Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
  - Aug. 14, 2012 -  

IDC Manufacturing Insights Study Finds Procurement Seen as Top Driver to Reduce Overall Supply Chain Costs

Improving Forecast Accuracy Viewed as Critical, but Is that a False Opportunity?

  by SCDigest Editorial Staff  

The analysts at IDC Manufacturing Insights have just released a report based on a major survey of supply chain executives and managers, among the highlights of which is that companies see the highest opportunity for supply chain cost reduction from better procurement effectiveness and deployment of Lean/Six Sigma methodologies more deeply into their operations.

SCDigest Says:
Ellis and Knickle had the same reaction we did to this data, commenting that "What seems a bit odd is the fact that manufacturers still see responsiveness through the lens of increase demand forecast accuracy.

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The study surveyed more than 300 supply chain professionals in manufacturing companies across a wide range of titles and types of firms, both in terms of size and industry sector.
The type of manufacturer was almost even split four ways along the segmentation scheme IDC adopted a few years ago, placing manufacturers as being asset-oriented (e.g., chemicals), brand-oriented (e.g., consumer goods companies), engineering-oriented (automotive, aerospace), or technology-oriented (e.g., high tech).

About 48% of respondents identified themselves as "product-focused' companies, versus roughly 36% saying they were cost-focused, and another 16% saying they were service-focused.

Report authors Simon Ellis and Kimberly Knickle suggest there are four key trends most impacting the manufacturing supply chain environment right now:

(1) The "empowered consumer" who has access to considerable information and alternatives, and is increasingly demanding very rapid fulfillment.

(2) Complex and extended global supply networks that are a consequence of globalization and the chase for "low cost" manufacturing - but the expected results often are not being realized.

(3) Increasingly volatile demand that has become the "new norm," driven by many factors that together "conspire to drive forecast accuracy down and demand volatility up, requiring greater supply chain agility if service performance is to not suffer.

(4) Growing regulation, particularly in the area of traceability.

(5) Increasingly volatile and generally rising direct input costs, especially as many manufacturers lack the ability to make price increases stick. (See Will Companies Retain Ownership of Products they Sell to Harvest and Re-Use the Materials they Contain?)

Although more companies identified themselves as product-centric rather than cost or service-centric, reducing overall costs was the top rated supply chain priority. Ellis and Knickle suggest that there is still some discrepancy between 'what we say we do' and 'what we do,' though we would argue this may be simply that the supply chain views product innovation as mostly engineering and marketing's job. (We'll save the debate over the supply chains role in innovation for another time.)

After reducing costs came "responding more quickly to supply and demand changes," followed by "improve product quality/safety."

So, what tools and techniques to supply chain managers see as most fruitful to reduce overall supply chain costs?

Perhaps somewhat surprisingly, "reducing procurement costs" dominated the results, with some 35% of respondents citing it as the top opportunity, versus just 18% or so for the number 2 response, which was "establish or expand Lean/Six Sigma" type improvement methodologies. Just behind was reducing transportation and logistics costs, as shown in the figure below.

Top Tactics to Reduce Supply Chain Costs




Does that ranking reflect a simple reflex to look at purchasing to find a way to beat suppliers up for lower prices?

Not really, IDC says, given the increasing concern about inflation and input costs, and the reality that purchased materials are generally the largest single source of cost for manufacturing supply chains.

(Supply Chain Trends and Issues Article - Continued Below)



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How will companies tackle the second ranked priority, which was becoming more agile in responding to supply and demand changes?

Here, the top answer was - as usual - "improve forecast accuracy," the perennial solution to many supply chain problems that just never seem to get here. As shown the graphic below, that choice was followed by "improving manufacturing execution/factory floor flexibility."

Top Tactics for Improving Supply Chain Responsiveness



Ellis and Knickle had the same reaction we did to this data, commenting that "What seems a bit odd is the fact that manufacturers still see responsiveness through the lens of increase demand forecast accuracy. Indeed, improving the forecast was the top activity chosen as a way to drive responsiveness, yet it isn't really going to help companies actually be more responsive, or agile."

Later in the report, the survey found generally decent but not tremendous levels of satisfaction with their company's current IT capabilities and performance, with all the areas surveyed (e.g., metric systems, visibility, etc.) coming in with scores between 3.2 and 3.5 on a scale of 1-5, with 5 being the most satisfied.

Interestingly, capabilities relative to collaboration with customers was ranked the lowest in satisfaction, though it still achieved a 3.2 score.

Based on other research done earlier this year, IDC found the three highest priorities for IT investment for manufacturers are: (1) Sales and Operations Planning support; (2) production scheduling; (3) inventory optimization.

Among some concluding comments, Ellis and Knickle argue that "Companies should consider an appropriate trade-off of forecasting and responsiveness in terms of both a competitive capability to manage demand forecasting/supply planning and the ability to respond adequately when the forecast proves to be wrong."

They continue: "Certainly, companies should be investing in improving demand planning and forecasting capabilities as needed, but the prioritized role of production planning in 2012 suggests a need for more flexible and agile factory performance."

Does anything is this report especially strike you, or is different than your perspective? At what point does chasing improved forecast accuracy deliver decreasing returns? Let us know your thoughts at the Feedback sector below.

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Recent Feedback

Great data from a broad set of practitioners.  I'm surprised there's such emphasis on increasing demand forecast accuracy.  It seems like there will be diminishing returns there as we may have pushed that boulder as far up the hill as we can.  We're hearing more from our peers about agility and responsiveness being the more affordable, more achievable place for investment. 

Accept the volatility in demand and find better ways to sense change and collaborate with your trading partners to course correct profitably.  It's much more actionable than hoping a few people get the forecast right. 

Sean Rollings
VP Product Marketing
Aug, 14 2012

 "Perennial" indeed.  As someone who used to do forecasting for a living, and still teaches the basics to students, I would point out that this is going to get harder, not easier, as lead times increase and markets get more global.  

I fully agree (and advocate to my students) that being able to flex the supply chain, whether on the inbound or outbound side, or in the factory, is by far the likeliest approach for improvement.  

Even if you can really model consumer behavior (and I think the jury is still out, big data or not), how realistic is it to also model your competition's responses?

I think surprises will continue to happen, and the best way to handle them is to be prepared.

Arnold Maltz
Assoc Prof
Aug, 15 2012