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10 Minutes
on supply chain exibility
January 2013

Developing agility in an uncertain world


Highlights

Companies need to make the supply chain a strategic priority and integrate it more closely with other business functions. To enhance exibility, companies need to partner and collaborate more with their suppliers. New technology and analytics can make the supply chain transparent, enabling companies to adjust quickly to changes. For maximum impact, exibility should be designed into the supply chain as a strategic performance characteristic that can be measured and managed.

After weathering the economic crisis, US companies are operating at near-record levels of efciency. But their cost efciency has often come at the expense of supply chain exibility. As demand dropped during the recession, companies reacted by trimming inventory levels in their supply chains. Now, many companies are nding their starved supply chains arent very responsive. Supply chain performance will depend on the ability to respond quickly to changes in demand and supply through the ups and downs of business cycles, as well as during crises. Flexibility will continue to grow in importance with the rise of emerging markets and a proliferation of new products. Consequently, companies will need to consider different strategies, such as segmenting supply chains, partnering more closely with vendors, and increasing transparency and risk management. The good news is that sophisticated new technologies are making supply chains more transparent and efcient. According to PwCs latest Global Supply Chain Survey, more than half of the respondents are implementing or plan to add new tools for better process automation or transparency.1
1 PwC, Global Supply Chain Survey 2013, September 2012.

Why supply chain exibility? 1. With emerging economies providing new growth opportunities, demand patterns will shift around the globe, forcing changes in both physical footprints and material ows. Demanding customers, different order-to-delivery times, and the need to tailor products to different segments will require exibility. 2. Competitive factors related to cost and speed are making supply chain management more complex. These include the ability to exploit low-cost natural gas, the importance of speed to delivery, and penalties suppliers may face for long-lead-time supply lines. 3. As companies have seen in recent years, supply chains are vulnerable to disruptions caused by natural disasters or political instability. 4. Companies are increasingly held accountable by watchdog groups and the media for labor conditions and sustainability practices. They may consider excluding supply chain partners that don't adhere to the highest standards.

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Making the supply chain cost effective, higher performing, and responsive
Companies rate exibility a top priority, nearly as important as cost and delivery performance...
Percentage of survey respondents indicating very important or important

...and they favor investing more in next-generation technologies for process automation, ef ciency, and transparency.

Minimized costs

Maximum volume exibility and responsiveness Complexity management

Minimized risks
High importance of automation in 20131 (%) Pharmaceuticals and life sciences Technology and telecom Chemicals and process Retail and consumer goods Increase by 20152 (%) % Increase by 2015 vs. 2013

Maximum delivery performance Pharmaceuticals and life sciences Technology and telecom Chemicals and process Retail and consumer goods Automotive Industrial products

100

94

78

78

72

54

23

+43%

94

90

83

71

58

51

25

+49%

50

19

+38%

87

87

77

72

58

54

+10%

95

90

79

70

60
Automotive

53

+9%

90

87

83

67

67
Industrial products

41

16

+39%

98

93

74

61

60

Question: Please indicate the importance of the supply chain value driver for your supply chain operating model. Base: 503 supply chain executives in a wide range of industries Source: PwC, Global Supply Chain Survey 2013, September 2012.

Notes: 1 Percentage of participants who judge trend as critical or signicant in 2013. 2 Percentage of participants who say that trend is signicant, critical, or moderately important in 2013 and who say it will increase by 2015 or who indicate critical or signicant for 2013 and indicate that it will stay the same for the next two years.

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Prioritizing strategy and integration
To increase the agility of supply chains, companies need to make them a strategic priority and connect them more closely with other business functions. The rewards can be substantial. According to PwCs latest Global Supply Chain Survey, companies that acknowledge the supply chain as a strategic asset achieve 70% higher performance. Unfortunately, only 45% of respondents say their companies view the supply chain as a strategic asset.2 To elevate supply chain to a higher priority level, some companies are giving the supply chain leader a seat in the C-suite. This vice president of operations or chief supply chain ofcer mediates between business functions and is ultimately accountable for supply chain performance. These leaders need conict resolution and relationship skills, as well as technical knowledge and operations experience.3 What does integration look like? Because todays global supply chains are end-toendfrom the suppliers supplier to the customers customerthe supply chain organization should include managers not only from sourcing, manufacturing, and logistics, but also product and service development, marketing and sales, nance, sustainability, and ethics and compliance. The integrated supply chain is especially important as businesses enter new markets and roll out more products, requiring additional suppliers and processesand complexity.
2 PwC, Global Supply Chain Survey 2013, September 2012. 3 Shoshanah Cohen and Joseph Roussel, Strategic Supply Chain Management Second Edition (McGraw-Hill, 2013).

An integrated organization lets the company map out supply chain processes alongside product and service design. This approach makes it easier to tailor supply chains to meet customer needs across marketsdeveloped or emerging, premium or price-sensitive. It also helps draw the lines between products with short lead times and customized products that take longer to deliver. More than 83% of the leaders in the PwC supply chain surveythose companies that have consistently outperformed their peers both nancially and operationallytailor the conguration of their supply chains to different customer segments.2 At Intel, supply chain groups work with specic business groups to understand the intricacies of their operations and their goals and deadlines. On the procurement side, for example, a supply chain representative is the direct partner with the chief information ofcer and is intimately familiar with the companys internal data center strategy. Increasingly, organizations also extend their planning to encompass suppliers and customers. Some companies, for example, include product development, contract manufacturing, and retail operations worldwide in their sales and operations planning.4

Industry leaders are more than twice as likely to treat the supply chain as a strategic asset
Percentage of leaders and laggards that take a strategic view of their supply chains, by industry All industries Technology and telecom Industrial products Pharmaceuticals and life sciences Retail and consumer goods Chemicals and process Automotive Leaders Laggards Note: Leaders are dened as the top 20% of supply chain performers; laggards, as the bottom 20%. Companies were evaluated on such criteria as on time in full (OTIF) performance, supply chain cost, and supply chain exibility, as well as the maturity of their supply chain. Base: 503 supply chain executives in a range of industries Source: PwC, Global Supply Chain Survey 2013, September 2012. 70% 29% 73% 33% 67% 20% 50% 25% 86% 38% 78% 30% 50% 20%

4 Debra Hofman, The Top 25 Supply Chains: Leadership in Action, Supply Chain Management Review, September/October 2011.

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Collaborating with suppliers for greaterresilience
Your purchase orders are on the upswingbut are your suppliers up to the task? Consider, for example, that more than 20% of US commercial aerospace suppliers are at risk of not being able to deliver the increased output needed to address the huge order backlog that has accumulated.5 Given such potential threats to supply chain exibility, its more critical than ever for companies to strengthen relationships with key suppliers. By working closely with suppliers on everything from nancing to emergency contingencies to labor and environmental concerns, companies can spot problems early and resolve them quickly. Making vendors feel like valued partners also can build better communication and greater loyalty. As a rst step, companies should identify the strategic and core suppliers who are central to business strategy and operations. They require closer care and monitoring than transactional suppliers of commodity goods and services. Intel works with key suppliers to prepare for natural disasters and other disruptions that could affect its chip-making processes. For that single or sole source magic molecule, the company may include in supplier contracts guaranteed levels of off-site inventory storage or even provisions where we could have the recipe for the molecule and have it actually built somewhere else on behalf of our supplier,
5 PwC, Soaring or stalling: Can aircraft manufacturers prevent rate ramp-up problems? 2012. 6 Interview with Jackie Sturm, vice president, Technology and Manufacturing Group, at Intel, Aug. 24, 2012.

says Jackie Sturm, vice president, Technology and Manufacturing Group, and general manager for Global Sourcing and Procurement. Intel and other companies also provide nancial aid and other assistance to wobbly supply partners. Sturm says Intel tries to understand its suppliers ability to withstand nancial shocks and might offer short-term loans to assist key vendors with working capital, advice about whats driving their cash-burn rate, or engineering help to improve their net return on production.6 Some companies help suppliers keep their manufacturing operations up to speed by alerting them as early as possible to expected demand and production timetables. Companies also can prepare for unexpected demand by negotiating exible supplier contracts. For example, a exible contract for a critical part might allow a company to increase volume by up to 20% over three months without cost penalties. Collaboration is a zero-sum game Ultimately, supply chain visibility and collaboration boil down to balancing the level of trust between partners with the information sharing required to work together on the priorities of the extended supply chain. Without the right focus and without that trust factor, even the best governance agreements and tools wont yield the desired results.7
7 Brad Householder and Mike Giguere, Supply Chain Visibility: More Trust Than Technology, Supply Chain Management Review, November 2012.

Industry leaders make collaboration central to their supply chains


Percentage of leaders and laggards who have fully deployed or are implementing key elements of a collaborative strategy in their supply chains Collaborative planning Supplier collaboration Collaborative product development Leaders Laggards Question: What measures have you chosen to improve supply chain planning? Base: 150 senior executives Note: Leaders are dened as the top 20% of supply chain performers; laggards, as the bottom 20%. Companies were evaluated on such criteria as on time in full (OTIF) performance, supply chain cost, and supply chain exibility, as well as the maturity of their supply chain. Source: PRTM Global Supply Chain Trends, 2011. 74% 43% 79% 53% 65% 45%

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Creating transparency, end-to-end
The better the information companies have at hand, the more responsive their supply chains can be. But information from the supply chain may be slow to reach managers, and suppliers may complicate matters by using different software programs and data formats. Fortunately, advances in technology and analytics have ushered in an era of greater supply chain transparency. Intel, for example, collaborates with such schools as the Massachusetts Institute of Technology and Stanford University to explore analytical methods and tools that will give it the best options for its supply chain. McKesson, a pharmaceutical distribution and healthcare technology company, uses analytics to develop a detailed supply chain model, which allows the company to quantify the impact a fundamental change will have.8
Technology for real-time tracking of global supply chains grows in importance

blindsiding them by revealing problems with their vendors products or workplace conditions. Suppliers can instantly tarnish a companys reputation, resulting in declines in revenue and share value. To protect against such damage, companies should not only monitor suppliers, but also consider incorporating codes of conduct and sustainability criteria into supplier contracts. Some electronics product manufacturers are working to ensure that the conict minerals they usetantalum, tin, tungsten, and gold from war-torn areas of the Democratic Republic of the Congoare not subject to the pervasive civilian exploitation in the region, while still preserving opportunities for legitimate miners making their living in the Congo. Were trying to actively prepare ourselves so that we fully comply with the law, support our communities, and never inadvertently stop production, says Intels Sturm.9 The food industry also needs increased visibility along the supply chain, as ingredients increasingly come from multiple countries and suppliers. Pending regulations, coupled with complex sourcing and production, make it imperative that food companies monitor their ingredient chains. Among the benets: enhanced protection from the reputation risk of product recalls and more nimble production and distribution decisions to seize fast-changing marketopportunities.10

Increasingly, companies use cloud-based platforms to share information in real-time. They use the cloud to manage orders, shipments, and inventory across the entire supply chain, eliminating delays and improving service. Transparency and risk management To maintain exibility and avoid supply chain disruptions, companies also must demand open access to their suppliers facilities and business practices. Without such transparency, they risk watchdog groups, the media, and social networks

45%
of CEOs who say their company could be affected greatly or to some extent by a disruption use technology for real-time visibility into operations and the supply chain

31%
of CEOs say their organizations have a critical and immediate need to improve supply chain logistics through real-time global tracking and tracing

Base: 366 CEOs and regional heads of companies active in the 21 Asia-Pacic Economic Cooperation economies Source: PwC, APEC CEO Survey, 2012.

8 David Kiron, Rebecca Shockley, Nina Kruschwitz, Glenn Finch and Dr. Michael Haydock, Analytics: The Widening Divide, Sloan Management Review, Nov. 7, 2011.

9 Interview with Jackie Sturm, vice president, Technology and Manufacturing Group, at Intel, Aug. 24, 2012. 10 PwC, Brand enhancement: The hidden benet of implementing food chain visibility, 2012.

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Toward greater exibility
Economic uncertainty has become a given for the time being, making an agile supply chain critical to any companys success. Nearly two-thirds of supply chain executives say they will need to build in greater exibility to respond to shifts in volume, and they expect exibility to grow in importance over the next three years, according to PwC's latest Global Supply Chain Survey.11 To ensure you can respond quickly and effectively to unanticipated changes in demand and supply, you should ne-tune your supply chain strategy, organization, processes, partnerships, and performance metrics. Such an evaluation should be repeated when market conditions change or business strategies are revised. Here are some issues to consider as you evaluate your current supply chain and makeimprovements: 1. Assess where you stand in terms of exibility. Does your company have demand planning processes in place to respond to a big upswing or downturn in orders? What does inventory look likeare you carrying products you dont need or wont sell? Is your cost structure right? 2. Set new standards internally. How do you measure exibility? Have you made it a key standard for evaluating your own operational and nancial performance? 3. Ensure suppliers have planning and production practices that support long-term exibility. Are they able to respond quickly when your
11 PwC, Global Supply Chain Survey 2013, September 2012.

demand increases suddenly? Do you have visibility into their inventory positions? How exible are your suppliers suppliers? 4. Investigate ways to build more exibility into your supply chain. Can you tailor the supply chain by types of customers or products? Are there opportunities to co-create products or processes with key suppliers? 5. Segment suppliers based on their importance. Are their products and services so critical that their nancial health and performance require careful monitoring? 6. Develop back-up plans for critical suppliers. Do you have alternative suppliers who could quickly ll the void if a key vendor failed to deliver? Should you retain additional suppliers for vital components? 7. Determine whether decision-making is a bottleneck to supply chain responsiveness. Are you able to bring the right information analysis and leaders together to make strong, timely decisions? 8. Minimize supply chain risks. Do you have facilities in areas that could be vulnerable to natural disasters or civil unrest, and if so, have you developed contingency plans to protect your supply chain from potential disruptions? 9. Take precautions to avoid problems that could damage corporate reputation. Do you collaborate with suppliers to ensure that they keep facilities safe, treat employees fairly, and conduct business in an ethical manner?

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To have a deeper discussion about supply chain exibility, please contact: Mark Strom Global Operations Leader PwC 949 437 5438 mark.a.strom@us.pwc.com Mike Giguere Operations Principal PwC 617 803 6377 mike.giguere@us.pwc.com Brad Householder Operations Principal PwC 508 259 0432 brad.householder@us.pwc.com

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