THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012 - Scmr

EXECUTIVE SUMMARY smaller, more local distribution centres and those who expect larger, centralised, more flexible multi-mode distribution centres. It appears likely that some hybrid of the two may become common. Social media is playing little role today in supply chain strategies, but in the future will be a source of customer feedback, inform product innovation and warn of supply disruptions. Three-quarters of all respondents also expect changes in their manufacturing strategies. Respondents in the hi-tech sector are the most certain that manufacturing strategies will change (only 16% see “little or no effect”), while chemicals reject this idea (54% see “little or no effect”). A majority (56%) expect brands to develop their own direct-to-customer fulfilment systems, while a quarter anticipates reliance on eCommerce specialists such as Amazon. One-fifth sees little reason to change. Social media is playing little role today in supply chain strategies (47% see “no effect”), but in the future many see opportunities to get customer feedback (56%), inform product innovation (46%) or warn of supply disruptions (41%). Seeking demand insight in emerging data sets elicits some concern about privacy. Most Views on the use of customer data Customer transaction data should be mined to understand buying behaviour 3.55 3.27 Customer geospatial data (mobile GPS) should be mined to understand buying behaviour 3.20 2.98 SOCIAL AND ENVIRONMENTAL RESPONSIBILITY Positive customer image and brand equity remains the key driver for social and environmental responsibility (SER) initiatives, with 71% of survey respondents saying this is a board-level motivation. Companies can use SER to strengthen their customer relationships and enhance their value propositions. SER efforts start with visibility of SER performance inside the company as well as the extended supply network. While progress has been made, companies are still far from having good visibility of their suppliers and the extended supply network – only a quarter say they currently have this. Companies have stepped up their action in response to SER violations by suppliers. A third do not give suppliers warnings before The board’s motivations for investing in SER 4.08 3.75 Customer webstore data (cookies, eCommerce history) should be mined to understand buying behaviour respondents shy away from mining sources such as search histories or social networking activity. Rich demand data may exist, but using it to design a supply response seems inappropriate to many. Create a positive customer image and enhance brand equity 71 75 Satisfy government regulations 49 42 Reduce costs and/or increase efficiency (e.g., through better use of energy, raw materials) 43 32 Ensure no disruption of supply Fend off shareholder or external PR concerns Customer private web data (Google search, Facebook, etc) should be mined to understand buying behaviour Weighted average rating, 1-5 scale n 1,346 8 2.89 2.69 Disagree At an aggregate level At an individual level Neutral Agree Increase sales revenue 37 30 28 22 17 31 2012 2011 % of respondents n 1,281 THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012

EXECUTIVE SUMMARY reacting and taking often punitive actions. And these punitive actions have shifted to a more severe kind – immediate termination of the business relationship is now more common than it was a year ago. Positive incentives are still necessary to improve SER performance in the long run. Punitive actions will hopefully induce more compliance, but getting commitment requires a collaborative effort, with the company willing to invest and work with suppliers for real improvements. Preferred supplier status and increased business are the two most popular incentives, as they were in 2011. The SER journey for many companies is maturing, and companies are beginning to realise more significant benefits from their SER efforts than in previous years. More than half of survey respondents report good or substantial results in complying with government regulations and laws, and in improving both supplier relationships and customer satisfaction. Measuring benefits continues to be a challenge for almost 6 out of 10 respondents, however. And more than half are concerned Penalties for breach of SER standards Warning first, followed by both about price pressure or customers appearing not to care, and a lack of resources for SER efforts. Despite the challenges, most companies are still pushing forward with their investments in SER efforts. Such investments are multidimensional, involving internal operations, product design, supply network and customers. The trend towards increased SER initiatives seems to be unstoppable. RISK MANAGEMENT The impact of last year’s natural disasters in Japan and Thailand is strongly in evidence, with shortages of raw materials and components heading the list of risks that survey respondents are most concerned about. The hi-tech sector, in particular, is very concerned about this, as are almost half of those based in the Asia-Pacific region – twice the level of European respondents. More than two-thirds of supply chain executives are also concerned about shipping disruptions, incidents at supplier facilities and the failure of key suppliers when they consider the potential of supplyImpact of supply- and demand-side disruptions in the past two years 14 Loss of sales/revenue 58 Lower profits 42 13 53 47 % of respondents n 1,227 Monetary fines 47 45 35 39 62 Delays to new projects/product introduction/growth plans Loss of customers No warning, immediate action taken in the form of Companies are beginning to realise more significant benefits from their SER efforts than they did in previous years. 44 28 19 33 41 Higher cost of capital Damage to image, reputation or brand 27 14 19 16 Supply-side disruption 34 Lower share price 14 Failure to meet legal or regulatory requirements 13 None 16 Demand-side disruption 19 8 Reduced business Termination of business relationship THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012 15 % of respondents n 1,240 9

EXECUTIVE SUMMARY A move back toward highwage countries may make sense for organisations working to balance their talent portfolios. and demand-side disruptions to negatively impact their businesses during the next 12 months. And more than a quarter are very concerned about regulatory issues and counterfeit products. during the past two years. Almost half have suffered a loss of sales/revenue and more than a third have seen lower profits from both upstream and downstream events in their value chains. A third have also lost customers and 44% have suffered delays to product introductions, new projects or growth plans as a result of supply risks becoming live issues. Better and more frequent communication with suppliers is the most popular method of identifying potential risks – a trend that accelerated during the 2008 financial crisis and is now an integral part of many companies’ supplier relationship management programmes. This is followed by more formal and structured risk tools such as supply chain risk mapping, business impact analysis and scenario planning. Dual or multi-sourcing of key materials, components and products is the most widely used approach to mitigating risk, with more than three-quarters of respondents (and 94% in the chemicals sector) doing this on the supply side. Audits of key suppliers and holding safety stocks are also common, with two-thirds of companies using these tactics as part of their risk management efforts. More than 8 out of 10 companies have been hit by supply- and demand-side disruptions Challenges in respect of knowledge workers TALENT MANAGEMENT Supply chain talent management has become even more problematic in the past year, with companies experiencing increasing levels of difficulty in finding, hiring and retaining skilled people. Some improvement can be seen in the area of providing “a compelling career progression”, which saw a drop in the share of respondents who feel this is extremely challenging. It may be the case that even mild economic growth has tightened talent markets, while leadership has worked to improve opportunities for those willing to commit. In addition to tighter competition for talent, it seems the pain of lost talent has also worsened. More respondents say the Impact when talented staff are lost 4.50 *1-5 scale, where above 3.00 challenging 4.50 *1-5 scale, where above 3.00 challenging Weighted average rating* Weighted average rating* 4.00 4.00 3.50 3.00 10 3.50 3.00 2.50 Finding talent Hiring talent EMEA APAC Developing talent Americas Relocating talent n 1,302 Measuring talent Career Retaining progression talent Lost production EMEA Lost process IP APAC Lost product IP Americas Cost of transition n 1,294 THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012

EXECUTIVE SUMMARY problems arise from disruption and the cost of transition than from lost know-how – a reversal from 2011. Geographic cuts of this data show that the problems are most severe in Asia, where retention is a prominent issue and penalties for lost talent hurt most. China is clearly no longer a “low-cost country” in the traditional sense. Knowledge workers in China are generally not seen as lacking in technical or business skills, but do pose problems in terms of rising costs and poor retention. The implications for talent management in a global supply chain strategy include a need to diversify away from Asia, and China in particular, as tighter labour markets increase the risk of damaging departures among key staff. Comparing opinions of overall “value for money” and “biggest risk” talent markets suggests a move back toward high-wage countries may make sense for organisations working to balance their talent portfolio. THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012 Best value talent markets US 2.61 Germany 2.13 India 2.12 China 2.11 UK 2.01 Singapore 1.89 Brazil 1.82 Eastern Europe 1.77 Japan 1.60 Taiwan 1.59 Mexico 1.58 Netherlands 1.55 France 1.41 South Korea 1.38 Weighted average rating (1-5, where 5 highest value) n 1,172 Biggest risk talent markets China 2.98 US 2.11 India 2.05 Brazil 2.03 Mexico 1.98 UK 1.74 Eastern Europe 1.72 Taiwan 1.72 Germany 1.69 Singapore 1.66 France 1.60 Japan 1.59 South Korea 1.58 Netherlands 1.22 Weighted average rating (1-5, where 5 highest value) n 1,108 11

12 THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012

INTRODUCTION Images of Apple CEO Tim Cook unveiling the company’s latest iPhone stand as a milestone for many in the world of supply chain. Having built his career in materials management and fulfilment, Cook’s ascendance to the leadership of the world’s most valuable company speaks volumes about the potential for supply chain to impact business. Despite this symbolic achievement, the supply chain management discipline is still in its early years. Wikipedia credits the coining of the term to a Booz Allen Hamilton consultant named Keith Oliver as quoted in a Financial Times article in 1982. Thirty years has seen some progress toward general acceptance of what supply chain means and how it relates to business, but few would argue the journey is anywhere near its end. Since 1982 so much has changed in the shape of the global economy that the principles underpinning what we mean by “supply chain” have had little opportunity to stabilise. Today’s chief supply chain officers (CSCOs) are wrestling with new types of consumer demand, wider accountability for impacts on the environment and society, and heightened exposure to risks, both natural and man-made. At one level, the challenge includes finding and co-ordinating skilled people to handle the ongoing quest for better performance; at another, assuring that supply chain strategies are aligned with business strategies. The survey on which this report is based polled the worldwide professional community to get a picture of how these forces are affecting our work now and in the future. As well as crystallising a view of the top issues facing senior supply chain leaders as they begin to plan for 2013, the purpose of this research effort was to assemble a data set large enough to allow almost any question about the state of supply chain in 2012 to be answered with at least some factual basis. Our respondent base consists of almost 1,400 practitioners answering over 40 questions each. This means detailed cuts by industry, location, job function and job level, as well as by opinion, are possible. Our hope is that individual SCM World community members, all of whom will have access to aggregate data, can get the facts they need to benchmark their plans against peers and, when necessary, make the case for change within their own organisations. We would like to thank everyone who took part in this year’s study, E2open for once again sponsoring it, and Gerry Smith at Lenovo for writing the Foreword. Your support has been invaluable and is much appreciated. Dr Hau Lee Chairman, SCM World and Thoma Professor of Operations, Information and Technology, Stanford Graduate School of Business Kevin O’Marah Head of Faculty, SCM World Geraint John Senior Vice President, Research, SCM World THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012 13

1: STRATEGY ALIGNMENT AND VALUE CREATION The design and operation of a company’s supply chain is critical to its business performance. However, it is important that the supply chain strategy is aligned with the corporate strategy of the firm. The orchestration of the supply chain should support the company’s attainment of its strategic goals. Likewise, a company may have to refine these goals in light of the constraints faced by its supply chain. The ideal situation is that the supply chain can be developed in a way that aligns completely with the company’s strategic goals. This alignment also means that the supply chain is making major contributions towards the attainment of those goals. The role of supply chain management in this process can be viewed as twofold. Traditionally, it is a supportive role – a supply chain enables the goals to be accomplished with the highest efficiency, often defined to be cost and time. The second role, which is increasingly the modern view of supply chain management, is that the supply chain enables the company to set even higher goals or expand its strategic directions. A value-creation view of supply chain management requires supply chain executives to work closely as an integrated part of the company’s top executive team. The supply chain function is not in the background in driving the company’s strategic performance; rather, it becomes part of the steering team in the executive suite, building value through strategic alignment. While there has been anecdotal evidence and small sample studies showing that some companies have started to view supply chain management as an integral part of the top management team, and that supply chain has begun to assume more of the value-creating role, how this trend is developing among a wider pool of companies is still not well known. In addition, how exactly does supply chain management create value? In what ways does supply chain management influence key strategic levers that allow value to be created? What are the key factors that could drive such value-creation levers? These issues have not been well understood. 14 Last year’s Chief Supply Chain Officer Survey was one of the first attempts to dive deeply into these issues. In 2012 we continue this exploration, in order to more concretely understand how the role of supply chain is evolving, and how value can be created through excellence in supply chain management. A MIXTURE OF COST REDUCTION AND VALUE ENHANCEMENT As in 2011, the main way that supply chain improvement is contributing to business strategy is through operating cost reduction. Almost twothirds of survey respondents say this contribution is “very important”, with another third saying “important” (see Figure 1). Those in the hi-tech sector express this view most strongly, with 7 out of 10 rating it very important. This contrasts with just 44% in the chemicals sector who say the same. This gulf can be explained by the fact that in hi-tech industries new products can be commoditised quickly, due to the shortening of product lifecycles. Fierce competition requires companies to be both innovative in new product introduction on the one hand, and be extremely cost efficient on the other. Hence, operating cost reduction through effective supply chain management is critical. In chemicals, however, product margins are still high and it is the control of source materials that matters the most. Supply chain management is concerned more with reliable supply than with operating cost reduction. Cost reduction may still be regarded as the fundamental role of supply chain management by practitioners, but a strong supply chain supports a firm’s business strategy in other ways too. Just over half of our sample believes it has a very important role in increasing revenue, with 93% in total seeing this as an important role. Again, respondents from hi-tech firms are most strident on this point. Just a few percentage points behind is competitive advantage through differentiated customer service, with almost 9 out of 10 identifying this as a means through which supply chain THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012

STRATEGY ALIGNMENT AND VALUE CREATION can drive improvements. The logistics sector leads the way here, with 56% saying this is very important. This is followed by 84% who rate competitive advantage through strategic supplier engagement as important (with the healthcare and pharmaceutical sectors being the most dominant); while 77% of respondents assign importance to value creation through long-term equity improvement – up from 61% in 2011, with the food and beverage industry a full 20 percentage points above this all-sector average. Relative to last year, the gap between those who view supply chain improvement as important for operational cost reduction and those who see it as important for creating value in these other forms has reduced. This confirms that, increasingly, supply chain management is not only important for operational excellence, but is also being used by companies to create value. Supply chain management’s growing role as a value creator can be related to the observation that the supply chain function is also increasingly viewed as an integral part of a company’s strategic management. We asked participants how their CEO and executive team see the position of supply chain. A clear majority (59%) say it is viewed as equally important as other major functions such as R&D, marketing, sales and product development. Among those in logistics firms, more than twothirds believe this is the case. This compares with 31% who say supply chain is viewed as an enabler of product or sales-driven business strategies (see Figure 2). Almost half of respondents in the retail sector agree that this is the case. The remaining 10% of the sample overall say that supply chain is viewed primarily as either a cost centre or as a support function to serve the business. So it is gratifying to see that the majority of companies appear to see supply chain as an integral part of business strategy. The rising importance and recognition of the supply chain function is also linked to the earlier observation that supply chain’s role is increasingly about value creation and building competitive advantage, as opposed to purely operational cost reduction. THE CHIEF SUPPLY CHAIN OFFICER REPORT 2012 HOW HIGH-PERFORMING SUPPLY CHAINS DRIVE VALUE Cost reduction may still be regarded as the fundamental supply chain role, but a strong supply chain supports a company’s business strategy in other ways too. High-performing sup

Value created by a high-performing supply chain No value whatsoever Little value Moderate value. High value Very high value. n 1,379 Note: Figures may not add up to 100 because of rounding. Do your CEO and executive management team appreciate the alignment of business strategy and supply chain strategy? 31 59 8 2. Absolutely. Supply chain is .