Post on 06-Apr-2018
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How resilientwill internationalsupply chainsprove in 2010?An report, in association with RBS
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RBS Foreword 4
Executive summary 5
Introduction 6
Pushing through change 8
Change for the sake of change? 12
Where the dangers lurk 14
Acts of god and governments 18
Managing the chain 20
Case studies 23
Conclusions 25
Contents
2010 The Royal Bank of Scotland Group plc. 2010 Economist Intelligence Unit. All rights reserved. This report
including the research eldwork was written in co-operation with the Economist Intelligence Unit (www.eiu.com).
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RBS Foreword
Thats why weve commissioned the Economist Intelligence Unit to produce this independent report which provides insight
into the general health of supply chains within a sample of 250 UK-based corporates.
The results show that over half the companies surveyed were condent that they would increase their revenues in 2010.
Interestingly, even for larger companies, the report shows that China is not the obvious choice it once was. If the nancial
markets are to be believed, the competitive advantage that Chinas undervalued currency brings may not be available for
much longer. Buyers will therefore extend their supply chains to other areas of the globe in search of cheaper or better
sources. But of course, a supply chain is only as strong as its weakest link. As globalisation on both the supply and market
side increases, the complexity of supply chains also increases, leading to a closer, more co-dependent relationship with
suppliers. This, as we know, can often be a delicate balance. What is certain, however, is that supply chains are gradually
playing a more prominent part in the fortunes of companies, and the effective management of these chains is becoming a
critical determinant of competitiveness.
Thats where RBS can help. Although this report suggests progress is denitely being made in managing the risks inherent in
extended supply chains, there is still much work to be done. We have years of experience when it comes to supporting our
customers international operations. And our extensive international network in over 35 countries means we can really helpyour business make the most of the opportunities out there.
Id like to take this opportunity to thank you for your interest in the Economist Intelligence Unit survey and report. I hope you
nd it of use.
John Lyons
Head of Global Transaction Services UK
The Royal Bank of Scotland plc
Please note that the report contained in this paper is sponsored by The Royal Bank of Scotland Group plc (RBS), although the ndings expresseddo not necessarily reect our views. No representation or warranty, express or implied, is or will be made and no responsibility or liability is or willbe accepted by RBS or any of our ofcers or employees in relation to the accuracy or completeness of this report and any such liability isexpressly disclaimed.
Theres no doubt that the economic challenges o the last year have changed the ace o
commerce in the UK. But as companies look to diversiy and take advantage o the potential
profts international markets can oer, they must also balance the risks and supply costs involved.
This means that the importance o maintaining healthy and costeective supply chains has
never been greater.
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Executive summary
A key strategy or increasing revenues and preserving
margins is cutting costs with suppliers. Some 63% of
respondents negotiated lower prices in the past year, and
41% hoped to do so in 2010. A fth had switched the
countries in which suppliers are located, a third had
reduced the number of suppliers and half reported that
their relationships with their remaining suppliers were,
indeed, more cooperative than before the recession.
Modern supply chain management (SCM), however,
extends well beyond price cutting. The term SCM
recognises that when some 80% of a products content is
bought in, as is now common practice, the producing
company relies heavily on its selection of suppliers, and
close cooperation with them. Survey respondents listed
specialist expertise as the second most important
consideration when choosing a supplier, after cost.
In spite o the ragile state o the global economy, the
fnancial stability o suppliers is just the third most
important consideration when selecting a supplier. Only
36% of respondents selected nancial stability as a
consideration when choosing an overseas supplier.
However, after a supplier is selected, nancial accounts
are the top area for ongoing monitoring, chosen by 64% of
respondents.
Insolvency o a supplier is a major threat to the supply
chains o a signifcant minority o respondents. 29% of
respondents have experienced an insolvency
in the past year and a quarter see insolvency of a
supplier as one of the biggest threats to the resilience oftheir supply chains over the next year.
Respondents are also looking to take advantage o
opportunities created by the recession. The top three
opportunities spotted were greater availability of talented
workers in the labour market, lower interest rates (which
makes nancing of debt less expensive) and better
prospects for mergers and acquisitions. A quarter will use
the impetus of the recession to review and/or rationalise
their supply chains.
The fnancial crisis has put the spotlight on
companies supply chains as management
struggles to realise the benefts o
outsourcing and reduce risks. The results o
this survey suggest that their eorts havepaid o: well over hal the companies were
confdent o increasing their revenues in
2010, retaining their customer base and
preserving their margins. Other major
fndings include:
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Introduction
At the same time, the number of foreign subsidiaries has
massively increased over the past 20 years tripling,
according to estimates from McKinsey. Of the most talked
about hotspots, China recovered from the nancial crisis
well enough in the last quarter of 2009 to notch up 10.7%
annualised growth, and growth is forecast to continue at
least 8% for the next few years. And India is not far
behind, producing hundreds of thousands of trained
engineers every year, and growing economically at a
pace just slightly slower than Chinas.
Companies that can take advantage of such fast-evolving
supply opportunities wherever they may arise hold a valuable
competitive weapon, but require a well-managed modern
supply chain with the ability to cope with rapid change
and volatility. This type of supply chain requires a
standard of management several degrees higher than
that usually encountered in the traditional purchasing role.
The supply chain model is now more of a network, with
suppliers assuming the role of partners and frequently
carrying some of the risk. The recent recession and the
credit crisis have tested such supply chains and
relationships as never before, and many suppliers have
gone out of business 29% of respondents to this survey
reported such instances in the past year. Companies that
have adopted lean production techniques, such as
just-in-time inventory and reduced numbers of suppliers,
have had to be especially vigilant.
Companies dont compete: supply chains
compete is an old adage that is becoming
more compelling as the years go by. In the
days when companies manuactured, refned
or processed everything themselves, theirate was largely in their own hands. Now,
approximately 80% o the material value
o a complex product, whether an Airbus
passenger jet or a Stannah stairlit, is likely
to have been bought in, whether on the
grounds o price or a simple plastic
moulding or expertise or an electronic
control system.
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It is not surprising, therefore, that at this stage of the
economic cycle, risk is still at the forefront of everyones
minds. The moment of truth for a hard-pressed company
can be the point at which sales start to increase again
after a recession, but when the cash requirements nally
exceed resources. That perhaps explains why in this
survey all but a few of the larger companies (those with
annual revenues in excess of $1bn) apparently attach
high priority to the risks lurking in their supply chains, and
are aware that they need to be constantly alert to possible
problems. Extending the supply chain concept from supplier
to customer is not uncommon (if not always effective) in the
consumer industries (see the case study on PJ Cussons),
but elsewhere it is still a rare concept. The arguments in its
favour are universal but, in many companies, departmental
boundaries may prove insuperable.
Overall, however, the results suggest that by managing
their supply chains effectively, respondents have comethrough the nancial crisis in pretty good shape. Of
course, the survey does not cover the failures, only the
survivors, but well over half the respondents to this survey
of 282 UK companies, conducted in January 2010, were
condent of preserving their margins over the next 12
months, increasing their revenues and retaining their
existing customer base.
Still, many had reduced both the number of suppliers
and their supply chain staff, but claimed they now monitor
the remaining suppliers more closely. Collaboration and
their systems have improved, and (perhaps as a result)
their demand forecasting and continuity planning aremore accurate.
The implication is that communication within the company
is now generally smoother than in the past, especially
between the supply chain managers and the sales and
marketing teams. But some believe it is still not good
enough, specically in their liaison with the far end of the
chain (i.e. their customers).
Effective liaison assumes greater importance given
the increasing volatility in both the target markets and the
suppliers markets. The chief supply chain ofcer (if one is
appointed) acts as piggy-in-the-middle, who has the added
responsibility, whatever the nancial pressures, of keeping
inventories at a safe minimum and unit costs at a level
that satises the nance director, while leaving the supplier
with enough incentive to provide a reliable service.
As a companys national and international operations
develop, the complexity in the supply chain increases
exponentially, with different markets, different products
and different manufacturing and distribution centres. Yet
still, the survey shows that frequently the supply chain
has no single head, or is decentralised. It is difcult to
see how a process of optimisation could be achieved in
such circumstances.
Many companies, it seems, have yet to wake up to the
scale of possibilities that a well-managed supply chain can
offer, not just in terms of operational efciency, but as an
indispensable weapon in the modern competitive world.
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Dont waste a good crisis, as White House
chie o sta Rahm Emanuel told fnancial
regulators last year. Farsighted managers
can seize the opportunity to initiate
a longdesired radical change at a time whennervous colleagues and other stakeholders
are more receptive to change. The supply
chain, involving as it does practically every
department in the company, as well as a
long list o suppliers, sometimes needs a
crisis beore all parties will all into line.
For example, Toyota, facing a $2bn loss in the 2009/10
nancial year as a result of the recession, even before
the devastating eight million car product recall programme,
announced in December 2009 that, among other changes,
it was merging three purchasing divisions into two and
imposing a 30% cut in prices to suppliers for a range of
components for its 2013 models.
Despite its recent problems Toyota is still considered a world
leader in managing its supply chain, having demonstrated
in the Toyota Production System how to work with suppliers
to reduce costs on both sides and improve productivity.
Its obeya process brings all parties together to discuss
ideas and projects, and break down functional silos.
The evidence from this survey is that on a smaller scale,
many respondents are faced with similar problems to
Toyota and appear to be following the car rms lead:
56% said they were taking steps to improve collaborationand 48% went further by introducing systems to connect
and align interests more closely with supply partners.
Their primary objective, as always, was to nd ways to
cut costs by negotiating lower prices 63% said they had
done so in the past year and 41% hoped to in the coming
year. Perhaps to focus their relationships, 33% had reduced
the number of suppliers they used and, possibly for that
reason, 35% had cut their own supply chain staff. Whatever
the results of their efforts, 50% agreed that suppliers were
more cooperative as a result of the recession.
Pushing through change
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Source: Economist Intelligence Unit
Which of the following steps has your organisation taken in the past 12 months as a resultof the current downturn?
Negotiated lower prices from suppliers
Reduced headcount in supply chain function
Reduced number of suppliers
Implemented a sustainability strategy
Diversified supply chain
Increased payment terms to suppliers
Invested in supply chain management technology
Reduced capacity levels
Moved production to lower-cost countries
Increased output volumes
None of the above
0 10 20 30 40 50 60 70 80 90 100%
63%
34%
33%
32%
29%
26%
25%
23%
19%
18%
5%
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Source: Economist Intelligence Unit
Which of the following steps do you expect to take in the next 12 months?
The number of suppliers tends to grow of its own
accord, and a periodic weeding process is probably
desirable, whatever the conclusions. Three years ago,
for example, an embarrassed Airbus, struggling to
assemble the A380 superjumbo as well as the A400M
transport, announced a gradual plan to cut its list of
suppliers from 3,000 to less than 1,000. The numbernow stands at 1,500, and would probably be nearer its
target but for the political pressures on management not
to be the cause of redundancies at its suppliers and the
need to limit the effect of the strong euro by buying
more components in dollars.
Whatever the difculties, there is an unmistakable note
of optimism in companies replying to questions about the
current atmosphere. They are, of course, the survivors,
but 51% were condent of growing their revenues over the
next year, with only 22% not condent. As to prot
margins, 39% were condent of an increase, with 29% not
condent. There is less condence at the C-level: 30%were not condent about growing revenues and 33%
feared they would not be able to increase their margins.
Negotiate lower prices from suppliers
Increase output volumes
Diversify supply chain
Reduce number of suppliers
Invest in supply chain management technology
Implement a sustainability strategy
Reduce headcount in supply chain function
Increase payment terms to suppliers
Move production to lower-cost countries
Reduce capacity levels
None of the above
0 10 20 30 40 50 60 70 80 90 100%
41%
28%
24%
24%
23%
23%
21%
17%
17%
16%
11%
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Compared to this time 12 months ago, what degree of condence do you have in your companysability to achieve the following, over the next 12 months?
Source: Economist Intelligence Unit
Figures have been rounded to the nearest %.
At the smaller end of the scale, the up-market pram and
child car seat manufacturer Silver Cross has sales of
20m, but chief executive Nick Paxton admits to having
had tough times over the past year with some of our
major customers demanding extended payment terms.
Over several years, Paxton has carefully built up a close
relationship with a small group of suppliers, mostly in
China, and explains I dont believe in spreading our
custom. Youre dealing nowadays with a well-educated
set of managers with a good understanding of our overall
requirements and the prot that we have to make, as well
as their own business.
We have an ofce in Shanghai, and ofces in each of four
primary suppliers. We have more secondary suppliers, but
I take time to nurture relationships. For instance, we use
video-conferencing for one of the factories because e-mail
is so easily misinterpreted. Our Chinese suppliers have
actually suffered labour shortages, so we share our troublesand our relationships with them have grown stronger.
Preserve existing profit margins
Retain existing customer base
Grow revenues
Increase profit margins
Expand into new markets or customer segments
Maintain control over supply chain
Access capital at acceptable cost
16%
6%
21% 36% 25% 13%
30% 39% 20%
4%
10% 2%
21% 30% 26% 18% 4%
14% 26% 31% 20% 9%
19% 31% 30% 4%
25% 38% 29% 2%
17% 28% 38% 13% 4%
Very confident Confident Neutral Not confident Not at all confident
0 10 20 30 40 50 60 70 80 90 100%
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Change for the sake of change?
Even among larger companies, China is not quite the
obvious choice that it once was. Some 47% of larger
companies, with over 1bn in revenues, source some
of their supplies there, compared to only 19% of rms
with less than 500m. But if the nancial markets are
to believed, the competitive advantage that China has
because of its undervalued currency may not be available
for much longer. Output continues to rise in China, but so
do wages, therefore cheaper cost of labour is not a
guarantee either.
Perhaps in consequence, while 47% of the largest
rms currently source from China, just 42% say they are
enthusiastic about sourcing opportunities there over the
next three years, with slightly more (43%) now favouring
India. Oddly, smaller rms have moved in the opposite
direction, with just 19% currently sourcing from China but,
27% say they expect to source from there next year and
for it to offer the greatest sourcing opportunities over thenext three years. Equally surprising, while 41% of
companies currently source some of their purchases in
North America, just 28% expect to over the next year,
and just 14% say it will offer the best opportunities over
the next three years.
What Paxton and bosses in a similar
position disapprove o is switching suppliers,
even countries, or a relatively small cost
advantage. Among all survey respondents,
19% reported moving their production tolower cost countries. Signifcantly, the
proportion was 12% in companies with
below 500m turnover but 26% in those
above 1bn. The critics say that however big
the saving, it is likely to be temporary.
Meanwhile, the quality and reliability o the
supplies over a period will be untested, and
the advantages o close cooperation in
design, marketing and fnance will have to
be built anew.
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From which of the following regions and countries do you currently source products or services?
Source: Economist Intelligence Unit
Which of the following regions and countries do you expect to offer the greatest sourcingopportunities for your organisation over the next three years?
Companies with global Companies with global Companies with globalannual revenues annual revenues annual revenues
Total of 25m-500m of 500m-1bn of >1bn
Africa 15.9% 14.9% 16.9% 16.0%
Australia & New Zealand 21.9% 12.8% 26.5% 26.4%
Central & Eastern Europe 36.4% 26.6% 42.2% 40.6%
China 35.0% 19.1% 37.3% 47.2%
India 32.9% 26.6% 30.1% 40.6%Latin America 19.1% 9.6% 18.1% 28.3%
Middle East 19.8% 10.6% 24.1% 24.5%
North America 40.6% 33.0% 42.2% 46.2%
Other Asia 24.0% 19.1% 25.3% 27.4%
Rest of Western Europe 53.4% 43.6% 57.8% 58.5%
UK 76.7% 75.5% 74.7% 79.2%
Companies with global Companies with global Companies with globalannual revenues annual revenues annual revenues
Total of 25m-500m of 500m-1bn of >1bn
Africa 8.5% 9.6% 4.8% 10.4%
Australia & New Zealand 6.4% 8.5% 7.2% 3.8%
Central & Eastern Europe 18.4% 18.1% 15.7% 20.8%
China 36.7% 26.6% 42.2% 41.5%
India 30.7% 19.1% 28.9% 42.5%
Latin America 10.6% 6.4% 9.6% 15.1%
Middle East 5.3% 4.3% 6.0% 5.7%
North America 14.1% 20.2% 18.1% 5.7%
Other Asia 12.7% 13.8% 13.3% 11.3%
Rest of Western Europe 18.4% 20.2% 16.9% 17.9%
UK 38.5% 43.6% 41.0% 32.1%
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I nothing else, the data shows just how
volatile supply chains have, or are expected
to, become. Labour costs, exchange rates
and local productivity all play their part, but
meanwhile commodity prices have uctuatedin the past two years and show no sign o
stabilising. Oil, as always, is the key
commodity, and its price has swung rom a
high o $147 in July 2008 down to $31 in
early 2009 and now stands at around $85.
With renewed economic growth, common
sense says the price can only go up, aecting
a vast array o material and transport costs.
At Contico, for example, a 10m supplier and manufacturer
of cleaning equipment and materials, operations director
Phil Macey complains that in three months last year, the
cost of resin for plastic mouldings increased by 78%.
Meanwhile, the range of exotic metals and rare earths
now required in modern technologies and markets adds a
further dimension to the expertise demanded of the supply
chain manager, who must pay particular attention to their
market costs and guarantees of availability.
As the supply chain extends across the globe in search
of cheaper or better supplies, volatility and the range of
demands placed on it have risen, as have the volume and
severity of the underlying risks involved. The companys
future depends on the risks being at least managed if
not avoided. But 28% of respondents admitted to
under-estimating the risks inherent in the supply chain,
and the gure grew to 34% amongst the largest companies
(with more than 1bn in annual revenue). Not far behind,the lack of a risk culture was cited by 18%. The range of
events aficting companies in the past year extended from
straightforward insolvency through falling quality (16%) to
sabotage (3%). By far the most frequent was severe weather
at 40%. However, a fth of companies (21%) were lucky
enough not to have faced any such events.
The consequential damage to a companys business by
events of these kind is well-illustrated by the case of
Land Rovers sole supplier of Discovery chassis, which
went bankrupt in 2002. The suppliers receivers,
accounting rm KPMG, demanded 60m just to maintain
supplies. To nd a new supplier would require a freshinvestment of at least 12m and a six-month wait, and
meanwhile, all production on the Discovery line would
have to cease. The case went to court and Land Rover
(then owned by Ford) settled for 15m.
Where the dangers lurk
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Which of the following events affecting the supply chain has your organisation experienced overthe past year?
Source: Economist Intelligence Unit
Severe weather event
Insolvency
IT failure
Increased tariffs
Falling quality standards after honeymoon period
Labour dispute
Transport shut-down
Theft
Product tampering
Sabotage
Other reasons
None of the above
0 10 20 30 40 50 60 70 80 90 100%
29%
22%
19%
16%
16%
13%
12%
5%
3%
1%
40%
20%
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Land Rover was lucky. It was alleged at the time that the
supplier had been making a loss on every chassis made
at the price that Land Rover had negotiated. No doubt
Land Rover had initially been satised with the deal,
oblivious to the risk it was running with the source of a
critical component. Putting a supplier in that position, as
any supply chain director will advise, is seldom the best
policy. But having taken on the risk of relying on a single
supplier, the company compounded its problems by not
keeping a close check on the suppliers nancial health
and stepping in before the receivers were called. It
evidently failed to foresee the further risk posed byKPMGs attempt to exploit the strength of its position.
In another case, Mr Squiggles, the toy electronic hamster
made by Cepia, a large toy company in the US, caught
the world markets imagination in the run up to Christmas
2009 and 600,000 were expected to be sold in the UK
alone. Then tests in a California laboratory surfaced,
appearing to show too-high levels of the toxic chemical
antimony in the hamsters fur. Sales were halted and
frantic phone calls around the world were made.
Cepia had all the right safety certicates in place and
quickly proved the results were a mistake, but not quickly
enough to prevent a dip in sales. With modern
telecommunications, rumours can cause real damage
anywhere in the world in an instant and, at that time
of year, it could have been a disaster for Cepia.
The inference from these two examples is that a supply
chain disaster, actual or potential, can come from any
quarter, so when 52% of respondents judged their companies
audit of supplier risk to be effective and 53% thought their
assessment and identication of risks were effective, the
verdicts have to be treated with some scepticism.
The great majority of the sample say they have stepped
up their due diligence research on potential suppliers
(60%) and on-going monitoring of existing ones (58%).
Possibly as a result, those who fear insolvency among their
suppliers (29%) are outnumbered by those who say theydo not (34%) but 35% would not commit themselves.
Solvency, quality, nancial resources and the customer
base can indeed be checked, while commodity prices,
exchange rates and protectionism can in some degree
be forecast and the effects mitigated, but there will
always be risks which are more difcult to manage.
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Do you agree or disagree with the following statements?
Source: Economist Intelligence Unit
I am fearful that partners in my companyssupply chain may become insolvent
in the next year
My company has stepped up the levelof due diligence performed on potential
supply chain partners as a resultof the recession
My company has increased the level ofongoing monitoring of my companys supply
chain partners as a result of the recession
My company has introduced systemsto more closely connect and align interests
with supply partners
6% 34% 28% 7%23% 2%
2%
Strongly agree Agree Neutral Disagree Strongly disagree
9% 26% 10%50% 2%
6% 26% 12% 2%51% 2%
7% 38% 10% 1%42% 2%
Dont know
0 10 20 30 40 50 60 70 80 90 100%
Figures have been rounded to the nearest %.
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Earthquakes, tsunamis, orest fres and
oods are another matter, and are likely to
need more careul assessment in the uture
as globalisation and the possible eects o
climate change increase. Local politics, too,must be taken into account by the supply
chain management, as Nestls recent
experience in Zimbabwe shows.
Nestls local management had come under pressure
in October 2009 to break its existing supply contracts
with local farmers, and purchase its milk instead from
farms that had been requisitioned and were now
controlled by President Mugabe and his Zanu-PF party.
Human rights groups in neighbouring South Africa heard
about it and appealed for a boycott of all Nestl products
there if it gave in. Then in December Nestl found itself
threatened with nationalisation and physical violence if it
would not accept milk from Mugabes farms. It immediately
halted all production at its Harare factory, and only restarted
once it had received (from the Minister of Industry and
Commerce) a written guarantee of the security of its
management and staff and non-interference in its
operating processes.
No doubt the Nestl management will be keeping a very
close eye on progress in Zimbabwe. But even in the
best-governed countries, the way regulations affect aparticular business may not be apparent until it is too late
to have them changed. 39% of survey respondents
expected regulations, benign or otherwise, to increase
over the next year, while 29% foresaw informal barriers
increasing, including problems with customs, health and
safety regulations and bribery. On the other hand, a
further 29% had no fear of government regulations.
Even well-intentioned government activity in the UK has
sorely tested companies supply chains. The climate
change levy, for example, has borne particularly heavily
on the UKs aluminium extrusion industry, according to
Tim Eagles, joint managing director of Stannah (see casestudy), the dominant manufacturer of domestic stairlifts.
He says We have every concern for the environment,
but the levy is applied only in the UK, so weve had to
buy our extrusions from suppliers in southern Europe.
Acts of god and governments
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Source: Economist Intelligence Unit
Do you see any of the following protectionist measures as threats to your businessover the next 12 months?
The brewery business in the UK has more government
regulation to cope with than most, with changes to licensinghours in its pubs, the banning of cigarettes and the duty
levied on alcoholic drinks. Long a source of revenue for
the government, duty may soon be increased sharply in
an attempt to curb excessive drinking and relieve
pressure on the National Health Service.
The government shouldnt interfere too much, thinks
Andy Wood, the managing director of Adnams, the East
Anglian brewery. Were a hugely responsible company,
but our business is changing. 2009 was a seminal year,
when absolute beer volumes consumed in the home
exceeded those in pubs and bars for the rst time. The
supply chain must be exible enough to cope with theconsequences of that on our pubs, plus all the changes
government imposes upon us, and the high seasonality.
Adnams is proud of its record on another front
sustainability which is of increasing interest tocustomers, governments and local authorities alike.
A good record is coming to be a necessary qualication
when bidding for contracts and licenses. In Adnamss
case, it can point to the way its transport system has
been rationalised and bottle weight reduced, while the
brewing plant has been modernised so that instead of
15 pints of water being used to brew one pint of beer,
only three pints are now required.
Of respondents to the survey, 31% reported that their
companies had implemented a sustainability strategy,
however dened.
Increased regulatory barriers to business
Informal barriers to trade (e.g. customs practices,health and safety, bribery)
Tariffs
Export taxes
Trade defence measures
Bail-outs/state aid
Export subsidies
None of the above will be threats
0 10 20 30 40 50 60 70 80 90 100%
30%
20%
19%
18%
13%
40%
30%
12%
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Managing the chain
Ideally, he or she has to have a strategic view of the
companys future and the ability to create the necessary
supply chain capacity to match, yet be a diplomat rather
than a driver, able to see which are the weak links and
where to nd solutions. The supply chain managers real
role, says consultant and author John Gattorna, is in
supplying customers with what they want its more of
a philosophy than a function. In practice, he says, supply
chains are often still seen as cost centres, little more than
purchasing and logistics departments.
Respondents to the survey reported in 43% of cases that
the supply chain head reported to the CEO or other
director, while in a further 44% there was no single head
but the structure was fairly centralised. In the remainder
it was decentralised. It may be signicant that in the
C-level view, 51% of companies had supply chain heads
reporting to the CEO or other director. The implication is
that there is a certain amount of confusion in the reportingstructure, which is likely to reduce performance. In the
decentralised cases, circumstances or the nature of the
business may obviate the need for a single coherent
supply chain.
There is a gradual trend towards greater centralisation,
however in supply chains as in so much else, everything
depends on the nature and structure of the business and
also the geographic spread. For practical reasons the
supply chain may be split into two or more as reported
by 28% of respondents. But there is wide variation, even
within a single business, according to the nature of the
product: fashionable items, or ones given heavypromotional support require one structure; short-life
products with many optional features (such as mobile
phones) demand another; slow-moving or price-sensitive
lines demand a third. As globalisation on both the supply
and the market side increases, the complexity of the
supply chain or chains also increases, and, in the opinion
of some, places a limit on its optimum size.
A supply chain is only as strong as its
weakest link, and in a company o any size,
there are many links, extending rom the
supplier, to the procurement team, to the
design and production teams, to fnance, IT,marketing, sales, customers and atersales
service. In act, it is more o a network than
a chain, with each unction responsible or
a ew links, and a single chie supply chain
ofcer a rarity.
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Source: Economist Intelligence Unit
How would you describe the way in which your companys supply chain is managed?
With complexity comes obfuscation. Like other consultants,
Gattorna reports nding companies struggling under masses
of data, but making only slow progress in creating an
accurate and timely picture of the whole supply chain so
that it can be managed effectively. Measures of success,
apart from reducing costs, are difcult to nd, so Gattorna
favours using the cash-ow return on investment, which
everyone can understand, as the principal metric to guide
management.
With some 2,000 products and 120 suppliers, Macey at
Contico says that it is the quality of his staff that makes sure
the supply chain works. Were not just selling in the UK
we sell in Japan and the Middle East, and have just set up
Contico Europe in Amsterdam. Here in Cornwall were
incredibly lucky with staff. They have tremendous knowledge
of our products and exactly what the targets are.
We spend a lot of time with stats, covering the whole
chain from supplier to customer, and half of what we sell
we manufacture ourselves. We measure everything to the
nth degree our shipping performance, our credit notes
and quality in every aspect. The aim is not just to prove
how were doing, but to help in tendering, and ensuring
that salesmen know what to quote.
Supply chain executives in larger companies are
usually organised into their functional specialities but, as
the survey shows, communication then suffers: 31% of
respondents believed that poor communications across
the chain was one of the main obstacles to improving
performance. Also cited were poor liaison with customers
(6%) and inadequate cooperation between sales and
production (13%). Some 25% of companies had invested
in supply chain technology, or automated control or
information systems (17%). Adnams for one is abandoning
its old economic resource planning (ERP) system and
moving towards a more user-friendly web-based system.
However, supply chain managers say that although ERP
and other systems can help, solutions are to be found in
human more than electronic interaction.
In certain cases, Gattorna favours creating small
multi-disciplinary teams to focus on a group of customers
rather than a specic function. That way, he claims,
communication is much improved, and changes, for example
in product specication, can be accomplished in a matter
of days rather than weeks. Adidas, the German sports
equipment supplier, did this at the time of the last football
World Cup, because it knew that if Italy beat France, say,
sales of Italian shirts would go up 300% overnight.
Companies with global Companies with global Companies with globalannual revenues annual revenues annual revenues
Total of 25m-500m of 500m-1bn of >1bnSingle supply chain headreporting to the CEO or director
42.7% 44.1% 41.0% 42.7%
No single supply chain headbut fairly centralised
43.7% 39.8% 49.4% 42.7%
Decentralised 13.6% 16.1% 9.6% 14.6%
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Improving collaboration with suppliers is a widespread
ambition for all the obvious reasons to cope with the
growing volatility of the market, to ensure quality and
reliability standards are maintained and to improve
productivity so that costs can be reduced with minimum
pain. But suppliers are frequently referred to as partners
because the fortunes of both parties are in practice
intertwined. The relationship may actually involve some
considerable capital investment on the part of the
supplier. Risk-sharing is rare however, at least on the
scale that, for example, Boeing has chosen for rms
assembling some 70% of its new 787 Dreamliner, which
has already become a case study in the problems of
managing a global supply chain.
As the bought-in content of many products has grown,
suppliers contributions in terms of marketing as well as
technical innovation are all the greater. Ideally, products
will be designed jointly but the company needs to havecondence in the relationship where precious patents,
drawings and tooling are at stake, as demonstrated by
the Land Rover case, where these vital assets came to be
controlled by the receivers. With a sound relationship, too,
the supplier is likely to be sympathetic to a request from
the company to defer payment; and if the shoe is on the
other foot, the company will have more condence in
supporting the supplier.
In fact, half of companies questioned found that cooperation
was better since the recession, while 56% said they were
improving it further, to increase the resilience of their
supply chains. Some 48% claimed to have introducedsystems to more closely connect and align interests with
supply partners. Improvements have been made to
forecasts (31%) and continuity planning (33%), perhaps
giving suppliers more condence in their customer.
However, a further question revealed that while 43% of
respondents had condence in their companies demand
forecasts, 19% did not. There is clearly still some way to go.
Progress is also needed, according to larger rms, in
the hiring and training of supply chain staff. Ted Kondis,
consulting vice president of the supply chain specialist
Ariba, says that the pressure on costs over the past two
years has left companies short of skilled supply chain
staff to cope with renewed growth. So the question in
the minds of top executives should be Do I have the
right talent?
The problem applies especially in rms that still see the
supply chain as a fancy name for purchasing and
logistics, and as some consultants observe, their staff
often have an engineering background with a tendency to
rely too heavily on their spreadsheets and delivery
schedules, and not enough on relationships with the
people concerned.
At PZ Cussons (see case study) the complexities of its
manufacturing and marketing operations in 12 countries
require the right people with a rather broader view, and the
need is recognised as one of its four strategic pillars,
alongside its selection of markets, its brands and its
world-class supply chain. Supply chain director John
Pantelereis explains that the company believes in
growing its own timber. It recruits 60 or 70 graduates
every year, and develops the talent it needs to build
human relationships with suppliers as well as to manage
the purchasing of valuable raw materials and plan the
distribution of the products. For the supply chain, you
need to hire the best people and give them as much
responsibility as possible, he says, implying that his
company has got them and does.
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Case studiesStannahs steady climb
With the UKs housing stock having a preponderance of old houses built on
two levels connected by a winding staircase, it is perhaps not surprising that
the world leader in the stairlift market is a British rm that claims to have made
400,000 lifts since 1975. A family-owned company dating from the 1860s, its
volumes have grown every year for the past decade, so that current turnover
now tops 105m.
The skill consists as much in tting the stairlifts into a conned space as in the
mechanics, and also in controlling the second-hand market since its customers
tend to have shorter lives than the lifts. Tim Eagles, joint managing director, is
directly responsible for the supply chain and although his principal aim is to
nd better, cheaper supplies, competition in the market is growing and the
efciency of the whole supply chain is an important weapon.
Customers naturally want exactly the right product installed on the agreed
installation day, and for that, all components have to be in place and to work
as designed. But market dynamics may depend on suppliers themselves
innovating to produce new components and facilities as required.
In the past, practically everything was made in-house, Eagles says, but
nowadays, perhaps 80% is sourced outside. Plastic mouldings and castings
need higher volumes than we need ourselves to keep the price down. In our
product, the carriage and chair is standard, but the rail it runs on is bespoke,
so that has to be manufactured here and tted by our staff.
We have a reasonable level of spend in South-East Asia, but I dont deal
direct, and I turn over my stock up to 30 times a year. Theres always the risk
of quality deteriorating, and other things being equal, Id buy locally because
of better responsiveness. But I have a very good relationship with our overseas
suppliers. I also have very close cooperation with our sales force. We project
sales forward for 18 months and have an umbrella agreement against which I
can call off as needed.
Are we getting the best performance? I dont think you can tell. The supply
chain delivers whats needed, and were constantly making improvements. Ten
years ago, our stockturn was around four a year. Now the average is 20. Were
very cautious with cash. If something goes wrong, I know I can count on my
suppliers to cancel the Christmas party to put it right.
In the past, practically
everything was made
inhouse
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PZ Cussonss four pillars of success
Not many companies take their supply chains quite as seriously as the 838m
personal care group PZ Cussons. Founded 125 years ago, it was known until
2002 as Paterson Zochonis, and its best-known brand is Imperial Leather soap.
With a new name, new brands and Imperial Leather relaunched, it has grown
steadily in Europe, Africa and Asia, working to a four-point strategy: selected
markets, leading brands, a world-class supply chain and the right people.
Its last annual report enlarged on the third point We operate world-class supply
chain networks that enable us to deliver our brands quickly and efciently to our
local customers... We take pride in our exible distribution capability which is
tailored specically for the local market.
The report refers, of course, to the selling end of the chain rather than the
buying end, but that does not mean the latter is neglected. John Pantelireis,
the corporate supply chain director, explains We start our supply chain
planning process with sales forecasts and any major marketing promotions
that are planned, and work back through distribution to stock levels and
purchasing needs.
The company makes most of what it sells in a number of factories in Nigeria,
Ghana and Kenya. But it also has factories in Asia and Europe, making for a
very complex supply structure. Some materials are bought centrally, mainly the
key commodities like phosphate, sulphates and tallow, and others locally, but
under the eye of the management network. Charles Worthington, the hair care
brand bought in 2004, maintains its own supply chain. The emphasis is on local
exibility, but carefully controlled by central management. Theres always a
target set for each country and product category, says Pantelireis.
Theres huge volatility in our markets now, and timing is vital. You need good
people, and we dont like to speculate or gamble. We only buy forward if we
feel the need, because it absorbs working capital and we sometimes get it
wrong. But as well as price uctuations, we have to be ready for a huge newdemand for example the hand sanitisation programme to counter swine u,
which doubled and tripled the sales of handwash brands.
Were not yet at the forefront of the climate change controversy, but
sustainability is a growing concern. We take an active interest in helping to
develop Nigerias economy, where weve operated for 100 years. Ive seen
many small companies get into difculties there, so we help where we can, and
weve got two joint ventures, with Haier, the Chinese white goods company, and
Glanbia, an Irish company making milk products. Weve also opened four retail
outlets for electrical goods to help stimulate the local economy.
We take pride in our
exible distribution
capability, which is tailored
specifcally or the local
market.
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Conclusions
Next Steps
Against a gloomy economic background, the optimism this
survey reveals in the ability o respondents to increase revenues
and proft margins at their companies over the next year
belies conventional wisdom. What is certain is that their
supply chains are gradually playing a more prominent part inthe ortunes o companies as globalisation gathers pace.
The implication of the overall trend is that management of supply chains is
going to become an ever-more critical determinant of companies competitiveness.
Companies with the best suppliers benet not just from price, but from quality,
reliability, innovation and so forth all to their customers satisfaction. But to
maximise the advantages, a higher standard of management is called for, able
to cooperate closely with suppliers management anywhere in the world. That
ambition is declared by the majority of the sample, yet nearly half have reduced
their supply chain head count in the past 12 months.
Able managers are not the only requirement. A structure is required to providean overall supply picture with appropriate information to help management
decision-making. Yet most responding companies have no single supply
chain head or are decentralised. At a time when the volatility of world markets
is increasing, and with it the risks inherent in an extended supply chain, this
report indicates that while progress in managing those risks is being made,
much work still lies ahead.
To fnd out more on how we can help ufl your international ambitions,
speak to your Relationship Director or visit www.rbs.co.uk/international
Able managers are
not the only requirement.
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