Supply Chain Management &
Business Financial Performance
Joseph Francis, Executive Director SCC
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Supply Chain is Directly Connected to Company Value
The Supply Chain Impacts .
..
The Knobs &
Levers
•
Improve customer service and
response
• Optimize inventory flow,
utilization & productivity
Revenue
Profit
Expense
•
Best-in-class customer
relationships
• Differentiated service
capabilities
Value
Working
Capital
•
Best-in-class strategic supplier
partnerships
• Leverage of outsourcing of
business processes
• Unique supply chain models
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
& Shareholder
Value
2012 DMSCA – SCC Financial |
Capital
Efficiency
Fixed Capital
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7 March 2012
HOW DO YOU EAT AN ELEPHANT?
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
What is an Elephant?
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
What is a Supply Chain?
Product Design
DCOR™
Sales & Support
CCOR™
Supply Chain
SCOR ®
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Customer processes
Supplier processes
Product/Portfolio Management
How Many Supply Chains?
•
•
We use a tool called the
Supply Chain Definition Matrix
to define the supply-chains
within an enterprise
Column Generation:
›
•
Region 1
Segment
A
The columns in the matrix are
focused on demand e.g.
channels or segments or
customers
Group 1
Region 2
Segment
B
X
Group 2
X
Group 3
X
Segment
C
Segment
D
X
X
Row Generation:
›
The rows in the matrix are
focused on supply e.g.
business lines or products or
locations or suppliers
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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Group 4
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7 March 2012
X
X
X
What’s Your Strategy?
• We use a tool called the Supply Chain Strategy Matrix
to Identify priority strategic features or attributes of
supply-chains.
• Each supply chain strategy is indicated by a collection
of ranked features:
Reliability On time? Complete? Undamaged?
Responsiveness From Customer Request to final acceptance
Flexibility How long to scale up? How expensive to scale down?
Cost Cost of Processes? Cost of Goods Sold?
Assets Working Capital? Return on Investments?
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Supply Chain Strategy in 5 Minutes
Build Strategy
Model
Lifecycle
1. Assets
2. Cost
Buy
Make
ETO
1. Reliability
2. Response
BTO
1. Assets
2. Reliability
BTS
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Likely Priority
2012 DMSCA – SCC Financial |
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Start
1. Flexibility
2. Response
Middle
1. Cost
2. Reliability
Commodity
1. Cost
2. Assets
EOL
1. Assets
2. Cost
7 March 2012
Customer
What Are Your Metrics? Why?
Strategic Attribute
Metric (Strategic)
Reliability
Perfect Order Fulfillment
Responsiveness
Order Fulfillment Cycle Time
Agility
Supply Chain Flexibility
Supply Chain Adaptability†
Internal
Cost
Supply Chain Management Cost
Cost of Goods Sold
Assets
Cash-to-Cash Cycle Time
Return on Supply Chain Fixed Assets
Return on Working Capital
† upside and downside adaptability metrics
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
SCORcards in 5 Minutes
Philosophy
• You need to have the most data where performance is
most critical
• You need to have least data where performance is
least critical
For Every
Superior
Advantage
Parity
Select
Level 1 Metric
Level 1 Metric
Level 1 Metric
and Level 2 Metric
Level 2 Metric
and Level 3 Metric
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
A Metrics Architecture
Supply-Chain
SCORcard
Reliability
S/A/P
S
Level-1 Metric
Level-3 Metric
Perfect Order Fulfillment
Reliability
Summary
Perfect Order Fulfilment
% Orders Delivered in
Full
% Orders Delivered in Full
Reliability
Delivery Item Accuracy
Reliability
Delivery Quantity Accuracy Delivery Quantity Accuracy
Reliability
External
Level-2 Metric
Delivery Performance
to Commit Date
Delivery Item Accuracy
Delivery Performance to
Commit Date
Reliability
Date Achievement
Date Achievement
Reliability
Location Achievement
Location Achievement
Reliability
Accurate
Documentation
Accurate Documentation
Reliability
Shipping Documentation
Accuracy
Shipping Documentation
Accuracy
Reliability
Billing Documentation
Accuracy
Billing Documentation
Accuracy
Reliability
Perfect Condition
% Orders Received
Damage-Free
Reliability
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Perfect Condition
2012 DMSCA – SCC Financial |
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% Orders Received
Damage-Free
Where Are Your Goals?
Attribute
SAP
Metric (level 1)
You
Parity
Adv
Superior
Gap
Reliability
S
Perfect Order Fulfillment
95%
92%
95%
98%
3%
Response
A
Order Fulfillment Cycle Time
14 days
8 days
6 days
4 days
8 Days
Flexibility
P
Ups. Supply Chain Flexibility
62 days
80 days
60 days
40 days
0
Cost
P
Supply Chain Mgmt Cost
12.2%
10.8%
10.4%
10.2%
1.4%
Assets
A
Cash-to-Cash Cycle Time
35 days
45 days
33 days
20 days
2 Days
• Used for choosing target performance
• Critical to understand Performance in a particular
Demographic
• Can be “internal” (competing against other supply
chains in same company)
• Aligns Strategy, Performance, and Performance Goals
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Retail, inc.
Where are the Problems?
S1.1
Schedule Prod.
Deliveries
mp3 HQ
Customer P.O.
Delivery Commit
D2.2
Receive, Enter,
Validate Order
C.O.
D2.3
Reserve Inv.
Calculate Date
C.O.
S2.1
Schedule Prod.
Deliveries
mp3 Factory
Inter-Company P.O.
D1.2
C.O. = Customer Order, Inv. = Inventory,
P.O. = Purchase Order, Prod. = Product
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
Receive, Enter,
Validate Order
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D1.3
Reserve Inv.
Calculate Date
The SCOR® System
• SCOR is a supply chain
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Supplier processes
Supply Chain
Plan
Source
Return
Make
Deliver
Return
Customer processes
process reference model
containing over 200
process elements, 550
metrics, and 500 best
practices including risk
and environmental
management
• Organized around the five
primary management
processes of Plan, Source,
Make, Deliver and Return
• Developed by the industry
for use as an industry
open standard - Any
interested organization
can participate in its
continual development
Process, arrow indicates material flow direction
Process, no material flow
Information flow
2012 DMSCA – SCC Financial |
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From Strategy to Operations: The System
Business Strategy
Supply Chain
Strategy
Supply Chain
Configuration
Supply Chain
Assets
Supply Chain
Performance
Supply Chain
Processes
Supply Chain
Skills
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
SCOR® AND FINANCIAL ANALYSIS
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
SCOR KPI’s Help Measure Performance…
The Knobs &
Levers
& Shareholder
Value
Perfect Order Fulfillment
Revenue
Order Fulfillment Cycle Time
Profit
Supply Chain Flexibility
Supply Chain Adaptability†
Expense
Supply Chain Management Cost
Value
Cost of Goods Sold
Working
Capital
Cash-to-Cash Cycle Time
Capital
Efficiency
Return on Supply Chain Fixed Assets
Return on Working Capital
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Fixed Capital
2012 DMSCA – SCC Financial |
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7 March 2012
… And to Diagnose Root Cause Issues
Level-3 Diagnostic
Level-2 Diagnostic
Delivery Item Accuracy
% Orders Delivered in
Full
Delivery Quantity
Accuracy
Date Achievement
Location Achievement
Shipping
Documentation
Accuracy
Billing Documentation
Accuracy
% Orders Received
Damage-Free
Level-1 KPI
Delivery Performance
to Commit Date
Revenue
Perfect Order
Fulfillment
Profit
Expense
Accurate
Documentation
Value
Working
Capital
Perfect Condition
Capital
Efficiency
Fixed
Capital
Example:
How might we analyze improvements
in Delivery Accuracy
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
The Dupont Model
Net Sales
$ 100
Gross
Profit
Example:
What would be the
impact of a strategy
to increase delivery
reliability?
Return on
net worth
74.91 %
Financial
Leverage
11
Net
Profit
Net Profit
Margin
$ 3.00
3%
$ 40
$ 60
Total
Expense
s
$ 34
$ 100
Taxes
$3
6.8 %
Variable
Expenses
$ 12
Fixed Expenses
Sales
ROA
COGS
$ 18
Inventory Expenses
$4
Sales
Asset
Turnover
$ 100
Current
Assets
$ 26
divided by
2.27
$ 44
Fixed
Assets
Total
Assets
$ 18
Inventory
$ 16
Accounts
Receivable
$8
Other Currents
Assets
$2
Assumption: Financial Leverage is a company-wide constant
= Total Assets / Shareholder Equity
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
The Dupont Model
Net Sales
Income Statement
$ 100
Gross
Profit
Net
Profit
Net Profit
Margin
$ 3.00
3%
Return on
net worth
74.91 %
Financial
Leverage
11
$ 40
$ 60
Total
Expense
s
$ 34
$ 100
Taxes
$3
6.8 %
Variable
Expenses
$ 12
Fixed Expenses
Sales
ROA
COGS
$ 18
Inventory Expenses
$4
Sales
Asset
Turnover
$ 100
Current
Assets
$ 26
divided by
2.27
$ 44
Fixed
Assets
Total
Assets
$ 18
Inventory
$ 16
Accounts
Receivable
$8
Other Currents
Assets
$2
Assumption: Financial Leverage is a company-wide constant
= Total Assets / Shareholder Equity
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
The Dupont Model
Net Sales
$ 100
Gross
Profit
Net
Profit
Net Profit
Margin
$ 3.00
3%
Return on
net worth
74.91 %
Financial
Leverage
11
$ 40
$ 60
Total
Expense
s
$ 34
$ 100
Taxes
$3
6.8 %
Variable
Expenses
$ 12
Fixed Expenses
Sales
ROA
COGS
$ 18
Inventory Expenses
$4
Sales
Asset
Turnover
$ 100
$ 26
divided by
2.27
$ 44
Fixed
Assets
Total
Assets
$ 18
Balance Sheet
Assumption: Financial Leverage is a company-wide constant
= Total Assets / Shareholder Equity
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
Current
Assets
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7 March 2012
Inventory
$ 16
Accounts
Receivable
$8
Other Currents
Assets
$2
Comparison: SC Change to Sales Change
SC Change
Net Sales
-1%
100
COGS
Vairable
Expenses
Fixed
Expenses
Inventory
Expenses
Inventory
AR
Other Assets
59.4
Gross Profit
Total
Expenses
11.88
Sales Change
3%
Net Sales
103.3
COGS
Vairable
Expenses
Fixed
Expenses
Inventory
Expenses
Inventory
AR
Other Assets
61.98
12.396
18
Net Profit
3.76
33.84
Sales
100
3
Sales
Total
Assets
100
Taxes
Current
Assets
25.84
Fixed Assets
18
18
3.96
15.84
8
2
40.6
Gross Profit
Total
Expenses
Taxes
Current
Assets
4 Fixed Assets
16.528
8.264
2
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
41.32
34.396
3.099
26.792
3.76%
ROA
8.58%
2.28
Leverage
11
Return
94.34%
43.84
In this model, every 1% of Supply Chain
Cost Reduction is equivalent to a more
than 3% increase in sales.
A 10% supply chain reduction is
Net equivalent to a more than 40% increase
Profit
3.825
NPM
3.70%
ROA
8.54%
in sales
staff.
Asset
Sales
Sales
Total
Assets
103.3 Turnover
103.3
44.792
18
2012 DMSCA – SCC Financial |
NPM
Asset
Turnover
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7 March 2012
2.30 Leverage
11
Return
93.93%
SCM Asset Returns: Superior Valuation
• Comparison of Fortune-1000 Council
•
•
•
•
member company share price aggregate
growth from 2003 – present to S&P 500
and DOW indices.
Growth inflected after 2 years, and the
spread between SCOR index companies and
other industrials has grown to almost 30
points.
Growth is increasing exponentially:
Compound interest on SC performance.
Correlates SCC Membership/SCOR
investments with Shareholder value.
Same pattern evident in FTSE-100, DAX,
NIKKEI and other indices.
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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SCOR Best Practices Levers & Financial Performance
• 2006/7 the SCOR Financial Research team reviewed
SCOR Practices
• Estimated correlation between practices and balance
sheet outcomes
• Resulting SCOR Financial Impact Paper provides
excellent guidelines
• Practices are “Levers” – influence outcome, but are not
“knobs” – they don’t directly create outcome
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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Example Study Outcomes
Revenue &
Capital Effects
Reviewed
Best
Practice
&
Definition
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
Estimated Impact:
Neutral, Increase
or Decrease
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7 March 2012
Practice Maturity and Supply Chain Performance
PRTM analyzed data from about 100 companies that submitted practice maturity and quantitative performance data
Early Stage
Mature
50 Companies
50 Companies
Stage 4:
Cross-Enterprise
Collaboration
Stage 3:
External
Integration
Stage 2:
Stage 1:
Functional
Focus
Discrete supply
chain processes
and data flows well
documented and
understood
Resources managed at
department level and
performance measured
at functional level
Strategic partners
throughout the global
supply chain
collaborate to:
Internal
Integration
•
Company-wide
process and data
model continuously
measured at the
company, process,
and diagnostic levels
Resources managed
at both functional and
cross-functional
levels
Identify joint
business objectives
and action plans
•
Enforce common
processes and
data sharing
•
Define, monitor,
and react to
performance
metrics
© Copyright 2006 The Performance Measurement Group, LLC, a PRTM Company
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
IT and eBusiness
solutions enable a
collaborative
supply chain
strategy that:
•
Aligns participating
companies’
business objectives
and associated
processes
•
Results in real-time
planning, decisionmaking, and
execution of supply
chain responses to
customer
requirements
Stage of maturity correlates with performance,
profitability, and sales growth
Analysis Results:
 Mature companies have a
1–2% advantage in Total
Supply Chain Management
Costs (as % of total revenue)
 Mature companies have a
10% advantage in Delivery
Performance to Commit
Date
 Mature companies have 10%
higher Unit Forecast Accuracy
 Mature companies have a
30% advantage in Upside
Production Flexibility
 Mature companies have
4.5% lower COGS (as a
% of total revenue)
 Mature companies
demonstrated a 4.8%
year over year net
decrease in COGS
Supply Chain
Suppliers
Manufacturing
Facilities
Customer Service
and Warehousing
Local
Customers
Note: Results based on performance data from discrete companies which included: Consumer Goods, Electronic Equipment, Industrial, Telecom, Computers, and
Aerospace & Defense.
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Forecast accuracy matters… Fill Rate
•
Companies are clearly achieving higher fill rates with better forecast accuracy
Fill rate vs Forecast accuracy
100
OFR = 0.9026FA + 4.1173
90
80
Fill rate (%)
70
60
50
40
30
20
10
0
0
N = 21
Correl: 0.68
10
20
30
40
50
60
70
80
90
100
Forecast accuracy
P value: 0.007
Forecast accuracy vs. Fill rate using a cross industry population of 67 companies, showed similar trends and correlation = 0.4
..while production flexibility and overall inventory do not show the same relationship to fill rate
Order Fill rate vs Finished Goods Inventory Days of
Supply
100
90
80
70
60
50
40
30
20
10
0
N = 25
Correl: -0.09
100
80
Fill Rate (%)
Fill rate (%)
Order Fill rate vs Upside Production Flexibility
60
40
20
0
0
50
P value: 0.67
100
150
200
0
250
N = 62
Correl: -0.09
Upside Production flexibility (Days)
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Cross industry population N = 104, Correl: -0.08
2012 DMSCA – SCC Financial |
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20
P value: 0.51
40
60
80
100
120
140
Finished Goods Inventory Days of Supply
Cross industry population N = 160, Correl: -0.006
160
180
Forecast accuracy matters…
Best In Class Performers
The best performing companies have better forecast accuracy performance – they have engineered
their supply chain, product architectures and customer relationships in a manner that allows them to
achieve superior business performance and utilize a forecasting methodology that both meets their
business needs and promotes higher forecast accuracy
Forecast accuracy vs "Best Performers" (Delivery to
Forecast accuracy
Commit, Fill rate, EBIT, Finished Goods Inventory)
Forecast accuracy:
100
90
80
70
60
50
40
30
20
10
0
0
N = 14
Correl: 0.58
Best Performers:
FA = 5.4208BP + 51.074
94%
Population average: 76%
2
4
6
8
10
12
14
Best Performers (Fill rate, DPC, FGI, EBIT)
P value: 0.028
Correlation analysis against a cross industry population of 55 companies, showed similar trends and correlation = 0.2
NOTE:
Best performers is defined as the top 20% companies that have the highest index score across Delivery to Commit,
Fill Rate, EBIT and Finished Goods Inventory.
This index provides a method for sorting “best performer” companies from “typical” or “low performers”
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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Forecast accuracy matters… Delivery Performance
Forecast accuracy is directly correlated with delivery performance….
•
Forecast accuracy vs Delivery Performance to Request
Forecast accuracy vs Delivery Performance to Commit
100
90
Delivery Performance to Commit (%)
Delivery Performance to Request
(%)
100
DPR = 0.3935FA + 48.241
80
70
60
50
40
30
20
10
0
90
DPC = 0.4725FA + 46.526
80
70
60
50
40
30
20
10
0
0
N = 67
Correl: 0.36
10
20
30
40
50
60
70
80
90
100
0
N = 65
Correl: 0.46
Forecast accuracy
P value: 0.0027
Cross industry population N = 203, Correl: 0.26
10
20
P value: 0.0001
30
40
50
60
70
80
90
Forecast accuracy
Cross industry population N = 218, Correl: 0.2
…And to profitability, but…
Fore cast accuracy v s EBIT
80
EBIT % Revenue
60
40
EBIT = 0.2375FA - 7.4343
20
0
0
10
20
30
40
50
60
70
80
90
-20
-40
-60
N = 61
Correl: 0.27
P value: 0.037
Forecast accuracy
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
Cross industry population N = 187, Correl: 0.12
2012 DMSCA – SCC Financial |
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100
…while the EBIT correlation is
“significant”, the correlation
coefficient is not very strong
100
SUPPLY CHAIN COUNCIL, INC.
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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SCC: An independent, non-profit global association
•
Formed in 1996 to create and evolve a standard industry process
reference model of the supply chain for the benefit of helping companies
rapidly and dramatically improve supply chain operations
•
SCC has established the supply chain world’s most widely accepted
framework – the SCOR® process reference model – for evaluating and
comparing supply chain activities and their performance
•
›
It can be used to describe supply chains that are very simple or very
complex using a common set of definitions and enabling a common
understanding
›
It lets companies quickly determine and compare the performance of
supply chain and related operations within their company or against
other companies
SCC continually advances its tools and educates members about how
companies are capitalizing on those tools
›
With membership open to all interested organizations
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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Industry Membership Scope
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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7 March 2012
Thanks!
jfrancis@supply-chain.org
www.supply-chain.org
© 2010 Supply Chain Council. ALL RIGHTS RESERVED. |
2012 DMSCA – SCC Financial |
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