Global Supply Chain Management excellence study

Joint study by Roland Berger Strategy Consultants, Stanford University und ETH Zurich: Supply chain management boosts return on assets

• 259 participants from 234 companies in 16 countries with average annual sales of EUR 15.32 billion
• The majority of companies that have adapted their supply chain to the strategic requirements of their product portfolio achieve a return on assets (ROA) that is 4 to 5 percentage points higher than at companies with no supply chain adjustment
• Careful supplier selection and joint use of information are key to flexibility in procurement
• Additional data for engineered products, the process industry, consumer goods, electronics and the automotive sector

Companies that adapt their supply chain and structure it to fit the special requirements of their products are much more successful than average. In collaborating with two of the world's leading universities, Roland Berger Strategy Consultants has proved for the first time that companies can boost their performance by creating an optimum supply chain fit. Companies that have improved their supply chain in this way achieve a return on assets 4 to 5 percentage points above that of companies with no supply chain adaptation. In terms of sales growth and EBIT margin, the improvement is between 3 and 5 percentage points. Looking at return on capital employed (ROCE), the figures are even 12 to 16 percentage points higher. These are the findings of the Roland Berger study "Global supply chain management excellence". The study is based on a survey among 259 participants from 234 companies, particularly in the European and American process industry and including many blue chip companies with sales of EUR 1 billion or more. The study concludes that in supply chain management (SCM) it is essential to adapt the structure of the supply chain to the requirements of the product range: standard products need a highly efficient supply chain structure, while for differentiated products response time is the most important factor.

"Especially in the consumer goods and electronics industry, companies with supply chain fit achieve substantially better results. In the electronics industry for example, ROA figures are up to 10 percentage points above average," says Stephan Wagner, Professor of Logistics Management at ETH Zurich. "By making strategic decisions about their supply chain structure, companies directly influence the two key drivers for improving ROA: asset productivity and EBIT margin," adds Robert Ohmayer, Partner at Roland Berger Strategy Consultants and also one of the study's authors.

The specific needs of a company arise firstly from the special characteristics of its products: standard products with a long usage period, little fluctuation in demand, accurate forecasting and only occasional order changes by customers require an efficient supply chain structure with low costs, high inventory turnover and high capacity utilization. By contrast, products with a high degree of differentiation are characterized by a short product lifecycle, numerous product variants, lower accuracy of forecasting and more frequent order changes. That is why they need a faster-reacting supply chain structure with greater security of supply, high levels of buffer stock, large capacity and a high level of customer service. "Bayer Schering AG, for example, strategically optimized its supply chain with a view to being able to respond quickly. The company now achieves excellent ROCE of 25.2% with average annual sales growth of 7.5% (2004-2006)."

The percentage of companies that have adapted their supply chain to the requirements of their products varies from 36% in the process industry to 76% in consumer goods. "Apparently in all industries there are still plenty of companies without a good supply chain fit," says Steffen Kilimann, co-author of the study and Project Manager at Roland Berger. "Even though the average ROA of companies with supply chain fit was 10% for standard-product producers and 9% for differentiated-product producers in 2004-2006. That is 4 to 5 percentage points more than among companies with no supply chain fit." Similar results were calculated for sales growth and EBIT margin: companies with standard products and an optimized supply chain achieved 11% sales growth (vs. 6%) and 10% EBIT margin (vs. 6%). Manufacturers of differentiated products had sales growth of 12% (vs. 8%) and an EBIT margin of 10% (vs. 8%). "The results clearly show the direct influence of a company's current supply chain management on its profitability," says Pan Grosse-Ruyken from ETH Zurich, adding that "companies use dynamic supply chains as a strategic competitive advantage to generate above-average returns."

Demand planning and forecasting becoming more important

While companies have concentrated on optimizing supply chains, especially cutting costs, over the past two years, it is now time for them to turn to improving demand planning and forecasting. Most companies without optimized SCM have now realized that action is needed," says Robert Ohmayer.