May 1997, Volume 14, No. 5 Improving the Supply Chain: Like Putting Money in the Bank

Leading manufacturing companies spend between 3% and 7% worth of revenue less on supply chain management than their competitors, according to an integrated supply chain performance benchmarking study, conducted by Pittiglio Rabin Todd & McGrath (Weston, Mass.; http://www.prtm.com), a management consulting firm. In other words, an effective supply chain can save a $600 million company as much as $42 million annually.

The study, co-sponsored by 28 companies (including Hewlett-Packard, Merck and Xerox), indicates that the best-in-class companies — the leading 20% — out-perform their peers in virtually all areas of supply chain management, and realize significant cost savings and competitive advantage. The study's other findings include:


Top companies function with as much as 60% fewer inventory days than competitors.
Low inventory translates into available working capital, and best-in-class companies are masters of this, typically requiring half the number of days of inventory supply as median competitors. As a result, leading companies boast a 40% to 60% advantage in "cash-to-cash" cycle time (the time it takes cash to flow back into the company after it is paid out for production materials). Keys to success include "auto-replenishment" programs that require suppliers to automatically replenish material after supply chain consumption.


Leaders boost employee productivity.
Best-in-class companies widened the productivity gap, lowering their overall costs. For example, in the electronic equipment industry, leading manufacturers boasted 33% higher value-added productivity per employee than the median in 1992. Today, through practices like effective outsourcing, they've increased that margin to 44%.


Source/make cycle time gap widens.
Top companies are finding ways to reduce their lead time to source and manufacture products while lead time for average companies is growing. For instance, in the telecommunications industry, leaders decreased their cycle time from 73 to 60 days, while average companies saw an increase from 104 to 123 days. The study indicates that many manufacturers simply do not know how to work effectively with their suppliers.


Top performers spend 50% less on material acquisition.
Leaders not only cut their number of suppliers, but they also choose the right suppliers by assessing the total cost of ownership (TCO), not just the purchase price. A TCO assessment looks at such areas as component quality, warranty and repair costs, delivery performance, stocking costs and improvement performance. The end result is a company can reduce its expenditures on overall acquisition cost.


Average companies take as much as 8 times longer to meet customer demand.
All companies experience swings in customer demand, but leaders are better prepared to respond to their customers' changing needs. While typical companies need anywhere from 4 weeks to 4 months to achieve a sustained production increase, industry leaders require less than 2 weeks.


Leaders meet committed delivery date 17% more often than average companies.
Top companies also meet customers' requested date 96% of the time, compared to 83% for average companies. Best practices include outsourced consolidation, packing and delivery, and direct delivery to customers' "point of use."