introduce new technologies to streamline information flow and improve the transparency of data, creating a platform for even tighter integration with suppliers and providers.

Forward-thinking hospitals are addressing similar issues within their organizations. By working closer with its part-ners to address inefficiencies and improve inventory man-agement, the Lahey Clinic successfully drove $1.3 million in costs out of its supply chain (see accompanying sidebar). Nebraska Medical Center created a strategic advisory board that elevated the role of supply chain professionals and pro-vided a platform for a more strategic relationship with its supply chain partner. Through this process, the center real-ized first year savings of $1.9 million attributed to reduced consumption through automation, product substitution and more effective negotiations.

3. Improving Information TransparencyA key enabler to building collaboration is improving the

transparency, as well as accuracy, of information. Consumer goods companies lead the way in terms of effective supply chain information sharing. They have been more effective in turning into valuable information data from store-level point-of-sales systems, inventory management systems, and loyalty card databases, thereby enabling them to optimize supply chain performance and innovation.

In addition, CPG companies have launched numerous data synchronization efforts since the early 2000s to further improve business performance and establish the ground-work for future improvements. Examples of the inefficien-cies that data synchronization efforts target include:

• High administrative costs driven by both manual work and rework caused by data match errors.

• Underutilized logistics assets due to pallet and product master data errors.

Reduced warehouse productivity due to lengthy receiving processes.9

Led by Wegmans Food Markets and supported by Coca-Cola Co., General Mills, Hershey, J.M. Smucker, Nestle, PepsiCo, and Procter & Gamble (P&G), a pilot was conducted by the Grocery Manufacturer’s Association (GMA) to validate the opportunity in supply chain efficien-cies that would be realized by investing in data synchroniza-tion. Included in the findings were the following meaning-ful savings: (1) improved accuracy of product weights and measures, leading to $2.2 million of savings for one sup-plier and (2) improved logistics and distribution efficien-cies, allowing Wegmans to eliminate $1 million in labor and inventory carrying costs from its distribution network.10

Taking a cue from other industries, the U.S. Department of Defense (DoD) launched a pilot in 2006 to test the global data synchronization network’s (GDSN) applica-bility in healthcare. Their conclusion from the pilot: “All parties agree that consistent and synchronized data would bring great benefit to them as individual entities as well as to health care overall.”11 The DoD is looking to build on

Lahey Clinic is a physician-led, non-profit healthcare group in suburban Boston, with more than 500 physi-

cians and 4,600 other personnel supporting a 327-bed hospital and a 24-hour ambulatory care center. In enhanc-ing its supply chain operations, Lahey first moved to a stockless inventory system, which essentially replaces the hospital’s bulk stockroom with distributor-held inventory. In this case, Cardinal Health now manages the clinic’s inventory and arranges for just-in-time delivery of clinical products to stocking cabinets in the hospital’s units and laboratories.

Lahey also deployed Pyxis Products automated dis-pensing cabinets to control the dispensation of medications and medical supplies in a way that automates inventory management and enables usage to be tracked to employ-ees and patients. Employees use their ID numbers or fin-gerprints to access inventory. The system then transfers the information to the hospital’s billing system and generates reports that can be used to optimize medication and supply utilization and manage costs.

Lahey also worked closely with Cardinal Health to implement an enterprise-wide systems approach to supply chain efficiency to replace its management-by-committee approach. The clinic created a new position, Director of Supply Chain Management, to help implement recommen-dations and drive greater compliance. This experienced supply chain administrator built a team that was able to streamline the materials management information sys-tem to enable more effective use of the data generated by the Pyxis cabinets. This data was analyzed to better illus-trate precisely what drives the cost structure and allowed the team to improve inventory control, reduce waste and improve workflow.

To date these improvements have generated $1.3 million in savings and a 70 percent reduction in product stock-outs.

Lahey Clinic: Best Practices in Action


these results and expand its pilot with addi-tional items and manufacturers.

Based on the results seen in other industries and the success of the DoD pilot, it would be reasonable to expect that additional data synchronization programs are occurring throughout the healthcare industry. However, one of the key conclu-sions of the GMA study provides some insight into why this is not the case: “Data synchronization is not just about technology—it is about people and processes working together to form a highly integrated and collaborative value chain.”

Job Must Be Done TodayImproving the performance of the healthcare supply chain will be a core element of reducing the cost of healthcare in the U.S. An efficient supply chain will not only reduce costs, but also will increase patient safety by ensuring that the right product is available at the time the nurse needs it. Likewise, it will free up capital that can be diverted to fund further research and recovery efforts.

The solution is not easy and will take some time. Despite the documented successes of companies like Gillette and P&G, not all CPG companies have embraced the importance of communication and collab-oration. In fact, in 2005, in a GMA report highlighting the characteristics of companies that were winning in the marketplace (as defined by sales and operating mar-gin growth), one key differentiating trait was still that “winners…collaborate more closely with their partners to drive execution and eliminate waste.”12

Some of these winners are starting to emerge in healthcare, as seen in the best practices being deployed by leaders such as Lahey Clinic and Nebraska Medical Center. Now we need to build on their successes by establishing stronger relationships among all partners, aligning goals and increasing transparency to ensure that the value chain contributes to the White House’s goal of slowing the growth rate of healthcare spending.

At Cardinal Health, we are committed to making healthcare more cost-effective. By better aligning our-selves with our suppliers, implementing new scorecards to gauge performance, partnering with hospitals to deliv-er supply chain improvements, and reviewing internal processes in the spirit of improving the extended supply chain, we are taking the necessary first steps for improv-ing the healthcare value chain.

But it should go without saying that the job of reduc-ing healthcare’s value chain costs is bigger than any one company. We must all break through the industry’s siloed

thinking, challenge old paradigms and push ourselves to find solutions for the industry’s issues. This is our oppor-tunity. It can be done—and it’s a job that cannot wait much longer. jjj

Sources:

1 “How Gillette Cleaned Up Its Supply Chain”, Supply Chain Management Review (April 2004)

2 The Healthcare Value Chain: Producers, Purchasers and Providers, Lawton Burns and Wharton School Colleagues, published by John Wiley & Sons (2002)

3 “The Economic Case for Health Care Reform”, Executive Office of the President Council of Economic Advisors (June 2009)

4 “Costs of Health Care Administration in the United States and Canada”, Steffie Woolhandler, Terry Campbell, and David Himmelstein, The New England Journal of Medicine (August 21, 2003)

5 “Improving Health Care Means Spending More Time with Patients and Less Time with Inventory”, Nathan, J. and Trinkaus, J, Hospital Material Management Quarterly (November, 1996)

6 HFMA’s Health care Finance Outlook, 2008-2013 (November 2007)

7 “Health Spending Projections Through 2017”, John A Poisal, Federal Forecasters Conference (April 24, 2008)

8 “The Health care Value Chain Transformation: a Time to Learn, Unlearn, and Relearn”, Hussain Mooraj, AMR Research, and Aamir Rehman, MD, Saint Peters Heath System, 2008 Healthcare Exchange (November 2008)

9 “Synchronization – The Next Generation of Business Partnering: How Leading Companies are Delivering Actual Results,” Grocery Manufacturers Association, Food Marketing Institute, Wegmans Food Markets, Accenture LLP and 1Sync (2006)

10 “Data Synchronization Improves Supply Chain for Wegmans,” Logistics Today (August 10, 2006)

11 “Creating a Source of Truth in Health care: Testing the GDSN as a Platform for the Health care Product Data Utility. Results from DoD Health care GDSN Pilot Phase IIA,” DoD/VA Data Synchronization Program (September 2007)

12 “Winning with Customers to Drive Real Results: the 2005 Customer and Channel Management Survey,” Grocery Manufacturers Association (2005)


The supply chain transformation that occurred at Gillette and other consumer packaged goods companies during the 1990s and early 2000s has yet to take root in healthcare


An Update on the State of Supply Chain

EduCationBy Stanley E. Fawcett

upply chain management is no longer a stranger in the corpo-rate boardroom. Indeed, today’s ubercompetitive environment has placed SCM in the spotlight on the strategy stage. To meet ever-rising customer expectations in the face of fierce competi-tion, companies are building global networks and streamlining value-added processes. The goal is to efficiently use worldwide

resources to profitably meet the needs of global consumers. Supply chain activities lie at the heart of these strategies. Yet, many com-

panies struggle to find managers capable of executing these strategies and creating value across organizational and national borders. This reality raises a fundamental question for academics and practitioners alike: How well are our educational resources—namely professional associations, universities and industry publications—providing the education needed for managers to design and lead today’s global supply chains?

This article seeks to answer this vital question by evaluating the relevance and efficacy of existing supply chain educational resources. It’s based on a survey of (1) academics teaching supply chain subjects and (2) practitioners working in the supply chain arena. The findings are compared and contrasted to earlier studies on supply chain education conducted over the past 15 years. Given the rapid evolution of this business discipline, a new dimension has been added to the analysis and discussion. Specifically, this latest survey also asked respondents to evaluate the importance and usefulness of continuing education and professional development activities.

Survey MethodologyThe original “State of Logistics Education” was reported in 1995 in the Journal of Business Logistics1 with a follow-up report appearing 10 years later in Supply Chain Management Review.2 The present study employed an updated version of the original instrument, making it possible to track chang-ing perceptions regarding professional associations, university programs, and supply chain journals as well as to identify new educational resources that have become popular in recent years. The principal change to the current study was to include a set of questions to assess continuing education and


Stanley E. Fawcett ([email protected]) is the Donald L. Staheli Professor of Business Management at Brigham Young University.

ManaGEMEnt Mutuality RESponSE SKillS tEChnoloGy

SCM090901_Education 36 9/1/2009 10:43:21 PM

professional development activities. A constantly chang-ing environment makes life-long learning a critical com-ponent of a modern education.

The data for this study were collected using a web-based questionnaire that was e-mailed to potential respondents. The mailing list for the academic version of the survey was complied by going to the websites of leading supply chain universities across America (all of the university programs contacted or identified in the 2005 study were included in this process). Faculty pro-files were read and 289 faculty who specialize in supply chain education were identified. The practitioner mail-

ing list was compiled from the read-ership of Supply Chain Management Review and Logistics Management magazine. The foremost goal in creat-ing the mailing lists was to include a broad cross section of academics and practitioners. A total of 302 usable surveys were returned: 102 academic surveys and 200 practitioner surveys.

The questionnaire consisted of four sections—professional associations, university programs, continuing educa-tion, and publications. Each section, in turn, consisted of two principal parts. Respondents were initially asked to rate the importance of various criteria that are used to evaluate diverse educa-tional resources. They were then asked to evaluate the educational resources themselves based on these criteria. This approach helped develop a com-mon reference point for respondents to use in their evaluations.

Professional Associations: The Quest for RelevancyA number of professional associations are dedicated to the needs of supply chain professionals. The three largest, APICS, the Council of Supply Chain

Management Professionals (CSCMP), and the Institute for Supply Management (ISM), entered the supply chain arena from distinctly different domains—production, logistics, and purchasing respectively. However, in recent years, these associations have morphed from their original functional orientations to focus on end-to-end resource management. Other, typically much smaller, associations such as the Warehousing Education and Research Council (WERC) have retained their targeted educational focus. Importantly, limited collaboration among the various associ-ations means that they increasingly compete for not just the same mindshare but also for a slice of companies’ currently

Universities, professional associations, and publications all have a role to play in

developing the supply chain leaders of the future. But how effectively are they

stepping up to the task? Updated research conducted among both supply chain

practitioners and educators show that they’re making an effort. But greater, faster

progress needs to be made if we are to meet tomorrow’s leadership challenge.


Bruno Budrovic

SCM090901_Education 37 9/1/2009 10:43:30 PM


Education

shrinking professional development budgets.To assess how effectively these associations are engag-

ing professionals to shape the supply chain discipline, the survey asked respondents to evaluate the value of member-ship along six dimensions: role in educating supply chain professionals, national conferences, seminars and work-shops, local meetings, professional certification, and pres-tige of belonging. Since the original survey in 1995, both academic and practitioner respondents have consistently identified the associations’ role in educating professionals as their most valued contribution. Even so, the two respon-dent groups value specific educational activities differently. Academics rate national conferences highly, practitioners much less so. In fact, in both the 2005 and 2009 surveys, practitioners gave national conferences among their low-est scores, suggesting they view these events as delivering marginal value—a problematic finding in a recessionary environment. By contrast, practitioners rate seminars and certification highly. Supply chain professionals are seeking the latest, relevant skills and a means to communicate that they have acquired them.

Based on their perceptions of how well the asso-ciations deliver the six services considered, respon-dents rated the effectiveness of 15 groups on a five-point scale (1=Poor, 3=Average, and 5=Outstanding). Respondents also indicated whether they are active mem-bers of each association. The lowest-rated associations from the 2005 survey were replaced with the following four associations: Association of Strategic Alliance Professionals, Strategic Account Management Association, Supply Chain Council, and Voluntary Interindustry Commerce Solutions (VICS). Exhibit 1 highlights key results of those ratings.

The data draw attention to three findings:

1. The overall association ratings declined significantly—and across the board—from 2005 to 2009 (average 2005 rating = 3.68 compared to 3.19 in 2009). Only one association, CSCMP, received a rating above 4.0. (CSCMP was the most highly respected associa-tion in both 1995 and 2005.)

2. Membership levels decreased dra-matically for most of the organizations. Only APICS escaped a large decrease in activity level. With the exception of WERC, the smaller, specialized logistics

associations have fallen from favor, attracting membership levels of 3 percent or less.

3. The absence of memberships in the Association of Strategic Alliance Professionals and the Strategic Account Management Association suggests that sup-ply chain professionals have yet to embrace the need to step out of traditional roles and seek a more strategic approach to integrated resource management.

Overall, what do these findings mean? In a resource-constrained world where managers are struggling to learn how to manage across boundaries, today’s professional associations are struggling to achieve and communicate their relevance. Moving forward, we can expect more con-vergence and competition among the leading supply chain professional associations.

University Programs: Educating Tomorrow’s LeadersToday’s supply chain leader is defined less by functional position or job description than by mindset and skill set. Effective SC managers possess strong functional skills but make holistic decisions. They build collaborative relation-ships while executing with discipline. They scan relentlessly and know the world is changing—so they embrace change.

EXHIBIT 1

Participation in and Effectiveness of Professional Associations

Council of Supply ChainManagement Professionals

Membership

4.154.41

34%68%

Institute forSupply Management

3.894.06

22%38%

Warehousing Educationand Research Council

3.884.13

7%26%

Supply Chain Council 3.66 7%

APICS 3.664.03

22%22%

The InternationalSociety of Logistics

3.203.45

2%11%

American Society forTransportation and Logistics

3.183.68

10%44%

Voluntary InterindustryCommerce Solutions

3.17 3%

TransportationResearch Forum 3.40

2%14%

Supply Chain and LogisticsAssociation of Canada

2009 2005

Scale: 1 = Poor, 3 = Average, 5 = Outstanding

2.923.35

1%12%

2.96

SCM090901_Education 38 9/1/2009 10:43:38 PM

Unfortunately, few managers possess this combination of attitudes and skills. A senior executive described this as his company’s greatest supply chain challenge, explain-ing, “We can find great entry-level people—the ones with strong functional skills. But finding people who can bring everyone together to work as a cohesive team is a real chal-lenge. They’re just not out there.” He then pled for universi-ties to create the curriculum needed to produce this type of manager. To assess the characteristics deemed important in a university supply chain education, respondents were asked to evaluate North America’s leading supply chain programs.

Using a five-point scale (5=Very Important; 1=Very Unimportant), respondents were asked to rate the fol-lowing criteria that impact the quality and reputation of supply chain programs:

• Faculty.• Research contributions.• Source for future employees.• Department reputation.• Graduate and undergraduate curriculum.• Alumni visibility.• Overall university reputation.• Continuing education presence.Exhibit 2 reports results of this rating process. In

both 1995 and 2005, academics rated a program’s facul-ty as the most important factor. Practitioners agreed in 2005. However, opinions diverged in 2009. Academics still viewed a program’s faculty as the most important success factor (rating of 4.58); however, practitioners placed faculty in a tie for the third in impor-tance (rating of 4.11).

This finding is representative of the divergent ratings and priorities aca-demics and practitioners expressed. Academics rated eight of the nine cri-teria as more important than their prac-titioner counterparts (five significantly so). The one exception—practitioners rated continuing education as more important than academics. The greatest discrepancies occurred in the areas of alumni encountered in the work place, research, and source of employees. On a relative basis, practitioners are giving more weight to curricular issues. With a score of 4.23, graduate curriculum was the practitioners’ highest-rated criteria. Practitioners are also concerned with overall university reputation (rating of 4.15). As companies rationalize their

sources of employees, they are increasingly selecting schools based on curriculum and reputation.

Based on the evaluation criteria, respondents were asked to identify and rank up to the top 20 supply chain programs in North America. To facilitate the ranking process, the respondents were provided a list of 57 uni-versities that have been identified as national or regional leaders. Respondents could also write in schools not on the list. School rankings were determined by allocating 20 points for each first place ranking, 19 points for each second place ranking, 18 points for each third place ranking, and so on down to one point for each twentieth place ranking. Point allocations were then summed to arrive at a total score for each school.

Exhibit 3 shows the Top-20 results for the academic and practitioner respondents. An overall weighted-aver-age top 20 list is also shown. As with the football polls, the rankings here are not likely to escape controversy. After all, some loyalty is likely expressed in these rank-ings as many of the practitioners graduated from the listed schools. This is also true of the academics.

As in the previous surveys, Michigan State and Penn State lead the ranking. Other programs with long traditions in supply chain-related disciplines like Arizona State, Ohio State, Maryland, and Tennessee continue to be highly regarded. Some schools such as MIT, Georgia Tech, and Stanford have built on their


EXHIBIT 2

Criteria Used to Evaluate Education Programs

Faculty 4.114.58

Source for Employees 3.974.38

University Reputation 4.154.37

Program Reputation 4.054.33

Graduate Curriculum 4.234.32

Alumni in the Workplace 3.624.32

Undergraduate Curriculum 4.114.29

Research Contributions 3.794.23

Continuing Education 4.063.93

Practitioner Academic

Scale: 1 = Very Unimportant, 3 = Average, 5 = Very Important

SCM090901_Education 39 9/1/2009 10:43:45 PM


Education

universities’ sterling reputations to achieve widespread recognition. Most of the remaining top-rated programs tend to be large state schools that have invested con-sistently over the past ten years to establish a supply chain presence. Three exceptions exist: Brigham Young, Central Michigan and Miami (OH) universities. This result contrasts sharply with the 2005 findings that identified several smaller, regional programs among the top 20. These “newcomers” have found it difficult to retain mindshare in a very competitive and financially difficult market. Indeed, the recent economic downturn has forced both universities and companies to focus on core programs and recruiting relationships.

To summarize, the essential ingredients to building a highly rated supply chain program appear to be consis-tent over time. They include the following:

1. Build a strong curriculum. Although MBA pro-gram curriculum is the most visible, undergrad and pro-fessional development curriculum are also important.

2. Hire well-know productive scholars who have the demeanor and skills to reach out to and work with the practitioner community. Outreach skills have been over-looked in the past!

3. Establish a user-friendly placement process that strengthens corporate relations and makes it easy to hire capable problem solvers.

4. Create program visibility. Building a solid program

is necessary; marketing it aggressively is a step toward sufficiency.

Climbing into or up the Top 20 requires resource dedication and resolve. A sustained presence demands a sus-tained effort.

Publications: Evolving Reader NeedsPublications are the currency of aca-deme. Because the ability to publish determines professional reputation and success, the “publish-or-perish” mindset is firmly ingrained. Thus, educators have long rated the quality of research jour-nals. More importantly, it is through their research that educators seek to advance the supply chain discipline and improve business practice. Therefore, in the 2005 survey, practitioners were asked to weigh in and share their perceptions of research journals. A divide between academic and practitioner perspectives was evident: aca-demics pursued rigor; practitioners valued

relevance. The question was proposed, “Is it possible to please both worlds?” The findings of the current survey—in which respondents were asked to rate 25 leading jour-nals—indicate that this divide has yet to be fully bridged.

To guide their evaluation of the journals, the respon-dents were asked to assess and use these seven criteria: quality of articles, impact on the discipline, relevancy, readability, timeliness of topics, theoretical vs. applica-tion orientation, and variety of topics covered. Of note, although both groups value relevance, academics place the most emphasis on quality and impact while practi-tioners rate timeliness and variety more highly than their educator counterparts. Each publication was rated on a five-point scale with 5=Outstanding and 1=Poor.

Among academics, the Journal of Operations Management received the highest rating (4.16). This was the first time that a non-logistics journal was so highly ranked. The only other journal to receive a score above 4.0 was the Journal of Business Logistics at 4.01. Rounding out the top five were two practitioner-oriented journals—Harvard Business Review (3.96) and Supply Chain Management Review (3.78)—and the International Journal of Physical Distribution and Logistics Management (3.64). The presence of both HBR and SCMR among the top five academic journals denotes that supply chain educators value high-quality, practical research. Overall, the findings confirm that the nature of the supply chain

EXHIBIT 3

Ranking of Supply Chain Programs

Practitioner

Michigan StatePenn StateOhio StateTennesseeArizona StateMITMarylandGeorgia TechStanfordArkansasIowa StateOklahomaAuburnBrigham Young NorthwesternPennsylvaniaMiami (OH)PurdueIndianaNorth Carolina St.

123456789

1011121314151617181920

Academic

Penn StateMichigan StateMITGeorgia TechOhio StateTennesseeArizona StateStanfordHarvardWisconsin-MadisonPennsylvaniaNorthwesternPurdueNorth Carolina St.UCLAGeorgiaIndianaTexas A&MBrigham YoungCentral Michigan

Overall

Michigan StatePenn StateOhio StateTennesseeArizona StateMITGeorgia TechStanfordMarylandArkansasHarvardPennsylvaniaNorthwesternIowa StatePurdueBrigham YoungAuburnNorth CarolinaWisconsin-MadisonIndiana

SCM090901_Education 40 9/1/2009 10:43:52 PM

discipline is changing. Only four of the top ten journals are traditional logistics journals. Discovering how to use sup-ply chain resources to create dynamic capabilities and customer value is today’s focus.

Not surprisingly, the practitioners viewed the value of the journals quite differently, rating HBR (4.16) and SCMR (4.15) as their two top publications, followed by JBL (3.92), Journal of Supply Chain Management (3.72) and in a tie for fifth, the Journal of Purchasing and Supply Management (3.67) and IJPDLM (3.67). Practitioners not only are more focused on practical research but also more interested in learning about supply relationships. If they really want to influence practice, educators need to recognize these interests and needs of the business com-munity. Managers are looking for research that will help them solve today’s pressing competitive dilemmas—they are not interested in rigor without application.

The survey also looked into the readership of the vari-ous journals. Among academics, four journals are read by 40 percent or more of the respondents: Journal of Business Logistics, Harvard Business Review, Journal of Operations

Management, and Supply Chain Management Review. Among practitioners, only SCMR achieves a readership of 40 percent. HBR is a close second with a 36 percent share. A precipitous drop off in readership occurs beyond these two journals. Overall, readership among both edu-cators and practitioners has declined since 2005.

Professional Development: The Need for Continuing EducationIn the early 1990s, Professor Bud LaLonde, one of the forefathers of modern SCM, warned that professionals who failed to spend 10 percent of their time learning new skills would become obsolete within five years. A decade later, his message changed—managers now needed to invest 20 percent of their time to avoid obsolescence within three years. Globalization and compressed tech-

nology cycles have only accelerated and made steeper the obsolescence curve.

To evaluate whether today’s supply chain professionals are keeping pace with our hectic marketplace, respon-dents were asked to give their view of continuing education’s importance as well as indicate many hours they spent building new skills in the past year. On a scale of 1=Not important to 5=Very important, both educators (4.28) and practitioners (4.45) perceive profession-al development to be highly important to continued success. Yet, both groups fall well short of the amount of investment Professor LaLonde recommended: on average, last year academics dedicated 133 hours and practitioners invested 106 hours in pursuit of better skills.

When asked what motivated their continuing education efforts, practi-tioners responded that their desire to contribute more effectively on a day-to-day basis (4.52) was the primary rea-son for pursuing additional education (see Exhibit 5). Advancing their careers (3.98), achieving a professional certifica-


EXHIBIT 4

Overall Ranking of Supply Chain Journals

HarvardBusiness Review

4.06

Supply ChainManagement Review 4.12

Journal ofBusiness Logistics

3.974.19

Journal ofOperations Management

3.893.66

International Journal ofPhysical Distribution and

Logistics Management

3.663.95

Journal of SupplyChain Management

3.593.83

International Journal ofLogistics Management

3.573.91

Journal of Purchasingand Supply Management

3.443.29

Production andOperations Management

3.44

TR Part E: Logistics andTransportation Review

3.373.68

50%

43%

59%

44%

37%

33%

39%

16%

31%

13%

36%

40%

16%

10%

6%

20%

11%

8%

6%

4%

2009 2005

Scale: 1 = Poor, 3 = Average, 5 = OutstandingEducator2009 Readership

Practitioner

3.97

Although supply chain professionals recognize continuing education’s importance, they need more flexible and higher-quality options to help keep them off the wrong side of the obsolescence curve.

SCM090901_Education 41 9/1/2009 10:44:05 PM


Education

tion (3.70) and obtaining a formal degree (3.66) were other important motivators. Interestingly, practitioners noted that approximately 40 percent of their con-tinuing education efforts are self-directed reading and study. The next most popu-lar approach to improving relevance is to seek a formal degree from an accredited university (23 percent of time and effort). Company-directed activities represented only a small fraction of the time invested.

Finally, the survey evaluated the effectiveness of a variety of continuing education formats on a five-point scale (1=Poor; 5=Outstanding). Practitioners rated the formal classroom experience as most effective (4.10) followed by semi-nars and workshops (3.76). Academics agreed that these were the most effective formats, but reversed the order (seminars, 3.93 and classroom 3.73). Despite the increased use and popularity of distance learning, such formats—regardless of type (independent study, multimedia, on-line)—received significantly lower scores from both audiences. This finding connotes both a challenge and an opportunity for purveyors of profes-sional development programs.

The overall message: although supply chain profes-sionals recognize continuing education’s importance, they need more flexible and higher-quality options to help keep them off the wrong side of the obsolescence curve.

The Mandate: New Skills for a New EraAs the first decade of the 21st century comes to a close, the supply chain revolution is well underway. Companies are rethinking the way they design processes and are striv-ing to change the way they manage relationships. They are implementing strategies that utilize all the resources of the supply chain to meet customer needs better than competing supply chains. However, despite a wealth of educational institutions and opportunities, companies are finding it difficult to find people with the right skills—deep functional know-how guided by a holistic, collabora-tive vision—to turn these strategies into reality.

This is tomorrow’s educational mandate: to help stu-dents and managers alike build these skills so they can effectively manage an entire supply chain’s capacities and capabilities to create outstanding customer value. Today’s difficult economic circumstances will heighten the challenge. As companies retrench and redouble their efforts to reduce costs, spending on training and profes-

sional development will likely be cut. Educational activi-ties that are undertaken will need to yield a measurable return on investment.

Unfortunately, the current survey of supply chain edu-cational resources suggests that practitioners are some-what skeptical regarding the value they are obtaining. Membership in professional associations and article reader-ship are both down—in some cases dramatically. So too are the impact scores attributed to these resources. This is par-ticularly true of the associations and journals that are tightly focused on traditional transportation activities. Practitioner interest continues to move toward integrated resource man-agement. Associations and journals that fail to adapt quickly are likely to be relegated to the status of irrelevancy.

Tomorrow’s professional development dilemma is doubly challenging given the emphasis on new technolo-gies for delivering educational content. Practitioners and educators agree that in-class and seminar-based pro-grams provide the most effective education. They also agree that most distance-learning approaches are not currently providing the high-level learning they feel they need to remain on the cutting edge. Improvements are needed—both in content and delivery. If the purveyors of supply chain education do not respond quickly, we will likely find that we lack the managers to lead the next stage of the supply chain revolution. VVV

Sources:

1 Stanley E. Fawcett, David B. Vellenga, and Larry J. Truitt (1995), “An Evaluation of Logistics and Transportation Professional Organizations, Programs, and Publications,” Journal of Business Logistics, Vol. 16, No. 1.

2 Stephen M. Rutner and Stanley E. Fawcett, ”The State of Supply Chain Education,” Supply Chain Management Review, September 2005.

EXHIBIT 5

Professional Development: Motivation and Effectiveness

Ability to Contribute

Motivation

Effectiveness

4.52

Advance Career 3.98

Achieve Certification 3.70

Obtain SUM Degree 3.66

Classroom 4.10

Seminars/Workshops 3.76

Distance Learning: On-Line 3.33

Distance Learning: Independent Study 3.15

Distance Learning: Multimedia 2.92

Scale: 1 = Very Unimportant, 3 = Average, 5 = Very Important

SCM090901_Education 42 9/1/2009 10:44:18 PM


SaaS: Right for You?

By Sean A. Murphy

Sean A. Murphy ([email protected]) is associate editor at Supply Chain Management Review.

In the past decade, Software as a

Service (SaaS) has evolved from a

technical fad to a value generator

for many supply chains, especially

those involved with Transportation

Management Systems (TMS). Now,

SaaS is beginning to branch out

into other supply chain activities

like demand planning and supply

management. Here’s how to

determine if SaaS is right for you.

Software as a Service (SaaS) was a new technologi-cal idea 10 years ago. And like all technological innovations, it probably had an equal chance of becoming widely popular, a tool for generating value, or written off as a neat idea destined to be remembered as nothing more than a fad.

Now, a decade later, SaaS is clearly no passing fad (Exhibit 1 shows SaaS growth rate for 2007-2008 compared to more traditional “in-house” software and technology). With the growing need for intricate networks of data, and equally intricate methods of storing, accessing and delivering that data, many companies are discovering that building such a network—not to mention writing software to run it—is a daunting task. This is to say nothing of what it takes to maintain and operate such a network once it is up and running.

Naturally, that takes time and resources away from what the supply chain manager should be doing—managing the sup-ply chain. SaaS is designed to fix that. The concept is simple: a third-party provider offers, for a subscription fee, to set up serv-ers to host the company’s data, and the technical infrastructure needed to manage it.

For some supply chain managers concerned with transporta-tion management, this has been a godsend. (See accompanying sidebar for how Welch’s has put SaaS to use in transportation management.) But according to analysts, academics and SaaS users who spoke with Supply Chain Management Review, SaaS is branching out into demand planning, forecasting, supply management, and may expand even further into common supply chain management practices.

In this article, we discuss what SaaS can do, where it’s going, and whether it’s right for the supply chain management model. We also include things to watch out for when setting up a SaaS system, and we offer two brief case studies from GE and Welch’s describing what SaaS has done for them.

MANAGEMENT MUTUALITY RESPONSE SKILLS TECHNOLOGY

SCM090901SAAS 43 9/1/2009 10:51:38 PM


A SaaS HistoryThe early versions of SaaS date back to the late 1990s. These offerings were driven by venture capital firms, who began putting their backing behind companies that were willing to use this nascent technology, according to Bruce Richardson, chief research officer at AMR Research.

But it was not an easy beginning. Chris Caplice, execu-tive director at the Massachusetts Institute of Technology’s Center for Transportation and Logistics, said the first SaaS offerings focused on transpor-tation management, and had no other applications available.

And for those using SaaS for transportation management, Caplice said upgrades were often a problem. The systems were advanced enough to send out automatic software updates, but if, for example, the system

served 20 customers, all 20 of those customers had to be online at the same time in order for the upgrades to work. “It was a little clunky,” he said. Since then, SaaS has evolved to the point where today’s providers are more likely to keep the most critical upgradeable systems separated enough from their customers that upgrades will go more smoothly, Caplice said.

Transportation man-agement is still king in the SaaS world, according to

Dwight Klappich, vice presi-dent of research at Gartner.

In particular, transportation systems, where companies

need to stay connected to a vast network of carriers, still benefit

more from SaaS than any other sup-ply chain-related function.

But other supply-chain related func-tions such as demand planning, forecasting,

inventory and combinations of these functions such as collaborative planning, forecasting and replenishment (CPFR) are becoming more and more mainstream for people looking to use SaaS, said Ben Pivar, vice president of CapGemini’s North American Supply Chain Practice.

Another parallel trend worth mentioning is the increased willingness to give up proprietary software sys-tems in favor of packages from software vendors such as

EXHIBIT 1

SCM Total Revenue and Share by Revenue Type, 2007-2008

Application Software Licences

Saas

Application SW Maintenance

Implementation/Service/ Consult/Custom Development

Other

Total

Source: AMR Research

2,144

323

1,646

2,311

29

6,455

Revenue2007($M)Revenue Type

2,173

401

1,704

2,372

30

6,681

Revenue2008($M)

33%

5%

26%

36%

0.5%

100%

RevenueShare,2007

33%

6%

26%

36%

0.5%

100%

RevenueShare,2008

1%

24%

4%

3%

4%

4%

GrowthRate

2007-2008

Daniel Guidera

SaaS

SCM090901SAAS 44 9/1/2009 10:36:26 PM


Oracle and SAP. While not necessarily a move toward SaaS, Pivar said migrating to software packages might serve as a gateway to SaaS, building up a company’s trust in third-party involvement to someday motivate them to taking the plunge.

SaaS is also becoming more popular in global trade management. There, Klappich said, the emphasis is on content and regulation compliance, as opposed to net-work management. “There’s a shift from SaaS being an option to being a preference,” he said.

SaaS and Inventory ManagementOne function that has not yet become a popular SaaS option is warehouse management systems (WMS), says Klappich. Since SaaS is, by definition, designed to involve networks of disparate sources of data, warehous-es, which often are contained within one building, don’t need SaaS. “There’s really no advantage,” the analyst said. “It’s a very on-premise function, by and large.”

There’s another problem with WMS-related SaaS products: computing power. Managing a large warehouse full of inventory can involve tracking millions of SKUs with millions of variables. “That just chews up compute power,” Klappich said, making SaaS actually a less-effi-

cient alternative to traditional WMS. The one scenario that could make sense here is using

SaaS to track inventory that was spread out over multiple locations. For example, Klappich said, airplane manufac-turers often keep spare parts scattered at various airports worldwide. He also recalled a client that was selling medical testing equipment, which required the distribu-tion and tracking of small packets used by doctors.

“They needed some of the same capabilities of a small WMS,” Klappich said of this particular situation. Granted, some of the “warehouses” in the network were nothing more than a few shelves in a supply closet in a clinic somewhere, but no matter what the network of locations looked like, SaaS kept track of the inventory like it was all in the same building.

A more common example of SaaS being used to maintain inventory is in consumer service systems, which includes everyone from the local plumber with spare washers on his truck to high-tech computer parts in the vans run by Best Buy’s Geek Squad mobile com-puter service. “That is mobile inventory,” Klappich said, and as such could benefit from a SaaS-based inventory tracking system.

Cheaper and EasierOne of the biggest draws of late to SaaS, especially given the current state of the world’s economy, is price. “There’s no doubt that SaaS is less expensive than on-site software,” AMR’s Richardson said.

CapGemini’s Pivar called the idea of implementing SaaS “very compel-ling” for small to medium sized busi-ness, which he defines as up to $1 bil-lion companies. In addition to price, he cited another big selling point for the concept: Ease of installation. Companies paying for SaaS technol-ogy don’t have to worry about deliv-ery of hardware or software, Pivar explained. They also don’t have to hire anyone to install it all. This cuts down dramatically on the cost and time involved in implementation.

AMR’s Richardson noted that upgrades are easy, too. With on-site software packages, he said, it’s often unclear when an upgrade will be available or necessary, and even then, costs for upgrades can vary widely.

Welch’s�is�now�putting�SaaS�to�use�to�improve�its�transportation�manage-ment.�Bill�Coyne,�director�of�purchasing�and�logistics�for�Welch’s,�said�

one�of�the�jam�and�fruit�juice�company’s�most�notable�forays�into�SaaS�was�the�adoption�of�a�new,�outsourced�transportation�management�system�which�first�went�online�in�early�2008.�That�system,�Coyne�said,�allowed�all�data�connected�to�Welch’s�transportation�and�logistics,�including�shipments,�freight�bill�pay,�and�other�statistics�to�be�collected�together�in�a�third-party�company’s�“data�ware-houses.”

For�Coyne,�it�wasn’t�the�outsourced�model�that�attracted�him,�but�the�idea�that�all�relevant�data�was�available�to�him.�The�SaaS�provider,�Coyne�said,�is�able�to�deliver�the�data�in�any�form�Welch’s�needs.�“They�allow�us�to�slice�it�and�dice�it�any�way�we�wish,”�he�said.

For�example,�Coyne�said�analysis�of�delivery�patterns�to�regular�customers�has�exposed�inefficiencies�such�as�a�partially-full�truckload�going�out.�Since�a�fully-loaded�truck�costs�Welch’s�the�same�as�a�partial�load,�Coyne�said�the�analy-sis�of�the�data�has�led�to�Welch’s�suggesting�alternative�delivery�schedules�and�volumes�to�customers.

Coyne�declined�to�say�exactly�how�much�Welch’s�has�saved�in�logistics�costs�so�far�using�the�system,�but�he�said�it�was�a�“significant”�savings.�Considering�Welch’s�spends�over�$50�million�a�year�on�transportation,�the�savings�have�more�than�justified�sending�the�data�to�an�outside�source�for�management.

“We�don’t�really�care�if�we’re�drawing�from�an�internal�source�or�an�external�source,”�he�said,�summoning�up�the�project’s�success.

Welch’s Gets Out of TMS Jam

SCM090901SAAS 45 9/1/2009 10:51:57 PM


SaaS

SaaS, on the other hand, often lumps upgrade fees into the overall subscription fee. While the customer rarely knows just where all the subscription money then goes, updates are largely automatic, and don’t cost the cus-tomer anything additional at all.

But Is It Safe?Despite the increase in popularity of SaaS, some com-panies still hesitate, in large part due to concerns over security. “Some of the larger companies are still a little skeptical about losing data,” CapGemini’s Pivar said. “It’s a trust issue.”

In addition, CIOs often have trouble integrating SaaS applications into their IT model. In some cases, it’s a technical issue—it can be difficult to incorporate SaaS into a system dependent upon client/server setups. Sometimes, however, it can be the CIO’s fear of losing control, Pivar said.

They are somewhat justified, according to Richardson. Handing over control to a third party means you’re at their mercy when things go wrong. Even the largest companies promoting SaaS-type products like Amazon, Google, and salesforce.com have experienced outages. Richardson cautioned that any company looking into SaaS needs to do research on a potential provider’s redundancy and robustness.

Loss of control is not the only concern, Richardson added. Many companies, he said, have been gun-shy about using SaaS applications because of fear that the third-party provider will somehow get hacked, leading to very costly and very public cases of customer credit card numbers or other information being stolen.

In truth, though, Richardson said the SaaS industry as a whole has been aware of this concern, and responding well enough to the demand that outsourcing data to anoth-er company’s center might be safer in the long run than keeping everything in-house. “There’s an excellent chance they’ve got far better security than you do,” he said.

MIT’s Caplice also said he doubted SaaS was any more risky than any other venture for a company. “My sense is, it’s a risk,” he said, “but it’s minimal.” Caplice added that the term “in house” is becoming a thing of the past. Even companies that don’t use SaaS often keep their data centers at another location anyway.

In evaluating whether to adopt SaaS for supplier manage-ment, GE took the threats of data loss or security breaches seriously, said Tom Hattier, GE’s manager of shared sourcing interests. But the company ultimately determined those con-cerns were a cost of doing business. “It’s just another level of risk to worry about,” he said. (For more on GE’s experience with SaaS, see accompanying sidebar.)

As part of the “loss of control” issue, Caplice noted many companies that use SaaS have to get used to less customizability. Often, a user gets what the provider wants to provide, whether it’s a perfect fit for the cus-tomer’s needs or not. This will give larger companies an advantage, Caplice said, since “as you get bigger, you get more accustomed to standardization.” Smaller business, on the other hand, which are used to building their own custom applications will have to learn to adjust.

For any software provider, including SaaS, developing standard approaches that address how to interact with carriers, data fields, determine who can see what, and

In November of 2007, GE was evaluating how it managed its global supplier list, which the company maintained

back then on an in-house server. GE naturally needed to communicate with its suppliers from time to time, and sup-pliers needed to convey information such as banking data and updated contact names, addresses, and phone numbers back to GE.

At the time, all that was literally being handled by several roomfuls of people on telephones at GE relaying information back and forth. With half a million suppliers to keep in touch with, GE decided it needed a better way, according to Tom Hattier, manager of shared sourcing ser-vices for the company.

At first, GE was content with trying to develop a system to automate the process on its own, until they discovered a SaaS provider, Aravo, which worked largely in the area of supplier management. “It was the closest thing we’d seen to what we wanted to do on our own,” Hattier said.

In addition to hosting the supplier information, Aravo will act as the go-between GE needed to streamline the exchanges of information between the company and its supplier.

Aravo’s system was installed and live in six months, only a third of the amount of time it would have taken GE to build its own. “That was certainly a factor,” Hattier said of GE’s decision to go with the outsourced option.

But a philosophical issue also drove the company to hire Aravo to manage GE’s supplier list. While GE was certainly capable of building its own system, Hattier said, why should they, since GE is in the business of making, among other things, jet engines, light bulbs, appliances and health care equipment? “There’s still the issue of are we in the vendor management software business, and we’re not,” Hattier said.

GE Lights up Global Suppliers

SCM090901SAAS 46 9/1/2009 10:52:04 PM

Green Delivers Green ($)

Collaborative Distribution –A New Model for CPG Distribution

Imagine taking a cab to the airport. You sit in traffic for most of the way and, upon arrival, fork over most of thecash in your wallet to pay for the trip. As you walk into the departures building you bump into five people fromyour town who also arrived by cab and realize, together, that you could have paid less (and burned less fuel) toride a shared shuttle van.

Unlikely, you think? The same thing happens every day across America as CPG products make their way to thewarehouses of the country’s largest retailers. Different products all going to the exact same location, but eachfollowing its own individual line of supply and, in the process, blocking up our roads, burning fuel and emittingnoxious gases that threaten our ability to populate our planet.

It’s time to retire this outdated model. The way to do that is collaborative distribution. That’s when CPG manufacturers store products in the same warehouse and ride in the same truck as products from other companies whose loads are destined for the same retailer warehouse. In this model, everyone saves and theamount of energy used to transport the goods is substantially reduced, along with pollution and congestion.

To Implement Collaborative Distribution Requires New Ways of Thinking, Doing

CPG manufacturers may need to move their inventory to co-locate with like vendors shipping to the same customers. Also, they must allow their goods to be shipped with other companies, even competitors.

Retailers must get their different buying groups to consolidate orders and agree to receive these different products on the same days.

Third-party logistics providers (3PLs) will need to alter their pricing to reflect the efficiencies of collaborative distribution and determine an equitable way to share the savings.

Collaborative distribution won’t be easy. But we all need to wake up to the ineffectiveness of what we’re doing now, and the opportunity to take a whole new direction.

Kane and Collaborative Distribution

To position our customers to take advantage of this next wave of supply chain efficiency, Kane Is Able, Inc. hasdedicated 1 million square feet of space for collaborative distribution at our super-regional distribution center forthe Northeast in Scranton, PA. That’s a good chunk of our 8.5 million square feet of space nationally.

Want to get started with collaborative distribution? Let’s talk.

NEW e-Book! How to save millions and embrace the Green Revolution. Download at www.kaneisable.com/ebook

Contact Chris Kane at 888-356-5263 [email protected] • www.kaneisable.com



SaaS

other concerns is a daunting task. “No software is flex-ible enough to handle every situation,” Caplice said.

Taking the PlungeCapGemini’s Pivar said supply chain managers mull-ing over a switch to SaaS should start with a clear understanding of the technology, and what it means. Specifically, potential SaaS customers need to know that subscribing to a third-party SaaS program usually involves sending potentially sensitive company data out-side the firewall and internal networks.

SaaS customers also need to know what security mea-sures are in place, where your data is, who is guarding it, and how you can get at it. “To some extent, they need to be comfortable a little bit with giving up control,” Pivar said.

Pivar added it pays to do the research. Once the subscription is bought and the data offloaded, the SaaS customer could be stuck with the chosen vendor—for good or bad. Like any customer buying any product or service, there’s a chance the SaaS provider’s service will not live up to its advertising, or that the provider doesn’t evolve fast enough to keep up with the technology down

the road. If that happens, and the customer wants out, it might not be easy. “The switching costs of going to another provider could be high,” Pivar said.

Pivar said customers will also have to get used to a new way of paying for the technology. The pay scales and terms of SaaS are often handled on a subscription basis, which is vastly different from the one-time license fee purchase of software package. “They need to be comfort-able with that model.”

Gartner’s Klappich also warned about checking the terms of the contract. Prices and other terms of a SaaS contract are very different from packaged, in-house soft-ware contracts. He cautioned potential buyers not to sign a contract that’s too long-term—two to three years is normal. “Remember, if you make a bad decision, you’re stuck paying for it,” he said.

Klappich echoed Hattier’s advice on not taking the vendor’s word for anything. Model out the ultimate cost of ownership, including maintenance costs. And since service terms will be dependant on third-party software or hard-ware, it pays to make sure there won’t be any additional costs from those third-party companies, Klappich advised.

SaaS may be ruled by transportation management applications today, but AMR’s Richardson believes that’s due to change. Already, he said, the trend is leaning toward including more sourcing and procurement ser-vices—and that will likely continue.

Both CapGemini’s Pivar and Richardson said SaaS will become more a part of “cloud” computing in the future. While the concept of the “cloud” continues to evolve, making a firm definition impossible, it is led by companies like Google’s online applications such as Google Docs. The concept is virtually identical to Saas: Use a virtual, offsite data center to host and run various business appli-cations. In essence, Richardson said SaaS and “cloud” computing are the same thing.

Stepping Into SaaSIt’s clear that SaaS is not for everyone. For now, anyway, companies that keep inventory in one or very few locations will likely have little need for a SaaS-based warehouse management system, nor will any supply chain manager with little or no transportation management responsibility.

Until recent years, for almost any application out-side of hardcore TMS, SaaS could seem like overkill. In addition, the increased risk of loss of control, and keeping sensi-tive corporate data on a server somewhere outside the company firewall, and away from the company’s protection, would seem to discourage interest in the tech-

nology. But that could change soon. SaaS applications that handle demand planning, forecasting, and collab-orative planning, forecasting and replenishment are becoming more popular, especially with the current economy driving a need for a cheaper, more efficient way of managing data.

So what if you want to get in on the action? There are plenty of choices. In evaluating these choices, tops on your list of concerns would have to be security. It’s crucial for your provider to be able to demonstrate that your data will be safe, both from thieves and accidental outages. In other words, get ready to add SaaS to your risk management plan. Also, even if you planned from the start to hand your data and software management over to someone else, be sure you’re really ready to give up control over it.

Of course, all of this means you’ll have more free-dom to worry about more important things, like run-ning your supply chain. You’re also sure to have a leg up over any other company that isn’t SaaS-enabled, and if the future really is in the clouds, that will make all the difference. VVV

“There’s no doubt that SaaS is less expensive than on-site software”

—Bruce Richardson, AMR Research

SCM090901SAAS 48 9/1/2009 10:52:10 PM

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S50 September 2009 • SUPPLY CHAIN MANAGEMENT REVIEW

Politicians sometimes turn to the catchphrase “Now, more than ever” to encourage citizens to vote for them.

Yet while this overused term has lost much of its persuasiveness in the political arena, it still has real signifi cance in a business set-ting—particularly in tough economic times. A case in point: Sales and Operations Planning, or S&OP.

S&OP is an integrated business management process that allows management to achieve

focus, alignment, and synchronization among all functions of the organization. It is the set of business processes and technologies that enables a company to respond effectively to demand and supply variability with insight into the optimal

market deployment and most profi table supply chain mix.

Monthly S&OP plans include an updated sales plan, production plan, inventory plan, customer leadtime (backlog) plan, new product develop-

SPECIAL SUPPLEMENT: SALES & OPERATIONS PLANNING

SOP&

Sales & Operations Planning (S&OP)—a structured process of helping balance demand and supply—is benefi cial under any business conditions. And in tough economic times, it takes on a whole new level of importance.

By William Atkinson

:S&OP: Now More Than Ever

Jim Frazier

SCM090901S&OP_Supp 50SCM090901S&OP_Supp 50 9/1/2009 4:59:44 PM9/1/2009 4:59:44 PM

SUPPLY CHAIN MANAGEMENT REVIEW • September 2009 S51

ment plan, strategic initiative plan, and result-ing fi nancial plan. The S&OP process rou-tinely reviews customer demand and supply resources, then re-plans quantitatively each month across an agreed-upon rolling horizon, usually 24 months. The re-planning process focuses on changes from the previous S&OP.

In sum, S&OP strategies help companies make planning decisions at the right time for the best combination of products, customers, and markets to serve. If done properly, it can have a direct impact on profi tability, perfor-mance, customer satisfaction, and the product portfolio.

S&OP Is Right for the TimesWhile S&OP has value for companies in any economy, experts agree that it is a particularly important technique to apply during tough economic times. “In this economy, we have defi nitely seen an uptick in interest in S&OP as a strategy,” comments Fred Baumann, vice president, industry strategies for JDA Software Group. “A lot of it has been driven by the need to do scenario management more than ever before, due to the unknowns of the future of the economy.

Larry Lapide, a recognized expert on S&OP and research affi liate with the MIT Center for Transportation & Logistics, agrees. “If rev-enues aren’t changing that much, S&OP is not as critical,” he points out. “However, S&OP is extremely important in times like this, because revenues are changing very quickly and drasti-cally.” As a result, Dr. Lapide notes, you need to maintain the connection between what is happening in the revenue stream and what is happening in supply chain, manufacturing, and logistics.

“You need to plan more, and plan more frequently,” continues Lapide. In particular, he notes, you need to schedule multi-function meetings with marketing, sales, fi nance, and operations, to fi gure out what you are going to sell, make, and keep in inventory. In volatile times, it is very important to be able to do this well. “For example, operations people really need to know what is happening on the sales side,” he adds.

Tim Vaio, an expert on supply chain solu-tions at Hitachi Consulting, confi rms the criti-cal value of S&OP in tough times. However, he

emphasizes, the benefi ts of implementing the process will only be as good as the quality of the S&OP strategy itself. “In a good economy, a poor or even average S&OP process can mask a lot of fl aws and ineffi -ciencies,” he explains. As a result, you can make a bad decision, and it won’t hurt you very much. “In a poor economy, though, having a poor or average S&OP process can really hurt you, because the bad decisions you make will have a direct negative impact.”

Vaio sees two other reasons to have a top-notch S&OP process in times like these. “Competition is fi ercer in a down economy, so innovation becomes more important, such as new product introduction,” he states. An effective S&OP process is a keystone to having a successful new product introduction, Vaio adds.

Third, a strong S&OP process provides bet-ter visibility and integrated information that can be used in the business planning process. “This allows you to project with more consis-tency and confi dence what your results will be, both from an operations and fi nancial per-spective,” the Hitachi consultant says. (The accompanying sidebar shows how one com-pany, BASF, has realized widespread advantage from its S&OP program.)

Integrated Business PlanningSo, it seems that you can struggle with an average S&OP process, or achieve a measure of success with a good one. However, some companies are taking things a step further, transforming traditional S&OP into an even more robust strategy called Integrated Busi-ness Planning (IBP). Some analysts say that this advanced version of S&OP may be the single best guide for navigating through tough economic times.

One expert who understands the edge that IBP can provide to companies is Nari Viswa-nathan, vice president and principal analyst, supply chain management practices, for Ab-erdeen Group. Viswanathan’s recent research

While S&OP has value for companies in any economy, experts agree that it is a particularly important technique to apply during tough economic times.


S52 September 2009 • SUPPLY CHAIN MANAGEMENT REVIEW


has shown that some leaders are moving toward this more advanced technique. “IBP involves extensive collaboration between the various groups in an organization and enables the unifi cation of business goals and strate-gies, rather than just being a functional supply chain process, as S&OP is,” he explains.

Viswanathan contrasts traditional S&OP and IBP as follows. S&OP’s core elements:

• Involve volumetric supply demand bal-ancing only.

• Represent a tactical process with limited linkage to overall business goals.

• Is spearheaded primarily by the sales or operations organizations.

Integrated Business Planning, on the other hand:

• Profi tably aligns supply, demand, product,

and service (with risk management being an important aspect of the process).

• Is a strategic technology-enabled process aligned and integrated with fi nancial and cor-porate goals and metrics.

• Offers a balanced approach with equitable participation from key stakeholders: sales, operations, product development, fi nance, and service.

Hitachi’s Vaio also sees a trend of com-panies expanding to IBP from S&OP as they recognize the need to become even more proactive in this economy. “These days, S&OP is being used more with ‘integrated business planning’ to create an overall business plan-ning process,” he says. “This involves linking traditional S&OP information with fi nancial information.”

According to Vaio, S&OP’s traditional benefi ts include improved service, reduced obsolescence, and improved inventory turns. Plus, an important additional benefi t is enhanced responsiveness to the market as a whole. “To be more responsive to the market, you need visibility and control of your supply chain, and IBP provides this,” he states. (A joint survey by SCMR, IBM, and Oracle con-ducted earlier this year identi-fi es the main benefi ts that companies hoped to achieve through their S&OP effort. See Exhibit 1.)

JDA’s Baumann echoes the inherent benefi ts of IBP. He notes that some companies have been working to elevate their S&OP processes to an enterprise-wide global scale in order to enhance sup-ply chain visibility, reduce costs, and achieve more integrated business planning and management. This “next generation” S&OP can actu-ally become a mission-critical element of an IBP strategy, Baumann notes, which in-

BASF is the world’s largest chemical company, with revenues of $82 billion in 2008. “We have doubled our revenues in the last seven years, and we are the world’s most profi table chemical company,” reports Alan Milliken, the fi rm’s business process education manager. “S&OP has defi nitely played a part in this.”

BASF implemented its fi rst S&OP process in 1992. Since that time, it has been expanding the use of the strategy to all of its business units. Currently, the company has implemented S&OP in virtually all of its 75 or so business units. “The only units where it is not in place are those that we have just acquired in the last year or so,” says Milliken.

Why is S&OP so useful to BASF? When people ask Milliken this question, most expect him to respond with one or more of S&OP’s traditional benefi ts, such as better service, less inventory, and lower cost. Indeed, Milliken admits that these are important.

However, the greatest benefi t that S&OP provides to the company, he states, has been the creation of formal and comprehensive cross-functional teamwork and communication. In effect, everyone in the organization now knows what everyone else is doing. “We have really benefi ted from having a truly integrated organization,” he emphasizes.

According to Milliken, it works like this: When you are in diffi cult eco-nomic times like these, and you have the formal structure of the S&OP process, plus the formal cross-functional integration and collaboration structure that S&OP has helped to create, you can respond to market conditions so much faster and better. Milliken continues: “If you try to respond with traditional communication during tough economic times—the hierarchical route, where you ‘throw it over the fence’ and wait for a response—that will be a killer. In a siloed organization, you just can’t deal with the problems that occur in an economy like this.”

For BASF, its ability to respond effectively during any economic con-ditions is a result of having built a cohesive cross-functional teamwork and communication network. And the root of that, Milliken empha-sizes, has been the S&OP process.

BASF Credits S&OP as a Cornerstone of Success


SUPPLY CHAIN MANAGEMENT REVIEW • September 2009 S53


volves linking operations to business performance. “In the past, S&OP has primarily been unit-based supply and demand balancing,” he explains. “These days, more companies are seeing it as an ‘integrated business planning’ framework.”

According to Baumann, when you have a well-defi ned and well-run IBP process, you quickly see improvements across at least two key metrics: (1) forecast accuracy because you have more cross-functional interaction within your own company as well as with trading partners and (2) stronger rev-enue because the forecast is more accurate and thus you are better able to manage risks and opportunities.

S&OP as a RoadmapAs companies evolve from average S&OP processes, to more strategic ones, and fi nally to integrated business planning, other trans-formations are also taking place, according to one observer. “For one, we are seeing more adoption of S&OP by senior leadership in

companies, especially the CFOs,” says Baumann of JDA. “We are also seeing more interest around demand sensing and shaping.” That is, as companies assess their time-phased S&OP plans, they are also coming up with “demand shaping.” This involves shaping de-mand upwards to close gaps that are exposed through the monthly S&OP cycle. New promotions or earlier new product launches are among the ways in which to accomplish this.

In short, the best-run S&OP and IBP strate-gies are those that not only provide executives with comprehensive information on what has happened, what is happening, and will hap-pen, but also serve as roadmaps for navigating the twists and turns in a challenging economy. Given the magnitude of those challenges companies face today, the “now-more-than-ever” mandate of S&OP comes through loud and clear.

William Atkinson is a free-lance writer special-izing in supply chain management. He can be reached at [email protected].

EXHIBIT 1

Expected Benefits from S&OP

Improve inventory optimization

Cut costs without reducing customer service

Improve forecast accuracy

Gain better balance of supply and demand

Improve customer service

Increase profits

Ability to make more changes/Be more flexible

Reduce lost sales opportunities

Minimize out-of-stock situations

Minimize risk

Source: Study by Supply Chain Management Review, IBM, and Oracle, February 2009.

0% 10% 20% 30% 40% 50% 60%

50%

49%

46%

43%

41%

39%

36%

35%

35%

52%



S U P P LY M A N A G E m E N T

Planning and the Process Industries

Tobuildforfuturesuccess,processcompaniesandothersthatoperateinindustrieswithahighfixed-costassetbaseneedtoevaluatetheircurrentpeople,processesandsystems.

ByKishKhemani,AndrewWalbererandOliverZeranski

Kish Khemani ([email protected]) is a partner at A.T. Kearney.

Andy Walberer (andrew.

[email protected])

is a principal and Oliver Zeranski

([email protected]) is a manager at the

firm.

Supply chain planning and optimization pres-ent a range of challeng-es in both good and bad economic times. Those companies that take a disciplined approach to balancing cost, inven-

tory and service can best optimize their margins, helping them to enjoy significant competitive advantage.

The need to excel at supply chain plan-ning is taking on increased importance dur-ing the current global economic downturn. In particular, it’s brought unprecedented uncer-tainty and change to the process industries— chemical companies, oil refiners, mining opera-tors, and similar operations—and calls for adop-tion of a new approach to supply chain planning.

Supply chain planning is typically performed on three different time horizons, ranging from the high-level strategic work that is embarked upon every few years to the monthly planning that takes place at the operational level. In between lies tactical planning, which uses the annual bud-get, sales forecasts, and scenario planning to plan demand, production, inventory, logistics, and finances. Given today’s uncertain economic envi-ronment, companies need to be acutely aware of impending risks and have contingency plans in place before risks materialize.

During times of uncertainty, process compa-nies should refocus their supply chain planning efforts by:

• Expanding the scope of inputs to increase

the understanding of value chain dynamics.• Shifting the balance from planning precision

to big-picture understanding and risk awareness.• Retaining flexibility and exploiting market

opportunities.This column takes a closer look at the key

changes that process companies need to make in order to navigate in today’s uncertain business climate.

Expanding the Scope of InputsCompanies typically employ both bottom-up and top-down approaches to demand planning. In bottom-up planning, the sales department fore-casts anticipated demand to develop scenarios that are then rolled up to the sub-regional and regional levels. The top-down approach looks at market trends in order to anticipate demand. The two different sets of forecasts are then ratio-nalized against one another to determine the demand target, which is typically pegged within a narrow range.

In the current environment, this rational-ized approach will not yield the desired results. Consider the challenge of exporting from the Middle East to markets in Asia and Europe. Lengthy, marine supply chains always call for detailed planning, as maritime transportation has characteristically long lead times. When the global business climate is stable, companies typically employ a model that allows them to suc-ceed despite the long lead time disadvantage. But because regional demand plans in the cur-rent volatile climate can be so inaccurate, sup-ply chain execution plans must now be based on

SPOTLIGHTon

SCM090901_supplymgmt 54 9/1/2009 11:00:08 PM


S U P P LY M A N A G E mE N T ( c o n t i n u e d )

multiple demand scenarios.A top-down approach to demand planning is superior in

uncertain times, as the volatility in local markets leaves the bottom-up approach fraught with inaccuracy. While macro trends and indicators are not an especially accurate way to project demand, this type of big-picture, forward-looking philosophy brings a global perspective. Macro-level demand planning by geography and end-use market is a simplified approach that forces the planning team to grapple with and come to understand the market itself rather than the com-pany’s own potentially limited internal numbers.

By planning more frequently, companies can better respond to a changing business environment. Undertaking frequent reevaluations of their stra-tegic parameters (such as service levels and make vs. buy decisions) helps companies improve their ability to make changes that enable them to quick-ly adapt and work through the current situation—and ultimately position themselves for success when conditions improve.

Standard service levels, including fill rate, lead time and cost to serve, need to be continually reviewed in order to retain existing customers. Many U.S.-based chemical companies, for example, have adjusted service levels down-ward as part of a move toward explicit service-level pricing, which allows them to share cost benefits with customers. Make-versus-buy decisions need to be challenged as it may be possible to exploit economies of scale or oversup-ply when determining whether precursor materials should be processed in-house or purchased. To illustrate, supply-and-demand balances in key regions have been affected by recent capacity adjustments, such as the reduced demand for ethylene derivatives from the U.S. Gulf Coast.

Embracing�Risk�Management�Companies that integrate risk management into the supply chain planning process are better prepared for the supply chain disruptions that are almost inevitable during uncer-tain times. The supply chain team should be included in the risk management process in order to heighten aware-ness of potential risks and prepare supply chain risk miti-gation strategies.

Risk management tools are essential to understand-ing and classifying risks. Those risk areas with the high-est potential business impact and probability will require detailed mitigation plans. One significant risk that many companies face is potential business disruption brought about by financially distressed suppliers and customers. This speaks to the importance of the continual monitor-ing of these external parties’ financial well being. In addi-tion, on the supply side, capacity adjustments are bringing

about supply disruptions in many industries and material value chains.

Exploiting�Market�OpportunitiesEvery crisis offers opportunities. However, it is those com-panies that retain supply chain flexibility that will be pre-pared to take advantage of the market opportunities that will open up when demand returns. Process companies that position their key assets to restart quickly will enjoy a head start when demand increases. These assets must be carefully prioritized on the restart timeline. Performing opportunistic maintenance during times when contractor

resources are available and lining up their support services for restarts will help avoid delays when demand recovers.

While merger-and-acquisition activity has been static for more than a year, many chemical and refining assets likely will be made available by financially stressed com-panies over the next year. Those that feel confident will buy; those that lack confidence will look to exit some parts of their business. Supply chain leaders should work with senior management to evaluate potential buying opportu-nities. Those companies that opt to sell distressed assets can use their supply chain managers’ market awareness to help identify potential buyers.

Process companies and others that operate in industries with a high fixed-cost asset base need to evaluate their cur-rent people, processes and systems and measurements in order to build for future success. Linkages between resourc-es that are engaged in the collection and comprehension of macro trends and the supply chain must be forged or reinforced. Similarly, those in charge of asset disposal need to be engaged with the planning team to rationalize future network capacity. Steps must be taken to ensure that the planning process properly factors in risk. Macro scenarios must be continually updated and reviewed, and woven into the planning and hedging process.

While this discussion has emphasized practices to be followed by companies in the process industries, it goes without saying that every company is looking for ways to make it through the period of current economic uncertain-ty. The ones that will be best positioned for success when conditions improve will be those that have taken a forward-looking view.

SPOTLIGHTon

Theneedtoexcelatsupplychainplanningistakingonincreasedimportanceduringthecurrentglobaleconomicdownturn.

SCM090901_supplymgmt 55 9/1/2009 11:00:16 PM

S C M R . C O M

A D I N D E X

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