The Chief Supply
Chain Officer Report
2012
The Chief Supply
Chain Officer Report
2012
September 2012
A research study by:
Dr Hau Lee, Chairman, SCM World, and Thoma Professor of Operations,
Information and Technology, Stanford Graduate School of Business
Kevin O’Marah, Head of Faculty, SCM World
Geraint John, Senior Vice President, Research, SCM World
FOREWORD
Approaching 2013, we see a number of important trends in supply chain management. The collective
insights from 1,400 leaders who participated in this SCM World research demonstrate that we live in a
world where change is constant, and where groundbreaking approaches must be embraced to effectively
compete and win in today’s volatile global economy.
The report’s findings are a loud call to action for everyone in our discipline. Individually and collectively,
we must establish tight strategic alignment between our supply chains and businesses. We must harness
digital commerce systems to serve new market niches and maximise profitable growth by delivering
unprecedented operational flexibility. We must define and execute world-class social and environmental
responsibility practices. We must construct more robust risk management systems to persevere through
supply disruptions and adverse market conditions. And finally, we must fully embrace the idea that
world-class talent is a powerful engine of business innovation and competitive advantage.
This is a complex and interconnected set of challenges. Each one requires its own focused transformation
plan. However, broad operating principles can guide us in harmonising these plans and meeting the
demands of today’s chaotic world. At Lenovo, there are two in particular on which we rely very heavily
– driving speed of execution and customer focus.
Increasing speed demands a sustained focus on continuous improvement, a strong risk management
process and the talent to make good decisions quickly. These capabilities enable the flexibility and
agility needed to quickly adjust product mixes and routes to market in response to all types of business
conditions, including periods of supply disruption, while serving the “tail” of demand.
Being a customer-centric supply chain means having clear metrics tightly aligned with real experience.
Collaboration skills also are critical, as supply chain professionals must execute across marketing, product
development and sales, as well as external suppliers, to deliver a truly world-class customer experience.
Finally, our organisations cannot address the challenges of the day without great talent. This is a personal
passion of mine because, as former US Secretary of State Colin Powell once said, “no battle plan
survives contact with the enemy”. You need people with the skill, knowledge and intuition to improvise
in responding to unpredictable scenarios with groundbreaking business innovation. That is why talent
development is a core pillar of Lenovo’s supply chain strategy and why we make significant investments
in this area.
This Chief Supply Chain Officer Report advances a common view of our path forward to supply chain
excellence and strategic relevance in our industries. And many of the best practices to advance our
discipline will come from knowledge sharing and collaboration within our professional community.
Lenovo is proud to be a part of this process, and we look forward to tackling our opportunities and
challenges strengthened by this spirit of partnership.
Gerry P. Smith
Senior Vice President
Global Supply Chain & Global Services
Lenovo Group
CONTENTS
Foreword
4
Executive summary
6
introduction
13
Strategy Alignment and Value Creation
14
Digital Consumers and ecommerce
20
Social and Environmental Responsibility
29
Risk Management
36
Talent Management
41
Conclusions
49
About the research
50
This document is the result of primary research performed by RaptureWorld Ltd. RaptureWorld’s methodologies
provide for objective, fact-based research and represent the best analysis available at the time of publication.
Unless otherwise noted, the entire contents of this publication are copyrighted by RaptureWorld Ltd and may not
be reproduced, distributed, archived or transmitted in any form or by any means without prior written consent by
RaptureWorld Ltd (6443794).
© 2012 SCM World, a RaptureWorld Company. All rights reserved.
Executive summary
This is the third consecutive year that SCM
World has published its annual Chief Supply
Chain Officer Report. In July 2012 almost 1,400
practitioners from a wide range of industries and
geographies – more than twice as many as in 2011
– completed a 40-question survey covering five
main topics:
1.
2.
3.
4.
5.
Strategy alignment and value creation
Digital consumers and eCommerce
Social and environmental responsibility
Risk management
Talent management
The key findings contained in this report can be
summarised as follows:
Strategy Alignment and Value
Creation
• Operating cost reduction is still the
foundation of supply chain excellence, with
almost two-thirds of survey respondents
saying it is “very important”. But increasingly,
companies are using high-performing supply
chains as a way to support the company’s
business strategy. This enables value creation
and provides competitive advantage. Hence,
supply chain strategy and business strategy
must be aligned.
•
The importance of aligning supply chain
strategy and business strategy has led to the
recognition and appreciation of the supply
chain function as an integral part of the
company’s business leadership. Over half of
the respondents agree that their supply chain
is viewed as an integral function for business
success. Hence, supply chain and strategy
alignment is also linked with organisational
alignment within the firm.
•
There are many ways in which highperforming supply chains can support value
creation and competitive advantage. Leading
the way, according to our survey participants,
is the ability of high-performing supply
chains to enhance customer service, leading
to customer loyalty. The driving factors for
great value to be gained from enhanced
customer service are the ability of customer
service to generate repeat purchases and
customer service becoming an important
criterion in determining the customer’s
purchasing decisions.
•
The other important ways in which highperforming supply chains can support
value creation and competitive advantage
provision include stronger supplier
relationships, acceleration of new product
introduction, and business expansion in
existing and new markets. More than twothirds of respondents say these deliver high
or very high value in their companies.
Executive summary
•
This year’s results are a reconfirmation of
last year’s. And the trend is continuing for
companies to use supply chain excellence as
a means for creating value and competitive
advantage. Companies where supply chain
management is still viewed as a supporting
function, or where supply chain management
is only viewed as a way to reduce operating
costs, have a lot of catching up to do, as they
are missing great opportunities.
Do your CEO and executive management team appreciate the
alignment of business strategy and supply chain strategy?
8
Absolutely. Supply chain
is understood as an
equally important part
of business success
as sales & marketing
or R&D/product
development
2
31
Yes, but only as an
enabler of product or
sales-driven business
strategies
59
Not really. Supply chain
is understood primarily
as a cost center that
affects margins
No. Supply chain is
strictly seen as a function
meant to service the
business
Digital Consumers and eCommerce
•
•
•
•
Digital demand and eCommerce appear to
be driving complexity from the consumer
upstream into the supply chain in every
way possible, including packaging, pricing,
SKU counts, distribution networks and even
manufacturing strategies. The sensitivity
to this pressure is much higher closest to
consumers (retail, distribution, consumer
products) suggesting that tier suppliers
upstream may lack the agility needed to meet
fast-changing demand patterns.
The influence of eCommerce and digital/
mobile consumers is expected to increase
complexity of demand at the point of
fulfilment. By a ratio of 4:1 respondents
expect consumers to be increasingly
receptive to offers trading price, convenience
and selection against each other rather than
merely seeking the lowest possible price.
This effect is also most pronounced closest
to the consumer (in retail) and less powerful
further upstream in the supply chain.
Digital demand and eCommerce are
also expected to increase SKU counts as
opportunities to serve the “long tail” of
demand are exploited. Again, the effect is
significantly greater among respondents
closest to the consumer.
Three-quarters of all respondents expect
changes to their distribution networks to
be driven by digital demand. Opinions split
evenly between those who see a case for
% of respondents
n=1,373
Value created by a high-performing supply chain
Enhanced customer service and customer loyalty
3
15
40
Stronger supplier relationships
1 4
19
46
41
31
Accelerated new product introduction
20
43
31
1 5
Expansion of business to new market segments in existing/new regions
2 8
22
40
29
Expanded offerings of value-added services
30
41
1 8
20
Facilitation of premium pricing
31
19
2 10
38
Leverage opportunities created by external supply disruptions
6
17
30
30
18
% of respondents
No value whatsoever
Moderate value
Little value
High value
Very high value
n=1,379
Note: Figures may not add up to 100
because of rounding
Future effect of eCommerce and mobile-enabled customer
on SKU assortments
13
25
Drive much larger SKU
assortments as brands
pursue ever smaller niches
of demand
Drive some SKU expansion
as brands pursue some
smaller niches of demand
26
Have little or no effect on
SKU assortments
36
Drive smaller SKU
assortments as brands
simplify to cut costs in
response to price pressure
% of respondents
n=1,337
Executive summary
smaller, more local distribution centres and
those who expect larger, centralised, more
flexible multi-mode distribution centres. It
appears likely that some hybrid of the two
may become common.
Social media is
playing little role
today in supply
chain strategies,
but in the future
will be a source
of customer
feedback,
inform product
innovation and
warn of supply
disruptions.
•
•
•
•
Three-quarters of all respondents also
expect changes in their manufacturing
strategies. Respondents in the hi-tech sector
are the most certain that manufacturing
strategies will change (only 16% see “little or
no effect”), while chemicals reject this idea
(54% see “little or no effect”).
A majority (56%) expect brands to develop
their own direct-to-customer fulfilment
systems, while a quarter anticipates reliance
on eCommerce specialists such as Amazon.
One-fifth sees little reason to change.
Social media is playing little role today in
supply chain strategies (47% see “no effect”),
but in the future many see opportunities
to get customer feedback (56%), inform
product innovation (46%) or warn of supply
disruptions (41%).
Seeking demand insight in emerging data
sets elicits some concern about privacy. Most
Views on the use of customer data
Customer transaction
data should be mined to
understand buying behaviour
3.55
3.27
Customer geospatial data
(mobile GPS) should be
mined to understand buying
behaviour
3.20
2.98
Social and Environmental
Responsibility
•
Positive customer image and brand
equity remains the key driver for social
and environmental responsibility (SER)
initiatives, with 71% of survey respondents
saying this is a board-level motivation.
Companies can use SER to strengthen their
customer relationships and enhance their
value propositions.
•
SER efforts start with visibility of SER
performance inside the company as well
as the extended supply network. While
progress has been made, companies are
still far from having good visibility of their
suppliers and the extended supply network
– only a quarter say they currently have this.
•
Companies have stepped up their action in
response to SER violations by suppliers. A
third do not give suppliers warnings before
The board’s motivations for investing in SER
4.08
3.75
Customer webstore data
(cookies, eCommerce
history) should be mined to
understand buying behaviour
respondents shy away from mining sources
such as search histories or social networking
activity. Rich demand data may exist, but
using it to design a supply response seems
inappropriate to many.
Create a positive customer
image and enhance
brand equity
71
75
Satisfy government
regulations
49
42
Reduce costs and/or increase
efficiency (e.g., through better
use of energy, raw materials)
43
32
Ensure no disruption
of supply
Fend off shareholder or
external PR concerns
Customer private web data
(Google search, Facebook,
etc) should be mined to
understand buying behaviour
Weighted average rating, 1-5 scale
n=1,346
2.89
2.69
Disagree
At an aggregate level
At an individual level
Neutral
Agree
Increase sales revenue
37
30
28
22
17
31
% of respondents
n=1,281
2012
2011
Executive summary
reacting and taking often punitive actions.
And these punitive actions have shifted to
a more severe kind – immediate termination
of the business relationship is now more
common than it was a year ago.
•
•
•
Positive incentives are still necessary to
improve SER performance in the long run.
Punitive actions will hopefully induce more
compliance, but getting commitment requires
a collaborative effort, with the company
willing to invest and work with suppliers for
real improvements. Preferred supplier status
and increased business are the two most
popular incentives, as they were in 2011.
The SER journey for many companies is
maturing, and companies are beginning to
realise more significant benefits from their
SER efforts than in previous years. More
than half of survey respondents report
good or substantial results in complying
with government regulations and laws, and
in improving both supplier relationships and
customer satisfaction.
Measuring benefits continues to be a
challenge for almost 6 out of 10 respondents,
however. And more than half are concerned
Penalties for breach of SER standards
Warning first,
followed by
both about price pressure or customers
appearing not to care, and a lack of resources
for SER efforts.
•
Despite the challenges, most companies are
still pushing forward with their investments
in SER efforts. Such investments are multidimensional, involving internal operations,
product design, supply network and
customers. The trend towards increased
SER initiatives seems to be unstoppable.
Risk Management
•
The impact of last year’s natural disasters in
Japan and Thailand is strongly in evidence,
with shortages of raw materials and
components heading the list of risks that
survey respondents are most concerned
about. The hi-tech sector, in particular, is
very concerned about this, as are almost half
of those based in the Asia-Pacific region –
twice the level of European respondents.
•
More than two-thirds of supply chain
executives are also concerned about
shipping disruptions, incidents at supplier
facilities and the failure of key suppliers
when they consider the potential of supplyImpact of supply- and demand-side disruptions in the past two years
14
Loss of sales/revenue
58
Lower profits
42
13
53
47
% of respondents
n=1,227
Monetary fines
47
45
35
39
62
Delays to new projects/product
introduction/growth plans
Loss of customers
No warning,
immediate action
taken in the form of
Companies are
beginning to
realise more
significant
benefits from
their SER efforts
than they did in
previous years.
44
28
19
33
41
Higher cost of capital
Damage to image, reputation
or brand
27
14
19
16
Supply-side disruption
34
Lower share price
14
Failure to meet legal or
regulatory requirements
13
None
16
Demand-side disruption
19
8
Reduced business
Termination of business relationship
15
% of respondents
n=1,240
Executive summary
A move back
toward highwage countries
may make sense
for organisations
working to
balance their
talent portfolios.
during the past two years. Almost half have
suffered a loss of sales/revenue and more
than a third have seen lower profits from
both upstream and downstream events in
their value chains. A third have also lost
customers and 44% have suffered delays
to product introductions, new projects or
growth plans as a result of supply risks
becoming live issues.
and demand-side disruptions to negatively
impact their businesses during the next 12
months. And more than a quarter are very
concerned about regulatory issues and
counterfeit products.
•
•
•
Better and more frequent communication
with suppliers is the most popular method
of identifying potential risks – a trend
that accelerated during the 2008 financial
crisis and is now an integral part of
many companies’ supplier relationship
management programmes. This is followed
by more formal and structured risk tools
such as supply chain risk mapping, business
impact analysis and scenario planning.
Talent Management
Dual or multi-sourcing of key materials,
components and products is the most widely
used approach to mitigating risk, with more
than three-quarters of respondents (and
94% in the chemicals sector) doing this on
the supply side. Audits of key suppliers and
holding safety stocks are also common, with
two-thirds of companies using these tactics
as part of their risk management efforts.
More than 8 out of 10 companies have been
hit by supply- and demand-side disruptions
Challenges in respect of knowledge workers
•
Supply chain talent management has become
even more problematic in the past year,
with companies experiencing increasing
levels of difficulty in finding, hiring and
retaining skilled people. Some improvement
can be seen in the area of providing “a
compelling career progression”, which saw
a drop in the share of respondents who feel
this is extremely challenging. It may be the
case that even mild economic growth has
tightened talent markets, while leadership
has worked to improve opportunities for
those willing to commit.
•
In addition to tighter competition for
talent, it seems the pain of lost talent has
also worsened. More respondents say the
Impact when talented staff are lost
4.50
*1-5 scale, where above 3.00 = challenging
4.50
*1-5 scale, where above 3.00 = challenging
Weighted average rating*
Weighted average rating*
4.00
4.00
3.50
3.00
3.50
3.00
2.50
Finding
talent
Hiring
talent
EMEA
APAC
Developing
talent
Americas
Relocating
talent
n=1,302
Measuring
talent
Career
Retaining
progression talent
Lost production
EMEA
Lost process IP
APAC
Lost product IP
Americas
n=1,294
Cost of transition
Executive summary
problems arise from disruption and the cost
of transition than from lost know-how – a
reversal from 2011.
•
•
•
Geographic cuts of this data show that the
problems are most severe in Asia, where
retention is a prominent issue and penalties
for lost talent hurt most.
China is clearly no longer a “low-cost
country” in the traditional sense. Knowledge
workers in China are generally not seen as
lacking in technical or business skills, but
do pose problems in terms of rising costs
and poor retention. The implications for
talent management in a global supply chain
strategy include a need to diversify away
from Asia, and China in particular, as tighter
labour markets increase the risk of damaging
departures among key staff.
Comparing opinions of overall “value for
money” and “biggest risk” talent markets
suggests a move back toward high-wage
countries may make sense for organisations
working to balance their talent portfolio.
Best value talent markets
US
2.61
Germany
2.13
India
2.12
China
2.11
UK
2.01
Singapore
1.89
Brazil
1.82
Eastern Europe
1.77
Japan
1.60
Taiwan
1.59
Mexico
1.58
Netherlands
1.55
France
1.41
South Korea
1.38
Weighted average rating
(1-5, where 5=highest value)
n=1,172
Biggest risk talent markets
China
2.98
US
2.11
India
2.05
Brazil
2.03
Mexico
1.98
UK
1.74
Eastern Europe
1.72
Taiwan
1.72
Germany
1.69
Singapore
1.66
France
1.60
Japan
1.59
South Korea
1.58
Netherlands
1.22
Weighted average rating
(1-5, where 5=highest value)
n=1,108
introduction
Images of Apple CEO Tim Cook unveiling the company’s latest iPhone stand as a milestone for many
in the world of supply chain. Having built his career in materials management and fulfilment, Cook’s
ascendance to the leadership of the world’s most valuable company speaks volumes about the potential
for supply chain to impact business.
Despite this symbolic achievement, the supply chain management discipline is still in its early years.
Wikipedia credits the coining of the term to a Booz Allen Hamilton consultant named Keith Oliver as
quoted in a Financial Times article in 1982. Thirty years has seen some progress toward general acceptance
of what supply chain means and how it relates to business, but few would argue the journey is anywhere
near its end.
Since 1982 so much has changed in the shape of the global economy that the principles underpinning
what we mean by “supply chain” have had little opportunity to stabilise. Today’s chief supply chain
officers (CSCOs) are wrestling with new types of consumer demand, wider accountability for impacts
on the environment and society, and heightened exposure to risks, both natural and man-made. At one
level, the challenge includes finding and co-ordinating skilled people to handle the ongoing quest for
better performance; at another, assuring that supply chain strategies are aligned with business strategies.
The survey on which this report is based polled the worldwide professional community to get a picture
of how these forces are affecting our work now and in the future.
As well as crystallising a view of the top issues facing senior supply chain leaders as they begin to plan
for 2013, the purpose of this research effort was to assemble a data set large enough to allow almost any
question about the state of supply chain in 2012 to be answered with at least some factual basis. Our
respondent base consists of almost 1,400 practitioners answering over 40 questions each. This means
detailed cuts by industry, location, job function and job level, as well as by opinion, are possible. Our
hope is that individual SCM World community members, all of whom will have access to aggregate data,
can get the facts they need to benchmark their plans against peers and, when necessary, make the case
for change within their own organisations.
We would like to thank everyone who took part in this year’s study, E2open for once again sponsoring
it, and Gerry Smith at Lenovo for writing the Foreword. Your support has been invaluable and is
much appreciated.
Dr Hau Lee
Chairman, SCM World
and Thoma Professor of Operations, Information and Technology,
Stanford Graduate School of Business
Kevin O’Marah
Head of Faculty, SCM World
Geraint John
Senior Vice President, Research, SCM World
1: Strategy Alignment and Value Creation
The design and operation of a company’s supply
chain is critical to its business performance.
However, it is important that the supply chain
strategy is aligned with the corporate strategy of
the firm. The orchestration of the supply chain
should support the company’s attainment of its
strategic goals. Likewise, a company may have to
refine these goals in light of the constraints faced
by its supply chain. The ideal situation is that the
supply chain can be developed in a way that aligns
completely with the company’s strategic goals.
This alignment also means that the supply chain
is making major contributions towards the
attainment of those goals. The role of supply
chain management in this process can be viewed
as twofold. Traditionally, it is a supportive role – a
supply chain enables the goals to be accomplished
with the highest efficiency, often defined to
be cost and time. The second role, which is
increasingly the modern view of supply chain
management, is that the supply chain enables the
company to set even higher goals or expand its
strategic directions.
A value-creation view of supply chain management
requires supply chain executives to work closely as
an integrated part of the company’s top executive
team. The supply chain function is not in the
background in driving the company’s strategic
performance; rather, it becomes part of the
steering team in the executive suite, building value
through strategic alignment.
While there has been anecdotal evidence and small
sample studies showing that some companies
have started to view supply chain management
as an integral part of the top management team,
and that supply chain has begun to assume more
of the value-creating role, how this trend is
developing among a wider pool of companies is
still not well known. In addition, how exactly does
supply chain management create value? In what
ways does supply chain management influence
key strategic levers that allow value to be created?
What are the key factors that could drive such
value-creation levers? These issues have not been
well understood.
Last year’s Chief Supply Chain Officer Survey
was one of the first attempts to dive deeply into
these issues. In 2012 we continue this exploration,
in order to more concretely understand how the
role of supply chain is evolving, and how value
can be created through excellence in supply
chain management.
A mixture of cost reduction and
value enhancement
As in 2011, the main way that supply chain
improvement is contributing to business strategy
is through operating cost reduction. Almost twothirds of survey respondents say this contribution
is “very important”, with another third saying
“important” (see Figure 1). Those in the hi-tech
sector express this view most strongly, with 7
out of 10 rating it very important. This contrasts
with just 44% in the chemicals sector who say
the same. This gulf can be explained by the fact
that in hi-tech industries new products can be
commoditised quickly, due to the shortening of
product lifecycles. Fierce competition requires
companies to be both innovative in new product
introduction on the one hand, and be extremely
cost efficient on the other. Hence, operating
cost reduction through effective supply chain
management is critical. In chemicals, however,
product margins are still high and it is the control
of source materials that matters the most. Supply
chain management is concerned more with
reliable supply than with operating cost reduction.
Cost reduction may still be regarded as the
fundamental role of supply chain management by
practitioners, but a strong supply chain supports
a firm’s business strategy in other ways too. Just
over half of our sample believes it has a very
important role in increasing revenue, with 93%
in total seeing this as an important role. Again,
respondents from hi-tech firms are most strident
on this point.
Just a few percentage points behind is competitive
advantage through differentiated customer
service, with almost 9 out of 10 identifying
this as a means through which supply chain
Strategy Alignment and Value Creation
can drive improvements. The logistics sector
leads the way here, with 56% saying this is very
important. This is followed by 84% who rate
competitive advantage through strategic supplier
engagement as important (with the healthcare and
pharmaceutical sectors being the most dominant);
while 77% of respondents assign importance
to value creation through long-term equity
improvement – up from 61% in 2011, with the
food and beverage industry a full 20 percentage
points above this all-sector average.
Relative to last year, the gap between those who
view supply chain improvement as important for
operational cost reduction and those who see it as
important for creating value in these other forms
has reduced. This confirms that, increasingly,
supply chain management is not only important
for operational excellence, but is also being used
by companies to create value.
Supply chain management’s growing role as a
value creator can be related to the observation
that the supply chain function is also increasingly
viewed as an integral part of a company’s strategic
management. We asked participants how their
CEO and executive team see the position of supply
chain. A clear majority (59%) say it is viewed as
equally important as other major functions such as
R&D, marketing, sales and product development.
Among those in logistics firms, more than twothirds believe this is the case.
This compares with 31% who say supply chain is
viewed as an enabler of product or sales-driven
business strategies (see Figure 2). Almost half
of respondents in the retail sector agree that this
is the case. The remaining 10% of the sample
overall say that supply chain is viewed primarily
as either a cost centre or as a support function to
serve the business. So it is gratifying to see that the
majority of companies appear to see supply chain
as an integral part of business strategy. The rising
importance and recognition of the supply chain
function is also linked to the earlier observation
that supply chain’s role is increasingly about value
creation and building competitive advantage, as
opposed to purely operational cost reduction.
How high-performing supply
chains drive value
Cost reduction
may still be
regarded as the
fundamental
supply chain
role, but a
strong supply
chain supports
a company’s
business
strategy in
other ways too.
High-performing supply chains can enable
companies to create value in multiple ways.
Examples include accelerated new product
introduction, the facilitation of premium pricing,
enhanced customer service and loyalty, expansion
to new market segments and stronger supplier
relationships. This year’s CSCO survey shows
that the majority of supply chain executives
believe that high value is delivered for their
companies in these and other areas (see Figure 3).
Enhanced customer service leading to customer
loyalty is top of the list, with 41% believing it
has produced “very high value” and a further
40% saying “high value”. This is a similar finding
to 2011. Supply chain excellence improves
customer service, strengthens the customer
relationship and builds customer intimacy and
loyalty, which ultimately leads to increased
revenue and the development of competitive
advantage. Again, those practitioners working
in logistics and distribution firms are the most
bullish, with 9 out of 10 convinced that the
supply chain function has had a strongly positive
impact in this area.
Figure 1: Supply chain value contribution
of respondents business strategy to
How important is it for your% company’s
focus on supply chain improvements for the following?
Operating cost reduction
64
33
12
Value creation through increasing revenue
42
1 6
51
Competitive advantage through differentiated customer service capabilities
2
9
41
48
Competitive advantage through strategic supplier engagement
3
42
12
42
Value creation through long-term equity improvement (e.g., brand equity)
4
18
40
37
% of respondents
Not at all important
Somewhat unimportant
Neither
Important
Very important
n=1,381
Note: Figures may not add up to
100 because of rounding
Strategy Alignment and Value Creation
In second place are stronger supplier relationships.
More than three-quarters of survey participants
(77%) believe that these have resulted from
high performance in the supply chain – a rise
of seven points year on year. The hi-tech sector
is fully 10 percentage points higher than the allsector average, with 87% ranking it as a high-value
outcome. In that industry, as well as many others,
the ability to obtain supply when faced with
disruptions or capacity shortages, to collaborate
with suppliers in product development, and to
integrate better through information sharing and
co-ordination can all be sources of competitive
advantage and value. When Microsoft entered into
the game console market, for example, it relied on
Flextronics, Nvidia and Intel heavily to develop
the supply chain for its product development
effort. More recently, Cisco worked closely with
Foxconn on the successful launch of its Viking
router product.
Customers are
willing to pay a
premium price
if they value
speed, flexibility
and reliable
supply. Supply
chain excellence
must therefore
encompass such
levers.
It’s a similar picture on accelerated new product
introduction, which completes the top three
sources of supply chain value in this year’s
survey. Supply chain provides the backbone
for such time-critical activities, including in the
ability to ramp up production quickly, and its
role in enabling greater speed here has always
been widely accepted. Not surprisingly, perhaps,
Figure 2: Appreciation of supply chain’s role
Do you believe your CEO and executive management team
appreciate the alignment of business strategy and supply
chain strategy?
8
Absolutely. Supply chain
is understood as an
equally important part
of business success
as sales & marketing
or R&D/product
development
2
Yes, but only as an
enabler of product or
sales-driven business
strategies
31
59
Not really. Supply chain
is understood primarily
as a cost centre that
affects margins
No. Supply chain is
strictly seen as a function
meant to service the
business
% of respondents
n=1,373
given its rapid product churn, hi tech also views
supply chain as most critical in faster new product
introduction – 83% of practitioners working in
this sector believe the function adds high or very
high value here.
In the current economic climate, countries such
as China, Brazil, India, Turkey and Mexico are
experiencing faster growth than the more mature
markets of North America, Europe and Japan.
Hence, it is important for western companies to
find ways to expand their business in these newer
markets. For the second year in a row, more than
two-thirds of our respondents say that supply
chain excellence is providing an important means
to support such expansion for their companies.
Although leveraging opportunities created by
supply disruptions ranks last on our list of
value drivers, this has actually changed most
significantly in the space of 12 months. In 2012,
48% of those surveyed say this is of high or
very high value – up from 40% last year. At the
same time, the proportion saying it creates little
or no value has fallen from 27% in 2011 to 23%
today. Experiences garnered in the aftermath
of the major disruptions in Japan and Thailand
last year have no doubt convinced more supply
chain professionals that such events tend to
reward those whose strategies, plans and supplier
communications are more finely tuned (for more
on this, see Section 4).
There were some other ways mentioned by
respondents on how value is created from highperforming supply chains. The bulk of these
concerned the ability of the supply chain to
reduce cost and be lean. This, in turn, leads to
better utilisation of capital, reduced inventory
and cycle time improvement. This is value related
to operational cost reduction, one of the key
contributions of supply chain management
indicated earlier. The other key ways mentioned
related to product quality improvements, which
can be considered as a lever to enable new
product introduction, premium pricing and
market expansion.
Strategy Alignment and Value Creation
Value-creating elements of supply
chain excellence
In the survey, respondents who rated the
dimensions described above as either high value or
very high value were then asked about the specific
attributes within each area that helped to deliver
that value. Figure 4 shows the most relevant
factors for value creation through supply chain
excellence – those rated as “extremely relevant”
by more than half of survey respondents.
As indicated, building customer loyalty through
customer service is the most highly rated means
for value creation through supply chain excellence.
The factors for success come from the ability to
convert customer loyalty into revenue gains. These
factors naturally depend on whether customers use
customer service as a purchasing decision criterion
(rated most highly by hi-tech respondents), and
whether a positive experience leads to a repeat
purchase (rated highest among retail respondents).
Assuming that these factors are in place, then
strong value creation potential can result.
In the case of new product introduction, it is all
about managing time. Supply chain management
can be a way to speed up the new product
development process (through strong integration
of the supply chain and product development
teams), provide timely and cost-effective
launches, enable flexibility in product ramp-up,
and orchestrate the phasing in of new products
and the phasing out of existing products. Here,
hi-tech companies again view such levers as more
highly relevant than those in other sectors.
For new geographical market expansion, efficient
distribution of products to customers and the
ability to satisfy local regulatory requirements
are both viewed as highly relevant, particularly
in the CPG, healthcare and pharmaceutical
sectors. Since many of the new markets are likely
to be in emerging economies where logistics
and distribution infrastructures are not as well
developed, successful penetration requires the
ability to establish efficient channels. This requires
well-managed information systems, the use of
local distribution partners, effective warehouse
and trade management processes, and so on.
Other levers, such as the ability to customise for
local needs, the use of local manufacturing or
sourcing capacity, and after-sales service support,
are valued highly by the hi-tech sector.
Building greater
customer
loyalty through
customer service
is the most highly
rated means for
value creation
through supply
chain excellence.
Customers are willing to pay a premium price if
they value speed, flexibility and reliable supply.
Supply chain excellence must therefore encompass
such levers. The hi-tech sector, as expected, values
speed in the form of quick response, while the
retail sector values reliable supply in the form
on on-time and dependable delivery. Customers
of logistics providers, however, value flexibility
in delivery schedule change offered by these
providers. And food and beverage respondents,
as part of the consumer products sector, values
flexibility in order quantity change.
For expanded offerings of value-added services
to be a source of value creation, the key has to
be that the customers see this as important, so
that one can differentiate oneself from the
competition. Our survey results indicate that the
logistics and distribution industry has the highest
proportion of respondents who see the offering
of such value-added services as a source of
competitive differentiation for their companies.
Figure 3: Value of a high-performing supply chain
At your company, what is your assessment of the value
created by having a high-performing supply chain?
Enhanced customer service and customer loyalty
3
15
40
Stronger supplier relationships
1 4
19
46
41
31
Accelerated new product introduction
20
43
31
1 5
Expansion of business to new market segments in existing/new regions
2 8
22
40
29
Expanded offerings of value-added services
30
41
1 8
20
Facilitation of premium pricing
31
19
2 10
38
Leverage opportunities created by external supply disruptions
6
17
30
30
18
% of respondents
No value whatsoever
Little value
Moderate value
High value
Very high value
n=1,379
Note: Figures may not add up to 100
because of rounding
Strategy Alignment and Value Creation
Supply chain
management
is no longer
the engine in
the back of the
company, but
at the front
supporting
and enabling
business growth.
Exploiting opportunities presented by supply
chain disruptions, meanwhile, requires an
ability to generate quick response times and
have contingency plans in place (with the retail
sector valuing this the most), and collaborative
relationships with partners and visibility of gaps
created by external disruptions (with the hi-tech
sector valuing this the most).
Lastly, value can be created through strategic
supplier relationships. This can be achieved
through the suppliers giving priority and
loyalty to the company, collaboration on
design improvements or favourable terms and
conditions. Again, our survey data suggests
that companies in the hi-tech sector put a
slightly greater emphasis on these levers than
do their peers.
The levers described above are all based on supply
chain excellence, which is anchored on core
competencies such as time and cost efficiency,
flexibility and agility, reliability and accuracy, and
collaboration. As illustrated in Figure 5, time and
cost efficiency gives rise to quick response, lean
processes, excellent service, cycle time reduction,
favourable terms and conditions and speed in
new product introduction (NPI). All of these
levers are based on a supply chain being fast and
cost efficient.
Flexibility and agility are related to the company’s
ability to respond to unexpected situations, or to
provide a bigger range of services. Hence, they
are the anchor to support levers such as expanded
and differentiated customer service, flexibility
in responding to customers’ needs in delivery
schedule, quantity and product mix, the complex
processes of transition management, product
ramp flexibilities, and providing contingency
plans to unexpected disruptions. Reliability and
accuracy are means to provide on-time delivery,
on-schedule NPI, dependable customer service,
consistency in distribution in new markets, and
the dependency needed in contingency plans.
Lastly, the ability to collaborate with partners is
the foundation for the levers of collaboration
Figure 4: Most relevant factors for value creation through supply chain excellence
Value creation channel
Value creation levers
% of respondents saying
‘extremely relevant’
New product introduction
Premium pricing
On-schedule product introduction
63%
Ability to ramp up fast
63%
Product development cycle time reduction
58%
Ability to manage product transitions
54%
Customer value of on-time, dependable delivery
72%
Customer value of quick response
61%
Customer value of your flexibility in delivery schedule change
56%
Customer value of your flexibility in order quantity change
53%
Expanded offering of value-added services
Differentiation from competition with value-added services
61%
High levels of customer service
Strength of customer service and repeat purchase
58%
Importance of service as a criterion of customer purchase decision
54%
New or existing geographical market
Distribution efficiency in new markets
65%
expansion
Flexibility to satisfy local regulatory constraints
63%
Exploit opportunities from external
Response time to react
74%
disruptions
Existence of contingency plans for supply chain reactions
72%
Strength of collaborative relationships
63%
Visibility of needs or gaps resulting from external disruptions
65%
Strategic supplier relationships
Supplier giving you priority in times of tight supply
70%
Strength of supplier loyalty
58%
Supplier collaboration on design improvements
57%
Supplier willing to take favourable terms
55%
Strategy Alignment and Value Creation
with suppliers on design improvements, the
ability to work with partners for quick response
in times of disruptions, gaining visibility in the
supply chain, and working with local partners for
new market expansion.
It is clear from this year’s CSCO survey that
supply chain management has come a long way
within companies. It is still the backbone for
operational cost reduction, and the supportive
role of supply chain for business performance
is still the foundation. But from 2011 to 2012
we have seen how companies are increasingly
appreciating the need to align their supply chain
strategies with their business strategies. This is
because high-performing supply chains can also
enable companies to create value and develop a
competitive advantage.
chain management to deliver tangible business
results, and accordingly align their organisations
such that supply chain management is an
integral part of the executive suite. Supply chain
management is no longer the engine in the back
of the company, but at the front supporting and
enabling business growth.
There are many channels in which value and
competitive advantage can be created via supply
chain excellence, and different industry sectors
are experiencing differential value in each. Many
more companies are realising the power of supply
Figure 5: Strategy alignment and value creation
Supply chain competency
Value creation levers
Service & repeat purchase &
procurement criteria
Value creation channels
Enhanced customer service
Supply priority & loyalty
Design collaborations
Time/cost efficiency
NPI speed, ramp speed
Distribution efficiency
Flexibility for local needs
Reliability & accuracy
Strategic supplier relationships
Operating cost reduction
Favourable terms
Transitions management
Flexibility & agility
Strategy alignment
Differentiation from services
Accelerated new product intro
Value creation:
• Revenue increase
New market expansion
• Long-term equity
improvement
Expanded value-added services
On-time delivery
Quick response
Collaboration
Flexibility in time & quantity
Facilitation of premium pricing
Contingency plans, visibility
• Differentiated service
• Strategic supplier
engagement
Response time
Collaborative relationships
Competitive advantage:
Leverage disruption opportunities
2: Digital Consumers and eCommerce
The newly
empowered
consumer
is suddenly
expecting a lot
more from the
global supply
chain and is
able to shift
allegiances very
quickly if those
expectations are
not met.
One of the most disruptive and fast-moving
transitions impacting supply chains is the
emergence of digitally empowered consumers.
The transition involves far more than just
online shopping via web stores. In fact, the
digital revolution encompasses everything from
communication and social interaction to opinion
shaping and spatial tracking. It also permeates
the physical space of supply chain by adding
new points of sale (home computers, mobile
devices), new retail functions (in-store kiosks,
smart shelves) and new logistics considerations
(direct-to-consumer fulfilment, in-store returns).
Add the emerging potential for smart appliances,
vehicles and infrastructure to the mix and it
becomes clear that digitisation of consumer
demand will force some radical changes in
supply chains.
King customer means more
complexity for supply chains
Google any item and within a second thousands
of options fill your screen. Where once the
consumer knew little or nothing about what was
available until they entered a retail store, today
almost all have searched for what they want
online before leaving the home. Further, they are
likely to do more research on their smartphones
once they’re in the mall perusing the shelves.
This newly empowered consumer is suddenly
expecting a lot more from the global supply
chain and is able to shift allegiances very quickly
if those expectations are not met.
One school of thought says that this surge in
consumer power will take shape as a relentless
push for ever lower prices. Amazon has shaken
much of traditional retail by collapsing margins
across many categories. Other innovations such as
Groupon’s daily deal approach and eBay’s auction
system all seem to point toward low prices as the
dominant trend fostered by eCommerce. The
data, however, rejects this premise. In fact, by a
ratio of 4:1 overall, supply chain executives across
industries see this new digital consumer as more
likely to weigh price against other factors such
as choice, convenience and availability than to
simply push for discounts. Our survey question
even went so far as to explicitly call out that this
receptivity to such trade-offs meant a willingness
to “pay a premium for valued service”. Digital
consumers want choice, not just cheap.
On the one hand this is good news. Consumer
demand that can be effectively interpreted along
these types of trade-offs can be served in some
cases with higher-priced solution bundles and in
other cases with bargain basement, stripped down
assortments. The problem is that supply chains
built to take standard orders or simply replenish a
shelf are unlikely to be able to take and execute a
complex order that may include extra packaging,
assembly, shipping or professional service. The
added complexity of fulfilling not only item/
location/quantity combinations but also several
other variations could pose serious problems
for supply chain systems. More complexity in
demand must be met with more capability in
supply.
The data collected on this question also shows
clearly that those closest to the consumer see this
surge in complexity far more decisively than do
those further up the chain. Retailers are most
sensitive to this issue. By a ratio of more than
8:1 they expect consumers to be more receptive
to complex offers. Logistics and distribution
businesses, which are often handling the complex
fulfilment requirements being driven by digital
consumers, are second in most heavily leaning
toward consumers’ receptivity to premium prices
for value-added services.
Beyond these sectors, CPG, hi tech and food
& beverages are all clearly anticipating more
subtlety in consumer demand, while healthcare,
pharmaceuticals and chemicals firms are much
less sensitive to this trend (see Figure 7).
The implications of this data, especially when cut
by industry sector, suggest that consumer-facing
businesses will feel pain as their customers push
for more specialised fulfilment, while suppliers’
Digital Consumers and eCommerce
operations remain tuned to a cost competition,
mass production mentality. Retailers or consumer
products firms hoping to offer selections ranging
from bargain basement configurations to highend pack types may find less flexibility in the
supply base than they need.
Figure 6: Consumer demand variability
Within the context of your industry, do you believe the eCommerce and mobile-enabled
customer of the future will be:
More receptive to offers
trading product choice,
price point, availability
and convenience against
each other (i.e., willing
to pay a premium for
valued service, or accept
inconvenience in return
for lower price)
25
Demand complexity reaches back
into the supply chain
To pursue the notion of supply chain complexity
increasing with digital demand we also asked what
supply chain professionals expected in terms of
SKU assortments, distribution network design,
manufacturing strategies, and direct-to-consumer
fulfilment. In each case, the data shows that those
closest to the consumer are expecting more of
the global supply chain than are those upstream.
Overall, respondents see an increase in SKU
complexity with 25% agreeing that “eCommerce
and mobile-enabled customers will drive much
larger SKU assortments as brands pursue ever
smaller niches of demand”. The opposite answer,
that these customers will “drive smaller SKU
assortments as brands simplify to cut costs in
response to price pressure”, was chosen by half
as many (13%), while more than a third said the
drive would be toward “some SKU expansion”
and another quarter saw little or no effect.
Cut by industry, this data confirms the pattern
that those closest to consumers expect the
greatest pressure to offer more variety (see Figure
9). Retailers and distribution businesses, for
instance, are most likely to say they expect “much
larger” SKU assortments, perhaps because they
are already experiencing this trend. A Wells Fargo
investment research report last year claimed that
Amazon offered 80 times the number of items
as did Wal-Mart.com, suggesting that the bar for
variety is getting higher quickly. Other sectors
with close consumer ties such as CPG and hi
tech also anticipate more SKU expansion than
chemicals and industrials. Some of this SKU
expansion may come in the final stages of the
value chain with minor packaging differentiation
61
14
Less receptive to offers
trading product choice,
price point, availability and
convenience against each
other (i.e., only interested
in lowest price)
The same as regards
offers trading product
choice, price point,
availability and
convenience against
each other
% of respondents
n=1,335
Figure 7: Customer receptiveness to variable offers vs lowest price only
Retail
8.25
Logistics &
Distribution
7.43
Food & Beverage
5.20
Hi Tech
5.07
CPG
4.78
Industrial
3.76
Chemical
2.55
Healthcare &
Pharmaceutical
Ratio of variable offer to lowest price
n=1,335
1.21
Figure 8: SKU complexity
Within the context of your industry, do you believe the eCommerce and mobile-enabled
customer of the future will drive larger or smaller SKU assortments?
13
25
Drive much larger SKU
assortments as brands
pursue ever smaller niches
of demand
Drive some SKU expansion
as brands pursue some
smaller niches of demand
26
Have little or no effect on
SKU assortments
36
Drive smaller SKU
assortments as brands
simplify to cut costs in
response to price pressure
% of respondents
n=1,337
Digital Consumers and eCommerce
or other late stage bill of materials variation, but
one wonders whether tier suppliers upstream are
ready for the differential demand pressures that
this consumer trend implies.
inventory. Complexity may be on the rise with
digital demand, but not all businesses plan to
tackle it in the same way.
Not all respondents feel the pressure. Half of all
chemicals companies, for instance, see little or
no change and healthcare and pharmaceuticals
respondents are similarly more likely to say
they expect no change than either an increase
or decrease. For chemicals supply chains this
makes sense as they are, to a large degree, limited
by asset-intensive production facilities that
cannot readily increase variety without capital
expenditures. Healthcare supply chains, however,
which are increasingly impacted by new channels
like Express Scripts online drug ordering, may be
overlooking a wave of change at their peril.
An interesting observation in the data here
shows that hi-tech and distribution firms are
most clearly expecting at least some impact on
SKU assortments from the digital consumer.
Logistics and distribution respondents who
are most likely to say they expect “much larger
SKU assortments” are also least likely (16%) to
say they expect “little or no impact”. Clearly,
eCommerce is changing their world. Hi-tech
respondents are similarly unlikely (17%) to say
they expect little or no change, but interestingly
are the most likely of all to see a drive toward
smaller SKU assortments (18%).
1
New York Times, 13 August 2012
Putting some rough estimates around this opinion
data shows that those closer to consumers see
SKU counts increasing by 15-20%, while tier
suppliers look for closer to a 5-10% increase
(see Figure 10). Somewhere in here agility must
make up the difference. If the 1,350-plus supply
chain professionals in our sample are right, we
should anticipate at least a 10% increase in the
total number of unique items available for sale
in the near future. Coupled with the data above
indicating consumers’ desire for more variation
This finding may reflect a level of sophistication
associated with the steeper learning curve in
hi tech exemplified by the case of Motorola,
which under new leadership recently installed by
Google is reportedly planning to “cut the number
of devices [it] makes from the 27 it introduced
last year to just a few”1. Apple, whose product
line-up is famously simple, seems to be able to
succeed by pushing its complexity into the postpurchase content assortment rather than physical
Figure 9: SKU complexity by industry
Figure 10: Overall SKU change
Within the context of your industry, do you believe the eCommerce and mobile-enabled customer
of the future will drive larger or smaller SKU assortments?
Estimated % change
50%
40%
Chemicals
5
Healthcare
& Pharma
6
9
13
16
17
18
21
Industrial
30%
20%
Food &
Beverage
Hi Tech
CPG
10%
Retail
Logistics &
Distribution
Chemicals
CPG
Food &
Beverage
Healthcare
& Pharma
Much larger (+50%)
Little or no change
Somewhat larger (10%)
Smaller (-10%)
Hi Tech
Industrial
% of respondents
n=1,337
Logistics &
Distribution
Retail
n=1,337
Digital Consumers and eCommerce
in sale offers it looks likely that supply chains’
fulfilment duties are set to become dramatically
more challenging.
The distribution centre of the
future: bigger and smaller
In terms of distribution networks, eCommerce
and the digital consumer are also driving change.
The most obvious element of this change has
been the Amazon phenomenon where directto-consumer, non-store retail has upended the
economics of consumer spending by building
dozens of new warehouses in the past few years.
The trend could be toward “gigantism” (a term
used to describe supply chains in mining) with
examples like Marks & Spencer’s East Midlands
distribution centre in the UK which consolidates
all fulfilment of stores in-region, eCommerce
worldwide and international sales arising as a
means to provide the agility demanded of supply
chains by the digital consumer.
A counter argument can be made for smaller,
more local distribution centres (DCs) which
may allow quick turnaround response and
higher-touch customer service support. One
such example is an effort made by Seven and I
Holdings (parent company of the 7-Eleven stores
chain) to share DC facilities across suppliers in
order to have more nodes of supply closer to
stores with tighter delivery windows and smaller
shipments. A similar argument may apply to fresh
food businesses like Sysco whose network must
manage multiple temperature zones and deliver
prepared items as well as packaged items.
Closer examination of the data reveals a
difference between consumer-facing businesses
and tier suppliers with some mild bias in favour
of larger, more centralised distribution centres
in the eyes of those closest to the consumer.
There also seems to be some mild correlation
between those who say they expect much more
SKU variety and those anticipating the bigger
DCs. Interviews around this topic suggest that
the likely answer for most, regardless of industry,
is a bit of both.
If the 1,385
supply chain
professionals
in our sample
are right, we
should anticipate
at least a 10%
increase in
the number of
unique items on
sale in the near
future.
One takeaway may lie in seeing the link between
wide product assortments and mega-scale in
warehouse management as a means of delivering
on the “long tail” supply chain. Another may be
that complex value-added services able to justify
premium pricing are best served at the local level.
CPG and food & beverages were the only two
sectors more likely to bet on smaller, local DCs
than on larger, centralised DCs. Long-tail supply
Figure 11: Distribution centre design
Figure 12: Manufacturing strategies
Within the context of your industry, do you believe the
eCommerce and mobile-enabled customer of the future will:
Within the context of your industry, do you believe the
eCommerce and mobile-enabled customer of the future will:
23
26
35
41
36
39
% of respondents
n=1,336
Require larger, more
centralised distribution
centres serving many/
all channels
Require smaller, more
local distribution
centres serving
separate channels
Require minimal
change to existing
distribution centre
networks
Drive brands to develop
mass customisation
manufacturing
strategies
Drive brands to pursue
the lowest possible cost
mass manufacturing
strategies
% of respondents
n=1,338
Have little or no effect on
brands’ manufacturing
strategies
Digital Consumers and eCommerce
It is telling that
hi-tech firms,
whose product
lifecycles are
shortest and
learning curves
steepest, seem
most certain that
manufacturing
strategies will
be impacted
by eCommerce
and the digital
consumer.
chain may work well in a lights-out, automated
warehouse for books, electronics and luxury
items but may require kitchens, workshops and a
friendly face for grocery items.
Manufacturing strategies
schizophrenia
Added complexity at the consumers’ point of
sale implies more variety upstream. If this variety
is limited to final packaging or presentation it
is possible that manufacturing strategies will be
largely unchanged. Otherwise, tier suppliers will
be looked to for more flavours, colours, sizes and
configurations. Of course, powerful consumers
able to search online for the lowest possible prices
might also force manufacturers of plastics, food
ingredients, fasteners or electronic components
to streamline production for lower unit costs.
Digital consumer power appears ready to inform
product innovation too, potentially helping to
forecast demand for “hot” products. Winners
often surge ahead of capacity, leaving money
on the table, while losers show up as excess
and obsolete inventory write-offs. Spain’s Zara
built a manufacturing and supply chain strategy
explicitly around this problem even before
eCommerce and digital consumers had really
Figure 13: Customer fulfilment
Within the context of your industry, do you believe the eCommerce
and mobile-enabled customer of the future will:
Drive brands to develop
direct-to-customer
fulfilment capabilities
21
Drive brands to rely on
eCommerce retailers
for customer fulfilment
56
Have little impact on
existing retail channels
for customer fulfilment
23
% of respondents
n=1,334
emerged. Manufacturing strategies based on the
Henry Ford quip “any colour you want as long as
it’s black” may struggle in this new world.
At an aggregate level our respondents are split
on this issue. While only a quarter overall see
little or no effect on manufacturing strategies,
the remainder break almost evenly between those
who agree that the emergence of eCommerce
and digital/mobile consumers will “drive brands
to develop mass-customisation manufacturing
strategies” and those who expect “lowest possible
cost mass manufacturing strategies” to dominate.
Chemicals companies are by far the most
likely to say their manufacturing strategies
will not change (54%), while hi-tech firms are
clearly the most convinced that they will see
changes in manufacturing (16% see “little or no
effect”). Retail is the only industry sector whose
respondents are more likely to foresee more mass
customisation in manufacturing than low-cost
mass production. Other sectors generally forecast
change in manufacturing approaches with a mild
bias in favour of lower-cost mass production.
Here again, we see the same theme of those
closest to consumers bracing for change while
those upstream wait to see the impact. It is telling
that hi-tech firms, whose product lifecycles are
shortest and learning curves steepest, seem most
certain that manufacturing will be impacted by
eCommerce and the digital consumer.
This group (comprising 336 survey respondents)
is nearly evenly split between believers in lowcost mass production and more variable mass
customisation, suggesting that the end game may
include significant amounts of both approaches.
Certain inputs may well be so commoditised
(memory chips, for instance) that consumers,
no matter how informed or discerning, simply
don’t care. These will likely gravitate to ever more
massive, basic production operations. Other
inputs (exterior shells, for instance) could benefit
from unique designs, demanding smaller batch
runs on more flexible production lines.
Digital Consumers and eCommerce
Direct to consumer and changes
to retail
Perhaps the most obvious implication of
eCommerce is that all companies have an
opportunity to make more direct contact with
their customers. For industrial or B2B brands this
connection lends itself to ever deeper product
information sharing, forecast collaboration and
order streamlining, but is essentially just a superpowered version of the telephone-and-catalogue
relationship it replaces. For consumer brands,
the implications reach into order management
and fulfilment and potentially mean significant
changes to channels.
When asked about how these trends will affect
channels, a clear majority overall believe that
eCommerce and digital consumers will “drive
brands to develop direct-to-customer fulfilment
capabilities”. Nearly a quarter of respondents see
the future driving brands to “rely on eCommerce
retailers for customer fulfilment”, suggesting
that many see the need to serve customers with
home delivery but that they expect to outsource
this function to specialists like Amazon. Around
a fifth of the respondent pool sees little impact
on existing channels.
Industry cuts show some decisive, if obvious,
differences. Hi tech and retail each believe
overwhelmingly (by a ratio of 6:1) that brands will
develop direct-to-customer fulfilment rather than
leave channels alone. Healthcare, pharmaceutical
and chemicals firms are much more likely than
those in other industries to see the future in
terms of minimal channel change. The takeaway
suggests that classes of product suitable to classic
online shopping (consumer electronics, apparel)
are gearing up to ship direct to the home. One
wonders what pharmaceuticals is thinking.
The more interesting finding in this data may
be the relatively low and strangely consistent
percentage of respondents across industries who
anticipate relying on eCommerce retailers for
fulfilment. Amazon and its peers in pure-play
eCommerce have provided channel fulfilment to
many brands for years now. Recently, however,
some appear to be taking the function back in
house (Marks & Spencer, Target and Clark’s
shoes have all been cited in media reports within
the past year as moving this way). Interviews with
some large CPG companies have also pointed
toward supply chain strategists developing their
own direct-to-consumer capabilities as a way
to maintain visibility to demand and sell more
product at retail rather than wholesale prices.
An interesting
finding may be
the relatively low
and strangely
consistent
percentage of
respondents
across industries
who anticipate
relying on
eCommerce
retailers for
fulfilment.
The execution implications of this movement
are profound. While shipping full pallets to
Amazon’s DCs is a familiar process for most
manufacturers, picking, packing and shipping to
individual consumers is another matter entirely.
Secondary packaging, in particular, adds cost and
hassle to consumers who may end up associating
brands’ performance in fulfilment with
satisfaction in consumption of the product itself.
Also, the added inventory needed to populate a
full assortment and quick response supply chain
means more cost.
Getting the execution right while keeping
costs under control will, in many cases, mean
changes in production processes even further
upstream to allow inventory buffering prior to
Figure 14: Social media and supply chains today
What effect, if any, is social media (Chatter, Facebook, expert blogs/chatroom, etc)
having on your company’s supply chain strategy today?
No effect
47
Improved communication with
trading partners
27
Integrate structured and
unstructured information
23
Improved demand sensing
and forecasting
21
Competitive advantage
17
Improved employee
productiviity
11
% of respondents
n=1,345
Digital Consumers and eCommerce
Respondents
in Asia are the
most likely to
see immediate
impacts from
social media
on supply chain
strategy.
the finished goods stage. Imagine consumerordered configurations rolling directly off a
packaging line. The engineering needed mirrors
what BMW does in its vehicle plants or Dell did
in its Austin PC factories during the heyday of
build-to-order dominance.
Social media doesn’t do much now,
but many expect it to help
The digital consumer of the future does not
only shop. He or she also tweets, blogs, posts
on Facebook and otherwise shares feelings
about life, including which products rock and
which do not. The social media wave that seems
overwhelmingly powerful in terms of modern
culture may be relevant to supply chain strategies,
although no one seems perfectly clear how.
Nearly half of our survey respondents (47%) say
that social media is having “no effect” on their
company’s supply chains today. Of those who do
see some impact, the most common is “improved
communication with trading partners”, rather
than anything to do with customers. Only 21%
see “improved demand sensing and forecasting”,
despite abundant discussion about how
important Facebook, Twiiter and the like are to
brand building and consumer influence.
Figure 15: Social media and supply chains in the future
How do you expect social media to inform your company’s supply chain
management practices in the future?
Source of real-time
customer feedback
56
Inform product enhancement/
innovation priorities
46
Provide advance warning of
potential supply disruptions
41
Help forecast demand
for ‘hot’ products
39
Shed light on social/
environmental practices
33
Other
5
% of respondents
n=1,284
When cut by industry and geography, however,
some potentially important trends emerge. Hi
tech is clearly the most confident that social
media has an effect today, while chemicals
roundly dismisses it. Asian respondents are
similarly decisive in being the most likely to see
immediate impacts from social media on supply
chain strategy, while European respondents
are least convinced. The correlation may be
explained in terms of growth rates. European
mobile networks are top notch and the UK has
the highest rate of eCommerce penetration of
any major country, so technophobia is probably
not an explanation. The higher growth rates seen
in Asia as compared to other geographies and
hi tech as compared to other industries suggests
that, as a strategic tool, social media may be most
valuable in volatile markets.
Looking ahead at how social media might affect
supply chain strategies in the future, we see
significantly more optimism. Over half (56%) of
all respondents expect social media to provide
real-time customer feedback and significant
minorities look for product enhancement
information or “hot” product predictions (see
Figure 15). Cut by industry, this data also shows
that expectations of impact are not limited to
those high-growth areas that are seeing effects
today. Retailers, for instance, are particularly
hopeful that social media will offer real-time
customer feedback (80%) and help forecast
hot products (65%). CPG manufacturers are
most bullish on the role social media will
play in influencing product innovation (52%).
Geographically, it is in the Americas, rather than
Asia, where optimism about social media and
supply chain influence is highest. Social media’s
role in supply chain strategy is still decidedly
unsure, but many see the potential for it to make
a difference.
Our survey participants offered some other novel
ideas for social media in supply chain’s future.
Among the most interesting are quality early
warning systems, compliance support, supplier
health tracking, or even “as a source of feedback
Digital Consumers and eCommerce
from employees on company performance and
practices”. One consumer packaged goods
CSCO offered the following summary of what
is conceivable: “Cloud base supply network
visibility from consumer, to customer shelf, to
manufacturer, to suppliers’ supplier is where
we’re headed.” Having interviewed this same
executive in the past, it is clear that this really is
the company’s plan.
Social media is very likely to be at least part of your
supply chain strategy. Among businesses close to
the consumer, demand sensing is expected to
be important. Even for the most asset-intensive
basic materials industries it is conceivable that
“sentiment analysis” based on social networking
could forecast price movements in commodities
that might help with capital planning.
Mining for insight: what is too deep?
During a discussion on the topic of digital
commerce earlier this year, a member of SCM
World’s Executive Advisory Board posed the
question of how far it was reasonable to dig into
customer data given the massive amount of detailed
information now available on the movements,
interests and preferences of individuals.
Consumer insight used to rely on relatively dumb
point-of-sale data mixed with third party (IRI,
Nielsen) data and market research. Experience,
instinct and guesswork came together to paint
a picture of demand across customer segments.
Today, many consumers carry GPS-enabled
mobile devices that link to his or her entire
intellectual universe of email, web searches,
social networking and more. Cross-referencing
all of these data sets could, in theory, deliver
incredibly deep, granular analyses of exactly what
each person is willing to buy, when and where.
How deeply should demand planners drill into
this data before they strike a nerve?
We asked our survey respondents how appropriate
they believe it is probe into these new data sets to
develop customer insights at four levels of depth
(transaction data only, web store data, geospatial
data, and private web data such as Google
searches) and at the aggregate and individual
levels. The answer is that many are still hesitant to
take full advantage of all the information today’s
digital consumer is putting out there.
Conducting deep
analysis of data
on customers’
physical
movements
seems for many
to go too far.
The only type of data respondents are clearly
comfortable mining is traditional customer
transaction data, and while there is a bit less
certainty that individuals’ data should be probed
it is clear that most supply chain professionals
see this as fair game. Web store data, which
might be seen as owned by the business, is
significantly less acceptable as an area to mine.
This may reflect some degree of privacy concern
around clickstream analysis or other methods of
analysing the customer’s thought process.
Here, as at every level of the analysis, respondents
are more comfortable using this data in
aggregate than at the individual customer level.
Going deeper into data that tracks customers’
physical movements seems for many to go
too far. At the deepest level, where customers’
personal web data including things like their
search history and social network affiliations are
found, the view is that mining this for business
advantage is not acceptable.
Figure 16: Customer data mining
Within the context of your company/industry, please indicate your level of agreement/
disagreement with the following statements about the use of customer data:
Customer transaction
data should be mined to
understand buying behaviour
4.08
3.75
Customer webstore data
(cookies, eCommerce
history) should be mined to
understand buying behaviour
3.55
3.27
Customer geospatial data
(mobile GPS) should be
mined to understand buying
behaviour
3.20
2.98
Customer private web data
(Google search, Facebook,
etc) should be mined to
understand buying behaviour
2.89
2.69
Weighted average rating, 1-5 scale
n=1,346
Disagree
At an aggregate level
At an individual level
Neutral
Agree
Digital Consumers and eCommerce
Despite the
digitisation of
demand hurtling
forward, we
won’t have a
real-time global
supply network
anytime soon.
Cutting the survey data by industry and
geography further corroborates what we have
seen elsewhere in this section – namely, that
supply chains closest to the consumer are most
aggressive in looking for ways to engage and
serve this emerging digital/mobile demand.
Retail, in particular, is most bullish on all
means of drilling into customer data, both at
an aggregate and individual level. Even for
personal web data, retailers agree (although just
barely: 3.05 individual and 3.35 aggregate on
a 1-5 scale, where 3 is neutral) that analysis to
“understand buying behaviour” is appropriate.
For healthcare and pharmaceuticals, however,
the opposite is true. These respondents
generally believe that mining anything other
than transaction data is inappropriate.
Geographically, Asian respondents are clearly the
most comfortable using all types of customer
data, both in aggregate and individually. Even
in the use of personal web data at an individual
level, Asian respondents are only just negative
(2.91 on our weighted scale), indicating that even
here most are at worst neutral about whether to
poke around individuals’ web search histories
or Facebook pages. Europeans generally don’t
consider it appropriate to mine such data and are
least in agreement across the board.
These findings suggest that despite the
digitisation of demand hurtling forward in terms
of technical enablement, we won’t have anything
like the “real-time global supply network” anytime
soon. Data mining tools are certainly available
to digest all of this customer information, and
consumers, despite lip service given to privacy
worries, are happy to leave their electronic
footprint everywhere. If anything, it appears that
consumers are more comfortable having their
demand data scrutinised than businesses think.
Retailers may be right about this – consumer data
probably should be drilled into more deeply than
is currently the case.
The forces of change arising from today’s
digitally empowered consumer appear set to
drive tremendous complexity upstream into the
supply chain for every class of product. Those
closest to the consumer are feeling the pressure
most acutely and will inevitably look back to
their supply base for support. The immediate
implications include more and better flexibility in
packaging, retail presentation and configuration
options. These forces will drive suppliers of
raw materials and components to streamline
changeovers for their brand-owning customers
and carry inventory that allows variable demand
to be met without overburdening working capital.
Considering these trends, it appears that supply
chain organisations’ ultimate imperative may be
assuring agility.
3: Social & Environmental Responsibility
Corporate executives, from the board level
down, are increasingly concerned with their
supply chain’s performance across social and
environmental dimensions. Environmental
responsibility includes the control and
containment of the carbon footprint, energy
usage and pollution of the supply chain. Social
responsibility includes health and safety, labour
practices and contribution to the well-being of
local communities. The initial attention has been
on a company’s own internal operations, but that
has rapidly shifted to the extended supply chain.
Whether a company is legally liable or not, the
negative publicity and the resulting scrutiny by
the general public of violations that occur in
its extended supply chain are significant enough
that the scope of social and environmental
responsibility (hereafter referred to as SER) often
consists of multiple tiers of the supply network.
SER journeys, they are beginning to see that the
benefits come not so much from sales revenue
(customers being generally unwilling to pay more
for socially or environmentally friendly products),
but from reducing the cost of manufacturing and
distributing their products. The gap between the
two is widest in the food and beverage sector,
where 53% of respondents say cost reduction and
efficiency gains are the driver compared with just
13% who say increased sales revenue.
Why are companies so concerned with SER? This
year, 71% of our survey respondents indicated
that the motivation is to create a positive customer
image and enhance brand equity (slightly down on
last year – see Figure 17). Hence, the driving force
remains customers and the general public. This is
strongest in the chemicals industry, where more
than three-quarters of respondents (77%) say this
is the case. The second biggest driver of SER, as
Ensuring no disruption of supply and fending
off shareholder or external public relations
concerns also both increased by several points
this year. A small percentage of participants told
us there were “other” reasons for SER efforts.
Most indicated that these were derived from
corporate beliefs and corporate culture: their
companies want to do the right things for the
earth, the community and mankind in general.
in 2011, is government regulations. Almost half
of respondents (49%) indicated that SER efforts
are designed to satisfy government regulations – a
rise of seven percentage points year on year.
Cutting the cost of greener
products
But perhaps the most interesting finding concerns
the third main driver: cost reduction and greater
efficiency through better use of energy and
materials, reducing waste, and so on. This year, 43%
of participants say this is the driver of their SER
efforts – up from 32% in 2011. At the same time,
the proportion who believe their board’s reason
for investing in SER is to boost sales has fallen
sharply. This is a major change. The implication
could be that as more companies mature in their
This year, 43% of
participants say
cost reduction
and greater
efficiency in the
use of energy
and materials is
the driver of their
SER efforts – up
from 31% in 2011.
Of course, switching to new materials, improving
the energy efficiency of production processes, and
increasing the amount of recycling and reuse of
materials takes time. But our research findings and
conversations with supply chain leaders suggest
that companies are beginning to move more in this
direction, and we expect to see further evidence of
this shift in the next couple of years.
Figure 17: Drivers of SER investment
What is your best judgment of your board’s motivations for investing in SER?
Create a positive customer
image and enhance
brand equity
71
75
Satisfy government
regulations
49
42
Reduce costs and/or increase
efficiency (e.g., through better
use of energy, raw materials)
43
32
Ensure no disruption
of supply
Fend off shareholder or
external PR concerns
Increase sales revenue
37
30
28
22
17
31
% of respondents
n=1,281
2012
2011
Social & Environmental Responsibility
Visibility and monitoring of SER
violations
SCM World has advocated a Six Sigma process
cycle as a good framework to look at SER efforts.
This cycle has four stages: measure-identifyanalyse-act. Measuring SER performance,
identifying and analysing root causes, having
corrective actions in place to improve
performance, and then continuously measuring
and going through the cycle is the basis of a
sound SER journey.
Visibility of SER performance can be
accomplished at two levels. At the first level,
supply chain executives need to have visibility
of SER violations in their supply chains. This is
necessary, but it is not the most effective means
to manage SER. The ideal visibility is continuous
monitoring of performance before violations
occur. This is analogous to how we manage
quality. It is necessary for us to have a good final
inspection process so that we are able to identify
defects in finished products.
But that is not good enough. We need process
monitoring systems in place to make sure
minimal or zero defects are produced during the
manufacturing and assembly stages.
In this year’s survey we asked about both the
visibility and monitoring of SER performance.
What we found is a strong correlation between
the monitoring systems that supply chain
executives have in place and the visibility of SER
violations. In other words, most executives are
relying on the monitoring systems to know if
there have been violations or not, and these are
generally effective.
Visibility of SER performance starts with having
visibility and monitoring of one’s own internal
operations. A more progressive company will also
have visibility of their immediate suppliers. And
the most advanced ones will, in addition, also
have visibility of their extended supply networks.
Hence, companies should strive to be at the most
advanced level of having total visibility of the
extended supply network.
In 2012 we found that a quarter of companies
have visibility of both environmental and social
standards violations in their extended supply
networks (see Figures 18 and 19). Visibility at
the immediate supplier level was slightly higher,
at 28% and 29% respectively, while internal
visibility was higher still, constituting 39%
and 38%. It is gratifying to see that a larger
proportion of companies now have visibility
Figure 18: Environmental performance visibility
Figure 19: Social performance visibility
At which of the following levels do you have visibility of environmental
sustainability performance measures (e.g., carbon footprint)?
At which of the following levels do you have visibility of social sustainability
measures (e.g., violations of labour compliance regulations)?
None
9
8
Extended supply
network
Immediate
suppliers
39
38
25
28
% of respondents
n=1,352
24
29
Internally
% of respondents
n=1,346
Social & Environmental Responsibility
beyond their internal operations (since the total
sum of percentages for those with visibility of
immediate and extended supply networks is
greater than the percentage with visibility of
internal operations). At the same time, fewer
than 1 in 10 companies say they have no visibility
of any environmental or social compliance
violations in their supply chains.
Another observation is that visibility of
environmental and social compliance violations
seem to be tied together. Hence, companies treat
both types of violations as equally important
and would not have visibility of one without the
other. Compared with last year’s findings, there
are definitely more companies with visibility of
their extended supply networks this year. This
indicates that good progress has been made in
extending visibility to a more comprehensive
supply network.
The observations about monitoring systems of
SER performance are quite similar to the visibility
of SER violations. Again, the most advanced
companies have monitoring systems in place
for their extended supply networks, followed by
those having systems for immediate suppliers
and then for internal operations only. The most
distinct difference between the visibility of SER
violations and monitoring systems lies in the
extended supply network. Less than a fifth of
companies have monitoring systems in place for
their extended supply networks, compared with
the quarter that have visibility of environmental
and social sustainability violations (see Figures 20
and 21). Such violations are “easier” to capture,
whereas ongoing monitoring systems require
much bigger efforts and investments. Hence,
we are still far from having many advanced
companies that are able to monitor their extended
supply networks effectively.
It is gratifying
to see that a
larger proportion
of companies
now have
visibility of SER
violations beyond
their internal
operations.
Corrective action: firms are more
likely to switch suppliers
Once out-of-control states are identified,
and assignable causes and opportunities are
analysed, the Six Sigma process can move on
to the fourth step: act. In SER supply chains,
action involves both correcting problems and
putting in place processes or systems designed
to improve SER performance.
In terms of corrective actions, we found that
companies do react promptly when suppliers
are found to have breached SER standards.
Around two-thirds of respondents say they give
suppliers a warning first before taking punitive
Figure 20: Environmental performance monitoring
Figure 21: Social performance monitoring
At which of the following levels do you have monitoring systems in
place for environmental sustainability performance measures?
At which of the following levels do you have monitoring systems in place for
social sustainability measures?
None
10
10
Extended supply
network
Immediate
suppliers
45
44
19
26
% of respondents
n=1,340
19
27
% of respondents
n=1,342
Internally
Social & Environmental Responsibility
Companies are
increasing the
pressure they
put on suppliers
to improve SER
performance.
actions if things do not improve, while a third
take immediate action without giving suppliers
a second chance. This shows just how seriously
companies take violations of their social and
environmental standards.
So what are the consequences for suppliers if
they fail to comply? As Figure 23 shows, the most
likely – used by more than half of companies,
regardless of whether or not they issue a warning
first – is to reduce the amount of business they
give to a supplier. More than 4 out of 10 opt to
terminate the business relationship completely.
Monetary fines are the least popular tactic, used
by less than 15% of companies, indicating that
most do not believe these are an effective means
of correcting the violation problems.
The main difference between this year’s findings
and those in 2011 is that companies seem more
willing to terminate the relationship altogether
rather than reduce the volume of business. This
trend is most significant among those that issue
a warning first. In 2011, 73% said they would
reduce business and 36% would terminate the
relationship. In 2012, these figures are 58% and
42% respectively. Among the third of respondents
who say their companies take immediate action
without warning, those reducing business fell
from 56% to 53% year on year, while those
terminating the relationship increased from 42%
to 47%.
Although the most likely consequence of noncompliance remains a warning followed by
reduced business (52% of the sample overall,
compared with 20% who immediately terminate
the relationship), our findings indicate that
companies are both increasing the pressure they
put on suppliers to improve SER performance
and changing the way they respond to violations.
Increasingly, they are willing to stop using
those responsible for breaches of social or
environmental standards and find alternative
suppliers to replace them.
Incentives for suppliers to improve
SER performance
Of course, suppliers need to be committed and
motivated to help their customers make progress
in SER in a way that enhances their public image
and brand equity. Many studies have found that
the best way to ensure this is not more compliance
audits, but to collaborate with suppliers so that
they benefit from SER improvements and are
willing to invest time, money and resources in a
way that supports their customers’ objectives.
Figure 23: Penalties for breach of SER standards
Figure 22: Warning signals
If suppliers are found to be in breach of your company’s SER standards,
do you give a warning first before imposing “penalties”?
Warning first
14
Warning first,
followed by
No warning
58
42
32
13
No warning,
immediate action
taken in the form of
53
47
68
% of respondents
n=1,227
Monetary fines
% of respondents
n=1,227
Reduced business
Termination of business relationship
Social & Environmental Responsibility
For the second year running, our CSCO survey
shows that the most widely used incentives are
preferred supplier status (giving priority for future
business) and increased business engagements.
However, the proportion of respondents who
say their companies use preferred supplier status
has fallen from two-thirds in 2011 to 58% now.
Increased business engagements show no change
year on year at slightly under half of the sample
(see Figure 24). At the same time, the numbers
willing to grant price premiums and better terms
and conditions to suppliers in exchange for
SER commitments and improvements has risen
slightly. This suggests that the mix of incentives
may be changing somewhat as companies gain
more experience about the most effective ways to
incentivise suppliers. Granting preferred supplier
status is a positive incentive, but it is not as
concrete a benefit as better terms and conditions
and price premiums. As companies began to
realise the positive cost savings and benefits of
SER efforts, they are willing to give more explicit
benefits to their suppliers.
In general, we also found that companies in the
hi-tech and CPG sectors tend to be more likely
to use the incentives described, while those
in the logistics and distribution industry are
least likely. (More than a fifth of logistics firms
offer no incentives, for example, compared
with 12% across all sectors.) And among those
respondents who indicated that their companies
used other means, the most common are supplier
assessment programmes to identify capability
and performance gaps, knowledge sharing with
suppliers, and participation in industry forums or
industry-wide SER programmes.
Legal compliance and supplier
relationships are the big winners
What about the benefits companies are getting
from their SER efforts? In 2012, reduced
violations of government regulations and laws
are the most significant, with 60% of survey
respondents claiming good or substantial
results. More than half also say the same about
supplier relationship and customer satisfaction
improvements. And 41% have seen at least good
results in terms of operating cost reduction –
almost the same percentage who say this is a
driver of their SER investments, as we noted
earlier in this section. A small number of
respondents indicated some other benefits, such
as better brand image, public relations, employee
morale and working environment, community
contributions, and image as an industry leader.
Sector analysis of the data suggests that hi tech,
logistics and CPG seem to be industries that have
derived greater benefits from their SER efforts.
As companies
begin to realise
the positive cost
savings and
benefits of SER
efforts, they are
willing to give
more explicit
benefits to their
suppliers.
Although the scale used for this question varied
slightly from the one in 2011, we can still make
some year-on-year comparisons. In 2011, the top
benefit (combining the ratings of 4 and 5 on a
1-5 scale) was customer satisfaction improvement
(47%), followed by reduced violations of
government regulations and laws (44%),
supplier relationship improvements (35%), new
or improved sales opportunities (32%) and
operating cost reduction (31%). Comparing
these findings with those in Figure 25, we can see
that the 2012 results are better across the board.
This suggests that companies are seeing more
substantial results from their SER efforts than
they were a year ago.
Figure 25: SER incentives for suppliers
Preferred supplier status
(priority for future business)
58
66
Increased business
engagements
48
48
You invest in training
and education
42
44
Public recognition (e.g.,
supplier of the year awards)
32
32
Better terms and conditions
25
22
Price premiums
10
8
8
% of respondents
n=1,227
31
2012
2011
Social & Environmental Responsibility
The 16-point jump in benefits from reduced
violations of government regulations and laws
in 2012 is interesting. A possible explanation is
that governments have tightened their scrutiny
and enforcement of such regulations. And
the 19-point jump on supplier relationship
improvements indicates that companies are
finding beneficial ways to collaborate on SER
initiatives. Overall, our evidence shows that
such initiatives are maturing and more of the
investments in SER are beginning to pay off.
This is indeed a very encouraging trend.
Global brands
such as Apple
and Samsung
have attracted
significant
negative publicity
during the past
12 months as a
result of SER
violations by their
suppliers.
Obstacles to SER progress remain
significant
Despite this progress, however, measuring
the benefits of SER initiatives continues to
challenge many companies. Almost 6 out of 10
survey participants say this is “somewhat” or
“extremely” challenging. Just one percentage
point behind is the customer not caring or price
pressure (which drew the highest proportion of
“extremely” challenging responses, at 15%) and a
lack of resources. In addition, supplier resistance
and a lack of internal knowledge and expertise
are both rated challenging by half of our sample
(see Figure 26), so the barriers to forging socially
Figure 25: SER benefits
and environmental responsible supply chains
should not be underestimated.
Although, once again, we are not able to compare
the results of 2012 with those of 2011 directly, the
qualitative results suggest that the key obstacles
and challenges are more or less the same.
The observation of customer not caring and
no price premium being a major challenge is
an interesting one. At first glance it may seem
at odds with the earlier results that customers
are increasing their efforts and stepping up their
punitive actions for SER violations. How can we
interpret this finding? One explanation is that a
company will typically have multiple customers,
some of whom may be extremely concerned
with SER performance and some not. As a
supplier, one still has to improve SER in general,
and getting the latter group of customers to care
and be appreciative of these efforts can be a
major challenge.
Moreover, we have seen that only 10% of
companies are willing to offer price premiums as
an incentive for supplier SER improvements. So
investing here could be very challenging when the
supplier is already faced with cost pressures. To
Figure 26: SER challenges
What kind of results have you achieved through your SER efforts to date?
No measurable returns
7
27
8
Reduced violations of government regulations and laws
12
11
17
39
Supplier relationship improvement
8
12
26
Customer satisfaction improvement
8
13
26
Operating cost reduction
14
18
Customers do not care / price pressure
4
9
29
21
42
40
12
Lack of resources
5
10
27
13
Supplier resistance
5
14
20
27
33
8
32
27
7
32
8
12
15
14
43
31
Internal resistance
17
17
None
Not at all challenging
Minor
Somewhat unchallenging
Moderate
Substantial
43
44
% of respondents
% of respondents
Good
9
7
Lack of knowledge and expertise to pursue improvement projects
New or improved sales opportunities
14
50
42
31
8
30
Neither
n=1,237
Note: Figures may not add up to
100 because of rounding
Somewhat challenging
Extremely challenging
n=1,234
Note: Figures may not add up to
100 because of rounding
4
Social & Environmental Responsibility
address such challenges, we see the importance
of industry-wide efforts or joint programmes
in helping to unify the value and priority that
companies put on SER performance. Equally
important is ensuring that suppliers do not
perceive SER efforts as costly, and that there is
real business value to be gained.
Companies are stepping up their
improvement efforts
As for the future outlook of SER efforts, our
findings show that the biggest focus areas for
companies will be continuing to work with
their immediate suppliers (73% are planning to
increase their efforts here), internal operations
(71%) and their extended supply network (65%).
This is followed by internal product design (63%)
and customers (56%) – see Figure 27
Comparing these figures with those from our
2011 survey (which used an identical question),
we see an increase in the proportion of
respondents planning to step up their efforts of
at least five percentage points across the board.
In the case of supply networks, both immediate
and extended, the 2012 figures are double-digit
percentages higher – 21 points and 14 points
respectively. The significant negative publicity for
major global brands, such as Apple and Samsung,
stemming from suppliers’ SER violations during
the past 12 months could explain the heightened
attention here. As in 2011, companies are working
on multiple dimensions in their SER efforts.
And SER improvements can only be made with
integrated and collective efforts involving internal
operations, suppliers, customer support and
engineering/product development functions.
From this year’s survey, we see that most
companies have come a long way on the SER
journey. There is sufficient evidence that
their SER efforts are paying off with real cost
savings, and companies are maturing in their
experience and learning how to make the right
investments to realise such benefits. To improve
SER performance, companies are using a sense
and respond approach. Sensitivity to SER
performance is increasing, and more companies
than in 2011 have been able to gain visibility
and control of SER violations in the extended
supply network.
Improvements
in SER require
integrated
efforts between
the operations
and customer
support teams,
engineering
and product
development
functions, and
suppliers.
However, a big gap still exists, and many more
companies still have only limited visibility today.
In response, companies are becoming more
stringent about SER violations, with one-third
of our participants reacting to SER violations
with immediate actions without warning. At the
same time, investing in collaborative efforts and
creating incentives are found to be the effective
way for proactive SER improvements. Challenges
remain, but it is clear that SER efforts are starting
to become a central thrust of a company’s overall
supply chain strategy.
Figure 27: Future SER focus areas
Looking ahead, to what extent do you intend to focus your SER
efforts in each of the following areas?
Immediate suppliers
2
25
60
13
57
14
Internal operations
2
27
Extended supply network
3
31
51
14
Internal product design
2
35
Customers
2
50
41
44
13
12
% of respondents
Significantly reduce effort
Reduce effort
No change
Increase effort
Significantly increase effort
n=1,230
Note: Figures may not add up to 100
because of rounding
4: Risk Management
As an organisational discipline and capability, risk
management has come a long way in the past
decade or so. Major, and highly visible, global
events such as the earthquake and tsunami in
Japan and floods in Thailand in 2011 have shown
that a greater level of focus and professionalism
can pay handsome dividends when disaster strikes,
in terms of keeping production lines running,
shelves stocked and customers and shareholders
happy – as evidenced earlier in this report. And
yet risk management remains an extremely
challenging area for many supply chain leaders.
significant. A third say they are “very concerned”
about this, with a further 43% “somewhat
concerned” (see Figure 28). Those in the hi-tech
sector see this as a particularly acute risk, with 4 out
of 10 very concerned, compared with just 1 in 10 in
the retail sector (which is more able to pass on the
higher costs incurred in buying scarce commodities
to its customers). And from a geographical
standpoint, the proportion of respondents based
in the Asia-Pacific region who are very concerned
about supply shortages is double that of their peers
in EMEA – 48% to 24%.
In this year’s CSCO survey, we posed four key
questions: What are the risks you are most
concerned about? How does your organisation
go about identifying its potential exposure to
these risks? What strategies and tactics have you
adopted to mitigate them? And – perhaps most
importantly – what negative impact, if any, have
disruptions on both the supply and demand sides
had on your business?
In a volatile and uncertain global economy it is no
surprise that the risk of supply shortages should
be front of mind for supply chain executives.
Strong demand in fast-developing countries such
as China in recent years has placed enormous
strain on the supplies of some commodities,
such as steel, although there are signs that these
pressures are easing as growth in these emerging
markets slows. And, of course, supply shortages
are also a function of natural disasters and manmade incidents such as fires and strikes. Last year’s
events in Japan and Thailand halted production
at many factories and led to shortages of items
such as lithium ion batteries, LCD displays,
automotive components and food products.
Supply shortages top the risk list
Asked about risks they are concerned about in the
next 12 months, survey respondents cite shortages
of raw materials and components as the most
Figure 28: Most significant risks
How concerned are you about the following risks within your supply and demand chains in 2012-13?
Supply shortage of raw materials / components
3
7
43
16
Shipping / logistics disruptions
48
2 7
20
Incident at supplier facilities (e.g., fire, strike, technical problems)
3
50
8
20
Natural disaster affecting supplier facilities (e.g., earthquake, flood)
9
19
44
6
Financial failure of critical supplier
3
9
21
42
Legal/regulatory issues (e.g., trade policy, tax laws)
24
40
2
8
Inability of customer to fulfil production/sales targets
3
7
24
46
Financial failure of critical customer
23
38
6
11
Counterfeit products
25
32
7
10
Data security / IT incidents
3
29
36
11
Breach of intellectual property rights
30
31
11
6
Supplier ethical standards exposed as unsatisfactory
33
31
14
6
War, terrorism or other geopolitical issues
9
14
32
31
9
Not at all concerned
Neither
Somewhat unconcerned
Somewhat concerned
Very concerned
Note: Figures may not add up
to 100 because of rounding
31
32
23
19
23
25
26
19
21
26
20
23
16
15
% of respondents
n=1,312
For John Haydon, chief supply officer at
electronics giant Philips, these events exposed
the fact that few companies really understand
the lower tiers of their supply chains (suppliers
at levels 2, 3 and 4). In Philips’ case, he explains,
the impact of Japan’s earthquake and tsunami
was much greater than might have been expected
by looking at the sourcing data – just $50 million
out of his $14 billion annual procurement budget
spent directly with Japanese tier 1 suppliers.
Understanding where suppliers are sourcing their
components and raw materials is one area where
CSCOs need to drill deeper, says Haydon. But
so too is knowing which other major customers
your suppliers are serving, and ideally which are
likely to get the highest priority in the event of
supply shortages.
Risk Management
Incidents affecting supplier facilities are third
and fourth in our risk ranking overall, behind
shipping disruptions, with more than two-thirds
of respondents expressing concern about the
potential impact these could have on their value
chains. The financial failure of critical suppliers
– an issue that took centre stage for many
companies when the 2008-09 recession hit –
completes the top 5. As with supply shortages,
respondents working in hi-tech firms have
higher-than-average concerns about all of these
risks, while those in retail and chemicals appear
to be the least worried. And those located in
Asia express higher levels of concern than their
counterparts in either Europe or North America.
The risks that most exercise CSCOs after supply
shortages, however, are legal/regulatory issues
and counterfeit products. More than a quarter
are very concerned about both. Perhaps not
surprisingly, given their push into emerging
market countries such as China and growing
competition from local rivals, it is consumer
goods, healthcare and pharmaceutical firms that
express the greatest concerns both about their
products being ripped off and red tape negatively
impacting their ability to compete effectively.
At the other end of the spectrum, geopolitical
issues (including war and terrorist attacks)
generate the least concern. But this is a relative
statement – just under half (46%) of respondents
are concerned to some extent, compared with
just under a quarter who are not concerned and
a third who are neutral. And this is one of only
two types of risk (the other being supplier ethical
standards) that dip below the 50% mark. So there
are many sources of risk that organisations need
to mitigate and manage to ensure that their value
chains function as smoothly as possible.
this as a channel. The risk of critical suppliers
going out of business in the past few years has
prompted many customers to step up their
dialogue, rather than rely on classic sources of
information such as financial statements, which
can often be woefully out of date. Alongside this,
the growth of supplier relationship management
(SRM) programmes has encouraged business
partners to share and discuss risk issues more
openly – a trend that is to be applauded.
However, the average hides some wide disparities
between industry sectors and regions. Seven out
of 10 respondents in hi-tech firms say they tap
suppliers for information, compared with just
a quarter of those in retail. And 73% based in
the Americas take this approach, versus just 55%
in Asia and Australia (EMEA is in between on
63%). Retailers also rely more heavily on intuition
or management insight – a more traditional
approach – than other sectors, with 43% using it
compared with just 27% in logistics/distribution
and chemicals firms, for example.
Scott Murphy, vice-president of global supply
chain at US-based retailer Dunkin’ Donuts,
explains this by pointing out that intuition is
often good enough to answer key questions such
as “will these donuts rise enough” or “will they
Figure 29: Methods for identifying potential risks
What techniques does your company use to identify its exposure to
potential supply or demand chain risks?
Better/more frequent 65
communication with suppliers
Supply chain risk mapping 63
Business impact analysis 62
Scenario planning 54
Better/more frequent
46
communication with customers
Third-party research / intelligence 41
Quantified risk analysis 40
Mitigating risk through supplier
dialogue
So what techniques are companies using to
identify potential risks? Figure 29 shows that
better/more frequent communication with
suppliers is top of the list, with two-thirds using
Intuition or management insight 36
Failure mode & effect analysis 34
Hazard & operability studies 23
Sentiment analysis (i.e., 11
monitoring social media)
% of respondents
n=1,289
Last year’s
disasters in
Japan and
Thailand exposed
the fact that
few companies
really understand
the lower tiers
of their supply
chains.
Risk Management
look good on our shelves”? Whereas for hi-tech
firms, he suggests, a greater level of precision is
generally required.
The other primary methods of identifying risk
are the more formal and structured tools of
supply chain risk mapping (63% of respondents),
business impact analysis (62%) and scenario
planning (54%). Supply chain risk mapping – a
visual approach to pinpointing key geographic
and relationship dependencies – is most popular
among healthcare and pharmaceutical firms;
while business impact analysis (a method of
differentiating critical and non-critical activities)
and scenario planning (a long-term, strategic
assessment of various “what ifs?”) are most
widely used by CPG firms and least used by
industrial firms, according to our data.
Dunkin’ Donuts started using scenario planning
this year, explains Murphy, as a response to what
he describes as “a heightened sense of priority”
on risk management, and commodity price
volatility in particular. Scenarios considered so far
include the impact of a massive drought across
the US – work that has proved useful given the
wheat shortages experienced there this past
summer, which prompted a 43% rise in the spot
What strategies and tactics has your company adopted to mitigate the impact
of potential supply or demand chain risks?
7
3
6
3
2
3
6
7
3
6
Dual or multiple sourcing of key
materials/components/products
77
Conduct regular audits of key suppliers
66
Hold safety stocks of key materials/
components/products
65
Implement performance-based
contracts with key suppliers
49
Evaluate business continuity
plans of key suppliers
47
Implement & test business continuity
plans internally
44
Establish risk registers/reporting/
governance
35
Expand into new/undeveloped markets
33
Diversify customer base/product range
33
Maintain spare in-house
production capacity
32
Negotiate mutual aid contingency plans
(e.g., with competitors, distributors) to
maintain supply in a crisis situation
20
25
As Figure 29 shows, just 11% of our survey
respondents say they are using sentiment analysis
at present. Companies operating in the businessto-consumer realm – notably, those manufacturing
food and beverages, household and personal care
products, and hi-tech gadgets – are more likely
to be using sentiment analysis to identify risks
than those in the business-to-business domain.
This can be partly explained by the fact that these
firms, their products and their supply chains are
the subject of more extensive discussion in social
media forums – and hence there is a larger and
more frequently updated body of data to analyse.
Putting fewer eggs in the
sourcing basket
Getting better visibility of potential risks and
assessing their significance is a vital component
of any risk management initiative. But the debate
then becomes one of which strategies and tactics
Purchase supply chain risk insurance 13
% of respondents
n=1,285
16
6
9
A much newer method of identifying risks before
they happen (and potentially inflict damage) is
sentiment analysis. This uses software to track and
assess postings made on social networks such as
Twitter and Facebook according to the strength
of positive or negative views expressed. In
theory, this could be a useful early warning signal
in terms of detecting, say, troubled customers
or suppliers, politically unstable hotspots or the
likelihood of new regulations becoming law.
However, as we saw in the earlier section on
digital consumers and e-commerce, practitioners
expect the usefulness of social media to grow
significantly in the next few years, including in
B2B supply chains. Almost half of respondents
in the industrial sector believe that social media
will provide advance warning of potential supply
disruptions, for example, compared with the allsector average of 41%. So the likelihood is that
tools such as sentiment analysis will become
much more widely used in future.
Figure 30: Risk management approaches
7
market price. “We have to be able to react much
quicker than in the past,” he says.
31
15
Risk Management
to deploy in an effort to mitigate their likely
impact. Our research shows that supply-side
levers are the most widely used. Chief among
these by some margin is dual or multi-sourcing
of key materials, components and products – a
strategy favoured by more than three-quarters of
respondents (see Figure 30).
Set against a backdrop of fears about supply
shortages and the financial health of key suppliers,
this is an understandable response, albeit one that
is not always as carefully planned as it ought to
be (witness the hi-tech firms affected by the Thai
floods last year, for example, which discovered
that their alternative suppliers were based in the
same geographic area).
Companies in the chemicals sector are the most
likely to use dual or multi-sourcing to mitigate
risk, with 94% doing so. The same is true on
holding safety stocks – the third most adopted
tactic – where 82% of chemicals practitioners say
they do this compared with an all-sector average
of 65%. Chemicals firms also use regular audits
of key suppliers more often than most sectors,
albeit slightly less than those in healthcare,
pharmaceuticals and food & beverages.
Interestingly, the chemicals sector also leads
the use of demand-side levers, in terms of
diversifying their customer base and product
range, and expanding into new markets. This is
no doubt due in part to the significant level of
demand volatility and business uncertainty that
has characterised this sector of late. But the fact
that chemicals companies appear to be using a
wide range of proactive tools (and just 3% rely
on the fallback option of risk insurance) may also
be a response to the damage they have suffered
as a result of risks becoming reality.
The financial consequences of
disruption
Here, the evidence from our survey is pretty
unequivocal: disruptions usually result in
damage of one kind or another. Just 15-16%
say their organisations have not been affected
during the past two years. Loss of revenue is
the most significant consequence – almost half
of respondents say their organisations have
suffered this as a result of both supply-side and
demand-side disruptions. Lower profits are the
second most likely effect of the latter, with 39%
reporting a negative impact (see Figure 31).
On these two key measures of financial
performance, the chemicals firms again top the
list of affected sectors. Almost 6 out of 10 report
a negative impact on sales revenue from both
supply-side and demand-side disruptions, while
more than 4 out of 10 say profits have been hit.
On the supplier side, meanwhile, the second
major consequence of disruptive events (at
44%, just one percentage point behind loss of
revenue) is delays to new products, projects or
growth plans. Almost half of respondents in
the industrial sector say their companies have
Figure 31: The impact of disruptions
Which of the following consequences, if any, has your company suffered during the past
two years as a direct result of supply-side and/or demand-side disruptions?
Loss of sales/revenue
Lower profits
47
45
35
39
62
Delays to new projects/product
introduction/growth plans
Loss of customers
44
28
19
33
41
Higher cost of capital
“Chief supply chain officers need a more
structured and disciplined approach to managing
risk,” says Philips CSCO John Haydon. “Risk will
continue to move up our agenda and you’ve got
to be on top of your game.”
The likelihood is
that newer tools
for identifying
and monitoring
risk, such as
sentiment
analysis, will
become much
more widely used
in future.
Damage to image, reputation
or brand
27
14
19
16
Supply-side disruption
34
Lower share price
14
Failure to meet legal or
regulatory requirements
13
None
16
Demand-side disruption
19
8
15
% of respondents
n=1,240
Risk Management
been affected by this, compared with less than
a third of those in logistics and distribution. But
the latter’s good fortune here is counterbalanced
by the fact that a higher than average proportion
(39%) say they have lost customers as a result of
demand-side disruptions.
Although participants were not asked to put
hard numbers against these losses, it is fair to
assume that, with half of the sample working for
companies with more than $5 billion in annual
turnover, they are not trivial.
One other observation worth making is that,
despite all the headlines they generate, less than a
fifth of survey respondents say their organisations
have suffered damage to their brand or reputation
in the past two years. Those in healthcare and
pharmaceutical firms top the sector list, with
27% saying supply-side disruptions have had
a negative impact. Counterfeit products are a
particular problem, which explains why concern
about this type of risk is highest in these sectors,
as we saw earlier in this section. The World Health
Organisation reckons that in some markets half
of all the drugs sold are fakes.
The financial knock-on effects of this are
significant – estimates put the losses to established
pharmaceutical companies in the tens of billions
of dollars a year. But other examples such as
BP with the Gulf of Mexico oil spill or, more
recently, the security firm G4S’s failure to provide
sufficient personnel for the Olympic Games in
London (for which it has already taken an $80
million charge) serve as reminders that a failure
to adequately manage risk can have devastating
consequences. And supply chain professionals
are on the front line.
5: Talent Management
For the second straight year our research has
probed the topic of talent management in supply
chain. Concern persists among senior leaders
about the gap between the amount and type of
skill needed to operate today’s supply chain and
what is available in the market. In last year’s survey
we looked at which associations offered valuable
skill development (APICS – the Association for
Operations Management – the Supply Chain
Council and the Institute for Supply Management
were top), which universities provided strong
recruits (Stanford, MIT and Michigan State led)
and which consulting firms’ alumni were worth
hiring (Accenture, McKinsey). Most, however,
agreed that new hires from industry were best
qualified overall and this means poaching talent
from each other.
Another topic we studied last year was what
specific types of skill were most important to
the job. Traditional disciplines such as planning
(85% consider this essential), logistics (77%) and
sourcing (69%) were deemed most important.
Many, however, also considered a number of
enabling skills to be nearly as critical (performance
management was essential to 81% and change
management to 76%). Our Executive Advisory
Board felt that much of this information was
unlikely to change significantly from one year to
the next and so these questions were not asked
in 2012.
The takeaway then, which we assume remains
valid as a basis for planning now, is that
technical supply chain skills are not enough.
Talent requirements include many of the same
business skills needed to succeed in roles such
as sales or finance. Supply chain does not exist
merely to serve the business, but instead is integral
to the business.
For 2012 we repeated a couple of questions from
2011 to begin developing a time series view. The
repeat questions were around what elements of
talent management are most challenging and
what hurts most when talented people leave. As
we’ll see below, the data for 2012 shows some
worsening of the talent problem across the
board. New questions this year were designed
to better understand the talent management
issue globally, including a specific question on
staffing concerns in China as well as country-bycountry assessments of “best value for money”
and “biggest risk” talent markets. The data casts
doubt on the oversimplified notion of low-cost
country sourcing as a sure bet to cut costs. Talent
management in the global supply chain of 2012
is more complex and subtle than ever.
Technical
supply chain
skills are not
enough. Talent
requirements
include many
of the same
business skills
needed to
succeed in roles
such as sales or
finance.
Talent challenges are becoming
more severe
Building and managing a team in today’s global
supply chain occupies a huge share of senior
leaders’ time and accounts for much of their
angst. The problem is not as simple as plugging
brains into the right slots and letting them run.
Compared to building a sales team, for instance,
which generally operates as a collection of
individual producers supported by a common
infrastructure, supply chain organisations are
deeply interdependent, with each function (plan,
source, make, deliver) affecting the success of all
the others. To make matters worse, most young
people entering careers still have little awareness
of supply chain as a profession.
Figure 32: Knowledge worker challenges
Finding talent
83
62
Hiring talent
77
50
Career progression
66
66
Retaining talent
66
50
Developing talent
63
50
Relocating talent^
55
Measuring talent
47
40
% of respondents saying somewhat/extremely challenging
^Not included in 2011
n=1,302
2012
2011
Talent Management
Across the lifecycle of talent management much
of the pain is still at the front end – finding
and hiring talent. These tasks have gotten
substantially tougher since last year, now ranking
decisively as the top two problems leaders face
(see Figure 32). Also more challenging in 2012
than in 2011 are retaining talent, developing
skills among existing staff, and even measuring
and differentiating talent among staff.
It is likely that improving economic conditions
have contributed to a tightening in the talent
market for supply chain roles over the past
year. Considering that global economic growth
remains stuck in a relatively low gear, however,
it should be worrying that by an overwhelming
17:1 ratio our 1,385 survey participants feel that
finding talent is very challenging. What happens
when business starts to boom again?
The only area in which we saw meaningful
improvement from last year was “offering staff
a compelling career progression” – the top pain
point in last year’s survey. Although two-thirds
of respondents in both 2011 and 2012 say this
is challenging, the proportion saying “extremely
challenging” fell from 25% to 18% year on
year. This shift probably reflects a concerted
Figure 33: Talent management challenges by industry
4.50
*1-5 scale, where above 3.00 = challenging
Weighted average rating*
4.00
3.50
3.00
2.50
Chemicals
Healthcare
& Pharma
Food &
Beverage
Industrial
Hi Tech
CPG
Finding talent
Developing talent
Measuring talent
Hiring talent
Relocating talent
Career progression
Logistics &
Distribution
Retaining talent
n=1,302
Retail
effort from the top to cultivate future leaders.
Career progression is especially susceptible to
committed effort by the senior supply chain
executives who care about retaining their best
people and are willing to lay out the details of
how to get ahead. Leadership here at least is
already making a difference.
When data for this question are cut by industry
we see little variation in the rank order of which
talent management tasks are most challenging.
Food & beverage respondents seem to feel the
greatest pain in finding talent, perhaps because
of the increasing focus in that sector on food
safety compliance. In fact, the Coca-Cola
Company recently partnered with Michigan
State University specifically to improve its
capabilities here.
The data also shows a somewhat surprising result
in hi tech where finding talent, although still the
top overall challenge, is actually perceived to
be less severe than in other sectors. Anecdotal
evidence suggests that talent searches in hi tech
are advantaged somewhat by an active network
of existing professionals who know who to
ask for referrals. Also noteworthy is the high
score retailers give to the challenge of offering
a compelling career progression. Other research
SCM World has conducted in the past year may
shed some light here, as it appears this sector is
still wrestling with how supply chain interacts
with other retail-specific functions such as
merchandising and store operations.
Viewing talent
management challenges
by geography shows that finding talent is
problematic everywhere, but that retaining it is
especially difficult in Asia. Much of the poaching
that goes on appears to happen in Asia. This
finding confirms other data in this survey which
indicates that talent markets in the region,
especially China, are rich with technical and
even business knowledge, but that they are very
high risk and, for many, represent worse value
for money than traditional, high-cost labour
markets, especially the United States.
Talent Management
The problems associated with losing talented
people start with the disruption of operations,
but may include lasting impacts arising from
deficits created around knowhow – both
process and product. In aggregate, just over
half of respondents in 2011 said retention of
talent was either “somewhat” or “extremely”
challenging. In 2012, this has risen to twothirds. The ratio of those who have a retention
problem against those who don’t is now 6:1,
proving that recruiting talent from competitors
is exploding. Accordingly, the level of concern
associated with lost talent has also risen in the
past year.
In 2011 the top concern overall was lost process
intellectual property. A third of all respondents
last year were “very concerned” about this
problem and nearly 70% were at least “somewhat
concerned” – more than any other issue. This
year the emphasis has clearly shifted toward
concerns about near-term impacts, especially
“cost of transition to replacement” (two-thirds
are at least somewhat concerned about this).
Even “lost production”, which is the least vexing
concern overall, nonetheless saw a big jump from
2011 to 2012 (see Figure 35).
These results could reflect an improved economy
and less tolerance for production disruptions, but
considering that we are nowhere near booming
globally, one wonders whether such shortterm impacts could become serious problems
in the next two to three years. Talent retention
initiatives may be worth starting now before the
pressure builds.
Pain felt when talent is lost viewed by industry
confirms the same rank order importance across
all sectors. Chemicals companies notably fear
production losses less than other industries,
probably because of the asset-intensive
manufacturing process. Retail has substantially
fewer concerns about product IP, probably
reflecting the relative lack of manufacturing
in the business for most. Hi-tech businesses
suffer most overall from all worries borne of
lost talent, while CPG suffers least. Hi tech’s
volatile environment and active talent market
likely explain the sector’s problems, while
CPG supply chains may benefit from a stable
and sophisticated view of the function at the
board level. Leading CPG companies (Procter
& Gamble, Unilever, PepsiCo, Clorox, etc) are
relatively strategic in their approach to supply
chain management and thus may have more
mature succession and contingency planning
already in place.
In 2011, just
over half of
respondents
said retention
of talent was
‘somewhat’
or ‘extremely’
challenging. In
2012, this has
risen to twothirds.
By geography, our data again shows higher
levels of concern where growth is fastest – Asia,
followed by the Americas, and last in Europe
(see Figure 36). Europe probably also reflects
some degree of greater labour market stability,
supported in part by legal structures and in part
by cultural traditions. A number of respondents
also specified other concerns when talent is lost
including negative impacts on the company’s
reputation, lost or damaged relationships with
key suppliers and adverse effects on morale
among remaining staff.
Figure 34: Talent management challenges by location
4.50
*1-5 scale, where above 3.00 = challenging
Weighted average rating*
Volatile talent markets are
hurting operations more in 2012
than 2011
4.00
3.50
3.00
Finding
talent
EMEA
Hiring
talent
APAC
Developing
talent
Americas
Relocating
talent
n=1,302
Measuring
talent
Career
Retaining
progression talent
Talent Management
The biggest
challenges
with knowledge
workers in China
reflect a tight
pool for talent.
The top concern
is rising costs,
closely followed
by poor retention.
China. At the bottom of the list overall were “lack
of technical skills” and “lack of business skills”.
Where once quality concerns, language barriers
and competence may have been problematic
it appears these issues are fading. To be fair,
though, the ratio of respondents who were
concerned against those who are unconcerned
is still at least 2:1 in these areas, meaning that
knowledge workers in China are not yet seen
as the equal of those in, say, the United States
or Germany (more of which below). But this is
by no means the biggest talent challenge facing
supply chain leaders.
Talent in China: no longer a ‘low
cost’ country
In preparing this year’s survey, substantial input
from our Executive Advisory Board drove us to
look at the talent question specific to geographies
known to be problematic. Chief among these,
of course, is China. In last year’s survey an
entire section was dedicated to globalisation and
emerging markets. One of the most obvious
spikes in the data was in the degree to which
supply chain executives around the world rely
on China for sourcing, manufacturing and even
product design. What started many years ago as
a move to tap cheap labour has since become
a deeply symbiotic relationship between brand
owners, retailers and other product creators
and the technically sophisticated supply base of
China.
The biggest challenges with knowledge workers
in China instead reflect a tight pool for talent.
The top concern, and by a ratio of 6:1, is rising
costs, followed closely by poor retention (see
Figure 38). The dynamic of the market for talent
in China appears to be heavily influenced by
poaching. Our data does not so much point to a
limited talent pool (ranked joint third overall as
a concern) as to a talent pool made up of people
willing to be lured away from rivals for more
money. As we’ll see below, this may translate into
substantial risk for businesses which suffer high
short-term costs of transition. In other words,
betting on building a great, long-term supply
chain team in China may not be so smart.
These emerging markets are also now essential
sources of demand and growth, meaning that
“low-cost country sourcing” has nearly run its
course. Markets are global for money, products
and talent and China is at the centre of it all.
To test the question of whether talent problems
are different here we asked respondents to rank
their top concerns about knowledge workers in
Figure 35: Impact of lost talent
Figure 36: Impact of lost talent by location
4.50
Lost process IP
*1-5 scale, where above 3.00 = concerning
75
61
4.00
Weighted average rating*
Cost of transition
66
69
Lost product IP
54
47
Lost production
49
31
% of respondents
n=1,227
2012
2011
3.50
3.00
2.50
Lost production
EMEA
Lost process IP
APAC
Lost product IP
Cost of transition
2011
Americas
n=1,294
Talent Management
Industry cuts of the data confirm the overall
rankings of where concerns are highest (see
Figure 39). Hi tech predictably stands out as
feeling these cost and retention problems worst,
although industrial and chemicals businesses
are not far behind. CPG and food & beverage
are less exposed as naturally regional or even
country-based supply chains, but retail, whose
China sourcing strategies (think Wal-Mart)
initiated much of the rush to low-cost country
sourcing, seems to see a serious cost problem.
Bang for buck in supply chain
talent? Try the US or Germany
In an effort to understand how talent is valued
by supply chain leaders holistically we asked
two simple questions: where is the “best value
for money” and where is the “biggest risk”?
These questions were structured with a long list
of countries to choose from and the instruction
to rank the top five against each of the criteria.
No explicit definition was offered for either
“best value for money” or “biggest risk”,
leaving respondents to use their judgment in
making selections.
The results were somewhat surprising. We
used an inverse point system (five points for a
#1 rank, one point for a #5 rank) to grade the
overall “best value” of each country included
and found, by a wide margin, that the United
States came out on top. In part this must reflect
the size of the country, since the number
of times the US was ranked anywhere was
highest overall (880 respondents ranked the
Figure 37: Impact of lost talent by sector
4.50
*1-5 scale, where above 3.00 = concerning
4.00
Weighted average rating*
As we saw earlier in this section, supply chain
leaders consider the issue of relocating talent
internationally, to countries such as China or
Mexico, to be a relatively low-level concern.
Anecdotal evidence, for instance from PC maker
Lenovo, suggests that global leadership of a
supply chain organisation can be assembled from
all over the world, even on a Chinese foundation.
China may be essential to most global supply
chain strategic designs, but it need not, and
probably should not, be strictly Chinese.
3.50
3.00
2.50
Chemical
Healthcare Food &
& Pharma Beverage
Industrial
Lost production
Lost product IP
Lost process IP
Cost of transition
Hi Tech
CPG
Logistics
& Distrib
Retail
n=1,294
Figure 38: Concerns about knowledge workers in China
Rising costs
78 48
25 27
Poor retention
49 9 6
36
2930
3343
Lack of business skills
5 10 10 9
27
Limited talent pool
5 11 14 9
28
50
22 15
33
44 35
3232
34
43
Lack of technical skills
811
12 12
31
13
14
14 7
4232
34
9
118
Other
17
32
17
4
31
45
30 10
10
% of respondents
Not at all concerned
Neither
Very concerned
Somewhat unconcerned
Somewhat concerned
n=1,234
Note: Figures may not add up to
100 because of rounding
Talent Management
US somewhere between #1 and #5). However,
nearly as many (749) ranked China somewhere
on the spectrum, but proportionally far more
put it further down. Recalling data from last
year’s survey also may help with context – 37%
of respondents listed China as their number one
sourcing location against only 20% who listed
the US. In other words, the ranking does not
only reflect size, but does capture at least some
variation in perceived value.
After the US, Germany, India and China all saw
substantial confidence from our respondents
in terms of value for money. In the case of
Germany, few would argue that these results
reflect low costs. German employees are
notoriously difficult to fire and far from low paid.
They do, however, have a reputation for quality
and reliability that appears to more than justify
the higher costs. India, in contrast, scored worse
than both China and Brazil in last year’s survey
questions about risk and reliability, suggesting
that costs there are low enough to put up with
a few mishaps.
The implications of this data should not be
over-interpreted. It does appear that supply
chain leaders see good value for money in highcost countries and are able to weigh the trade-
offs accordingly. It also seems that the rising
costs in China referred to above have cut into its
appeal. Given time series data on this question
one might begin to see advance warning of
geographies where talent bargains can be found,
as well as those less worthy of new investment
in permanent staff.
Talent risk: China’s dark side
The results of our “value for money” question
show China still scores well as a place to find
talent, despite abundant evidence that costs are
rising fast and in some regions (Shanghai, for
instance) are no longer at all low. Where Chinese
talent markets do pose a problem, however, is
in terms of risk. Data discussed above shows a
volatile market in which employers (or customers
of closely tied contract manufacturers) must be
vigilant about threats employees pose to business
continuity, cost and intellectual property.
Turning to the top five “biggest risk” talent
markets (where risk is not defined, but instead
is meant to encompass any and all worries
supply chain leaders have about talent in any
given geography), the data in aggregate shows
overwhelmingly that our respondents rank China
as the riskiest. Again, scale matters – the US is the
Figure 39: Concerns about knowledge workers in China by sector
4.50
*1-5 scale, where above 3.00 = concerning
4.00
Weighted average rating*
Risk-averse
supply chain
leaders would be
wise to scrutinise
plans for new
hiring in China
before putting
too many eggs in
one basket.
3.50
3.00
4 2.50
Chemicals
Healthcare
& Pharma
Food &
Beverage
Industrial
Limited talent pool
Lack of business skills
Lack of technical skills
Poor retention
Hi Tech
CPG
Rising costs
n=1,172
Logistics &
Distribution
Retail
Talent Management
second biggest risk market with 560 individual
respondents ranking it as one of their top five.
For comparison, however, consider that whereas
166 individuals ranked the US as the number one
biggest risk, 444 chose China for this distinction.
Risk-averse supply chain leaders would be wise
to scrutinise plans for new hiring in China before
putting too many eggs in one basket.
Looking for stable, reliable talent pools in supply
chain is one way to diversify away from some
risk. Many global supply chain organisations are
currently in the process of regionalising their
structures. Often the primary goal is proximity
to customers, but an added benefit is limitation
of risk. Among the most appealing in terms of
low talent risk is Germany, which is ninth overall
on the risk dimension but second overall on
value for money. The reverse is true for Mexico,
which ranks near the bottom overall on value for
money but near the top for risk.
It seems that in much the same way that risk
mitigation strategies call for dual or multisourcing of supply, so too might organisational
strategy benefit from a diverse talent pool.
Figure 40: Best value talent markets
US
2.61
Germany
2.13
India
2.12
China
2.11
UK
2.01
Singapore
1.89
Brazil
1.82
Eastern Europe
1.77
Japan
1.60
Taiwan
1.59
Mexico
1.58
Netherlands
1.55
France
1.41
South Korea
1.38
Weighted average rating
(1-5, where 5=highest value)
n=1,172
Figure 41: Biggest risk talent markets
China
2.98
US
2.11
India
2.05
Brazil
2.03
Mexico
1.98
UK
1.74
Eastern Europe
1.72
Taiwan
1.72
Germany
1.69
Singapore
1.66
France
1.60
Japan
1.59
South Korea
1.58
Netherlands
1.22
Weighted average rating
(1-5, where 5=highest value)
n=1,108
Conclusions
“Be careful what you wish for, because you just might get it,” goes an old saying. This little bit of
wisdom says a lot about the times as captured in the 1,385 survey responses we tallied for this year’s
Chief Supply Chain Officer Survey.
For a discipline accustomed to feeling underappreciated, the results of this year’s survey promise
great things for the future. Senior business leadership appears not only to grasp the role supply chain
plays in making money, but also increasingly to expect direct and unique contributions to everything
from new product development to brand equity. The “new news” includes heightened awareness
of the need for risk management as a core duty of the supply chain and a tightening of the vice on
overall social and environmental responsibility. Where once such matters were seen as frills worthy of
attention only after every box had been shipped and every penny had been pinched, now it seems the
boss links these things to his or her personal success.
If accountability is on the rise, so too are the drivers of productivity in supply chain. Digital demand
looks ready to force tremendous new levels of complexity upstream in the supply chain as consumers’
expectations inflate. The potential for deeper demand sensing and management implied with this
digital revolution is exciting. Unfortunately, it appears that the component and material supply base
may find itself playing catch-up in terms of manufacturing and distribution agility.
Perhaps most important, the deepening understanding of how supply chain operations pull specific
levers to impact customers and profits means that innovation is now a necessity. Far from merely
enabling the business, supply chain in many organisations today extends the envelope of competitive
strategy with new business models or previously unimagined levels of performance.
A damper on this otherwise rosy outlook for the supply chain profession is, ironically, our own human
capital. Finding and managing talent has been a sore point for some time now, but this year’s data
suggests the problem is worsening. At one level it is apparent that global supply chain no longer
means low-cost country sourcing with all the brains at headquarters. At another level it is clear that
dependencies on key people have become too important. The bigger, more strategic role of supply
chain seems to rest on too few shoulders, leaving organisations with less resilience than they need.
Looking ahead, supply chain strategists may feel an urgent need to consolidate some of the organisational
power that has built up under the CSCO title before reaching for more. Expectations of our collective
ability to handle the risks and responsibilities now assigned to supply chain could quickly outrun our
skills. Credibility at the board level takes a long time to earn, but it could be lost quickly.
Supply chain
strategists
may feel an
urgent need
to consolidate
some of the
organisational
power that has
built up under
the CSCO title
before reaching
for more.
About the research
This is the third annual Chief Supply Chain
Officer Report published by SCM World.
Invitations to complete an online survey
were sent to corporate members of SCM
World’s global community and to other supply
chain, procurement, operations and relevant
practitioners on our database in July 2012. In
total, 1,385 completed responses were received
during the two-week survey period and the key
demographics of this sample are as follows.
Location: An equal number of respondents are based in the
Americas and EMEA, with just under a quarter located in the
Asia-Pacific region.
1
Europe, Middle
East & Africa
38
Asia & Australia
38
North & South
America
Rest of the World
Industry sector: Hi-tech, consumer goods and industrial
firms drew the largest number of respondents. The
healthcare/pharmaceutical, logistics and distribution, food
23
and beverage, chemicals and retail sectors also each had
at least 50 respondents and have been included in sector-
% of respondents
n=1,385
specific analysis throughout this report.
Company size: In terms of revenue, half of the respondents
Hi Tech 25
work for companies with more than $5bn in annual sales, with
CPG 18
another fifth in the $1bn-5bn bracket. Just under a fifth of the
Industrial 10
Healthcare &
Pharmaceutical 8
Logistics & 7
Distribution
Food &
Beverage 7
sample did not disclose this information.
25
Chemicals 5
31
Retail 4
Under $1bn
Media &
Telecommunications 3
$1bn-$5bn
Professional Services 3
$5bn-$10bn
Utilities & Energy 2
$10bn-$25bn
Automotive 2
$25bn+
Agriculture & Mining 2
17
Aerospace & Defence 1
Fabric & Apparel 1
Construction &
Engineering 1
19
8
% of respondents
n=1,127
Software 1
Paper & Packaging 1
% of respondents
n=1,385
Job function: Almost half of respondents work in supply chain,
with 13% each in procurement and operations. Just under a
Job level: Four out of 10 respondents are at senior executive,
vice president or director level, with just under half at manager
or head of department level.
tenth are general managers.
8
14
Supply Chain 47
Operations 13
Procurement 13
SVP/EVP/Board
General Management 9
Manufacturing/
Production 6
VP/Director
Engineering 2
32
Manager/Head
Transport &
Distribution 2
Quality Assurance 1
47
Finance 1
Other
IT/IS/Technology 1
Other 3
% of respondents
n=1,385
% of respondents
n=1,385
SCM World, a RaptureWorld company, is the leading global community and think-tank for senior
level supply chain executives. Hosting a dynamic and interactive annual programme of end-user and
academic-led webinars, events and research projects for its members, SCM World is the de-facto
benchmark for forward-thinking supply chain leaders and their global teams to stay current through
cutting-edge content. Organisations from across multiple industry verticals use SCM World to further
enhance supply chain learning and development, including the likes of HP, Nestlé, Tyco, RIM, Nike,
GlaxoSmithKline, Cisco, Schneider Electric, Shell, Motorola, The Dow Chemical Co, BASF, Applied
Materials and many more.
www.scmworld.com
Contact:
Geraint John
Senior Vice President, Research
+44 (0) 20 7357 8321
geraint.john@scmworld.com
Report sponsor
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