The case for intelligent supply chain design

If you harbor any doubts that a supply chain's design is crucial to its performance, then the results of a new study offer some pretty convincing evidence that may lay those doubts to rest. Researchers at Roland Berger Strategy Consultants of Munich, Germany, found that manufacturers that have designed their supply chains for their particular type of products achieve a higher return on assets than manufacturers that do not.

The study was undertaken to determine the financial impact of supply chain "fit"—designing a supply chain to match product characteristics. The consulting firm worked on the study in cooperation with the WHU Otto Beisheim School of Management in Vallendar, Germany; Stanford University in California, USA; and ETH Zurich, a science and technology university in Switzerland. The organizations surveyed 234 manufacturing companies in Western Europe and the United States about supply chains for their main product lines. They also reviewed public financial data from 2004 to 2006 for those same companies.

The manufacturers were classified as either making standardized products (characterized by long product lifecycles, low product variety, low forecast error, and low frequency of customer changes) or customized products (noted for short product lifecycles, high product variety, higher forecast error rates, and higher frequency of customer changes).

A "good fit" for standardized products was defined as a supply chain that focuses on efficiency. The key characteristics of an efficient supply chain are minimization of supply chain costs, high inventory turnover, and high utilization rates. Companies with customized products, on the other hand, obtain a strategic supply chain fit by emphasizing responsiveness. Design characteristics for a responsive supply chain are high delivery reliability, high buffer inventory for parts and components, high buffer capacity, and high customer service levels.

To determine a company's supply chain fit, researchers asked respondents to prioritize various supply chain performance metrics. They found that 63 percent of the 180 companies with standardized products and 61 percent of the 54 companies with customized products had achieved a strategic supply chain fit.

Those companies with a good supply chain fit reported a higher return on assets—4 percent to 6 percent higher on average than companies with a poor fit. They also experienced a higher return on capital employed, higher sales growth, and higher earnings before interest and tax margin.

[Source: "Global SCM Excellence Study: How Supply Chain Management Can Boost Company Performance, a Summary of Results," Presentation by Jim Nelles, principal, at Roland Berger Strategy Consultants in Stuttgart, Germany, September 8, 2008]