Masters of Supply Chain:

Direction in Supply Chain Management

Bill Copacino

Title slide

This is Bill Copacino, I’m the managing partner of Accenture’s global supply chain
practice, and I am delighted to have the opportunity today to talk to you about some recent
work in recent research that we have done in the area of supply chain management. Let
me give you a summary of what you will hear today in one slide, and I’ll come back in the
next forty-five minutes or so and provide evidence and build upon the key points that I
would like to lay out.

Slide 1

But in brief, we see a fundamental shift in the past five years in the position of supply
chain management, most importantly, I think, supply chain management is becoming a
much more strategically and competitively critical variable. It used to be something that is
nice to do, but increasingly today, not in all industries, but in many industries, it is becoming
a much more important and vital strategic and competitive variable, and I will talk about that
a little bit during the presentation today.

Secondly, what we found is the gap between the leading and the average players is
widening, that is, the best is getting better faster than the average company. This has
profound strategic implications and I will show you some evidence and speak to examples
in a number of industries.

Thirdly what we found is that we believe that average companies and laggards, those
who have not developed strong supply chain capabilities or performance have a window of
opportunity to catch up. Clearly as supply chain is competitively more important, and if the
gap is widening, the average players and the laggards, will really be marginalized. We’ll
see below average performance, and their businesses will be really threatened if they don’t
address the issues that they are facing in this arena.

And then finally, we’ve identified six critical factors, or six levers that the supply chain
leaders have focused on, have gotten right, and are important for strong supply chain
performance going forward, and I will outline those six levers.

So let me talk about the first area, that supply chain management being competitively
and strategically a more important competitive variable. There’s a lot of anecdotal evidence
we see on this. Let me speak to a few points, first of all, you know, F.D. Scott, who is the
CEO of the largest retailer in the world, Wal-Mart, at two hundred and twenty billion dollar
retailer, he grew out of the logistics function, he served as the head of transportation and
subsequently the leader of their logistics group, and we’re seeing in more circumstances
companies promoting people from the logistics and operations side to the more senior
executive positions. Secondly, Alan Greenspan had recently noted that, who is head of the
Federal Reserve - as you know - in the U.S., that supply chain management might well be
the most important productivity factor behind the long expansion in our peacetime history,
speaking about the economic expansion from ’92 through 200, so he attributed it to supply
chain management as the key driver for that. Additionally, we have seen corporate
advertising touting companies’ supply chain management capabilities, companies like
Microsoft, IBM, UPS, and others have put that forward, and that is unheard of. So clearly
there has been anecdotal evidence where people have been emphasizing their supply
chain management capability. We also see leaders in many segments using supply chain
management in Internet-based capabilities as a fundamental lever for competitive
advantage. For example, Zara Corporation, the Spanish retailer and merchandiser of
fashion merchandise, has developed a design to replenishment time of two weeks, so from
design to replenishment they’ve compressed their cycle to two weeks. This is three to five
times better than any of their competitors, so store managers, in essence, send information
directly to designers, merchandisers, and supply chain planners on what is moving, what is
the customers reactions to goods, what are the hot items. And they are then able to get
rapid replenishment of those items within season. Normally fashion retailers need to make
a bet what is going to sell. Most have a single replenishment, with Zara able to do multiple
replenishment they’re able to both get a second wave for the hot sellers, and then secondly,
they are able to discount earlier slower moving merchandise to move it out, which is a
critical profitability lever for retailers. Importantly, they are also able to understand
customer preferences, and not surprising through this supply chain capability Zara has
outperformed its competitors it has the highest growth and highest returns in the industry in
Europe. Similarly, General Electric has used supply chain management in the Internet
processes to achieve fundamental competitive advantage. They purchase twelve percent
of their goods through auctions. They are a leader in design collaboration, particularly in
their more complex product groups, like imaging, aircraft engine group, power systems, and
so forth. They’ve set up a very effective, using technologies, they happen to use
MatrixOneto really link with their suppliers in a very effective way, and shorten and improve
the design cycle and the design products. In doing so, in many businesses they have been
able to achieve a significant cost advantage, up to ten percent in some businesses. You
know, similarly, United Technology has used advanced supply chain concepts in Internet-
based processes to double profits over the recent period of time.

Slide 2

We have also seen compelling evidence that supply chain management is strongly linked to
shareholder value. If we look at the shareholder value framework, you can see that supply
chain management influences all of these levers. It clearly has a strong effect on revenues
as customer satisfaction, customer service become a much more increasingly important
competitive dimension. Supply chain management is critical for making the right product in
the right place at the right time and making it available for sales. Similarly, supply chain
management influences seventy percent of most companies cost structure, so it has a
critical impact on operating efficiency, cost and profitability. And finally, it has a significant
impact on a company’s capital structure, both fixed capital and working capital. Plant
equipment represent a significant portion of fixed capital for many companies, and inventory
is a critical part of working capital. So we see supply chain affecting all shareholder value
levers.

Slide 3

Most compelling, we see a growing gap between the leading and the average companies
on all of these dimensions, in terms of cost, in terms of service, in terms of inventory
performance. And let’s take a look at this a little bit deeper.

Slide 4

We have found the gap in logistics cost between the average and the best performers is
significant in many cases, and is widening. The data shown in this slide clearly needs to be
adjusted based on the markets companies serve and the characteristics of the product.
That being said, there is a compelling difference in many cases on individual companies’
cost structure.

Slide 5

On the next page we see that lost sales also impacts customer service. In this case, this
was a study that Accenture did with the Coca-Cola retail council, and it looked at lost sales
from stock-outs, so this was at store level, so if the product was in the back room of the
store, was in transit to the store, was in the retailers warehouse, it didn’t count, we were
looking at available stock to sell at the store level. And we went to seven hundred stores
over a period of time, tracking the in-stock availability of every item in that store, and what
we found was that, on average, on the store level, and this was grocery and drug channels,
was that 8.2% of the items were out of stock. That represented a 6.5% loss in sales. On
average, there were substitution or alternative purchases for 1.5% of the items, so net loss
sales were 5%, which is a significant impact.

Slide 6

More importantly we found, however, that the gap performance between the leading and
the average retailers was very significant. This slide shows the percentage of items that
are out of stock at least once a month. So, on average, 48%, or almost half the items were
out of stock at least one day per month in the average, across all retailers. However, I think
more interesting, is that the best performers only had 24% of the items out of stock for at
least one day, and in general it was a shorter amount of time that they were out of stock.
The worst performers were out of stock 68% of the time, one item was out of stock at least
once per month. So, a tremendous competitive gap if you are working with 68% out of
stock at least one time to 24%, and the sales losses would be significantly higher in that
case. And again, we see a loss of performance in that dimension.

Slide 7

Finally, in the inventory area, we see a gap in performance in inventory performance. This
is in the consumer products area. We are looking at both manufacturers and retailers. In
the case of manufacturers we are looking at total inventories as well as finished good
inventories. We see on the average a 33 to 50% gap on the performance between the best
in class and the average performers

Slide 8

I’d like to talk a little bit now on the gap in performance between the leading and the
average retailers. In industry after industry we see a growing gap in performance, and let
me give you a few examples. Let’s take personal computers. Dell is now the leader in pcs,
it averages over sixty-four turns, which when we find inventory turns or inventory time
supply, the reciprocal of that being a very good measure of aggregate supply chain
performance. Their competitors are operating at 14-30 turns. Gateway, which also has a
direct model, is operating at thirty turns, others are operating below that, which is a
substantial competitive advantage, particularly in an industry where the price of an item
deteriorates about .5% per week. So where you have a depreciating product the
management of inventory is more critical. And Dell has developed a very powerful operating
model. It used to be for most companies people’s suppliers delivered to a companies plant
on to two times per week. Dell has a very different operating model. They pull down from
suppliers every two hours to their plant, generally on two shifts, so over sixteen hours, over
eight times per day. They are rescheduling their plant pulling down from suppliers,
delivering every two hours, exactly what they need for that next two hour period of time.
They have created fourteen supplier hubs around the plant. They built significant
integration to their suppliers so that they can replenish those hubs and they have minimal
inventory that they own. Discount retailing is another example. Wal-Mart has used
advanced supply chain concepts in private exchanges to achieve low inventory and high
service. From 1995-2000, Wal-Mart’s inventory turns improved from 5.87 to 8.3 turns.
Their leading competitor moved from 4.65 inventory turns in 1995 to 5.01 in the year 2000.
They didn’t even reach the level that Wal-Mart was operating at in 1995, and are 40% lower
today. In consumer goods we see a similar pattern. Proctor and Gamble has levered
channel integration programs and collaborative planning to have an inventory advantage.
From 1995 to 2000, P and G’s inventory turns improved from 9.7 to 11.5. The industry as a
whole moved from 9.7 to 11.1, so it has a full turn and a half cost advantage. P and G has
been the leader in CPFR, Collaborative Planning and Forecasting and Replenishment. For
example, in a pilot that they did, they improved their stock position from 87% to 98%. Their
lead-time was reduced from 21 to 11 days. Their on hand inventory was cut by two weeks,
and sales increased by 8.5 million in one chain alone. In contract manufacturing we see
Flextronics operating at 8.86 turns, and Selectron at 4.92 turns. In home improvement,
Home Depot operates in seven turns, its nearest competitor operates with 5.6 turns. So
clearly there is a growing gap in performance.

Slide 9

There’s some data on the next slide on the performance management group. It
shows a similar effect if you look at the best in class, this is cash to cash cycles, so it
includes clearly the inventory cycle is part of this. It also includes the receivable portion of
it, but we see almost a two to four times advantage, 3.7 advantage in different industries of
the best in class versus the average performer. So I think that in industry after industry we
see a growing gap.

Slide 10

We asked ourselves then, why is this happening? If it’s competitively, strategically more
important, and there is a growing gap, why are the leaders continuing to advance and go
ahead and why haven’t the laggards and average companies done better in catching up.
We think that there are a few reasons for this. Number one is that supply chain is not easy
to do. You can’t wake up tomorrow and say, you know, we need to make our supply chain
capabilities and performance world class. It takes years to do. You need to do many
things well, you know, not just managing your suppliers and integrating with your suppliers,
and in your procurement and purchasing area, and in your manufacturing, and in your
distribution and transportation, and how you face off to your customers and integrating your
sales programs and demand shaping, and a number of other strategies to optimize overall
performance.

And you need to develop integrated IT support in a capability that links supply and
demand, we call it supply chain planning and collaboration, and it just takes a fair amount of
time to build the culture and to build in these kinds of capabilities, the cross-functional
capabilities that are needed for success, operating with one forecast, avoiding narrow
functional measures, focusing on economic profit and return versus just revenue
maximization, and building understanding of cross-functions so that they can work more
effectively. So that not only do you need to work effectively across the various elements
within the supply chain, but across all business functions, marketing, sales, finance, and so
forth, as well as operations. We need to melt into our harmonious, integrated capability,
and it takes a long time to change that culture. So that’s one of the reasons many
companies like the ones I alluded to have been doing this for a decade and they have built
this capability.

Secondly, we are seeing scores of new tools evolve in the supply chain area. Over the past
three years there has been many tools developed. Let me just allude to a few. In design
collaboration we now have PTC and their windshield product in their MatrixOne, which
allow you to collaborate with your suppliers in a much more effective way, shorten your
design cycle, do much more effective product data management, re-use components, work
with standard modules and components can substantially reduce your cost structure. One
of my colleagues has said a significant portion of the supply chain cost are set in the design
process. If that is not done well, your cost structure is going to be high. Secondly in the
area of e-procurement and strategic sourcing, we have seen a lot of capabilities evolve,
new auction services in ERFP capabilities. I’ll talk about an example in Dow that uses e-
markets effectively, and clearly the whole use of strategic sourcing, e-procurement using
tools like Ariba, BDE, Frictionless Commerce, Portem, which is very strong in Europe, and
so forth, has provided companies with tremendous opportunities to fundamentally change
their cost structure. We have seen a growth in procurement outsourcing. Additionally the
area of supply chain collaboration, a whole slew of CPFR tools in areas like event
management, which was not on the screen two or three years ago, provides capabilities so
companies can synchronize their operation sin a much more effective way and manage
much more tightly with that. The arena of distributed order management and EDI tools, and
things around reverse logistics in the emerging area of silent commerce also provide more
tools. So, all companies have not implemented these tools very well, but what we have
found is the leading companies have been very thoughtful in selecting the capabilities that
make sense to them and they have been very effective in implementing the focus on the
process, not the technology, and they have focused on program management for effective
implementation, they’ve put a lot of attention to change management and these things have
made a huge difference for them. So that’s why I think we see the gap.

Slide 11

The good news is that we have identified the six core capabilities that we find, what
we call the masters of the supply chain, that the leading companies have used. Let me
speak to these briefly and I will come back and speak to them in a little bit more depth.
First of all is what we call “functional excellence. You can’t be good at the supply chain if
you are not good at blocking a tackle, so companies need to develop the basic capability in
procurement, manufacturing, procurement, transportation, warehousing, customer service,
supply chain management, etc. Secondly, companies need to be able to manage surge
and uncertainty. I’ll talk about this a little bit, but it’s a critical variable, once your cost
structure is set, what really makes the difference is how you mange the uncertainty and
unexpected events is part of that. Thirdly is IT enablement. Fourth is really extending the
supply chain capability, the connections with customers and with suppliers. Fifth is
selectively leveraging virtual logistics, and lastly is putting a focus on organization and
capability development in advancing the supply chain n skills. That was one of the reasons
that motivated us, frankly, to create Supply Chain Academy as a tool for companies to be
able to do that. So let me go through these in a little bit more depth, and then I’ll
summarize the key points at the end.

Slide 12

Next slide. The first is functional excellence. As I mentioned, functional excellence

is the blocking and tackling of the excellence of all the key functions that underpin supply
chain as well as being effective in being able to manage them collectively. And we have
seen companies make many advances in this area, but if you don’t have sound
manufacturing using cell manufacturing, lead manufacturing capabilities, just in time
principles, set up production, focus on yield management, and waste reduction, which are
critical value levers, thinking through the structure in manufacturing strategy, rationalizing
facilities, using low cost centers where appropriate, using focus capabilities, etc, especially
in distribution, putting in the best capabilities and techniques. So the blocking and tackling
is important. We’ve seen companies like Dunlop tire put in a whole new forecasting and
inventory approach, and the results of that were increased four points in market share
through better availability of products and visibility, 37% reduction in finished goods
inventory, 24% drop in raw material stock, and a 22% increase in inventory. True Serve,
the Howard co-operative used supplier integration and collaboration, and in this case they
used the Celarix tool to improve customer service by 10%, to reduce the SKUs by 20%, to
shorten delivery time from the warehouse from 5 days to 24 hours, and reducing logistics
costs from $165 million to $126 million, by effectively 25%. ChemEx, the Mexican cement
company sees a lot of delays and cancellations of projects, and they put in a centralized
production and scheduling and dispatch capability. They also put GPS, Global Positioning
Systems on their trucks. They reduced delivery time of their trucks from three hours to
twenty minutes, and they found that they need much more fewer trucks from the better
utilization, and shorter time in transit. So, the blocking times and transit is important. I think
all companies focus work on this, some do it better than others, and for most companies
there are some areas to improve.

Slide 13

The second area I would like to talk about is a key area, and it is called the
management of surge and uncertainty. I think this has as much of an impact on supply
chain performance as almost any lever. And clearly all companies work hard to balance
supply and demand, many don’t have a fundamental planning process in place. They don’t
conduct a sales and operations planning meeting, but you know, what effectively influences
this more than anything is unexpected events. End of period loading, where companies at
the end of the month, end of quarter, end of year, try to push things out from the channel in
order to meet their short term sales targets. Poorly planned trade promotions that are
uncoordinated, and broadly poor coordination between marketing sales and sales, and non-
aligned capacity strategies where you may have a marketing forecast that suggests one
thing and a financial forecast that suggests another, and people try to build capacity for the
marketing forecast. Poor channel visibility, where you really don’t see what is happening
within the channel. You have weak demand planning capabilities, which as I was alluding
to a moment ago, where you don’t have the sales and marketing teams take responsibility
and accountability for forecasting, where you don’t conduct a sales and operation planning
meeting, and where there isn’t a coordinated event to decide on production strategies and
inventory strategies, or when you have long cycle times. The whole effort towards cycle
time reduction, both in the planning processes and in the operating processes, is
fundamentally focused on the area of managing surge and uncertainty.

Slide 14

So what happens? You can see that retail sales, is relatively flat. There is some
variation, but it is not terrible variation. And then if you look secondly, you would expect
that the shipments would parallel retail sales, but if you look at the blue line, you see that
the variability increases a bit. And similarly, the production line, which is the dotted blue,
again, would vary even more. And then thirdly, if you look at the inventory, you get wild
swings within the inventory. And all of these practices are very costly for companies where
the fundamental demand pattern is not askew, and getting rid of unproductive things like
the end of month, end of quarter, end of year spikes, illogical promotional activities,
managing seasonality in a more effective way. Proctor and Gamble has been the star, if
you compare them with most consumer products companies, they do a very effective job of
managing uncertainty, and of integrating their processes very effectively, and not doing
things that in the end might produce the short term revenue lift, but fundamentally profits
and customer service and customer satisfaction.

Slide 15

A second major concern is a visibility within the channel, because the effects here are
very exaggerated as these demand signals are passed down through the supply chain to
suppliers. I like to go to the example of poor visibility within the chain. If you take a look at
this, the top line on page fifteen represents the production levels, the bottom line represents
the sales levels, and you can see for the first four or five weeks supply and demand are
effectively in balance. What happens at the fourth week is that the demand begins to
deteriorate. It takes a period of time for the problem to be identified, because there is poor
visibility ahead into the channel, and then it takes another period of time to initiate action.

So what happens then, change in production is disproportionate to change in demand.

For a small change in demand, the change that ultimately needs to be changed in
productions is almost twice as much, in this case, effectively 20-40%. So it tends to create
a very irregular pattern in effectively what people often refer to as jerking-around
operations, which turns to be very costly and results in very poor service levels.

Slide 16

On the next slide you see the bull-whip effect, which has been popularized by How
Lee of Stanford university, where as these changes then, the changes in production are
passed down in the supply chain through distributors to suppliers and manufacturers and
suppliers. That effect is exaggerated, but if you operate with visibility, it could be
considerably damped. Leading companies, in addition to the things that I mentioned like a
very strong sales and planning process, with the sale s and operations planning meetings
with the visibility into the channel and responsibility of forecasting, with functional ownership
of forecasting, etc, in addition to those activities, other companies have gone a step further.

Slide 17

The next slide shows data that was taken off the Internet. This was taken from purely
public sources, it shows four vendors of computer equipment for sellers, if you will, of
computer equipment, and their pricing over a two month period. So if you look at the
orange, the white and the very light blue line, you see the pattern you would expect, prices
stay stable for a time, in this case this is the Pentium 500 computer. Prices stay stable for a
period of time, and then when chip prices go down prices drop, and then prices stay stable
for another period of time, and you see that effect for three of the competitors of Dell. If you
look at Dell’s line, which is the dark blue, every three to seven to ten days the prices
change, they go up a little, or they go down a little bit, and they change over that period of
time. And you know, we asked ourselves what is really happening here, and Dell was
practicing a new technique, which was called demand shaping, the idea that you can use
pricing to shape demand based on what you are able to make. Dell has the challenge that
they promise orders in roughly three days, three to five days from an order their products
are shipped. However, their component lead times are sixty to ninety days in some cases,
so they need to forecast what they are going to make and purchase their components. You
know, generally speaking, they do a very good job of that, but they are not going to be
perfect. Sometimes they are going to purchase more of one item and fewer of another. For
example, in this case, they sell more of the Pentium 500, or less of the Pentium 500 versus
the Pentium 600, they could shift demand between those, for example, if demand for the
Pentium 500 is more than they expected and demand for the Pentium 600 chip is less, they
can lessen the price difference between the two, in effect to shape or shift demand from the
Pentium 500 to the Pentium 600 where they have components where they are able to make
the product. We call this demand shaping, or I like to call it sell what you can make.
Clearly companies want to make what customers want to buy, but you are not going to be
perfect. In the end, you have to sell whatever you make, either throw it away, or you sell it
in a discounted way. So this demand shaping technique, we are seeing this technique
being applied to the auto industry, and a number of other industries going forward, and I
think it will become much more prominent in the future.

Slide 18

I’d like to jump to the third lever now which is the extended supply chain, which is
effectively linking with customers and with suppliers. This technique has been around for a
significant period of time. I believe I wrote the first piece on this in 1983, I wrote a piece on
what I called at the time “Intercorporate Logistics”. The term intercorporate logistics didn’t
stick, but clearly the concept has. Each of the players in the channel has the supply chain,
clearly by coordinating them significant benefits can be achieved. By coordinating a
collaborative, forecasting and planning, having visibility into what is selling and be able to
translate that back into actions using techniques like vendor-managed inventory and
collaborative forecasting and replenishment, integrated transportation management is
becoming what is now called transportation management, is becoming a much more
important capability. Using event management, electronic linkages to have visibility of the
status of both the incoming as well as the inventory of the channel. Thinking about direct
shipment, what we call nose-skipping, being able to build truckloads at a plant to go directly
to the source, and in some cases we see entities, some three suppliers collaborating, each
sending a third of a truck and they are sourced in the same area. We are seeing this
happening in the food industry, a truck will go to each of those three locations, pick up a
third of a truckload, and go directly to a plant, rather to an intermediate warehousing
location with all the additional handling, and so forth. So, the case for this is very well
known, and very powerful, clearly a reduce in transaction costs, reducing waste in the
channel, you can enhance customer service, as I mentioned, from a number of examples
earlier, operate with a significantly lower inventory and reduced transportation costs.

Slide 19
 The next six or seven pages goes through and example of this within the food
industry. I am not going to go through it in detail, but basically it shows the impact on
different levers on different functional areas of channel collaboration. We identify here
about eight tools that are available for forecasting, trade promotion, materials handling,
logistics rationalization of capacity across the channel, quick replenishment, EDI, event
management, and electronic linkages, product line rationalization of flexible manufacturing,
and we look at the impact in this case on the food industry, on the manufacturers and the
retailers of effectively impacting the manufacturing cost structure by 6%, and potentially the
retail cost structure by 2.7%. Now the retail side, when you are on that side dealing with a
2-4% margin, you can have a significant impact, and in addition on the manufacturers side,
a substantial potential profit improvement from putting in channel linking and coordination
programs. The next five or six pages break that down by individual tactic. I will not go
through those in detail, but you can see the impact of those.

Slide 26

Page 26 looks at the impact of trade promotions. And again, this is a major lever, better
coordinated and more thoughtful trade promotions can have a significant impact. This is
the issue of surge and uncertainty that I had mentioned, if you were cross-channeling we
have seen manufacturers improve their cost of sales by 2.5%, and retailers by almost a full
percentage point to trade promotions.

Slide 27

On the next two pages for the manufacturers the value chain improvement in the
levers are shown where that 2.5% can be created from, and similarly, for the retailer the
leverage points of where cost and operating expenses and inventories are taken out of the
system up to .9%, almost a full percent increase. So channel integration, channel
collaboration, intercorporate logistics, the extended supply chain, whatever you want to call
it, offers a major advantage to leading companies leveraging this in a very effective way. It
is quite interesting because I see the leaders focusing more attention on the issue of what I
call operating mild design. Fundamentally thinking through the channel structure in the
inner relationships within the channel, I mean, Dell is a very famous example of that as they
built their whole point of differentiation on direct to the customer, and effectively gained a
huge advantage in that industry without all the depreciating inventory sitting in the channel
at the distributors and resellers and other intermediaries, and they have been able to
achieve a significantly lower cost structure in a pricing advantage will be a number of their
competitors.

Slide 28

You know, similarly, if you look at the GE Appliances very innovative operating
model design with Home Depot, rather than put all the appliances in the store, they put
samples within the Home Depot stores and shipment occurs directly from General Electric
warehouses directly to the customers, huge inventory savings, huge channel integration,
collaboration with an advantage. You look at Saturn spare parts management, and this is
for auto parts at dealers, Saturn operates with about seven turns, the majority of other
operators operates in the one to two turns. Now you see some operating at three, but he
vast majority are operating with one to two turns. And what Saturn did was put in the
capability to monitor parts availability throughout the system. Every night they allow the
dealers to do parts planning, but they provide recommendations to the dealers based on
very deep materials management capabilities and skills, you know, which most dealers
don’t have and can’t afford. They provide recommendations of what should be the
replenishment policies, additionally they provide visibility to other spares within the
channel. Additionally within a region, they allow one entity to serve as the master
warehouse, so they carry a bit of surplus to help replenish for that. So by looking at the
inventory from broader than the single dealer point of view, by allowing of sharing of parts
across the dimensions, one is able to achieve a significant cost advantage, and almost
seven times better inventory performance than some competitors. So thinking through the
operating model and design is a critical factor that needs to be considered.

Slide 29

The next area that I would like to speak to is the IT enablement, and as I mentioned
earlier that we find that the leading companies have effectively and selectively used IT
capabilities for advantage. You know, historically companies operated with very
unintegrated IT applications.

Slide 30

And the great benefit of the ERP was that it allowed integration of financials,
materials management, sales and distribution and production planning. That being said,
there were a number of systems around that that were important to integrate. Things like
supply chain planning, supply chain optimization, warehouse and logistics and
transportation execution systems and manufacturing executions systems and supplier
relation management, as well as customers and product management. And companies
have spent a lot of time the last decade not only getting in fundamental ERP systems, but
also linking those together. You know, we are finding that the leading companies have
done an effective job in linking together some of the key capabilities.

Slide 31

Clearly, the capabilities that are available have expanded, and selected vendors in
a number of areas are shown here, but we continue to hear the horror stories about
unsatisfactory implementations, not achieving the business case, not achieving the full
benefits, and what we have found is that the leading players approach this in a much more
thoughtful way. First of all, they focus on the process versus the technology, so a lot of
attention to the process of design. They carefully select the technologies to make sure that
they are both appropriate and that their company is ready for them. They spend significant
attention to the issue of program management during implementation with very rigorous
program management methodologies. And they spend a fair amount of time on the change
in people management related issues, and therefore have much greater success and an
advantage to their business cases, and so they deliver the results that they plan on. So,
supply chain technologies have taken a little bit of a bad rap. I believe that the capabilities
that have been developed over the last three to five years, as I mentioned earlier, are
enormous. That being said, a lot of companies have done a poor job selecting and
implementing, but the leading companies have been attentive to that, and they have
increased their competitive advantage because of that.

Slide 32

The fifth area I want to speak to is the area of virtual logistics, clearly we have seen
a trend of traditional outsourcing growing. During the decade of the nineties we have seen
it grow from an embryonic business to a fifty billion dollar business in warehousing
transportation, and additionally contract manufacturing. That core outsourcing is expected
to continue to grow, however we are seeing new forms of outsourcing emerging, in
procurement, in spares management, in what we call managed logistics services, so that in
procurement, clearly in the indirect spend it’s a non-strategic and non-critical category.
There’s new capabilities that are available for that, and there’s aggregation opportunities on
much of the spend and so we have seen a growing interest among our clients, and a very
profound value proposition in that arena. We have seen more and more companies begin
to outsource elements or segments of their direct spend as well. The service parts and
spare parts area has been the second area where there has been robust growth and robust
interest in the area of outsourcing of spares management. It is a very specialized area. It
requires distinctive techniques and so we’re seeing growing interest in that area And lastly,
in the area of managed logistics services, what used to be called perhaps four PL of
companies considering outsourcing more of their warehousing and transportation area, but
a whole broader step of supply chain function. There’s embryonic interest with that, and we
expect those areas to grow. What we have found is that the leading companies have
selectively outsourced these capabilities, and we’ll expect more of that to grow in the
future.

Slide 33

The last area that I want to speak to is the focus on capability development. We
find that the leaders are clearly working to differentiate themselves on this dimension. It is
something that is very challenging to fix quickly. It takes years to attract, retain, develop
capabilities and skills within your companies, however, it’s clearly a major focus of
companies in the next decade. It’s critical for supply chain performance. As I mentioned, it
was one of the reasons we created Supply Chain Academy, and we view this as a growing
area of focus.

Slide 34

So in conclusion, we have found that supply chain management is becoming a

much more important strategic and competitive variable for many industries and many
companies, and that the gap in performance is growing between the leading and the
average players, but we believe there is a window of opportunity to close that gap, and that
we find that the leading companies have focused on six levers, or six core capabilities that
has enabled them to create a supply chain advantage, and therefore a strategic advantage,
functional excellence, managing surge and uncertainty, IT enablement, managing the
extended supply chain and building links with customers and suppliers, selectively using
virtual logistics, and putting a focus on organization in capability development.

Thank you.