succeeding in a dynamic world: supply management in the decade ahead

Succeeding in a Dynamic World: Supply Management

in the Decade Ahead

Authors> Phillip L. Carter, DBA

Executive Director for CAPS Research and

Professor of Supply Chain Management, Harold E.

Fearon Chair in Purchasing, W. P. Carey School of

Business at Arizona State University

> Joseph R. Carter, DBA, C.P.M. Avnet Professor, Department of Supply Chain

Management for W. P. Carey School of Business

at Arizona State University

> Robert M. Monczka, Ph.D., C.P.M. Director, Strategic Sourcing and Supply Chain

Strategy Research for CAPS Research, and

Distinguished Research and ISM Professor of

Supply Chain Management for the W. P. Carey

School of Business at Arizona State University

> John D. Blascovich Partner

A.T. Kearney, Inc.

> Thomas H. Slaight Partner

A.T. Kearney, Inc.

> William J. Markham Fellow Emeritus

A.T. Kearney, Inc.

2007A Joint Research Initiative of

CAPS Research

Institute for Supply Management™

A.T. Kearney, Inc.

CAPSFutureStudyCover07.indd 1 9/27/07 8:09:38 AM

Succeeding in a Dynamic World: Supply Management in the Decade Ahead

A Joint Research Initiative of:CAPS Research

Institute for Supply ManagementA.T. Kearney, Inc.

Phillip L. Carter, DBA, Executive Director for CAPS Research and Professor of Supply Chain Management, Harold E. Fearon Chair in Purchasing,

W. P. Carey School of Business at Arizona State University

Joseph R. Carter, DBA, C.P.M., Avnet Professor, Department of Supply Chain Management for W. P. Carey School of Business at Arizona State University

Robert M. Monczka, Ph.D., C.P.M., Director, Strategic Sourcing and Supply Chain StrategyResearch for CAPS Research, and Distinguished Research and ISM Professor of Supply Chain

Management for the W. P. Carey School of Business at Arizona State University

John D. BlascovichPartner

A.T. Kearney, Inc.

Thomas H. SlaightPartner

A.T. Kearney, Inc.

William J. MarkhamFellow Emeritus

A.T. Kearney, Inc.

Copyright © 2007 Institute for Supply Management™ and W. P. Carey School of Business at Arizona State University.

All rights reserved. Contents may not be reproduced in whole or in part without the express permission of CAPS Research.

The lead researchers for this study would like to thank the supply executives of the more than 260 companies thatparticipated in this study for their time and contributions. The research was greatly enriched by their insights andviewpoints on the challenges and opportunities that lie ahead.

The lead researchers would also like to publicly acknowledge and thank the following members of the extendedresearch team for their contributions to this effort.

• Nadine Schnell, Mary Alice McHale, Julie Couch, Stephanie Tsai, Jitender Uppal and Roshni Puri of A.T.Kearney, Inc. developed the web-based version of the survey questionnaire, managed the technical aspects ofits use and developed many of the data extract and analysis tools used by the team.

• Debbie Maciejewski of CAPS Research managed the solicitation process for the CPO focus groups, conferencecalls and interviews for the web survey, and administered the ongoing communications with surveyrespondents.

• Rebecca Sweda, Tuvan Sencalis, Matt Skindzier, Michael Phillips, Arthurine Barned and Deepa Bangaru ofA.T. Kearney, Inc. provided significant analytical and document preparation support throughout the research.

• Inigo Aranzabal, Stephen Easton, Jules Goffre, Mui-Fong Goh, Federico Mariscotti, Jesper Schade, HasanShafi, Per Thompsen, Alfredo Tsutumi, Jan Fokke van den Bosch and Danny Wyatt of A.T. Kearney, Inc.organized and led CPO focus groups and coordinated web survey participation by supply executives in theEuropean, Latin American and Asia/Pacific regions.

• Paul Laudicina, managing officer and Chairman of the Board of A.T. Kearney, Inc., provided valuableguidance and support throughout this effort.

• Jim Brown of A.T. Kearney, Inc., Steve Wade of CAPS Research and Steve Gozdecki, an independent writer,provided ongoing editorial guidance and communications support for the study.

• Sung Kang, Ph.D. candidate in the Department of Supply Chain Management in the W. P. Carey School ofBusiness at Arizona State University, conducted sophistical statistical analysis of the survey results, often withvery short lead times.

• Yusoon Kim, Ph.D. candidate in the Department of Supply Chain Management in the W. P. Carey School ofBusiness at Arizona State University, conducted literature reviews and investigated the feasibility of using awiki as a data collection tool.

• Steve Koch, IS/applications analyst at CAPS Research, provided IS support for the project and pioneered thedevelopment of a wiki for use with the project.

The principal researchers would also like to thank the Institute for Supply Management, and in particular its CEOPaul Novak, for ISM’s significant funding of the research project and for providing access to its membership toreport on the research results at the 2007 Annual International Supply Management Conference and in InsideSupply Management magazine.

ISBN 0-945968-70-1

2 Succeeding in a Dynamic World: Supply Management in the Decade Ahead

Acknowledgements

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Index of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

External Forces Will Affect All Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Tomorrow’s Business Models and Strategies Will Raise the Bar for Supply . . . . . 9Supply Must Pursue Seven Key Strategies in the Coming Decade. . . . . . . . . . . . 9

Section I — About the Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Chapter 1 — Background and Previous Research Findings . . . . . . . . . . . . . . . . . . 13

A Look Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13The Need for New Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Chapter 2 — Research Design and Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Research Participant Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Report Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Section II — How the Environment for Supply Management Will Change . . . . . . 19Chapter 3 — Forces Driving Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Survey Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Complex Interactions Between Forces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20What Supply Managers Foresee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Chapter 4 — Impacts on Business Models and Strategies . . . . . . . . . . . . . . . . . . . 28Keys to Future Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Complex Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Other Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Chapter 5 — New and Expanded Missions, Goals and Performance Expectations for Supply Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Survey Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Delivering More Innovation From Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . . . 32Contributing More Broadly to Revenue Generation . . . . . . . . . . . . . . . . . . . . . 34Anticipating and Managing Supply Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Expanding Cost Management Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Even Broader Missions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Section III — How Supply Management Strategies Will Change . . . . . . . . . . . . . . 37Chapter 6 — Overview: Seven Key Strategies for the Coming Decade . . . . . . . . . . 38

E-Survey Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Key Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Table of Contents

3CAPS Research

Chapter 7 — Developing Category Strategies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Achieving Leading-Edge Category Strategy Development and

Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Strategy Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45Strategy Enablers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Chapter 8 — Developing and Managing Suppliers. . . . . . . . . . . . . . . . . . . . . . . . . 54Structuring the Supply Base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55Supplier Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58Developing Supplier Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Chapter 9 — Designing and Operating Multiple Supply Networks . . . . . . . . . . . . 62Modular Versus Integral Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Managing Multiple Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63Assuring Supply Chain Agility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Chapter 10 — Leveraging Technology Enablers . . . . . . . . . . . . . . . . . . . . . . . . . . . 70A Decade of Technology Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Supply Executive Goals for Technology Over the Next Decade . . . . . . . . . . . . 72Technology over the Next Decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73Future Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Future Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Chapter 11 — Collaborating Internally and Externally . . . . . . . . . . . . . . . . . . . . . 76Key Success Strategies for Collaboration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Keys to External Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Keys to Internal Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Technology Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Protecting Intellectual Capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Chapter 12 — Attracting and Retaining Supply Management Talent . . . . . . . . . . . 81Identifying Needed Skills and Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Acquiring, Developing and Retaining Talent. . . . . . . . . . . . . . . . . . . . . . . . . . . 84Managing a Diverse, Dispersed Global Workforce . . . . . . . . . . . . . . . . . . . . . . 89Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90

Chapter 13 — Managing and Enabling the Supply Management Organization . . . 91Moving Away from the Center-Led Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91Integrating Supply with Other Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93Cross-Functional Teams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Outsourcing Supply Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95Measuring Supply Management Performance . . . . . . . . . . . . . . . . . . . . . . . . . . 95Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Section IV — Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . 100Chapter 14 — Research Summary and Potential Supply Challenges

for the Decade Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Forces of Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101Supply Mission — The Era of Great Expectations . . . . . . . . . . . . . . . . . . . . . 102Category Strategy — The Era of Dynamic Value Acquisition Strategies . . . . . 102Developing and Managing Suppliers — The Era of Customer-centric

Supply Base Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102Developing and Operating Multiple Supply Networks — The Era of

Complex and Dynamic Supply Networks . . . . . . . . . . . . . . . . . . . . . . . . . 103Collaboration — The Era of Collaboration Without Boundaries. . . . . . . . . . . 103Technology — The Era of Networked Analytics . . . . . . . . . . . . . . . . . . . . . . . 103Talent Management — The Era of Killer Talent in Supply Management . . . . . 104Organizational Design — The Era of Empowerment and Adaptation . . . . . . . 104


Chapter 15 — Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Key Takeaways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Appendix A — CEO Survey Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109Appendix B — Study Participant Demographic Profiles . . . . . . . . . . . . . . . . . . . . 112Appendix C — E-Survey Questionnaire. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115Appendix D — Analysis Strategy and Results of Detailed Analyses . . . . . . . . . . . 131

5CAPS Research

Figure 2.1: Research Framework . . . . . . . . . . . 18

Figure 3.1: Average Ratings of External Forces’ Impact on Business. . . . . . . . . . . . . 21

Figure 3.2: Linear Versus Exponential Growth Rates. . . . . . . . . . . . . . . . . . . . . . . . 26

Figure 4.1: Future Importance of 17 Key Business Strategies . . . . . . . . . . . . . 28

Figure 5.1: Supply Missions and Goals. . . . . . . 33

Figure 6.1: Future Importance Versus Current Level of Implementation. . . . . . . . . 39

Figure 6.2: Quadrant 1 Biggest Gap — Collaboration Remains a Challange . . . . . . . . . . . . . . . . . . . . 39

Figure 6.3: Quadrant 2 Biggest Gap — Information Sharing Across the Extended Supply Chain . . . . . . . . . 40

Figure 6.4: Many Supply Strategies Are Universally Seen as Very Important . . . . . . . . . . . . . . . . . . . . 40

Figure 6.5: North America — Emphasis on Internal Strategic Alignment . . . . . . 41

Figure 6.6: Europe — Emphasis on Global Strategies, External Integration andOrganization. . . . . . . . . . . . . . . . . . 41

Figure 6.7: Supply Chain Focus in Manufacturing Sector,Administration and Control Focus in Services Sector . . . . . . . . . . . . . . 41

Figure 7.1: Creating Additional Value by Thinking Differently about Categories. . . . . . . . . . . . . . . . . . . . 44

Figure 7.2: Category Strategy Framework. . . . . 45

Figure 7.3: Category Strategy Critical Element Change . . . . . . . . . . . . . . . . . . . . . . 46

Figure 7.4: Rapid Growth Seen for China, India and Eastern Europe as SourceMarkets . . . . . . . . . . . . . . . . . . . . . 48

Figure 7.5: Most Companies Expect a Net Decrease in Number of Suppliers by 2012 . . . . . . . . . . . . . . . . . . . . . 48

Figure 7.6: Future Category Strategy Focus . . . 49

Figure 8.1: Developing and Managing Suppliers . . . . . . . . . . . . . . . . . . . . 55

Figure 8.2: Developing and Managing Suppliers — Maturity Stages . . . . . 57

Figure 8.3: Typical Supplier Segmentation . . . . 59

Figure 8.4: Driving Toward Institutionalized Supplier Relationships . . . . . . . . . . 59

Figure 9.1: Supply Chains Will Be Segmented by Product/Customer . . . . . . . . . . . 63

Figure 9.2: Designing and Operating Multiple Supply Networks — Supply Management Strategy Gaps. . . . . . . 64

Figure 9.3: Supplier Networks Will Be Strategically Configured . . . . . . . . . 65

Index of Figures


Figure 9.4: Complex Models Will Be Used To Evaluate Supply Chain Risk, Costs, Performance and Design. . . . . . . . . 67

Figure 9.5: Supply Network Flows . . . . . . . . . . 69

Figure 10.1: Technology Tool Evolution . . . . . . . 71

Figure 10.2: Critical Success Factors — Technology Enablers. . . . . . . . . . . . 72

Figure 10.3: Technology Tools Will Evolve Even Further . . . . . . . . . . . . . . . . . 73

Figure 11.1: Collaboration Strategies . . . . . . . . . 76

Figure 12.1: Future Skills and Capabilities for Supply Management Professionals . . . . . . . . . . . . . . . . . . 82

Figure 12.2: Supply Strategies for Attracting and Retaining Supply Management Talent . . . . . . . . . . . . . . . . . . . . . . . 83

Figure 12.3: Talent Acquisition, Development and Retention Strategy . . . . . . . . . . 85

Figure 12.4: Supply Management Career Paths . . . . . . . . . . . . . . . . . . . . . . . 87

Figure 12.5: Managing the Workforce of Tomorrow. . . . . . . . . . . . . . . . . . . . 89

Figure 13.1: Survey Data on Organization . . . . . 91

Figure 13.2: Survey Data on Integration of Supply Management . . . . . . . . . . . . 93

Figure 13.3: Organizational Enablement . . . . . . 94

Figure 13.4: Survey Data on Cross-Functional Teams . . . . . . . . . . . . . . . . . . . . . . . 95

Figure 13.5: Supply Management Metrics . . . . . 96

Figure 13.6: Balanced Scorecard for SupplyManagement. . . . . . . . . . . . . . . . . . 97

Figure B.1: Global Coverage . . . . . . . . . . . . . . 112

Figure B.2: E-Survey — Revenue Size . . . . . . 113

Figure B.3: E-Survey — Respondents’ Global Presence . . . . . . . . . . . . . . . . . . . . 113

Figure B.4: Interviews and Forums — IndustryCoverage . . . . . . . . . . . . . . . . . . . 114

Figure B.5: E-Survey — Industry Coverage . . 114

Figure D.1: Forces of Changes — Sorted by Mean Response. . . . . . . . . . . . . . . 133

Figure D.2: Forces of Change — Factors. . . . . 134

Figure D.3: Business Strategy — Sorted by Mean Response. . . . . . . . . . . . . . . 135

Figure D.4: Business Strategy — Factors. . . . . 135

Figure D.5: Supply Mission, Goals and Performance Expectations — Sorted by Mean Response. . . . . . . 136

Figure D.6: Supply Mission, Goals and Performance Expectations — Factors . . . . . . . . . . . . . . . . . . . . . 137

7CAPS Research

In 1998, CAPS Research, A.T. Kearney and the Instituteof Supply Management published “The Future ofPurchasing and Supply: A Five- and Ten-Year Forecast,”a research study that helped the procurement professionunderstand and prepare for the future. Although manyof the predictions from that report proved to be true,there has been significant change in the world since1998 — and each of these changes has consequencesfor how businesses and industries operate, and in turnhow companies manage supply.

As a result, CAPS Research, A.T. Kearney and theInstitute of Supply Management have once againexplored the future direction of supply management.The objective of the research was to find answers tothese questions:

• What external forces will have the greatest effecton business over the next ten years?

• How will business models change as a result ofthese forces?

• How will the mission, goals, performanceexpectations and strategies for supplymanagement change to support these newbusiness models?

More than 260 companies from North America, Europe,Latin America and Asia/Pacific participated in the 2007research. About two-thirds of the participatingcompanies came from manufacturing industries, whilethe rest were from service industries.

This executive summary distills the main findings andrecommendations of the research, while the completereport that follows presents the detailed results of thestudy.

External Forces Will Affect All Businesses

A multitude of external forces will reshape markets,products and industries over the course of the nextdecade. To survive, companies will have to rethink andrevamp their business strategies in order to anticipate,react to and even take advantage of these forces.

The research indicates that supply managers areconcerned about a variety of forces that will impactcompany and supply management strategies. Foremostamong these is the impact of China, India and otherlarge, developing countries on the competitivelandscape. The impact is expected to be felt on both thedemand and supply side, and will create opportunitiesas well as challenges.

To meet this onslaught of new competition, companiesheadquartered in developed economies will need toincrease in size, with improved economies of scale andmarket power on both the supply and sell sides, tosurvive. Thus, in order to successfully compete, manycompanies will be forced to merge and consolidate.

Government legislation and regulation of business willincrease, requiring companies to dedicate significantresources to ensure compliance. Government actions tosupport economic development, such as tax incentivesand trade restrictions, will have a large impact onsupply strategies. Political instability could require arapid change in supply strategies.

Technology breakthroughs will cause major changes tohow products and services are provided. These changesmay require capital investment, but will lower thecustomer’s total cost of ownership. In many industries,core technologies will eventually be commoditized,forcing geographic consolidation and concentration of

Executive Summary


the supply base and fundamentally affecting supplychain structure and relationships.

In some industries, the downstream supply chain willchange rapidly due to economics and governmentpolicies. Within other industries, supply chaindynamics will be influenced by the poor financialcondition of major trading partners in the chain. Thisperformance will reverberate up and down the chain,altering relationships and causing suppliers to seekother customers and/or sources of revenue.

The impact of private equity firms will also besignificant. Many companies and suppliers have alreadybeen bought and taken private by these companies. Inlooking to recoup their investments, the private equityfirms tend to slash costs, raise prices and changebusiness relationships with their trading partners,affecting supply and supply chain strategies.

Companies in developed economies will be held to highstandards wherever they do business in the world.Supply management will be tasked with working withthe supply base to ensure that it meets environmentalstandards. Customers, consumers, shareholders, non-government organizations and government will allincrease their scrutiny of corporate environmentalpractices in all regions of the world. They will demandthat companies take environmentally friendly actions bydoing things like using less packaging material,reducing carbon emissions and making products thatcan be readily recycled.

Tomorrow’s Business Models and StrategiesWill Raise the Bar for Supply

In response to these forces, companies will shift theirbusiness models, adopt different strategies, pursue newrevenue streams, further squeeze costs, make their assetbase as lean as possible and reshape their capitalstructures. The mission and role of supply managementwill be changed in a variety of ways.

The need for innovation will accelerate as companiescontinue to aggressively pursue new geographic anddemographic markets. With the demand and supply forinnovation in a state of flux over the coming decade,and limited resources within any one firm, companiesmust overcome the usual “not invented here” barriersand tap into all available sources globally.

Relationships between companies and their externalinnovation sources may need to be structureddifferently in the future. This will be especially truewhere past adversarial approaches have deterred

suppliers from sharing their best and brightest ideas.Financial support, equitable sharing of risks andbenefits and two-way protection of intellectual propertyrights will need to be a part of the mix.

Supply management has always helped contribute torevenue generation. Close attention to costs for goodsand services leads to more competitively priced endproducts. A focus on quality and service reduces failurerates, improves availability and leads to higher customersatisfaction and loyalty. Innovations from the supplymarket lead to revenue increases from new productsand services.

Already, there is widespread acknowledgement amongsupply executives of heightened top-down attention tosupply risk management. Extended global supply chainsthat include geographically distant, unproven (or evenunknown) suppliers pose supply continuity, liability,reputational and intellectual property risks.

Supply management must more aggressively manageliability and safety risks as well. To ensure compliancewith Sarbanes-Oxley legislation, supply must addressinternal controls as well as a range of possible risk-exposure areas that includes supply chain disruption,outsourcing, long-term contracting, leasing and vendor-managed inventories.

Performance expectations will be raised considerably asglobal competition forces companies to squeezeunnecessary cost out of every part of their business. Forsupply management, this means widening the breadthof spend areas covered, managing costs more holisticallyand delivering cost savings faster.

Supply Must Pursue Seven Key Strategies in theComing Decade

Based on an analysis of the survey data and focussession and interview learnings, the research teamconcluded that seven main families of strategies willhave the greatest impact on supply management successin the future.

Developing Category Strategies that are Robustand Forward LookingCategory strategies will become more robust and requireengagement not only from multiple functions but alsoacross enterprises. They will become more agile due tothe fact that they will have to be quickly reconfigured asconditions change. Strategy development opportunitieswill be examined across categories where synergies arepossible; e.g., packing and specific product designs.

9CAPS Research

Strategy development will include approaches toinfluence supply markets. Category strategies willincreasingly aim to block competition, and early-warning or predictive approaches will be used as part ofan improved approach to risk.

Developing and Managing Value-AddingRelationships with SuppliersThree dominant themes will emerge around developingand managing suppliers. First, the supply managementfunction will have to clearly understand company needsand align with suppliers that have the capabilities toprovide innovation and help create value in support ofachieving competitiveness.

Second, working relationships between buying andselling companies that are strategically important toeach other will improve in order to unlock value-creating potential. The supply base will include supplynetworks, many of which will be in competition witheach other. This new reality will require leadingcompanies to provide leadership and manage entiresupply networks, not just individual suppliers, to gainpreferential treatment and competitive advantage.

Finally, companies will invest in reactive and proactivesupplier development efforts to maximize the valueachieved by the supply base. As strategic suppliersdevelop, they in turn will be afforded opportunities tohelp improve the buying company through continuoustwo-way communications and feedback.

Designing and Operating Multiple SupplyNetworks to Meet the Needs of Specific MarketSegmentsSupply chains that are seamless and driven by end useror customer needs will become the norm. Revenues willflow to companies that can get the correct product orservice bundles to customers at the lowest landed andtotal costs. Supply chain innovation and the use ofmultiple supply chains will be key to future revenueand market share growth.

Leading companies will pioneer tomorrow’s supplychains by combining multi-company capabilities in newways. They will create total service offerings that extenddeep into the customer’s value chain. They willanticipate changes, adapt their supply chains by using ablend of insight, strategy, creativity and technology, andaccelerate the achievement of results.

Leveraging Technology for Internal Productivityand External EffectivenessTechnology developers are positioned to provide aricher set of offerings for supply management. But there

will be many challenges moving forward. Managementwill pose one such challenge, as new technology willbring up concerns about inter-functional collaborationand potential loss of intellectual capital. Each of thesenew technologies also requires practitioners who havethe capabilities — the knowledge, insight and interests— to get the most out of them. In part due to theadoption of technology, the headcount of supplymanagement resources has been pared down over thepast decade, which may make obtaining additionalresources to learn and implement new technologies achallenge.

Collaborating Internally Across Functions andExternally with Suppliers and CustomersWhile collaboration was cited as an important successfactor for the future, it was also noted that it does noteasily fit in with the traditional view of supplymanagement’s role in the organization. Four mainthemes around collaboration emerged:

• Internal collaboration and integration mustadvance further if companies are to capitalize ontheir future needs.

• External collaboration will signal a shift from purecompetition to partnership for some segments of acompany’s supply base.

• Technology will be necessary to enable thisincrease in collaboration — internal systems willhave to provide more visibility to multiple dataviews, while external systems will have to shareinformation safely and effectively.

• The tension between the potential for strategicadvantage through supplier collaboration and theconcerns about managing risk and protectingintellectual property will not be easily resolved.

Attracting and Retaining Supply ManagementTalentSupply management organizations will take onincreased responsibility and a higher value role.Tomorrow’s supply management professionals will becharged with developing and executing valueacquisition strategies that find new value in the supplybase, deliver value as quickly as possible within the costparameters defined by the demand market andmaximize the return to the company. To do so, they willneed to find and leverage external sources ofinnovation, contribute to revenue generation, expandefforts to manage costs, and ensure business continuityand sustainability.

In many ways, talent management could be thedeciding factor between success and failure fortomorrow’s supply management organizations. Ingeneral, companies will have access to the same supply


market information, the same suppliers and the samesupply management best practices and tools. What willbe different is how each company uses that information,works with those suppliers, and applies those practicesand tools, which will come down to the skills andcreativity of its people and the relationships thosepeople build with others.

Managing the Future Supply ManagementOrganizationDespite the importance and success of the center-ledmodel, some companies may benefit from tailoring thesupply organization for future needs.

Specifically, some of the factors that will drive thispotential adjustment are the need for local leadershipwithin a globally managed workforce, the relaxation oftight supply markets that allows category leadershipwithin business units and the maturation of technologyto support common practices across organizationalboundaries. This last point could mean that technologywill allow virtual collaboration among category teamsand free them from the necessity to be co-located at orconstantly traveling to a central location. Knowledgemanagement systems will give personnel access to thesame information regardless of their locations.

Aggregation of demand may benefit the corporation as awhole, but it can still be detrimental to the performanceof a specific unit. While centralized-versus-decentralizedcontrol is an old argument, large business units mayhave the superior argument in the future, to thedetriment of strong centralized supply organizations.Best practices created by center-led organizations canstill be implemented by business units at companiesthat no longer see the need for centralized control.

Continued pressure on supply management headcountwill drive more companies toward automation oroutsourcing of select parts of supply management,continuing a trend to allocate scarce resources to themost strategic activities.

Outsourcing of the non-tactical activities in supplymanagement will occur only very selectively. Thestrategic importance of supply management to thecompany will make outsourcing a higher-riskproposition.

11CAPS Research

Section I — About the Research


In the early 1990s, purchasing began a long journey oftransformation from a tactical activity to a strategiclever. By 1998, new approaches were taking hold, suchas strategic sourcing and strategic cost management,and leading companies were using these to demonstratethat purchasing could contribute more to the businessthan low prices for purchased goods and services. E-procurement offered the promise of additional benefits,both to extend the reach of the purchasing organizationinto supply markets and to boost internal efficiencies.

In 1998, CAPS Research, A.T. Kearney and the Instituteof Supply Management undertook a study to help theprocurement profession understand what might comenext. The results of that research were released in areport entitled “The Future of Purchasing and Supply: A Five- and Ten-Year Forecast.”

A Look Back

As Danish physicist Niels Bohr once said, “Prediction isvery difficult, especially about the future.” Yet, lookingback on that 1998 study, many predictions about thefuture of supply management proved quite accurate.The 1998 study predicted that:

• Electronic commerce and supply e-systems wouldbe widely implemented and the internet wouldbecome the backbone of e-supply. This hasoccurred and growth continues.

• Strategic cost management, with a focus on costreduction, would continue to be the primarysupply focus. This has clearly proven to be the case,with outsourcing, volume aggregation, e-auctions, low-cost country sourcing and price give-backs being theprimary supply strategies at many companies.

• Strategic sourcing would be applied acrossorganizations worldwide; supplier evaluation and

selection criteria would become more extensive;and category strategies would become more fullydeveloped and somewhat more linked tocompanywide strategies. All of the above haveoccurred at numerous companies worldwide.

• Global sourcing would increase. This has clearlybeen the case.

• Performance measurement would continue to befocused on cost reduction, with companiesadopting total-cost-related measures of performanceand increased linkages with strategic businessmeasures. Numerous companies have implementedthese approaches, including engagement with finance.

• Tactical purchasing would increasingly beautomated and outsourced. Headcounts would bereduced through digitization. Both have occurred atorganizations worldwide, and there are now a numberof third-party providers of e-supply software.

• Process uncoupling would occur. This uncouplingis evidenced by the growth of outsourcing, theutilization of contract and original designmanufacturers and various supply chain models beingused to meet customer requirements; e.g., a thirdparty producing and shipping direct to the endcustomer.

Predictions in some other areas were directionallycorrect but did not achieve as extensive and broad-based implementation. These included:

• Competitive bidding, negotiation and negotiationstrategy would continue to be important butchange in nature, becoming more data driven andtotal-cost focused. However, possibly driven by abuyers’ market, e-reverse auctions and low-costcountry sourcing, this has not occurred to the degreeanticipated.

• Third-party purchasing, especially for non-criticalitems, would increase, although not across all

Chapter 1 — Background and Previous Research Findings

13CAPS Research

industries and for all categories of purchases. Thisstrategy still appears to be emerging.

• Supplier development would possibly become animportant supply initiative. This has been the casein some industries, especially automotive. However,there is no across-the-board drive to invest heavily inproactive supplier development.

• Strategic supplier alliances would become a focusacross numerous industries. This has only been thecase at a limited number of companies that havecarefully segmented suppliers into “eliminate,”“continue,” “preferred” and/or “strategic” categoriesand where supplier relationship management has beenestablished as a key strategy. Much still needs to bedone to modify behaviors and processes to fullycapitalize on the value-unlocking potential of strategicsupplier alliances.

Four areas where the 1998 predictions fell far shortwere:

• Demand-pull purchasing with full transparency ofsupply-and-demand requirements would bevisible across companies in the supply chain, alloperating in a synchronized manner andminimizing costs and waste. Implementation hasbeen severely limited by a lingering inability tointegrate data across disparate systems andunwillingness by some companies to share data acrossorganizations.

• Virtual supply chains would be created to meetshort-term needs. These virtual supply chainswould be characterized by risk/reward sharing,transparent resource commitments, operatingguidelines and means to end the relationship. Thishas not occurred, with traditional organizationsprevailing.

• Relationship management of a cross-organizational focus would be implemented.Again, given the relatively long-lived buyers’ marketduring the dot.com build-up, e-sourcing and reverseauctions may have contributed to delaying thedevelopment of inter-organizational relationships.

• Complexity management resolution would beachieved from both an inter-organizational andproduct/service design perspective. Organizationshave still not solved the complexities of how to conductbusiness between organizations to maximize valuecreation. Nor have companies been able to fullyminimize product/service specifications enablinggreater degrees of standardization and flexibility inoperations and design.

Overall, the 1998 study provided significant insight intothe decade that lay ahead. Supply leaders were able to

use these predictions to prepare their company’stransformation strategies and focus attention.

The Need for New Research

Much can change in a decade’s time. When the previousstudy was released, there were no iPods. The Euro hadnot been introduced. Business process outsourcing toIndia was still in its infancy. The dot.com boom andbust had not yet occurred. Terrorism was but a remotepossibility in most of the developed world.

Yet in ten short years, each of these changes has cometo deeply affect how businesses and industries operate.In turn they affected how companies manage supply —what they buy, where they source from, how they workwith suppliers, and which tools and organizationalmodels they use.

Changes have already included extensive e-systemimplementation, outsourcing, globalization and low-costcountry sourcing, movement to center-led supplyorganizations and cross-functional teaming, formalcategory strategies, enhanced understanding of supplierand supply chain costs, and efforts to better integratesupply chains applying lean principles and Six Sigma.

Will the future just be an extension of these changes, orwill radical new approaches emerge? What will be themost effective supply models in the decade ahead? Inwhat direction will organization strategies be driven? Towhat extent will supplier working relationships driveperformance? How will technology be applied? Whatextensions of category strategies are required, and howwill these strategies be linked to companywidestrategies? What performance metrics will drive supplybehavior? What should the human resources strategybe?

These questions are of critical importance to companyand supply leaders. One supply executive summed it upthis way:

What comes next after implementing many changes insupply strategy, structure, processes and people overthe prior decade?

To answer these and other questions, CAPS Research,A.T. Kearney and the Institute of Supply Managementundertook this second broad-based study to determinethe forces of change that would impact a company’sbusiness models, how these would affect executiveexpectations of supply, and what the future might holdfor supply strategies, processes and enablers.


The current look forward into the next decade shouldprovide valuable insights, as the predecessor researchdid. This study, extending and further globalizing the1998 research, may be even more important because ofthe dramatic and fast-changing macro trends and eventsoccurring worldwide. The growth of China and India askey markets and suppliers, population growth trends,terrorism, political uncertainties, the financial distressbeing felt in a number of industries, and mergers andacquisitions are but a few. These, combined withincreasing customer and competitive pressures andtechnology capabilities, provide an environment inwhich business and supply models must be agile inanticipating and reacting to competitive shifts.

This report discusses how we conducted the study,identifies forces of change and resulting businessmodels, and the key supply strategies, processes andenablers unfolding in the decade ahead. While some ofthe concepts under discussion will extend currentstrategies, others will denote some bold changes.

In addition, these results should stimulate considerablediscussion among a company’s supply leadership andother executives about supply strategy choices andwhere best to invest in supply and across the company.The findings should also help supply executives decidewhere to make their next “bold moves” to improve theglobal competitiveness of the firm. We anticipate theresults of this study will provide supply leadership witha better understanding of the likely paths forward.

15CAPS Research

The overall purpose of this research initiative was todevelop an updated forecast for supply management inthe decade ahead. The goal was to build on the workdone in our 1998 study, updating it to reflect currentconditions and expected changes while expanding andextending participation to include greater globalcoverage.

The objective of the research was to find answers tothese questions:

• What external forces will have the greatest effecton business over the next ten years?

• How will business models change as a result ofthese forces?

• How will the mission, goals, performanceexpectations and strategies for supplymanagement change to support these newbusiness models?

Although the horizon for our projections and forecastsof the future is the next decade (2007-2017), theforecast is likely to be most accurate over the next fiveyears.

Research Participant Demographics

More than 260 companies representing North America,Europe, Latin America and Asia/Pacific participated inthe research. This included involvement by 113 supplymanagement executives who participated in meetingsand teleconferences with the research team, and 180company responses to the e-survey. (Many companiesparticipated in both.) About two-thirds of theparticipating companies came from manufacturingindustries, while the rest were from service industries.More detail on study participant demographics isavailable in Appendix B.

Research Methodology

The research team began by defining specific areas to beinvestigated. This resulted in an initial researchframework covering these topics:

• Forces of change — The marketplace andcompetitive forces most likely to impact acompany’s business model in the future

• Business models and strategies — The ways inwhich an organization’s overall business modeland various elements of business strategy couldchange in response to the forces of change

• Supply mission, goals and performanceexpectations — The roles and objectives thatsenior executives could assign to the supplyorganization in support of the future businessmodel and strategies

• Supply strategies, processes and enablers — Theapproaches that companies could use to achievethe future supply mission, goals and performanceexpectations

As a starting point for hypothesis development, theresearch team used this framework to create an initialset of predictions about the future of supply manage-ment. More than 50 supply executives participated insmall group breakout sessions at the CAPS ExecutiveRoundtable in March 2006, where they rated, discussedand debated the likelihood of the predictions and addedtheir own. Another 28 supply executives (primarilyfrom Western companies operating in China)contributed their ideas in a CAPS Executive Roundtablesession held in Shanghai in June 2006.

Based on the success of these sessions, the researchteam expanded its efforts to engage supply executives indirect dialog about the future. Throughout the springand summer of 2006, the research team conducted

Chapter 2 — Research Design andApproach


several half-day in-person sessions with senior supplyexecutives in Atlanta, Chicago, Dallas, New York, Milan,Madrid, Amsterdam, São Paulo and Mexico City. Inadvance of these sessions, participants completed a briefsurvey that probed the importance of selected supplystrategies, and the degree of implementation currentlyand in five years. The survey also asked about the degreeof impact expected in the next three to five years due toselect forces of change. During the sessions, the researchteam presented the survey results and led discussionson those areas with the highest scores as well as thosewhere scoring showed the greatest dispersion.

These in-person sessions were supplemented by a seriesof additional focus group sessions that the researchteam conducted via conference call and several one-on-one interviews with supply executives. All of thesediscussions provided further insight into their visions ofand concerns for the future.

In addition, several chief purchasing officers used theopportunity presented by the study to conduct separateinterviews with their companies’ chief executive officers.CEO findings were grouped into five major areas:

• Globalization and strategic importance• Risk management and supply continuity• Supply management strategies beyond price• Senior supply relationships• Capabilities and organization

While the CEO areas of concern matched up with thegeneral survey population and are discussed throughoutthe body of this report, their input is also elaboratedupon in Appendix A.

In parallel with these discussions, the research teamdeveloped and deployed a comprehensive e-survey (seeAppendix C) that provided a statistical base of dataabout the following:

• To what degree will a range of marketplace andcompetitive forces impact the company’s businessmodel?

• How important will various business strategies beto the future success of the company’s businessmodel?

• How important will various elements of supplymission, goals and performance expectations betoward supporting the company’s future businessmodel?

• How important will each of more than 100 supplystrategies, processes and enablers be for achievingthe future supply mission, goals and performanceexpectations? To what degree are these alreadyimplemented?

• What is the expected magnitude/direction ofchange in key indicators of supply strategy, suchas the use of particular geographic supply marketsand size of the supply base?

The research team carefully analyzed focus grouptranscripts and interview notes, both via manual reviewand text-mining software, to uncover themes andconnections. In parallel, the team explored the surveydatabase for supporting information and new themes.From these analyses, the research team identified thekey drivers of change — major external forces,changing business models and new expectations forsupply management — that lie ahead. Further, the teamidentified seven critical success factors for future successin supply management. Figure 2.1 illustrates therelationship between these drivers and the successfactors.

As a final part of the research, the research teampresented preliminary study results at the March 2007CAPS Executive Roundtable, conductedreview/feedback sessions in April 2007 with seniorsupply executives in Atlanta, Dallas, Chicago andNewark, and previewed the final report executivesummary at the 2007 Institute for Supply ManagementInternational Conference in May 2007. These stepsenabled the team to test its findings and conclusionsabout the drivers and success factors, to verify theirrelevance to supply executives and to sharpen themessages contained in this report.

Report Structure

The remainder of this report presents the results of theresearch study. Sections II and III parallel theframework depicted in Figure 2.1, while Section IVpresents overall conclusions and recommendations.

• Section II — How the Environment for SupplyManagement Will Change

•• Chapter 3 — Forces Driving Change•• Chapter 4 — Impacts on Business Models

and Strategies•• Chapter 5 — New and Expanded Missions,

Goals and Performance Expectations forSupply Management

• Section III — How Supply Management StrategiesWill Change

•• Chapter 6 — Overview: Seven KeyStrategies for the Coming Decade

•• Chapter 7 — Developing CategoryStrategies

•• Chapter 8 — Developing and ManagingSuppliers

17CAPS Research

•• Chapter 9 — Designing and OperatingMultiple Supply Networks

o Chapter 10 — Leveraging TechnologyEnablers

o Chapter 11 — Collaborating Internally andExternally

o Chapter 12 — Attracting and RetainingSupply Management Talent

o Chapter 13 — Managing and Enabling theSupply Management Organization

• Section IV — Conclusions and Recommendationso Chapter 14 — Research Summary and

Potential Supply Challenges for the DecadeAhead

o Chapter 15 — Recommendations• Appendixes

o A — CEO Survey Resultso B — Study Participant Demographic Profileso C — E-Survey Questionnaireo D — Analysis Strategy and Results of

Detailed Analyses


Figure 2.1: Research Framework

Critical Success Factors

Addressing the forces of change

Managing and enabling the future

SM organization

Developing category strategies

Developing and managing

suppliers

Designing and operating multiple

supply networksLeveraging technology

enablers

Collaborating internally and

externally

Attracting and retaining supply

management talent

Adapting business models

and strategies

External and organizational drivers

Expanding the mission, goals and

performance expectations

Section II — How the Environment forSupply Management Will Change

19CAPS Research

A multitude of external forces will reshape markets,products, industries and competition over the course ofthe next decade. To survive, companies will have torethink and revamp their business strategies in order toanticipate, react to and even take advantage of theseforces.

The research team relied on previous work done by A.T.Kearney, as reported in the book World Out of Balance,1

to identify the important external forces at a macrolevel. This work identified six external forces that will,without question, impact companies and their strategiesin the coming decade. These external forces are:

• Globalization of the world economy• Demographics• Changing consumer demand• Natural resources and environmental pressures• Regulation and activism• Technology

In addition, seven “wildcard” forces were identified that,while not certain to occur, may well require companiesto adjust their strategies. These wildcard forces are:

• Global epidemic• Military conflict• Country disintegration• New protectionism• Terrorist resurgence• Hacker Hell• Quantum leap

This report will focus on a subset of these forces thatwere identified by the supply managers whoparticipated in our research, either through discussions

or the e-survey, as particularly important to them. Thereader is invited to refer to World Out of Balance formore discussion and detail of the other external forces.

Survey Results

The survey asked the respondents to rate the impact of20 specific external forces on their businesses, as shownin Figure 3.1. The qualitative data generally supportedthe importance of these forces. Specific forces arediscussed below.

Complex Interactions Between Forces

Uncertainty, instability, and material shortages createmultiple axes of change. Forces that may appearinnocuous when looked at individually have a muchmore dramatic and hard-to-predict effect whencombined. Time to market, proliferation of newproducts, shorter life cycles, supply base consolidation,new competitors, pressure to reduce costs and increasequality, and environmental and socially responsibilityforces create a complex and competitive businessenvironment. This can lead to a condition in whichbusinesses are optimized for the past but do notunderstand enough about the future. At a high level,these forces and complex interactions are ubiquitous inthe business community. At the industry level, they takeon more specific forms and directions.

For example, in the health care sector the pharmaceuticalsupply chain is fundamentally changing. Several large-scale branded drugs are moving to generic formulations,cutting into their originating companies’ revenue

Chapter 3 — Forces Driving Change


1Laudicina, Paul. World Out of Balance. New York: McGraw-Hill, 2005.

streams, which in turn puts pressure on the new drugdevelopment pipelines for faster cycle times andincreasing the risk of failure. Major retailers, such asWal-Mart, are significantly reducing prices for genericdrugs, undercutting the pricing of the major pharmacychains. For generic drugs, developing economies offernew sources of supply and markets — but also newrisks. New legislation requires pharmaceutical pricing tobe more transparent over time through the publicationof price indices. Finally, the consolidation of traditionalcustomer bases and the development of new distributionchannels will require more customized services for eachchannel. This combination of competition and legislationwill drive companies in this industry to create newsourcing and supply chain strategies.

The food industry faces different challenges. Producerstraditionally mass marketed to consumers and used thetrade as vehicles to get products into the hands ofconsumers. In the future, consumers and retailers willvigorously voice their opinions about what productswill be required to meet their individual needs. Themarketplace will demand rapid change, short productlife cycles, flexibility, adaptability and product variation.

In the hotel industry there will be a continued blurringof product lines between the competing chains andbetween lines within the chains. Hotel chains will keeppushing for differentiation without increasing costs. Ashotels upgrade their mid-range and value chains, theywill encroach on their full-service and high-endproperties, which risks confusing the consumer whilefailing to add value. With multiple chains followingsimilar strategies, the competition and cost pressureswill be intense.

In the oil and gas industry consumers will demand theimpossible — cheap, plentiful, renewable, non-polluting energy. Small players will be bought up by thelarge companies. Consumer preferences, politicians andenvironmental protection strategies will influence wherethe major companies direct their exploration andproduction activities — offshore, onshore, Alaska, theGulf of Mexico and overseas. Developing economies willincrease the demand for energy faster than new sourcesof supply can be found and developed, puttingcontinued upward pressures on prices.

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Figure 3.1: Average Ratings of External Forces’ Impact on Business

Average RatingExternal Force (1 = little impact, 7 = major impact)

Rising oil/raw materials prices 5.14Regulatory changes 4.84Increased competition from established competitors 4.71Spot shortages of key raw materials 4.55Changing customer requirements/buying habits 4.40Increased emphasis on supply chain security 4.38Increased environmental regulations 4.15Industry consolidation 4.15Emergence of new technology 4.14Terrorist-inspired instability 4.12Major change in the value of the US dollar 4.09Increased competition from new entrants 4.08Rising interest rates 4.05Commoditization 3.97Global supply consolidation and growth of cartels 3.77Pressures to improve corporate governance 3.74Rise in regionalism/protectionism 3.71Expansion of emerging markets 3.70Increased emphasis on recycling and recovery 3.65Demographic shifts in populations 3.65Increased focus on corporate social responsibility 3.57Offshoring/outsourcing 3.52Pressures on corporate finance 3.44Global supply market fragmentation 3.40Trade liberalization 2.86

As the above examples illustrate, supply managers willneed to examine the specific forces at work in their ownindustry sectors before formulating strategies.

What Supply Managers Foresee

Analysis of the responses from supply managersindicates that several forces will have a major impact oncompany and supply management strategies across allindustry sectors in the next decade, including:

• Global competition• Mergers, acquisitions and supply market

consolidation• Increased governmental regulation• Technology advances• Customer and channel dynamics• Increased product variety and shorter life cycles• Social responsibilities• Environmental responsibilities

The following discussion examines these forces andtheir ramifications for supply in greater detail.

Global CompetitionThe impact of China on the world economy willcontinue to be enormous over the next ten years. Toprosper, and perhaps even simply to survive, companiesmust embrace China both as a market and a source ofsupply for their goods and services. And while China isexpected to have the largest impact, other developingeconomies — including India, Brazil, Eastern Europeand Russia — will also make their mark in the globalmarketplace.

The “gravitational pull” of China will impact mostcompanies and markets. As it continues to modernizeand urbanize, China will consume an increasing shareof the world’s raw materials, driving up prices and/orcreating shortages. Steel, specialty metals and energywill be particularly impacted by demand from Chinaand other emerging markets.

This pull may have a particularly large impact on Africa,where China and other nations are actively seeking newsources of raw materials. Additionally, companies mayfinally start considering Africa as a source of low-costlabor for manufacturing operations. This latterdevelopment will largely depend on whether Africannations can reach a reasonable level of political stability.

The growth of China as a supply and demand marketwill create opportunities for all competitors. Those thatembrace the China opportunities will create profoundadvantages over those that do not. And it is not just the

low labor costs that will be important. Enormousintellectual capital exists in China that can be tapped forinvention, innovation and new technology. China willalso come to be a significant source of managementtalent in the next decade.

Emerging players are clearly weighing heavily onpurchasing executives’ minds, as our study participantsmade clear:

China makes everything else dwarf into insignificancein relationship to the impact that it is going to haveover the next ten years. Just when I start to think Iunderstand the cost structure of Chinese companies, Ilearn more that tells me I really don’t understand it.

We’re dealing with the whole new set of competitors inour particular business. The Asians, and the Koreansin particular, have competitors today that five yearsago weren’t on the radar screen.

China will also be a target for much capital investmentand will capture the attention of suppliers from aroundthe world. Companies in developed economies may findit increasingly difficult to get the attention of traditionalsuppliers that see China as a more lucrative market, asone study participant noted:

It’s increasingly difficult to keep suppliers’ attention. Inthe utilities’ transmission and distribution sector, Italywill invest € 8 billion in the next 10 years; China willinvest € 115 billion

Looking beyond China, other developing countries willcontinue to emerge as attractive supply sources andgrow as bases for new companies that will be significantplayers in the world economy. Already, Gazprom fromRussia, Cemex from Mexico, Tata Motors from Indiaand Koc Holdings from Turkey are major globalcompanies. Additionally, suppliers in these economiesthat currently sell through established distributionchannels to reach the markets of developed economieswill learn how to distribute, market, finance and createtheir own distribution channels to these markets. Thiswill result in significant distermediation of existingsupply chains throughout the next decade.

Mergers, Acquisitions and Supply MarketConsolidationsTo meet this onslaught of new competition, companiesheadquartered in developed economies will need toincrease in size, with improved economies of scale andmarket power on both the supply and sell sides, tosurvive. Thus, in order to successfully compete, manycompanies will be forced to merge and consolidate.


Mergers, acquisitions and consolidation amongcompetitors, suppliers and customers will requireboards of directors and top executives to carefullyconsider the potential impact on supply chains andrelated risks. An untimely merger could put a strategicsupplier in the hands of a fierce competitor, leavingonly less desirable suppliers available as tradingpartners. Of course, all concerned can play this game,and a company could opt to acquire a competitor’s keysupplier in order to gain competitive advantage.Consolidation is clearly on the mind of purchasingexecutives:

Some of our domestic competitors are waving thewhite flag and going away, and so we are entering intoa second wave of consolidation in our overall industry.

As the merger-and-acquisition game plays out, supplymanagement will be tasked with assessing the impacton the supply chain, including costs, risks andopportunities. As companies merge or are acquired, theacquisition price is often driven by forecasted synergieson the supply side. Thus, supply management will needto understand the new supply base, how it can be usedto gain advantage and how to find the forecasted costsavings. At the same time, supply management will beasked to produce many of the cost savings to supportthe mergers and acquisitions. The promised economiesof scale will have to be delivered, along with creativeways of taking out costs from the supply chain.

As the supply base consolidates, the balance of powerbetween buyers and sellers will shift, at leasttemporarily, in favor of the supplier. Buyers will have tofind creative ways to avoid the price increases thatnewly empowered suppliers may try to implement.

Consolidation of prime contractors and a major supplybase consolidation will occur in many industries,including aerospace, automotive and financial services.In a consolidating industry, the role of supply manage-ment changes. For example, a company can be sourcingand building a strategic relationship with a supplier thatis unexpectedly acquired by a company with which thebuying company has traditionally had a poor relation-ship. The buying company must then change suppliersor try to improve the relationship with the newlyconsolidated entity.

Other consolidation plays may include gaining access tothe potential acquiree’s supply base. These types ofboard-level decisions will require input from supplymanagement. Supply management must know whichsupplier will be in the best position to provideparticular technologies. Paying a premium for anacquisition can better position the company with

respect to a technology and at the same time block ordelay a competitive company from gaining access to thenew technology.

Oligopolies created by supplier consolidation shiftpower in the marketplace, diminishing customerbargaining power and creating a major threat for buyingcompanies. This power shift has already happened inthe steel and chemical industries in Brazil and otherLatin American countries.

Some companies pursuing a growth strategy focusstrongly on mergers and acquisitions. These companiesmust ensure that they have the right processes in placeto evaluate the potential partners and the synergiesachievable in the new supply chains, including costsavings, risks and liabilities. As one study participantcommented:

We look to the supply chain to be able to help usunderstand the companies that are potentialacquisition targets for us, what is their supply chain.When we acquire somebody, if we know that we canleverage the volumes that they already have or withpeople who we already have great contracts with orgreat deals with, then those instantly flow through thefinancial synergies and the acquisition becomes moreattractive. At that point, we are generally willing topay perhaps a little bit more to make sure that we canget that acquisition or at least we go into it with eyeswide open, knowing what we think the completeintegrated and acquired value would be for us.

Increased Governmental RegulationIn the coming decade government legislation andregulation of business will increase, requiringcompanies to dedicate significant resources to ensurecompliance. This will be especially true in the U.S. andthe European Union. Homeland Security rules will forcecloser scrutiny of suppliers, and privacy rules willrequire closer monitoring of contract discussions. In theU.S., the Sarbanes-Oxley Act will create the incentivefor companies to give supply management the authorityto work closely with finance in order to manage allcorporate spending.

Privacy legislation and regulations will mean thatsignificant time will be dedicated to discussing theseissues when constructing contracts. Any time thatcustomer information is sent outside the company,legislation regulates what has to be done to protect theprivacy of the customers. Government regulationsrequire that new suppliers be subject to backgroundchecks for terrorist activities. If a company is usingmany new suppliers or doing new business with asignificant number of different suppliers, it will need

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processes and procedures to handle the backgroundchecks.

Governmental activity is weighing heavily on supply, asone study respondent indicated:

We have an enormous number of regulatory issuesthat are creating a nightmare in terms of how weoperate and fly in the face of what seemingly would begood business practices (e.g., whether it’s how wehedge materials or how we account for things or howwe deal with the government around importing, howwe deal with safety and security issues). Thegovernment clearly does not understand theramifications of what they’re declaring and it’s just anabsolute nightmare.

In addition to regulation, government actions tosupport economic development, such as tax incentivesand trade restrictions, will have a large impact onsupply strategies. Political instability could changesituations overnight and require a rapid change insupply strategies.

Technology AdvancesIn many industries, technology breakthroughs willcause major changes to how products and services areprovided. These changes may require capitalinvestment, but will lower the customer’s total cost ofownership. In many industries, core technologies willeventually be commoditized, forcing geographicconsolidation and concentration of the supply base andfundamentally affecting supply chain structure andrelationships. Increased competition for, and someshortages of, key raw materials will lead to technologychanges and the use of other materials. For example,plastic bottles may not be cost effective when oil reaches$100 a barrel, which will bring about the need for newpackaging technology. This type of change is alreadycoming to light, according to one study participant:

Supply chain disintegration will be a major change.For example, in the television business 20-30 yearsago you had huge glass factories, made tubes andassembled everything in-house. Now, for flat panelsthe supply base is in Korea, Japan and Taiwan, whichmakes all the panels for all places in the world and allsuppliers in the world. Consumer product companiesdon’t differentiate on any kind of industrial technologyanymore but compete only on the features, thesoftware and some additions to the core of the product.

Customer and Channel DynamicsIn some industries, the downstream supply chain willchange rapidly due to economics and governmentpolicies. Consider pharmaceuticals, where there is a

significant amount of volume shifting away fromindependent pharmacies and moving toward the largerchains of drug and general merchandise stores includingCVS, Walgreen’s and Wal-Mart. At the same time, thewhole healthcare experience in the United States ischanging as the government comes to pick up more andmore of the bill. The government will force more valueand integration in the supply chain, specifically aroundelectronic health records, data sharing and security ofpatient records. The supply chain will need tocustomize services and value to the various channels,including hospitals, traditional clinics and theincreasing number of retail clinics. The flow of dollarsand information will become much more valuable inchannel management than the flow of products.

Within other industries (e.g., airlines and aircraftmanufacturers), supply chain dynamics will beinfluenced by the poor financial condition of majortrading partners in the chain. This performance willreverberate up and down the chain, alteringrelationships and causing suppliers to seek othercustomers and/or sources of revenue.

The impact of private equity firms will also besignificant. Many companies and suppliers have alreadybeen bought and taken private by these companies. Inlooking to recoup their investments, the private equityfirms will generally slash costs, raise prices and changebusiness relationships with their trading partners,affecting supply and supply chain strategies.

Increased Product Variety and Shorter ProductLifecyclesVariety will take several forms, including more models,brands, and products tailored to different geographiesand price points. For example, the market size for anyparticular consumer food product will continue toshrink as more and more varieties are made available,forcing more emphasis on quickly getting in and outof new and unique flavors. Consumer tastes inemerging economies will be new and different fromtraditional markets, necessitating new products andnew distribution channels. Traditional lines ofcompetition will blur as companies try new productsand markets and engage new suppliers from newindustries.

Social ResponsibilitiesCompanies in developed economies will be held to highstandards wherever they do business in the world.Shareholder proposals related to social concerns willcontinue to be brought forth, requiring companies tomonitor working conditions in their supply chains allthe way back to basic extractive and farming practices.Supply management will be tasked with working with


the supply base to ensure that it meets environmentalstandards.

As companies consolidate their supply bases to becomemore competitive, their commitments to a diversified(i.e., women- and minority-owned businesses) supplybase will come under pressure. Many diversifiedsuppliers are positioned in the long tail of those small-sized suppliers that will be cut from the supply base.Furthermore, it will be difficult to grow expenditureswith those that survive the supply base rationalization.To maintain their commitments, companies will rethinktheir strategies in this area. New approaches will includeinvestment in the companies, either directly or byhelping to secure outside financing, allowing thediversified suppliers to grow and better compete in theglobal marketplace. Other strategies will be to sharegood practices with them to strengthen their businessand to help them find new customers. Ultimately,companies will find ways to keep their commitments todisadvantaged suppliers, as one study participant noted:

A couple of things we’ve tried to do in the supplierdiversity space is really try to put a little less emphasison the dollars we spend and a little more emphasis onhow we can help minority businesses to grow theirbusiness.

Environmental ResponsibilitiesEnvironmental concerns will continue to increase on aworldwide basis as the interrelationships amongindustrial activity in various regions of the world cometo be better recognized and understood. Customers,consumers, shareholders, non-government organizationsand governmental bodies will all increase their scrutinyof corporate environmental practices in all regions ofthe world and demand that companies take environ-mentally friendly actions by doing things like using lesspackaging material, reducing carbon emissions andmaking products that can be readily recycled.Companies will be forced to meet the environmentalexpectations of the general populace.

Environmental issues will ultimately become brand-related issues and influence how companies are viewedin the marketplace. Information on the environmentalimpact of both purchased and sold products will bereadily available to consumers and impact their buyingdecisions. Retailers will be increasingly conscious ofenvironmental-sustainability issues and will give veryspecific goals to their suppliers, such as taking out somespecific amount of packaging over a defined timeframe.They will not put products on the shelf if the productsare not in compliance with their customers’environmental expectations, as several of our studyparticipants commented:

We are starting to get a lot more scrutiny aroundenvironmental concerns, particularly being a retailerwith catalogs. The interest is on the type of forests weuse for the paper products we use for catalogs,recycled content, and all those kinds of things.

The government, as a customer, is involved in greenprocurement. We had to drive green down all the wayto our office supply buying.

Companies will develop and publish “green statements”that declare their intentions to be environmentallyresponsible. Legislation and regulation will drive someof this behavior, but other action will be influenced bythe costs and benefits. Some of the benefits come frompositive public perception or the avoidance of negativepublicity. To meet these commitments, companies willput together cross-functional teams with executiveleadership to monitor environmental concerns in theextended supply base.

It will be important to examine these issues from acorporate perspective. If the costs and supply continuityrisks of environmental actions are high, then supplymanagement will not take unilateral action to incurthese costs and risks. Executive leadership will beneeded to set the “green” strategy and set the riskprofile for the company, which business units andsupply management will follow.

New technologies like nanotechnology will be a keydriver in most manufactured products. Theenvironment impacts of these technologies will need tobe carefully researched and studied. Consumers andcustomers will not stand idly by if the new technologiesalso bring new environmental, health and safety risks.

Companies will be challenged to satisfy the conflictingdemands of their customers, as one participant shared:

The consumer plays an important role in all of this.The consumer wants to know you’re recycling. Theywant to know that you’re environmentally friendly.However, people staying at a high-end hotel still wanttheir sheets changed every day.

Conclusion

Overlaying the several global forces discussed in thischapter is the reality that the speed, variety, scope andrange of changes will increase over the next decade.

Change in SpeedWhile current rates of change may make dramaticfuture increases seem unlikely, if the trend curves are

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viewed exponentially instead of in a linear fashion, theimplication is that the pace will keep changing at anevery increasing rate, as shown in Figure 3.2. Tounderstand this notion, one can reflect on the changesin Internet-related technology over the past 10 yearswithin supply management and the impacts — bothdirect and indirect — that this technology has had. Aswe will discuss later in this report, the impact of thistechnology on supply management will likely be evengreater in the next decade. Metrics documenting thatthese impacts did indeed follow an exponential changecurve over the past decade have not been developed.However, such rates of change have been welldocumented for the technology itself. The most famousof these is perhaps Moore’s law, which, loosely stated,predicts that the processing speed of CPUs will doubleevery 24 months, an exponential growth rate. On aneconomic level, consider that the Chinese economy hashad an average annual growth rate of more than 10percent over the past five years.2 At this rate of growth,the size of the Chinese economy will more than doublein less than nine years. The implications of this growthon the demand for raw materials, growth inmanufacturing base and growth of consumer marketsmust be of inordinate concern for supply managers.

Change in VarietyThink nanotechnology. As the basic building blocks oftechnology shrink, the number of new products andcompetitors will increase correspondingly.3 The totaldemand for most of these new products will be smalland fleeting. Companies will need agile supply chains tokeep up with this onslaught of new products, newmarkets and rapid product change.

Change in ScopeThe scope of trends that have direct implications forsupply managers will be greater than ever before. Thegrowth of third-world economies, mergers of customersand suppliers into mega-companies, environmentalregulations and the rapid dissemination of intellectualproperty will come to be much more than just abstractnews items. Rather, these phenomenona will occur onan unprecedented scale to impact companies andsupply managers directly and quickly.

Change in Range of OutcomesCertain major changes on the global stage appear nearcertain to occur. More difficult to predict are theimpacts that these major changes will have onorganizations and supply management. For example, asChina grows, its increasing need for raw materials may


2World Bank, Quarterly Update, May 2007, viewed at http://siteresources.worldbank.org/CHINAEXTN/Resources/318949-1121421890573/china_05_07.pdf.3See, for example, Consumer Products 2010: Executing to Lead in a World of Extremes, IBM Global Business Services, viewed at http://www-935.ibm.com/services/us/imc/pdf/ge510-3619-consumer-products-2010.pdf.

Figure 3.2: Linear Versus Exponential Growth Rates

33 additional months to double

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have a beneficial effect on the economies of sub-SaharaAfrica and bring new suppliers of commodities to theworld market. On the other hand, this demand may setoff more political battles and civil wars of the sort thathave plagued the region for years and further delaydevelopment of the raw material resources in theregion. Other forces will similarly have many high-riskoutcomes.

Living in the FutureExecutives can prepare for the changes brought on byglobal forces by first recognizing the trends and thendeveloping strategies to position their companies to takeadvantage of these changes. Extending supply chains todeveloping economies, working with suppliers todevelop green strategies, adjusting to new regulations,working to reduce cycle times and implementing newtechnologies will come to be routine activities in thenext decade. Additionally, companies must prepare forthe high-risk impacts of global trends by recognizingthe range of possible outcomes and crafting contingencyplans to meet and adapt to these changes.

Life promises to be interesting, but challenging, in thedecade ahead.

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The external forces discussed in Chapter 3 will have adirect and significant impact on the business modelsand strategies in the next decade. These models andstrategies will, in turn, drive the supply managementstrategies discussed later in this report.

Keys to Future Success

The survey asked respondents to rate the importance ofeach of 17 different business strategies to the success oftheir company’s business model in the next decade. AsFigure 4.1 shows, the top-rated strategies wereconcerned with cost, quality and responsiveness tocustomers, mirroring the top competitive strategies of

the last decade. Additional important strategies includeachieving synergies across business units, gaining accessto new markets and ensuring business continuity.

On the other hand, the respondents apparently thoughtthat their companies’ current insourcing/outsourcingstrategies were not going to change significantly. That is,there was little importance placed on insourcingactivities that had been previously outsourced and onoutsourcing those core parts of the business that havebeen retained.

These ratings were strongly supported by the qualitativedata. Some of the business strategies that will be themost salient in the next decade and have the greatest

Chapter 4 — Impacts on Business Modelsand Strategies


Figure 4.1: Future Importance of 17 Key Business Strategies

Average Importance ScoreExternal Force (1 = low, 7 = high)

Reduce cost of externally purchased goods and services 4.19Improve flexibility and responsiveness to customer demand 4.14Reduce internal costs 4.08Achieve higher product and service quality 4.03Improve overall value for purchased goods and services 4.00Realize synergies across divisions/SBUs 3.94Increase level of product and service innovation 3.93Gain access and sell into new channels and geographic markets 3.91Create new sources of value by better leveraging value chain partner/alliance 3.91capabilitiesEnsure business continuity 3.81Achieve faster time-to-market for new goods and services 3.79Improve working capital utilization 3.72Ensure post-sale customer support and service 3.54Develop and market new value-added technology 3.54Move activities to lower cost offshore locations 3.15Outsource non-core activities 3.07Insource previously outsourced goods and services 2.02

impact on supply management are discussed in moredetail below. These strategies are designed to improvethe financial performance of companies and impactboth their income statement and their balance sheet:

• Focusing on cost competitiveness• Aggressively managing resources• Pursuing new revenue sources• Targeting specific customer and market segments• Improving the level and speed of innovation

Focusing on Cost CompetitivenessIn the face of growing imports of finished products andthe provision of services from developing economieswith low labor costs, companies will need to take on anextreme cost management focus. Furthermore, as theymove to market and sell in developing economies, theywill need a portfolio of very competitively pricedproducts and services, typically at lower prices thanthey charge in developed markets.

Year-over-year cost reductions of the purchase prices forgoods and services can contribute to continuousimprovement in earnings per share and help to booststock prices. This is especially important when revenuegrowth is constrained.

A cost-competitive business strategy has manyimportant implications for supply management. Supplywill have to achieve year-on-year cost reduction targetsfor purchased goods and services while developingsupply strategies to offset or dampen the effects ofunfavorable commodity price swings. Off-contractspending will have to be reduced, and discretionaryspending tightly controlled. Supply chain waste willneed to be eliminated. Total cost of ownership will beaddressed by working cross-functionally, while even thehighest performing supply management function willbe expected to reduce headcount and administrativecost.

Aggressively Managing ResourcesIn the next decade, many companies will focus onincreasing the return on their asset base. One way to doso will be by designing and managing assets in such away as to maximize their productivity. For instance, acompany may strive to reduce change-over times for itsmajor production processes and invest in more flexiblemachinery and facilities, as Toyota has done with itsmanufacturing equipment suppliers. Using smaller,lighter machinery than its competitors, Toyota buildssmaller plants and shorter assembly lines that can bereadily reconfigured as market demands change. Theupshot? Nearly 30 percent in savings on the cost ofbuilding a new plant.

Companies will also endeavor to reduce their asset baseby outsourcing manufacturing and business processesand reducing working capital such as inventories andreceivables. The ongoing move to contract manufacturingis but one example of how companies are doing this, tothe extent that many name-brand companies actuallyown little more than their brand names.

A third way of increasing the return on the asset basewill be to invest in businesses with higher returns andexit businesses with marginal or low returns on assets.For example, the OEMs in the U.S. auto industry willstill concentrate on design, marketing, and assemblywhile continuing their exodus from the parts manufac-turing business. Consider the remarks of one studyparticipant who comes from a company that hasundertaken asset-minimization efforts while undergoinga growth phase:

As an organization, we have grown by acquisition andit’s also fair to say that from a total marginperspective, we do quite nicely. Therefore, some of thefocus on cost has not been what it should have been inthe past, so one of the big things for us over the nextthree to five years is really sweating our asset base. Ican see we still have numerous plants around theworld that will run five days a week, one shift. As Isay, with the margins we’ve had in the past, that’snever really been an issue, but it’s increasingly goingto become an issue.

The implications of these asset management strategiesupon supply management are manifold. Supply willhave to find sources of capital equipment that isflexible, has high uptime and can perhaps even becompetitively leased rather than purchased. Supply willtake a leadership role on cross-functional teams toexplore outsourcing opportunities and actively manageoutsourced manufacturing and business process. It willhave to implement vendor-managed inventory,consignment inventory, and pay-on-use or pay-on-shipment inventory plans and negotiate contracts withextended payment plans. As companies exit the partsmanufacturing business, new parts suppliers will haveto be found — in some cases, there will even be a needto create new Tier 1 suppliers that will integrate andbuild systems from the new Tier 2 suppliers. Supplywill have to create or maintain a supply base withstrategic suppliers to support the new businesses andfind synergies between the old and new supply bases.

Pursuing New Revenue SourcesBusinesses will pursue revenue growth over the nextdecade through a combination of incremental andradical changes to their current business models.Incremental changes will include increasing the breadth

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of offerings and customer relationship improvements,such as product line extensions for consumer productcompanies and after-sales service and support for officeequipment, and the continual introduction of innovativeproducts and services in industries like consumerelectronics. A greater challenge will be posed by theneed to enter emerging markets and compete againstlow-priced domestic products, as consumer productsand industrial supply companies will likely need to do.More radical changes will include moving up the valuestream in pursuit of additional sources of revenue bybecoming a systems integrator. In industries such asfinancial services, companies will seek instant growththrough mergers and acquisitions.

Supply implications for revenue-growing strategiesinclude finding suppliers that can support growthstrategies such as innovation and global expansion andfinding or developing suppliers with capabilities to addto the company’s value offerings through co-brandedand co-packaged products.

Targeting Specific Customer and MarketSegmentsSome business strategies will overlap pure cost, revenueand asset strategies. For example, some companies willfocus on identifying the requirements and unmet needsof fragmenting consumer demands. This will beespecially true in consumer products and consumerelectronics. Food products with new flavors will beintroduced to help boost stagnating markets andincrease margins. Also, many green, organic and sociallyresponsible products will be introduced to appeal to thegrowing segment of socially and environmentallyconscious consumers. Finally, new regulations and ruleswill create opportunities for new products and servicesaround areas such as health care and energyconservation.

Supply management will need to find suppliers that cansupport shrinking product lifecycles and constantinnovation, secure suppliers that have market-specificknowledge and capabilities and manage the upstreamsupply chain so it adheres to sustainability andregulatory requirements.

Improving the Level and Speed of InnovationBeing first to market will continue to be an importantand profitable business strategy. Doing so will requirecompanies to anticipate consumer demand and to reactquickly to new product introductions and new markets.

Supply management will need to find suppliers that cansupport shrinking product lifecycles and constantinnovation and bring knowledge of changing consumertastes. It will also have to ensure that suppliers are

willing and able to collaborate and establish processesand technologies for integrating suppliers into new-product development efforts.

Complex Business Models

These five strategies are not independent of one anothernor mutually exclusive; companies will pursue several— or perhaps all — of them simultaneously. Forexample, the aerospace & defense industry will facestructural change and need to refocus due to decliningdefense budgets. The customers of the major aerospacecompanies will want to work with fewer contractors inthe future, so these companies must become systemsintegrators. Systems development for major newplatforms requires significant upfront investments andcreates heavy risks. The challenge is to understand thecustomer’s requirements, while at the same timemanaging the costs of the systems. The chances of costoverruns are significant. More risk will flow through thesupply chain, causing all participants to demand returnscommensurate with these higher risks.

Systems integrators will combine products and systemsfrom the supply base and create fewer of the actualcomponents or subsystems. They will expect suppliersto provide more engineering, program management andvalue-added parts. The company will then integrate theparts and subsystems into an overall product or systemthat is delivered to the customer through a strategydesigned to increase their revenues while reducing theirasset base.

The systems integration business model will requirecompanies to increase supplier integration with theirbusiness strategies and use them in every wayimaginable. Some suppliers will be integrated intodesign, some to solve problems, some to take overwhole categories of business activities and some toprovide key technologies.

In a further effort to grow revenue, companies in thisindustry will be seeking new business in repair andmaintenance of products, regardless of whether theywere the original manufacturer.

On the cost side, aerospace companies will collaboratewith their suppliers for process efficiencies, cost savingsand better ways to roll out programs to customers. Thusin the aerospace industry, as well as many others,companies will simultaneously pursue a complex varietyof strategies to improve their income statement byincreasing revenues and reducing costs and theirbalance sheet through reduced assets.


Other Strategies

In addition to the strategies outlined above, some firmsmay adopt more radical strategies in response to theexternal forces detailed in Chapter 3. For example,some companies may move back toward verticalintegration to provide for security of supply in the faceof global terrorism and the rise of protectionism.Vertical integration may also be used to secure access tokey commodities and technologies.

Alternatively, in some industries Keiretsu- and Chaebol-like relationships may emerge among large companiesand their key suppliers as they form networkedconglomerates in an effort to secure sources of supply,capture key technologies and reduce the cost ofmaintaining supply relationships. Suppliers may join inthese relationships to gain alignment with competitivelyadvantaged customers with which they have strongrelationships and drop their relationships with weakerones.

Conclusion

Cost, flexibility, quality, value — these familiar themesfrom the last decade will certainly continue into thenext decade. What will be different will be the extremecompetition around these themes and the businessmodels needed to achieve exceptional performancelevels.

As more national economies develop, more resources —talent, capital and information — will be engaged todrive the competitive advantages of mature and newcompanies. All companies will be scrambling to developnew technologies, new products, new markets, newsources of revenue and new sources of supply to helpthem maintain and improve their competitive positionin the marketplace.

The good news is that a common set of approaches tonew business models will help drive improvement in allof these competitive priorities simultaneously. Asdetailed in the chapters ahead, supply strategies likecategory approaches, collaboration, technology, talentmanagement and organization support these businessmodels. By recognizing the changes and trends in eachof these areas, supply managers can help prepare theircompanies for the future.

The secret to success will lie in the identification andexecution of appropriate strategies in the context ofeach company’s competitive marketplace. What worksfor one company will not necessarily work for another,

even in the same marketplace. Each company and itssupply managers will have to craft detailed strategiesand execution plans for its particular situation andmeticulously execute those plans. There will be littleroom for error and exceptional performance will berequired. Reasonable costs, flexibility, quality and valuewill only be sufficient for those merely looking to getby; the very best will be required to prosper in the nextdecade.

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In the coming decade, companies will shift theirbusiness models, adopt different strategies, pursue newrevenue streams, further squeeze costs, make their assetbase as lean as possible and reshape their capitalstructures. Clearly, these changes will disrupt “businessas usual” for supply management. But in what ways?

Simply put, chief executives will ask far more of supplymanagement — requiring it to take on a broader, morestrategic mission, evaluating it on a morecomprehensive set of goals and expecting a higher levelof performance. To accomplish this, supplymanagement will need to expand its influence andimpact across functions, business units and geographies,go beyond the comfort zone of traditional successmeasures and find creative ways to deliver even morevalue to the corporation.

Tomorrow’s missions, goals and performanceexpectations for supply management will fall into fourmain areas:

• Delivering more innovation from suppliers• Contributing more broadly to revenue generation• Anticipating and managing supply risk to ensure

business continuity• Expanding the breadth and impact of cost

management efforts

We explore each later in this chapter.

Survey Findings

The supply executives scored the future importance of17 specific supply missions and goals to the company’sbusiness strategy. Each was rated on a scale of 1 to 5(1 = minimal, 5 = extreme). Figure 5.1 groups the items

into the four major missions discussed in this chapter(with some items applying to multiple missions). Thethird column in the table shows the average importancescore for each mission and goal while the figures shownin the last column indicate the percent of respondentsthat rated the item 4 or 5 (highly or extremelyimportant) on the scale.

Traditional objectives related to improved supplierperformance, price, value-to-cost and continuity ofsupply were viewed as highly or extremely importantgoing forward by 70 percent or more of respondents.Nearly all of the other missions, goals and performanceexpectations were rated as highly or extremelyimportant by at least 50 percent of respondents. Onlytwo objectives — “create new business opportunitiesand revenue streams in conjunction with suppliers” and“actively engage with tier-two and tier-three suppliers todrive improved supply chain performance” — were notrated highly or extremely important by a majority ofrespondents.

Delivering More Innovation From Suppliers

The need for innovation will accelerate as companiescontinue to aggressively pursue new geographic anddemographic markets. The supply of innovative ideaswill also accelerate as education and communicationsextend deeper into emerging markets to unleash a newwave of creative energy, and as companies, entrepreneursand individuals more rapidly create and commercializetechnological advances. With the demand and thesupply for innovation in such a state of flux over thecoming decade, and limited resources within any onecompany, businesses must overcome the usual “notinvented here” barriers and tap into all available sourcesglobally.

Chapter 5 — New and Expanded Missions,Goals and Performance Expectations forSupply Management


Already, many companies recognize that they cannot goit alone and are looking far and wide for externalsources of new ideas for future products and services,and integrating those that supply the ideas deeply intotheir R&D processes.

Delivering more innovation from suppliers will firstrequire recognition of the importance and value ofexternal innovation and its place in the company’s R&Dstream. It will also require advanced approaches to howcompanies identify external sources of supply, how theystructure the commercial and working relationshipswith those sources and how they make those resourcesan integral part of the product and service developmentprocess.

Unless the company already embraces suppliers as asource of innovation, the mindset change will need tobe driven from the top — the head of supplymanagement alone cannot make it happen. Reinventionof the innovation models will be required to fullyleverage external innovation sources, necessitating CEOleadership and cross-functional alignment of R&D,

engineering, marketing, supply management and others.For example, Procter & Gamble CEO A. J. Lafleychallenged the company in 2000 to fundamentally shiftfrom internal R&D to a “connect and develop” approachthat leveraged external resources. Over the course of sixyears, the new approach led to a more than twofoldincrease in the number of new products incorporatingexternal ideas, and a product development pipeline inwhich nearly half of the initiatives incorporated externaldiscoveries.4

Finding external innovation sources should becomeeasier with faster, more transparent flows of informationabout supplier capabilities. Fully leveraging thecapabilities of existing suppliers is of course the startingpoint. However, to ensure a continuous flow of newideas, companies will need to formalize an ongoingprocess for sourcing innovation. This will help uncoversuppliers in related industries/technologies that canadapt their ideas and capabilities to a new setting, andhelp identify nontraditional sources of innovation suchas design houses or university researchers.

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Figure 5.1: Supply Missions and Goals

Primary AverageMission Specific Supply Missions, Goals and Performance Expectations Score %*

Innovation Integrate suppliers into the new product/service development process 3.68 60%Identify and acquire new value-adding technologies and innovations from 3.64 58%supply markets

Revenue Support company’s entry into new geographic markets 3.66 61%Design/manage upstream supply chain to meet needs of specific customer/ 3.48 51%product market segmentsCreate new business opportunities and revenue streams in conjunction with 3.22 47%suppliers

Risk Ensure continuity of supply 4.19 81%Define and manage the strategic supply-related risk/reward profile for the 3.71 56%company

Cost Increase the ratio of total value to total cost of ownership for purchases 3.98 78%Drive company standardization/ de-proliferation efforts 3.82 66%Achieve year-over-year price reductions from suppliers 3.8 65%Improve the utilization of company assets 3.73 64%Improve productivity/reduce cost of the supply management function 3.46 53%Actively engage with tier-two and tier-three suppliers to drive improved 3.32 46%supply chain performance

Multiple Improve all aspects of supplier performance year-over-year 4.18 88%Integrate long term business planning with key suppliers 3.83 70%Integrate suppliers into the company’s business and operations processes 3.69 65%

*Note: Percentage of respondents rating item highly or extremely important

4Huston, Larry and Nabil Sakkab. “Connect and Develop: Inside Procter & Gamble's New Model for Innovation.” Harvard Business Review, 84.3(2006): 58-66.

Relationships between the company and its externalinnovation sources may need to be structureddifferently in the future. This is especially true if pastadversarial approaches deterred suppliers from sharingtheir best and brightest ideas. Financial support,equitable sharing of risks and benefits and two-wayprotection of intellectual property rights will need to bea part of the mix.

Finally, supply management organizations will need tointegrate all parties into the company’s new product andservice development process. Collaboration tools willconnect the company with its suppliers and customersin an innovation community and enable jointcollaboration among suppliers to deliver more value.

Contributing More Broadly to RevenueGeneration

Supply management has always helped contribute torevenue generation. Close attention to costs for goodsand services leads to more competitively priced endproducts. A focus on quality and service reduces failurerates, improves availability and leads to higher customersatisfaction and loyalty. Innovations from the supplymarket will lead to revenue increases from newproducts and services.

However, companies will expect even morecontributions from supply management in support ofnew revenue generation strategies for the business.

Some companies will seek to boost revenue by rapidlyintroducing short products with a limited lifecycleaimed at smaller, niche markets. Supply will need tofind suppliers and create processes that will supportgetting into and out of these unique offerings quicklywith speed, agility and minimal waste.

Those companies that pursue revenue opportunities indeveloping markets will likely require tailored products,different cost structures, local investment and localcontent. Supply will need to develop or restructure thesupply base to meet the needs/costs of the markets towhich the company wants to sell.

Other companies will seek ways to boost revenue byleveraging the existing asset base and distributionchannels to bring to market higher value or evenradically different products provided by others. Forexample, a telecom company might provide contentalong with network services, or a bank or brokeragehouse might provide other companies with access to itscustomer base. Supply will need to assess, screen andnegotiate with these external parties.

Companies will partner with others to bid on anddeliver total projects that are beyond the capabilities ofsingle entities, and supply will play a major role infinding those partners. For example, Singapore isaccepting bids for a new computer operatingenvironment for its governmental agencies. Teams ledby IBM, EDS and Hewlett-Packard each have additionalpartners that are providing part of the solution.

Supply management organizations may also be expectedto take a lead role in finding new revenue streams. Inone asset-intensive company, the supply managementorganization found revenue-generating opportunitiesthat had been overlooked by the existing assetmanagement process. Supply leveraged its knowledgeand network of contacts in the used capital goods andequipment markets to establish an ongoing process thatturns unused assets into cash. At a travel and hospitalitycompany that was acquiring premium amenities(bedding and decorative pieces) for use in its hotelrooms, the supply organization identified an opportunityto brand and sell the items directly to consumers aswell. Supply helped develop the business plan and setup the distribution channel to bring the goods toconsumers. At one high-tech company, supply isresponsible for licensing older technology to other firmsto generate a revenue stream.

Finally, supply may be asked to support the company’sown selling efforts. Depending on the situation, thiscould include providing deep insight into the dynamicsof upstream supply markets to proposal and bid efforts,or organizing and participating in co-selling teams withkey suppliers. It could also include helping the salesforce sharpen its own skills by critiquing and/or role-playing.

Anticipating and Managing Supply Risk

Already, there is widespread acknowledgement amongsupply executives of heightened top-down attention tosupply risk management. Extended global supply chainsthat include geographically distant, unproven (or evenunknown) suppliers pose supply continuity, liability,reputational and intellectual property risks. Changes inbuyer-supplier market dynamics brought on by supplyindustry consolidation and private equity acquisitions ofsuppliers reduce predictability. Consumer, customer andgovernmental actions related to environmentalprotection, sustainability and labor practices pose anuncertain future in terms of both magnitude and timingof changes. Additional complexity comes about due tothe volatility of commodity prices, currencies andinterest rates.


The drivers of change discussed in Chapter 3 foreshadoweven more uncertainty and complexity surroundingrisk. The emphasis on anticipating and managing riskwill only increase in the next decade. Supply executiveswill be expected to play a more strategic role inidentifying and interpreting risks, and making toughdecisions about risk exposure and risk mitigation.

Many of the individual tools of risk management will befamiliar. What will differ is the level of sophisticationrequired to manage the complex, wide-ranging portfolioof supply risks and integrate risk management intooverall supply activities.

Supply management will be expected to reduce or avoidrisks associated with limited sources of supply. Thismeans having better visibility and control over risksassociated with individual suppliers and supplierlocations. Approaches could include monitoringsupplier financial stability more closely, co-investingwith the supplier to get priority access to capacity andincreasing the use of dual sourcing for critical items.

Related to this is the need to more closely monitorevents that could disrupt supply from geographicmarkets and to establish contingency plans for usingalternate sources, transportation links and ports.Strategic stockpiling is also part of the equation.

Also, supply management will need to become moreeffective at dealing with volatility of exchange rates,markets and prices. This means obtaining better marketintelligence — not only the supply-demand situation ofthe primary market, but all along the value chain. Italso will require closer integration of operational andfinancial risk strategies, with supply management andfinance jointly developing strategies for hedging risk. Itmight also include the company taking on procurementresponsibilities for key commodities on behalf of itsupstream suppliers.

Supply management must also protect against otherrisks upstream in the supply chain. Suppliers that areseveral tiers back in the supply chain may follow laborpolicies that create unsafe working conditions or exploitworkers, severely damaging the company’s reputation(as has happened to several apparel companies).Choosing supply markets and sources and purchasingitems and packaging that run contrary to sustainabilityprecepts also exposes the company to reputational risks,as well as to direct loss of business with sustainability-aware customers. The potential for loss of intellectualproperty still exists in certain geographic markets.

Supply management must more aggressively manageliability and safety risks as well. To ensure compliance

with Sarbanes-Oxley legislation, supply must addressinternal controls as well as a range of possible riskexposure areas that includes supply chain disruption,outsourcing, long-term contracting, leasing and vendor-managed inventories. Tight controls over componentand ingredient integrity (i.e., ensuring the item meetsstandards and is what the supplier says it is), transportsafety (e.g., avoiding hazardous material incidents),tampering (to avoid accidental or intentionalcontamination in-transit) and source-to-final-usertraceability (for items ranging from pharmaceuticals toaircraft and auto parts to genetically engineered foodproducts) all will be required. Recent pet food recalls inthe U.S. due to tainted vegetable proteins and the recallof a number of different toys that were finished withlead-based paint from offshore sources underscore therisks introduced by the global supply base.

Companies will develop more sophisticated businessscenario planning/risk modeling to deal with the future,with supply as a full partner in this effort. The riskmodels will become more robust, covering more typesof risks. Risk strategies will balance both avoidance andrecovery approaches and companies will developspecific responses to known risks along with a responseprocess that can be adapted to unanticipated situations.

Expanding Cost Management Efforts

Cost management has always been the sine qua non ofsupply management’s mission. It will be no different inthe future. Performance expectations will, however, beraised considerably as global competition forcescompanies to squeeze unnecessary cost out of everypart of their business. For supply management, thismeans widening the breadth of spend areas covered,managing costs more holistically and delivering costsavings faster.

In our research, we found wide differences betweencompanies in terms of the breadth of external spendmanaged or influenced by their supply managementorganization. At one end of the spectrum are thosecompanies that are just beginning to address thepolicies that led to fragmented regional or divisionalbuying decisions that limited leverage on expendituresfor certain categories. Also, some supply managementorganizations have been unable to penetrate certainspend areas due to pushback from powerful users orlack of expertise on the supply team. Further, despiteattention over the past decade on capturing andunderstanding spend profiles, some are still severalyears away from systems and tools to overcome thelimitations of multiple ERP systems and lack ofcommon supplier- and item-coding schemes.

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In contrast, supply management organizations at othercompanies have already overcome information andorganizational barriers and are now being asked toextend their influence deeply into the full range ofexternal expenditures. They leverage volumes acrossunits globally and aggressively pursue opportunitiesjointly with users for traditional purchase categories aswell as in nontraditional areas (e.g., facilities manage-ment, legal, advertising and contract manufacturing).They also challenge assumptions about internalexpenditures, examining company competitivenessagainst marketplace alternatives and helping theexecutive team to evaluate outsourcing options. Theseorganizations will become the standard against whichother companies are measured. One study participantexplained it this way:

We are starting to be looked at as an activity that canweigh in on all aspects of cost in the business — notjust the goods and services that we buy. I was taskedwith heading up a group about a year ago that lookedat all of our SG&A expense — all of our selling,general, and administrative — and of course that’sother things besides just goods and services, primarilysalary but also office occupancy space and those kindof things. This is a nontraditional procurement-typerole but related to cost and related to processimprovement, related to looking at best practices anddoing the analysis of where the money goes and thosekinds of things. I see more and more of that starting tohappen. So the CEO is starting to look at our groupbeyond just goods and services and really look at allaspects of cost in the business.

Taking a more holistic view to understand and influencethe drivers of cost will also be required. Supplymanagement organizations will be expected to eliminateunnecessary expenditures and maximize value receivedfrom those expenditures that remain. A range of toolsand techniques will be used, including complexityreduction, greater standardization, tighter managementof specifications and demand, compliance management,target costing, value analysis, value engineering, pricebenchmarking, statistical price modeling, should-costanalysis, expressive bidding, lean design and Six Sigma.The organizing principle will be a collaborative, cross-functional, cross-enterprise strategic cost managementapproach focused on total lifecycle cost.

Finally, cash-hungry companies will continue to raisethe bar on the speed with which savings are realized.Rather than multimonth projects, supply managementorganizations will be expected to streamline processesand reuse tools and techniques for sourcing commonlyacquired items. Following acquisitions or mergers,supply management organizations will need to rapidly

integrate supply management activities and volumes ofnewly merged or acquired business units and deliverthe benefits.

Even Broader Missions?

Beyond those described above, the next decade couldsee successful supply management organizations assumea greater role in formulating company and business unitstrategy and helping to lead transformation effortsthroughout the company. For example, supply’s missioncould include critically reexamining the company’soverall business model from the perspective of supplymarket opportunities and threats, or formulating anddriving integrated supply chain strategies with businessunits. Supply could also be given the mission of leadingthe transformation of key cross-functional processes likeR&D.

Conclusion

A future of broader missions, more comprehensive goalsand much higher performance expectations will requiresupply management organizations to consider newapproaches across a range of strategies, processes andenablers. The next section of this report explores theseareas.


Section III — How Supply ManagementStrategies Will Change

37CAPS Research

The e-survey and early focus sessions gathered insightsand data on the approaches that supply executivesbelieved would be most important to supplymanagement success in the future. The range of topicsincluded:

• Category strategies• Supplier strategies• Supplier management/development• Strategic cost management• Integrated supply chain• Integrated new product/service development• Cross-functional integration and executive

engagement• Supply chain structure and relationships• Strategic outsourcing• Organization structure and governance• Human resources management• Supply management information systems• Measurement and evaluation

The e-survey data helped to isolate specific approachesthat will be important to supply success in the comingdecade. The focus sessions added depth and insight tothe survey data. Once both sets of data were collected,the research team used a number of statistical andempirical approaches to analyze them and extract thekey underlying themes.

In this chapter, we highlight the individual strategiesrated most important in the e-survey and introduce theseven key supply strategies for future success, each ofwhich will then be covered in-depth in a subsequentchapter.

E-Survey Findings

Our e-survey respondents rated the importance of 105potential supply strategies to their company’s success by2012 and the degree of implementation today.5 (Data onthe individual strategies is presented later in thischapter and subsequent chapters.) Using their meanscores, individual strategies were grouped into fourtypes based on their relative importance and relativedegree of implementation.6 Figure 6.1 displays thegroupings, along with the number of strategies withineach.

The 42 strategies in Quadrant 1 of the graph areconsidered especially important to future success, andare relatively farther along in implementation todayacross the companies in our survey population.However, as the yellow color indicates, these companiesneed to be cautious about overestimating their level ofreadiness. It is sobering to note that while companiesanticipate what strategies will be most important, theiractual readiness lags. The highest mean implementationscore of any strategy (“conduct spend analysis across thecompany in both products and services”) was just 3.36on a 5-point scale, indicating that many companies havesignificant work ahead. Figure 6.2 highlights thestrategies with the largest implementation gap in thisquadrant.

The 12 strategies in Quadrant 2 (indicated by red in thegraph) are of even more concern, because whileexecutives know that these are important for the future,they lag even farther in implementation. These deservemore attention to shore up the implementation gap. Thefour strategies in Quadrant 2 with the biggest point

Chapter 6 — Overview: Seven KeyStrategies for the Coming Decade


5Both importance and implementation were rated on 1 to 5 scales. Importance ranged from 1 = minimal to 5 = extreme, while implementationranged from 1 = minimal to 5 = complete.6Cut-offs for high-low in Figure 6.1 are based on the median importance and implementation scores of all 105 strategies.

score gap between importance and implementation allrelate to information sharing across the supply chain, asshown in Figure 6.3.

The 11 strategies in Quadrant 3 (indicated in green)have a higher than average level of implementationtoday, but have lower importance for the future.Companies should guard against over-investment inthese strategies. Finally, those 40 strategies in Quadrant4 (indicated in blue) deserve far less time and attentionthan those in other quadrants.

We also examined whether there was commonality orsignificant industry or regional differences in importanceamong the 105 strategies. To help focus the analysis, welooked only at those strategies with an overall meanimportance score of 4.25 or higher. For these 17strategies, we then compared the mean importance scoresfor North America and Europe participants, and formanufacturing and service participants.7

Several strategies were universally considered important,as shown in Figure 6.4. Many of these relate to strategicalignment, cross-unit management of supply,

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Figure 6.1: Future Importance Versus Current Level of Implementation

High future importance, low

implementation now (12 strategies)

Average Scores (2.47 : 3.84)

High future importance, high implementation now

(42 strategies) Average Scores

(2.90 : 4.13)

Low future importance, low

implementation now (40 strategies)

Average Scores (2.14 : 3.19)

Low future importance, high implementation now

(11 strategies) Average Scores

(2. 72 : 3.29)

Average Level of Implementation

Aver

age

Deg

ree

of Im

port

ance

(Median = 2.57)

(Median = 3.74)

High

Low

Low High

5

4

3

2

11 2 3 4 5

2 1

4 3

7“Top importance scores” were defined as a mean importance score of 4.25 or higher for any of the following four segments: manufacturingsector respondents, service sector respondents, North American respondents, European respondents. The value 4.25 was derived from a visualinspection of overall importance scores to identify a logical breakpoint in the data. A total of 17 strategies had overall importance scores of 4.25or higher.

Avg. ScoreStrategy Name Importance Implement Gap

Improve working relationships with strategic supplier 4.42 2.96 1.46Integrate business planning and supply management 4.28 2.70 1.58Develop common performance metrics across the supply chain 4.28 2.62 1.66Collaborate with suppliers and customers to reduce supply chain costs 4.25 2.71 1.55Use common company-wide data base 4.19 2.70 1.49

Figure 6.2: Quadrant 1 Biggest Gap — Collaboration Remains a Challenge

organization, human resource management andperformance management — areas where one mightexpect agreement on importance regardless of industryor geography.

Significant differences between geographies did appearfor other strategies. As Figure 6.5 shows, NorthAmerican companies tended to rate the importance ofstrategies for internal strategic alignment considerablyhigher than their European counterparts.

In contrast, European respondents gave more emphasisto strategies dealing with globalization, externalintegration and organization, as shown in Figure 6.6.This may in part be due to continuing efforts inEuropean companies to overcome the remnants offragmented, country-centric approaches prior to theestablishment of the European Union.

We had expected to find differences between themanufacturing and service sectors as well, primarily dueto the influence of direct materials procurement inmanufacturing and the attendant product developmentand supply chain linkages. However, the 17 strategiesthat had overall mean importance scores of 4.25 orhigher were highly rated by both manufacturers andservice companies.

To help understand which strategies did have significantindustry differences, we screened for strategies wherethe mean importance score was 4.0 or more for one orthe other segment, and where the difference in meanscores was 0.5 or greater. Ten strategies emerged, asshown in Figure 6.7

The data indicated that manufacturing companies placemuch greater importance on strategies to strengthen


Avg. ScoreStrategy Name Importance Implement Gap

Provide transparency of operational information (e.g demand 4.00 2.33 1.67requirements, inventory levels and forecast) throughout the supply chainProvide transparency of capacity and capability information throughout 3.81 2.21 1.60the supply chainProvide transparency of cost and financial information throughout the 4.07 2.53 1.54supply chainIntegrate sales and operations planning across the supply chain 3.84 2.47 1.37

Figure 6.3: Quadrant 2 Biggest Gap — Information Sharing Across the Extended Supply Chain

Figure 6.4: Many Supply Strategies Are Universally Seen as Very Important

Top Importance Future Strategies Common across Manufacturing & North America &Sectors and Regions (Average importance score Service Europe

4.25 or more) Companies CompaniesAlign supply management strategy with corporate-wide and SBU 3 3business and technology strategiesConduct spend analysis across the company 3 3Employ a formal process to develop and manage supply strategies for 3 3important categories across the companyAggregate and manage total expenditures for key categories across the 3 3companyUse cross-functional teams for category and supplier strategy 3 3development and implementationImprove working relationships with strategic suppliers 3 3Collaborate with suppliers and customers to reduce SC costs 3 3Establish a knowledge and skill competency model for supply mgt. 3 3Recruit and/or develop talent with broad general management expertise 3 3for supply management rolesDevelop common performance metrics across the companies in the 3 3supply chainMeasure supply mgt. performance on strategic functional objectives 3 3

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Figure 6.5: North America — Emphasis on Internal Strategic Alignment

Importance(1-5 scale)

NorthTop Importance Future Strategies with Major Regional Differences America Europe

Establish shared goals and objectives between the supply management organization and 4.49 3.75with other internal organizationsLink strategic supply metrics to business strategies and financial metrics 4.46 3.50Use total costs to drive decisions 4.44 4.00Integrate business planning and supply management processes 4.39 3.92Align supply management strategy with related internal customer strategies such as 4.37 3.50marketing, manufacturing, engineering and product/service developmentUse a common companywide database for supplier information 4.37 4.00

Figure 6.6: Europe — Emphasis on Global Strategies, External Integration and Organization

Importance Scale(1-5 scale)

NorthTop Importance Future Strategies with Major Regional Differences America Europe

Source from emerging/low cost markets 3.53 4.58Use a center-led model for supply strategy development with decentralized execution 4.00 4.50Use a common companywide database for item/service data 4.08 4.50Provide transparency of operational information (e.g., demand requirements, inventory 3.86 4.42levels and forecast) throughout supply chainIdentify and manage the lead times throughout the supply chain 3.67 4.33Standardize processes across companies in the supply chain 3.94 4.33Create, lead and manage global supply networks 3.80 4.25Foster global integration of the supply management organization 3.74 4.25Employ an ongoing process to define and establish core competencies of the company 3.64 4.25

Figure 6.7: Supply Chain Focus in Manufacturing Sector, Administration and Control Focus in Services Sector

Top Importance Future Strategies with Major Sector Differences Importance score (1-5 scale)(Only one sector’s mean importance score is 4.0 or above, and Manufacturing Service

difference in mean sector scores is 0.5 or above) Industries IndustriesIdentify and manage the lead times throughout the supply chain 4.17 3.52Create, lead and manage global supply networks 4.16 3.00Foster global integration of the supply management organization 4.13 2.64Source from emerging/low cost markets 4.07 3.39Integrate sales and operations planning across the supply chain 4.06 3.18Provide transparency of capacity and capability information throughout 4.03 3.18ManaIdentify and manage the lead times throughout the supply chain 4.17 3.52Create, lead and manage global supply networks 4.16 3.00Foster global integration of the supply management organization 4.13 2.64Source from emerging/low cost markets 4.07 3.39Integrate sales and operations planning across the supply chain 4.06 3.18Provide transparency of capacity and capability information throughout 4.03 3.18the supply chainManage time to market and innovation velocity 4.02 3.15Implement product management software (including product/service 3.53 4.18design, item specification controls, sourcing, contract compliance, etc.)Decrease number of suppliers to reduce administrative costs 3.29 4.09Unbundle cost components of product/service mix 3.53 4.09

external linkages along the supply chain, which boreout the hypothesis. On the other hand, servicescompanies place much greater importance onadministrative and control strategies.

Key Strategies

The survey team analyzed the survey data and focussession and interview learnings to identify underlyingthemes about success in supply management. The teamconcluded that there were seven main families ofstrategies that will have the greatest impact on supplymanagement success in the future. A text-miningsoftware analysis of focus sessions and interviewtranscripts supported the importance of these themes.

The strategic themes that we expect to be mostimportant to supply management in coming years are:

• Developing category strategies that are robust andforward looking

• Developing and managing value-addingrelationships with suppliers

• Designing and operating multiple supplynetworks to meet the needs of specific marketsegments

• Leveraging technology enablers for internalproductivity and external effectiveness

• Collaborating internally across functions andexternally with suppliers and customers

• Attracting and retaining supply managementtalent

• Managing and enabling the global supplymanagement organization

The next seven chapters of the report explore eachfamily in detail.


In the decade ahead, companies will think differentlyabout category strategies.

The essence of a category strategy is to maximize valueby leveraging external resources and capabilities. In thefuture, changes in business models, industry structures,technologies, customer demands, environmentalregulations and other factors will change both howvalue is defined and how external resources can helpdeliver it. As a result, traditional ways of thinking aboutcategories must change as well. Figure 7.1 offers onemodel of how this might take place.

Until the mid-1990s, many companies took aconservative approach to category strategy developmentby buying the same components, products and servicesthat they had always bought from the same markets andsuppliers. The supply management function wascharged primarily with securing the “best” price andensuring supply.

With the advent of strategic sourcing circa 1995, manycompanies started to aggressively challenge the statusquo. Instead of limiting their thinking to the currentform an item takes or what market supplies it, theybroadened their view to consider the functionality beingprovided and nontraditional markets that could supplyit. (For instance, some airlines currently purchasepower-by-the-hour aircraft service packages rather thanthe engines themselves. Other companies aremanufacturing or purchasing plant-based plastics in lieuof petroleum-based plastics.) Purchase price gave way tototal cost of ownership as a part of the value equation.Supply management teamed with internal experts anduser communities in the joint pursuit of increasedvalue.

Today, companies are taking the next step by lookingbeyond the goods and services they currently source

from external parties, and defining strategies for wholenew categories. The most common form of this occurswhen companies look at options to outsource businessprocesses and activities to reduce costs, resulting in newcategories like contract manufacturing, facilitiesmanagement and logistics.

However, some companies are going even further byseeking suppliers with discrete capabilities that can addnew types of value. Often these new categories relate tounrecognized and untapped competencies andknowledge already in the supply base for an existingcategory. For example, one engineering companydetermined that purchasing all of its large steelfabrications from low-cost countries would bring costsavings of some 30 percent. But it ultimately opted tokeep a portion of this spend with an existing supplierthat excelled at improving the design of new products, a talent that brings value several times greater than costreduction. In another example, one food manufacturerutilized a flavoring supplier’s knowledge and expertiseto rationalize its own ingredient base into flavor andadditive “modules” that provide specific taste or texture.Beyond bringing significant savings for the manufacturerand additional sales for the supplier, it also allowed themanufacturer to reduce time to market significantly, akey to competitive advantage in their segment.

Companies will increasingly use this value-basedsourcing approach to evaluate how the full capabilitiesof its extended enterprise (whether just one supplier orgroup of suppliers) may be leveraged to gain competi-tive advantage for categories with high business impact.

At the extreme, category thinking does not even need tobe constrained by conventional sourcing approachesand buyer-seller constructs. In the future, leadingcompanies will seek to gain access to and leverage eachother’s value chains as a way to enter into new business

Chapter 7 — Developing CategoryStrategies

43CAPS Research

segments. For example, household appliancesmanufacturer Philips DAP and consumer productsmanufacturer Sara Lee combined elements of their valuechains to create Senseo, a single-cup coffee maker thatuses specially developed coffee pods. The arrangementcame about when Sara Lee searched for a way ofdifferentiating its coffee and found the answer increating a new segment based on a unique coffee makerand specially developed coffee pods. In doing so, itconsiderably increased the consumer value of a singlecup of coffee. For Philips, it meant that it had created akitchen appliance that could ride the full force of themarketing introduction wave of premium fast-movingconsumer goods, which is unthinkable for standardkitchen appliances. Obviously, neither party could haveachieved such success on its own. For companies likePhilips and Sara Lee, the “category” they will be“sourcing” consists of relationships withnetworks/ecosystems of other companies with the goalof creating whole new business opportunities.

A robust category strategy development process beginswith clear category strategy objectives focused oncreating value. For key categories, strategies will need toexplicitly address how companies will speed newproduct development and obtain supplier technologyinnovations; how they will implement and achieve thebest theoretical price for a category worldwide; how

they can stimulate the creation of new products andservices with the support of suppliers; and how thecategory can become the source of new revenues.

Category strategies will focus on the total alignment ofcustomers and suppliers to meet competitive objectivesacross the end-to-end supply chain. Critical enablerswill continue to build a foundation for effective categorystrategy development achieved through a systematicprocess, as illustrated in Figure 7.2. Executives will haveto be engaged with development and execution ofstrategies for critical items, as the strategies will becomeincreasingly cross-enterprise.

One supply executive in our study discussed thechallenges around category strategies:

How can we develop our category strategy so that wewill best be able to obtain leading-edge innovation,capabilities and performance today and tomorrowwhile blocking/delaying our competitors fromachieving the same results?

A robust category strategy could include multiple andconcurrent initiatives, including low-cost countrysourcing, design specification change, switchingsuppliers to increase product innovation and supplierdevelopment. “Value” will become better defined by


Figure 7.1: Creating Additional Value by Thinking Differently about Categories

organizations, and the application of total cost andvalue-decision tools to assist in sourcing decisions willincrease.

The breadth and scope of strategies will increase.Supply base reduction and global sourcing, especiallyfrom emerging markets, will continue to play animportant role. However, in the next decade strategieswill increasingly focus on total cost and value creationrelated to supply and supplier contributions throughproduct/service design and complexity reduction,supplier improvement initiatives, design for supplychain effectiveness and enhanced collaboration betweensuppliers to improve performance.

Achieving Leading-Edge Category StrategyDevelopment and Implementation

Although strategic sourcing has been partially tosomewhat extensively implemented at most companiesin the prior decade, expectations will continue to rise inthe decade ahead due to the many external andorganization forces affecting companies, their businessmodels and supply. Figure 7.3 further illustrates howthe many elements around category development havechanged over the past decade and how much morechange will come over the next decade. The followingdiscussion describes these changes and what will berequired to achieve leading-edge category strategydevelopment and implementation.

Strategy Development

Category Strategy ObjectivesOver the next decade, category strategy objectives willgradually refocus from achieving unit price reductionsto total cost and then ultimately to total value. Althoughmeasurement will prove to be a challenge, sourcingdecisions will be increasingly based on the overall valuethat suppliers bring to the buying company to meetbusiness objectives. This value includes the supplier’scurrent and future capabilities, performance andcommitment to the buying organization (and viceversa).

Among the supplier facets that will increase inimportance will be the granting of preferential access tosupplier technology, the ability to improve through leanpractices, the demonstration of continuous innovationand the ability to collaborate on new product or servicedevelopment. As “value” comes to be better defined byorganizations, the use of total cost and value-decisiontools to assist in sourcing decisions will increase. Theseobjectives will also be flexible and cover multiple years,requiring implementation of category strategies that willprovide results on a year-over-year basis.

Time HorizonThe time horizon for category strategies will extendbeyond the three years or so that is typical today —indeed, some may even triple in duration as the time toachievement of meaningful strategy change and resultsfor many purchase categories will greatly increase.

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Figure 7.2: Category Strategy Framework

Robust Category Strategy

Development Process

Executive Engagement Supply Network Focus

Critical Enablers

Effective Cross-Functional

Teams

Spend Analysis & Analytics

Global Contracting

Process

Total Cost Analysis/ Benchmarking/ Supply Market Understanding


Figure 7.3: Category Strategy Critical Element Change

Elements Prior Decade Decade Ahead

Strategy Development • Price reduction • Value, innovation and competitive

Strategy Objectives • Quality positioning, plus total cost

• Delivery

Time Horizon • 1-3 Years • 1-10 Years

Customer Alignment and Linkage External

• External • Very Limited • Customer centric strategies

• Internal • Somewhat • Extensive

Internal

• Close alignment

• Customer participants

Strategy Formulation & Selection • Primarily volume aggregation, e-auctions, • Focus on all value and total costlow cost country sourcing, contracting opportunities

• Supply network focus

Supplier Integration • None to very limited • Significant for critical items.

• Influencing suppliers to work togetherat T1, T2, T3

Risk Mitigation/Contingency Plans • Supply chain availability • All elements of value considered in risk

• Contingency plans limited mitigation identification andcontingency planning

Action Plans • Limited to ad hoc assignments • Macro and micro project planning tools

Measurement & Learning • Primarily price reduction • All elements of value measured

• Finance department reviews • Directly linked to the income statement

• Limited finance follow up and balance sheet of the firm

• Determination of return on investmentfor strategy initiatives

• Significant effort to determinesuccesses/failures and why

Change Management • Limited emphasis • Extensive and knowledgeableapplication of processes

Documentation • Very limited • Extensive and part of a supplyknowledge management system

Strategy Enablers • Very limited • Significant engagement for critical items

Executive Engagement

Cross Location and Cross-Functional • Frequently limited to purchasing/supply • Truly global cross-functional teamsTeaming members across locations • Increasing full-time leaders

• Part time vs. full time • Both category and customer centric byproduct/service

Spend Analyses • Historical • Historical, future and strategy linked

Category Research and Fact Finding • Limited to moderate across the supply • Extensive research fact finding acrosschain the supply chain

• Few specialists • Research specialists employed

Strategy Analytics • Limited • Extensive

• Primarily price/cost related models • Analytics include category/supplierTCO, financial analysis, risk andsimulation tools

Contracting • Legal focus • How organizations will work together

• Selected performance areas • Productivity driven

• Worldwide

Moving parts production from mature to low-costcountries, developing performance and capabilitiesknowledge about best-in-class suppliers, developingsupplier relationships and establishing on-the-groundsupply-market and government regulation informationall take years to accomplish. Similarly, developing newlogistics capabilities (including extended supply chainmanagement ability), developing and implementing riskmanagement plans and developing supplier capabilitieswill require longer term efforts. Goods and/or servicesso moved will require multiyear strategy horizons, aswill many outsourcing strategies that are linked toglobal sourcing.

Customer Alignment and Linkage with SupplyOver the past decade, category strategy leaders havetaken on an active role in determining customerrequirements by working with key users on the indirectside, many of whom had been doing the actualpurchasing of goods and services within their functionalresponsibility, such as marketing and advertising, traveland legal services. To develop effective strategies, supplyfirst had to gain authority to make the purchase andthen enlist the support of the domain experts indeveloping and implementing the strategy. However,anecdotal evidence suggests that these efforts have notbeen fully successful across all organizations.

Supply management may not have broad transparency.Neither supply management nor suppliers havevisibility into aspects like future demand requirementsby purchase item and location of use, design orengineering changes, or technology roadmaps.Customer alignment is rarely complete.

To compete more effectively in the fast-changing future,where speed to implement strategy innovations andreaction to market shifts will become even more critical,formal mechanisms will have to be in place to betterlink the supply organization to internal and externalcustomers and suppliers and enhance cross-functionalintegration. For example, the role of product andservice development and improvement teams will haveto be strengthened. These teams will require categoryleaders and other team members to share informationand agree to support specific strategies to ensureimplementation. Important customers and suppliersneed to be made important members of product andservice teams as appropriate.

In the decade ahead, improved alignment and linkage ofobjectives, goals and requirements will be critical forsupply and suppliers to meet business and competitiveneeds.

Strategy Formulation and SelectionAs discussed above, category strategies can and willincreasingly affect business success and be linked withtechnology and production, operations and logisticsstrategies. The strategy portfolio will have to extendbeyond those traditional strategies perceived to beprimarily in the realm of supply.

A supply network focus (versus a focus on an individualsupplier) for category strategy development will beincreasingly critical. Supply networks, many of whichwill be in competition with other networks, will requirethat leading companies develop strategies that leveragethe capabilities of all suppliers that make up specificsupply networks supporting end-customer demand forgoods and services. To compete more effectively in thefast-changing future, where speed to implement strategyinnovations and reaction to market shifts will becomeeven more critical, category strategies aligning, linkingand achieving collaborative efforts by companiesthroughout the supply network will strongly influencefuture success.

For example, the most common supply strategiesimplemented over the past decade have aimed at costimprovement — including volume aggregationcombined with supply base reduction, e-auctions,aggressive price negotiations and low-cost countrysourcing. These strategies were supplemented byextending payment terms and supplier-managedinventory.

Global sourcing, especially from emerging markets, willcontinue to play an increasingly important role, asshown in Figure 7.4. Interestingly, North Americanbuyers are strongly focused on China as a supplysource, while Europeans appear more interested in theresources offered by nearby Eastern Europe. Thisgrowth in emerging markets sourcing will be accom-panied by an overall reduction in the number ofsuppliers, especially of indirect goods and services, asshown in Figure 7.5.

However, in the next decade strategies will increasinglyfocus on total cost and value creation related to supplyand supplier contributions through product/servicedesign and complexity reduction, supplier improvementinitiatives, design for supply chain effectiveness andenhanced collaboration between suppliers to improveperformance.

Depending on the nature of each category, a companycan choose from a variety of strategy elements. In the e-survey, participants provided their views on severalfuture category-related strategies. Figure 7.6 summarizes

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Figure 7.4: Rapid Growth Seen for China, India and Eastern Europe as Source Markets

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Figure 7.5: Most Companies Expect a Net Decrease in Number of Suppliers by 2012

the future importance and current degree ofimplementation participants gave to each strategy (on a1-5 scale) along with the resulting gap.

As can be observed, the strategies that were ratedhighest in importance are category strategy enablerssuch as spend analysis, total-cost decision making, aformal category strategy development process, priceforecast development and benchmarking and a globalcontract management process. These enablers clearlybuild a foundation for development of more robustcategory strategies in the decade ahead.

The remainder of the category strategies are focused onachieving price or total cost and value improvements.Three strategies — demand management for indirectgoods and services, sourcing from emerging countriesand reduction in the purchase of unique items/specifications — demonstrate significant gaps between

their stated importance and current degree ofimplementation. These strategies should provide focus,and all can have a significant impact on price, total costand value.

One additional observation from the data should benoted: implementation of all of the strategies, onaverage, is at the midpoint of the five-pointimplementation scale. This suggests that significantopportunities remain for companies to examineindividual and strategy combinations to produce aportfolio of value opportunities, some of which may becomplex, to achieve significant longer-term benefits.Category strategies will have to go beyond supply basereduction, volume aggregation, low-cost countrysourcing and e-auctions to achieve maximum benefits inthe future. The strategies in the decade ahead mustbecome more value creating and directly supportbusiness strategies and goals.

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Import. Impl. Quad.Supply Management Strategy Score Score GAP Assign

Aggregate and manage total expenditures for key categories 4.43 3.27 1.16 1across the companyConduct spend analysis across the company in both products 4.34 3.36 0.98 1and servicesUse total costs to drive decisions 4.33 3.07 1.26 1Employ a formal process to develop and manage supply strategies 4.30 3.25 1.05 1for important categories across the companyEstablish price benchmarks 4.21 3.02 1.19 1Improve price forecasts as input to category strategy development, 4.02 2.90 1.12 1contracting and financial risk managementEstablish global contract management process 3.96 2.72 1.24 1Use value analysis/value engineering techniques for purchased 3.86 2.81 1.05 1products and servicesManage demand/consumption of indirect purchases 3.83 2.51 1.32 2Employ an ongoing process to assess strategic insourcing/ 3.81 2.84 0.97 1outsourcing opportunitiesEmploy an ongoing process to define and establish core 3.81 2.87 0.94 1competencies of the companySource from emerging/low cost markets 3.77 2.51 1.26 2Reduce the number of unique items/specifications purchased 3.76 2.50 1.26 2Un-bundle cost components of product/service mix 3.68 2.86 0.82 3Decrease number of suppliers to increase leverage 3.55 3.00 0.55 3Decrease number of suppliers to reduce administrative costs 3.50 2.76 0.74 3Adopt industry standards for specifications 3.47 2.72 0.75 3Use target/cost-based pricing 3.43 2.36 1.07 4Outsource core competencies where it leads to increased 3.32 2.19 1.13 4competitive advantageTake an ownership position in suppliers of supply-constrained 3.28 2.14 1.14 4materials/services and componentsIncrease the number of suppliers to create competition 2.60 2.71 -0.11 3

Figure 7.6: Future Category Strategy Focus

There are many business considerations that will factorinto a company’s supply strategy. How will companiesspeed new product development and obtain suppliertechnology innovations? How will they implement andachieve the best theoretical price for a categoryworldwide? How can strategic category strategies bedeveloped to stimulate the creation of new products andservices with the support of suppliers? How can acategory become the source of new revenues?

In addition, more sophisticated analytics will be used toevaluate category strategy alternatives and risk.Probabilistic models can be used to assess the likelihoodof success for various strategies. Return-on-investmentcalculation will become increasingly common whenevaluating alternative strategies requiring investment.For example, what is the ROI of changing productdesigns and moving business to emerging marketsrequiring new tooling with extended supply lines?

Overall, the category strategy portfolio will have toincrease significantly, as will the tools used to evaluatestrategy alternatives and risks/rewards.

Supplier IntegrationIn the decade ahead, companies will likely increase theintegration of suppliers into new product developmentand customer order fulfillment. The increase inoutsourcing of both manufacturing and businessprocesses, globalization and its resultant extendedsupply lines, and the need to be increasingly customer-centric with unique supply chains for multiple marketsegments will all factor into this increase. Categorystrategy development will require suppliers and buyingcompanies to change processes to improve workingrelationships while developing contracts that provideincentives to collaborate for value creation andenhanced performance. These incentives couldpotentially include increased business, royalty paymentsfor new product ideas and innovation, and costsaving/benefit sharing.

Supplier integration will include the alignment ofbuying company objectives and strategies with those ofTier 1 and Tier 2 suppliers. Joint innovation efforts andengagement of suppliers in new product or servicedevelopment will also be a major supplier integrationfocus. Integration will also include the development ofcompatible information systems with informationtransparency and supporting human interaction. Thisintegration will require significant change from theadversarial buyer/seller relationship approach.

Tier 1, 2 and 3 suppliers will also be asked tocollaborate as part of doing business with the buyingcompany. In addition, this cooperation betweensuppliers aligned with buying company needs will growin sophistication. For example, a collaborative eventhosted by IBM and the Original Equipment SuppliersAssociation that solicited real-time online feedback fromautomotive suppliers8 concluded that there will be threemajor strategic themes in the future. The first was theneed to break down the adversarial relationshipbetween OEMs and their suppliers. The second was theneed for Tier 1 and 2 suppliers to collaborate and alignwith OEM needs to increase competitiveness. The thirdtheme calls for updating the industry’s image to engagethe next-generation work force. These findings alignwith the findings from our own study.

Risk Mitigation and Contingency PlanningThe dynamic nature of the competitive market andmacro-economic environments will require effective riskidentification, mitigation and contingency planning. Arecent emphasis has been placed on the need to identifypotential supply chain disruption, with some degree ofrisk mitigation planning.

While there has been less emphasis on contingencyplanning for unsuccessful category strategies, in thedecade ahead all elements that make up value to thebuying company will have to be considered. Risk torevenue, continuity of supply and customer service willhave to be evaluated on a predictive basis withappropriate risk mitigation. For example, if a companybecomes aware of financial instability that couldpotentially bankrupt a supplier, potential risk mitigationstrategies include inventory stockpiling, root-causeanalysis with corrective action at the supplier and eventhe extension of short-term financial support as a meansto ensure continuity of supply of goods or services thatcould disrupt the business. Companies will have toestablish a robust portfolio of risk mitigation strategiesand create well-documented contingency plans if acategory strategy is unsuccessful.

Action PlansWhile both overall and detailed action plans have beenlimited to ad hoc assignments in the recent past, in thedecade ahead teams assigned to category strategydevelopment will be required to establish an overallproject plan to lay out detailed responsibilities,accountabilities and timelines. Category strategieswithout detailed action plans have a tendency to lag inimplementation and limit achievement of performanceobjectives. Action plans will be further required because


8For more information on the IBM-OESA Automotive Supplier Jam, please see www.autosupplierjam.com.

the category strategies are most likely to be made up ofa series of initiatives versus one general strategy.However, without project and detailed operationalplanning they are not likely to be fully executed.

Measurement and LearningIn the decade ahead, measurement and metrics will gobeyond a focus on price reduction to measurement ofall elements of value and application of a balancedscorecard approach that includes detailed and ongoingfinance review and validation. Examples of valueinclude price, total cost of acquisition, speed of newproduct development, perfect supplier launches,innovation contributing to buying company revenuegeneration and so forth.

As companies increase their attention to value, they willwork to directly link value performance to the incomestatement and balance sheet. As more attention isfocused upon the measurement of value, greaterattention will be placed on learning why successes havebeen achieved and why there have been failures. Assupply takes on increasing importance in the financialand overall performance of the company, deeperanalyses of category strategies and why they do or donot work will be required. Increased learning will takeplace, thereby increasing the sophistication of futurecategory strategies.

Change ManagementChange management process implantation is requiredfor innovative category strategy development andimplementation. As the complexity of categorystrategies increases in the decade ahead, morestakeholders will be affected, thereby increasing thepotential of resistance or reduced support. Therefore,extensive and knowledgeable application of changeprocesses will have to be applied to category strategydevelopment and implementation.

This situation will require that category strategies beclearly understood and presented as a means to achievecustomer requirements. In addition, the end state of thestrategy initiatives will have to be clearly understoodand communicated, with logic presented as to whythere is a need for change. This logic will normally takethe form of problem resolution, meeting competition orcustomer requirements and a need for financialperformance improvement. Increasingly, categorystrategy development teams will have to identify whatwill be different because of the strategy and workdiligently throughout the strategy development processto determine and align all key stakeholders. In thefuture, as more complex strategy initiatives arecombined to maximize results the lack of a changemanagement process can doom the strategies to failure.

Category Strategy DocumentationCategory strategies will absolutely have to bedocumented, despite a historic trend to limitdocumentation. Going forward, strategy documentationand continuous updating will be part of a company’ssupply knowledge management system. Withoutappropriate documentation, a company will lack a“playbook” to help everyone in the organizationunderstand the what and why of the strategy. Alsohampered without documentation will be the ability tolearn and review prior strategy successes or failures,meaning that the organization will have to redevelop itsstrategies without taking full advantage of all priorlearnings. These conditions are unsatisfactory and createa noncompetitive situation compared to companies thathave developed excellent strategy documentation andutilization approaches.

Strategy Enablers

Executive EngagementIn the next decade, corporate executives will need toincrease the percentage of their time spent on supply-related efforts as category strategies will increasinglyaffect the success of the overall business. ConsiderBoeing and its 787 Dreamliner as an extreme example.Major subsystems of the plane were sourced fromsuppliers in China and other locations worldwide inorder to meet quality, cost and delivery requirements. Inaddition, new composites technology was developedand applied in fuselage construction with the assistanceof the more than 20 international partners that wereengaged in the effort to develop design concepts andtechnologies. Top executives were involved in thedevelopment and execution of these strategies.

High-level executives will play a key role in the successor failure of critical category strategies by providingguidance and approval while ensuring that keyfunctions are aligned and committing needed resourcesto support the strategy. For example, one studyparticipant commented:

Category strategies will become integrated with thebusiness, technology and operations/manufacturingstrategies to maximize overall financial performance.

Cross-Location and Cross-Functional TeamingTeams that span the business and its geographies will beneeded to develop robust strategies. While recentattempts by supply organizations to engage other keyfunctions for category strategy development have metwith moderate success, this type of activity will prove tobe the way of the future.

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To date, headcount and budget restrictions, along withfunctional measures that drive individual behaviors,have limited true cross-functional representation oncategory strategy teams worldwide. This will change.Both core and ad-hoc team members will be required,and both populations should be held accountable forresults. Functional, business unit and corporateexecutives will need to assign the appropriate people tocritical category teams, some on a full-time basis. Tomeet aggressive cost, quality, technology, delivery,responsiveness, innovation and softer value goals,knowledgeable people from various disciplines will haveto be involved in strategy development and executionfor both goods and services.

For example, in strategy development for marketing andadvertising services, supply alone cannot adequatelydevelop a strategy that will be fully implemented andachieve results. The active involvement of key stake-holders from marketing/advertising and other functionsis required to develop an executable strategy. Similarly,changing specifications from one material to another,including a supplier switch, requires a strong cross-functional team that works well together over anextended period.

High-Quality Spend AnalysisIn the past, spend analysis has typically been conductedby business units as well as companywide. However,the data so gathered has often been incomplete, poorlycoded by purchase item or unable to be aggregatedacross business units or geographies due to systems-compatibility issues.

In the decade ahead, an improved approach to spendanalysis will be needed in order to provide historicalspend by purchase category as well as by line item,suppliers and using locations. In addition, anticipatedfuture requirements by category and purchase items willhave to be provided by the demand side. How thesefuture requirements will be sourced then becomes aquestion for the category strategy team. Insights tofuture demand will be critical to establishing the mosteffective strategies.

Category Research, Fact Finding and AnalyticsIn recent years, research has been somewhat limited forpurchase categories due to a lack of research specialistsand/or the limited time or research expertise of personsdirectly responsible for sourcing decisions. Resources toperform this type of work will be required in the futuredue to its increasing importance.

As supply markets, competitive strategies and businessmodels change, category strategy leaders and teams willhave to improve their understanding of the industry

forces affecting availability, cost and the technologies ofcategories being sourced. This understanding will haveto be both historical and future oriented. Detailedinformation about the industry, competitive forces, coststructures, suppliers and products/services will berequired.

Supply chain intelligence will also be required toidentify technology leaders, potential bottlenecks andmajor risks. Both predictive insights and historical datawill be necessary. Companies will need the ability tolook several tiers upstream to identify and anticipatesupply “choke points” and complex interactions amongmarkets. For example, consider how the corn marketultimately affects the price of pizza. Demand for cornused to make ethanol affects cattle feed prices, which inturn affects milk production costs. Milk prices directlyimpact cheese prices, which drives up the cost of a“large with extra mozzarella.”

Therefore, companies will have to invest in supplyresearch experts who can collect meaningful dataworldwide and synthesize it into those factors mostcritical to the development of category strategies. Inaddition, advanced analytic tools must be applied tohelp analyze and synthesize the data. Lack of the correctinformation will hamper development of effectivestrategies and can lead to failure. Human resources ande-systems will be needed to obtain and manageinformation, necessitating investment.

ContractingIn the decade ahead, contracts will become more globalin nature, with companywide terms and conditionsadapted to local regions and countries. Beyond purelylegal considerations, contracts will also increasinglyinclude process considerations about how companieswill work together and approaches to improve workingrelationships and productivity. Important legalconsiderations will still be included as in the past.

Conclusion

Category strategies are developed from the bottom upby category teams to meet business objectives andcustomer requirements. They go far beyond volumeaggregation or focusing on unit price reductions. In thedecade ahead, the elements of value will drive categorystrategies, the development of which will become anincreasingly important part of the company strategy.This will require more effective teams with betterpersonnel and truly global, cross-functional repre-sentation. In addition, completely new purchasecategories will be developed due to changing businessmodels and technological advances.


Category strategies will become more robust and requireengagement not only from multiple functions but acrossenterprises. They will be more agile due to the fact thatthey will have to be quickly reconfigured as conditionschange. Strategy development opportunities will beexamined across categories where synergies are possible(e.g., packing and specific product designs). Strategydevelopment will include approaches to influencesupply markets and supply networks. Categorystrategies will increasingly aim to block competition,and early warning or predictive approaches will be usedas part of an improved approach to risk. Finally, strategydevelopment for critical categories will requireincreasing levels of executive engagement.

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In the decade ahead, the development of a competitiveworldwide supply base and suppliers that collaborativelyhelp to create value in support of the buying company’sbusiness models will become the norm. This focus willbe driven by global competition, continuous outsourcingand the need to develop supply chains for innovativeproducts and services to meet unique customerrequirements worldwide. In addition, based on theincreasing availability of information about the forcesaffecting industry supply and demand, cost structures,and supplier capabilities, including financial conditionsand product/service costs, we may well enter into an eracharacterized by companies looking for ways tostrategically leverage key supplier/buyer capabilities forinnovation and “enlarging the pie” rather than playingthe zero-sum game whereby one company’s gain usuallycomes at the expense of the other. The importance ofstrategic partners, both buyers and sellers, will likelyincrease.

Competition or market forces will not be eliminated.However, competition for the end customers will bebetween supply networks, not just companies. In manycases, buying companies will think about and managetheir suppliers like a portfolio rather than a host ofindividual companies with differentiated capabilities.Suppliers will look at their customers in much the sameway, weighing which companies are profitable, whichare growing, which has the best track record of makingthem successful and which they most enjoy doingbusiness with.

These factors will affect which supply networks asupplier will choose to join. The buying company at theheart of a given supply network will need to developphilosophies, attitudes and practices that will givesuppliers the opportunities to jointly achieve financial

and other benefits. Emphasis will be placed on morecooperative versus adversarial approaches, includingselective information transparency between strategicallyaligned buyers and sellers — and among the suppliersin a network.

In the automotive industry, both General Motors andFord have embarked on programs to change theirsupply base strategies and improve workingrelationships with suppliers. GM has just recentlyadopted a supply base strategy of working withsuppliers individually instead of seeking across-the-board price concessions. This change effort includesasking suppliers to express their major concerns inwriting, involving purchasing in seven annual in-personor conference call meetings with its top 300 suppliers tohelp align GM and supplier priorities, providingsuppliers quicker responses to their questions (andpossibly innovative ideas) regarding technology andmaking personnel changes.9 This is one example of thedirectional change in philosophy regarding theimportance of suppliers and the increased emphasisbeing put on improving supplier relationships to betterleverage capabilities and create value. As discussedduring our in-person sessions with supply executives,companies in a number of industries, includingaerospace, electronics, pharmaceutical and oil & gas,are making similar moves.

Figure 8.1 shows the e-survey responses for the 13strategies most directly related to developing andmanaging suppliers. Each of the six most importantfuture strategies focuses on working relationships withsuppliers and collaboration. Current implementation ofthese strategies is generally low, resulting in some fairlysignificant gaps that should be closed based on strategyimportance.

Chapter 8 — Developing and ManagingSuppliers


9Gopwani, Jewel. “Exec Sees U.S. Supplier Edge.” Detroit Free Press, June 8, 2007.

The decade ahead will require companies to structuretheir overall supply base for continuous and break-through improvement while improving workingrelationships and developing and managing specificsuppliers and supply networks. Each technique requiresa somewhat different focus, and is discussed in thefollowing sections. For example, at the same time thatcompanies are reducing their supply base, they arelooking worldwide for new suppliers, some of whichmay require development. Buying companies are andwill be providing new business to their best suppliersand working to improve relationships with thesesuppliers by implementing supplier relationshipimprovement initiatives.

Structuring the Supply Base

In the decade ahead, companies will put additional careinto strategically structuring their supply bases in orderto support the business model and category strategies.As outsourcing worldwide continues and the need forvalue creation and innovation from suppliers increases,the need to establish the best suppliers worldwide andmanage a strategic portfolio of suppliers in variousdistinct roles will grow in importance. Effective cross-functional category teams will need to be employed tostructure the supply base and help achieve the goals ofthe overall business.

Structuring the supply base requires a “bottom-up”rather than a “top-down” approach, as mentionedabove. Most companies initially take a higher level viewand set gross targets, as described by one studyparticipant:

We have 70,000 unique suppliers and we set a goal toget that down under 20,000 and apply the 80-20 ruleto that number, so that we have a much smallernumber of suppliers for most of the company’sstrategic spend.

The bottom-up approach is based on each categoryfamily strategy team establishing the required supplybase for the category, which, when added up, becomesthe right number of total suppliers for the company.

The role that suppliers will play in the innovationprocess will grow substantially. During the focus groupsand individual interviews conducted for this study,supply executives discussed the need to work moreeffectively with suppliers to achieve early product andservice innovations.

Companies that work in industries in which technologychange is a driving competitive force will opt to work inan “open innovation” environment that celebrates thepower of discovery and dedicates significant resourcesto working on these efforts with the best and brightest.For example, the Philips High Tech Campus in

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Improve working relationships with strategic suppliers 4.42 2.96 1.46 1Allocate management attention and resources to the supplier 4.05 2.81 1.24 1portfolio based on importance and potential value of the relationshipsGrow the volume of purchases from strategic suppliers 4.00 3.07 0.93 1Require suppliers to take a greater role in cost management 3.92 2.58 1.34 1Employ joint evaluation of the supplier-customer working 3.88 2.58 1.30 1relationshipCollaboratively share risks, rewards and cost savings with suppliers 3.81 2.48 1.33 2Develop new suppliers 3.64 2.62 1.02 3Help suppliers develop new capabilities 3.44 2.38 1.06 4Tie supplier payments directly to the flow of finished products/ 3.12 2.14 0.98 4servicesDevelop revenue growth based incentives for suppliers based on 3.10 1.83 1.27 4their contributions to new product/service developmentEmploy Six Sigma/lean process improvement techniques with 3.09 1.70 1.39 4suppliersTie supplier payments/incentives to perfect new product/service 2.82 1.66 1.16 4launchInvest in and share assets with suppliers 2.51 1.79 0.72 4

Figure 8.1: Developing and Managing Suppliers

Eindhoven, The Netherlands, consists of an opencampus where more than half of the workers are fromthird-party companies that are helping to createinnovative products and technologies. This isconsidered an essential part of Philips’ supplymanagement work of the future. Procter & Gamble’s“click and connect” strategy further exemplifies theimportance of having suppliers in the supply base thatcan provide innovation and working with thesesuppliers in an effective way.

In the decade ahead, supply management will have tomore effectively align supply strategy with both thecorporate-wide and business units’ business andtechnology strategies to create value. This will require ahighly competitive supply base providing whatever isnecessary in support of the business model(s); e.g., cost,technology, speed, innovation at accelerated rates,responsiveness and so forth.

In the future, companies will have to more carefully andstrategically answer the following questions for each oftheir purchase category families so as to most effectivelystructure the supply base:

• How many suppliers do we want for this category,and what role should each play?

• What current and future capabilities are required,and where in the world should the supplier(s) belocated?

• Which suppliers do we want and why?• Do we want to lead and/or manage supplier

networks at the Tier 2 and 3 levels?• Which suppliers do we want to collaborate with

each other and why, and how can we influencethis collaboration?

Having the correct number of suppliers to supportbusiness requirements worldwide and establishingspecific supplier roles will grow in importance due tocompetition, extended supply lines and outsourcing.Companies that are close to suppliers that can providelower prices from emerging regions but cannot supportproduct or process technology advancements willincreasingly find themselves facing competitiveproblems. Similarly, those that have too many suppliersin high-cost regions of the world when cost reduction isthe primary competitive driver will similarly exhibitinadequate competitive performance.

The question of what supplier capabilities will berequired and specific supplier selection decisions growsin importance. This is because of important broad-basedtrends, such as “green” products/services and thechanging requirements of specific customer segmentsacross industries (e.g., lower priced/cost goods in India,

more fuel-efficient automobiles in the U.S., the need forstrong, lightweight materials in the aerospace industryand ongoing innovations in the consumer packagedgoods industry).

Also of growing importance is the decision(s) by buyingcompanies about whether they want to lead or actuallymanage supply networks and influence suppliercollaboration. In the future, due to outsourcing and Tier2 and 3 suppliers being located throughout the world,the potential risk to supply continuity and financialperformance will increase. These issues can be clearlyobserved when sourcing contract manufacturers andsuppliers in emerging regions. Buying companies maywant to exert control over Tier 2 suppliers for keymaterials or components or where technology isdeveloped.

Supplier-focused strategies are increasingly expectingsuppliers to collaborate not only with the buyingcompany but also with other suppliers. One studyparticipant discussed how this has occurred:

[My company] bring[s] our key suppliers together ona particular platform and pursue a joint challenge.How do we drop the cost? Improve the cycle time?Across the board we’re also incorporating thecustomer as well because if you don’t often you’ll be ata disconnect. Now we can also do that with some ofour very specific customers.

Overall, companies will ask how their category andsupply base/supplier strategies can be better alignedwith their business models. One study participantdescribed the thought process as follows:

How can we best manage packaging material into thecompany to maximize the value of it through plantrun time, usability, quality, product display and soforth? How can it add more total value? How can wemake it more suitable to the customer? How can we bemore agile to individual customer and business andproduct line needs and so forth?

Leading companies in the decade ahead will be furtherpositioning their supply bases to gain competitiveadvantage. A study participant discussed one way thathis company has attempted to do so:

Our company looks for suppliers that are “my enemy’senemy.” We look at suppliers that our company’scompetitors don’t use for ways to gain an advantage.Regardless of amount of spend, if a supplier does thesame thing for the company as it does for itscompetitors, there is nothing strategic about therelationship, because the company gets no differential


from it.” [In fact, the company may be at a disadvantageif its competitors are larger customers of the supplier.]

In the decade ahead, companies will move from anoverall model geared toward consolidation of the supplybase to one of establishing, developing and leading avalue-creating supply base. This supply base will haveto be carefully chosen and developed by cross-functional teams. Two separate participant commentsillustrate this key point:

In a consolidating supply industry situation, change inthe focus of strategic sourcing will be from consolidatingspend with a strategic supplier(s) to trying to projectthe changes that will occur in the supply base andtaking advantage of the changes: Who will be aroundin 3-5 years? Who will they be acquiring? How doesthe company position itself to be beneficiaries of theconsolidation?

We invest in integrating our suppliers and choosingour suppliers not only for the product that they mightbe able to deliver immediately but more on the long-term value that they bring to us.

To establish a supply base that creates value, the fivestructural questions above must be carefully answered.

Effective supplier relationship and developmentstrategies must be applied concurrently. Figure 8.2illustrates the overall maturity stages associated with thedevelopment and management of suppliers

In addition, the process of establishing and maintaininga best-in-class supply base will be continuous due to itsever-changing nature; e.g., supplier capabilities expand,technology leaps are made, customer demands shift,low-cost supplier locations change, buying companyneeds become more varied.

In the decade ahead, establishing a poorly structuredsupply base with too few or too many suppliers, in theincorrect locations, without a full understanding of rolesand expectations, and failing to take advantage of theopportunity to manage supplier networks willsignificantly limit a company’s ability to leveragesupplier capabilities. For example, at one consumerproducts goods manufacturer, the supply base issegmented so as to enable the company to driveinnovation by bringing ideas and experiences fromother industries. At this company, the roles of suppliersare established — with “bringing innovation” as one keyrole. Supplier characteristics and capabilities requiredfor these “innovation suppliers” are identified andapproaches established to gain access to innovation.

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Figure 8.2: Developing and Managing Suppliers — Maturity Stages

Category and Company Strategy• Continues• Exchange Likely• Emerging Market Focus• Supplier Capability Matrices

Focus is Strategic Suppliers

Competitive Value Contribution

Start

Time

Supply Base Optimal Structuring

Supply Base Reduction

Deep Relationships and Collaborations• Perfect Alignment• Joint Efforts/Sharing• Supplier Networks

Supplier Development• Training• QBR’s• Investment• 3rd Party Intervention

Supplier Segmentation/Working Relationships• “Preferred”• Company Needs/Roles• Processes/Behavior Change

Effective Contracting Strategies• Leveraging• Longer – Term• Value Creation

Supplier Relationship Management

Figure 8.1 above showed that in terms of supplierworking relationships, significant gaps exist between thestated importance of and actual implementation of anumber of strategies. Companies will endeavor toimprove working relationships with strategic suppliersand allocate management attention and resources to thesupplier portfolio based on importance and potentialvalue of the relationships. They will also endeavor toincrease the volume of purchases from strategicsuppliers while requiring suppliers to take a greater rolein cost management. Companies will employ jointevaluation of the supplier-customer workingrelationship while sharing risks, rewards and costsavings with suppliers in a collaborative fashion.

Improving Supplier RelationshipsIn the decade ahead, making significant improvement inworking relationships with key suppliers will requirecompanies to more effectively structure their categorysupply base, carefully segment suppliers to identifythose that are truly strategic and modify attitudes aboutand approaches when working with these mostimportant suppliers.

Most importantly, companies will want to first carefullyestablish why they want to improve supplier workingrelationships, the current state of the relationships andthose behaviors and practices that require change. Inaddition, the potential mutual benefits to be achieved byboth buyer and seller need to be identified. Our researchshows that companies frequently wish to modifybehaviors without first establishing the current situationand why supplier relationship change is needed.

Moving forward, supplier relationship improvement willbe a growing need. First and foremost, suppliers —especially those with large investments and significantscale in product, service and manufacturing technology— will increasingly be viewed as a source of innovation,which will pose a change in the traditional buyer-sellerdynamics. For some companies, this will be a “catchup”effort; consider, for example, the need that Ford has inthis area compared to Toyota, which has built verystrong and mutually beneficial relationships with itssupplier base.

Those companies that have essentially completedleveraging their volume will also need to work withsuppliers to achieve the next generation of cost savings,which will tend to bring mutual benefits. For example,joint buyer-supplier project teams will form to eliminatesupply chain waste by mapping the supply chain,identifying waste and jointly arriving at wasteelimination (or minimization) solutions.

Companies will also strive to create a workingenvironment in which open dialogues can be held withimportant suppliers so as to better align suppliers’current and future needs and capabilities with thebuyer’s needs and capabilities. In supply-constrainedenvironments, companies frequently will need todemonstrate to suppliers that they are better customersthan other firms to ensure continuity.

Companies will also need to establish close workingrelationships with Tier 1 suppliers so as to influencethem to work together to the benefit of all parties. Forexample, one company undertook an approach wherebya set of integrated suppliers that normally would notwork together was asked to focus on a particularmanufacturing line and look for improvements. Doingso resulted in significant cost savings generated by thecombination of packaging equipment manufacturers,packaging companies and ingredient suppliers and thecompany’s engineering, R&D and purchasing personnel.

In some cases, a degree of “damage control” will berequired before suppliers will agree to engage incollaborative efforts with certain companies. Already,some suppliers are opting out of doing business withadversarial customers where profits are poor or non-existent. For example, automotive suppliers to the U.S.OEMs prefer to do business with the Japanese autobuilders. In addition, automotive suppliers, especiallythose that have filed for bankruptcy, are demandingprice increases before shipping parts to OEMs. A gooddeal of work will have to be done at many companies,as one study participant noted:

Developing the skills and relationships (and processes)with suppliers is quite important. It is also an areathat we do not have a particular degree of experiencein doing.

Supplier CollaborationTo enhance future working relationships with importantsuppliers, two different approaches — “initiative driven”or “institutionalized” — will be employed ascircumstances warrant.

The initiative-driven approach establishes a leadershipteam that will drive the company to further rationalizethe supply base, enhance segmentation and identifypreferred or strategic suppliers (as shown in Figure 8.3),improve supplier performance scorecards, create orfurther develop current/future supplier capabilitymatrices, modify performance-driven sourcingbehaviors to truly identify and reward best performers,and implement a company change program focused onimproving supplier working relationships.


Various other elements are also included in the initiative-driven efforts, including joint executive meetings;supplier conferences, councils and satisfaction surveys;process and innovation workshops; two-way evaluationsbetween supplier and customer; and supplier suggestionbanks. These efforts can and do provide results. How-ever, they can lose impact if the company “champions”begin to focus on other issues.

To move from initiative-driven efforts to an “institution-alized” state will require that key suppliers be viewed asa strategic resource for the company. Also, the goal ofthe supplier relationship must be focused on improvedvalue creation along multiple dimensions, includinginnovation, revenue enhancement, business continuityand total cost — not just on driving out cost to reduceprices.

In addition, this movement will require significant andsustainable change in people, processes and systems, asshown in Figure 8.4.

Overall, in the decade ahead more attention will have tobe focused on strategic supplier working relationships.The next generation of relationship management willrequire more detailed supplier segmentation andenhanced category strategy development by cross-functional supply chain teams, including strategyconsensus among and training of all key persons whohave working relationships with suppliers.

Developing Supplier Capabilities

As the supply bases of companies are being restructuredand relocated with improved working relationships,supplier development will likely increase. Outsourcing,globalization and establishment of a “best supply base”for strategic purchases will require investment inreactive and proactive supplier development.

Figure 8.1 indicated that developing new suppliers andhelping suppliers develop new capabilities both had

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Figure 8.3: Typical Supplier Segmentation

Strategic few — value creation

Preferred (market focused/ sustaining value)

Develop or eliminate

Figure 8.4: Driving Toward Institutionalized Supplier Relationships

People Processes & SystemsCompany culture and trust, including capability, Extensive supplier strategy, cost and financial predictability and consistency knowledge

Robust category strategiesCollaboration is fostered in the supply chain Supplier development capabilities are in placeMutual value between companies Effective processes and information transparencyBehavioral change to promote free exchange of External customer-focused metricsinformation on a selective basis

importance/implementation gaps and that implementa-tion was lower rated. In addition, employing SixSigma/lean processes with suppliers overall was notviewed as important as finding and developing suppliercapabilities. However, the supply executive focus groupsindicated that Six Sigma/lean was very important totheir companies’ supplier development efforts and willremain so in the future.

Supplier development efforts will take different formstomorrow than those that we see today. At present,quarterly business reviews, supplier training programs,joint improvement efforts, third-party investment andthe like represent the norm. Our research unearthed anumber of fruitful supplier development examples, allof which will be systematically deployed in the future.

Periodic, cross-functional reviews and meetings withkey suppliers will be the way of the future. Oneautomotive company already holds regular, systematicface-to-face meetings of its finance, engineering andsupply strategy leadership with supplier CEOs andCFOs. The company also reviews suppliers on a holisticbasis — by industry, by part and by using location —through a multistep process that features both aninternal review and meetings with suppliers. During thisbilateral review process, suppliers also offer theirassessment of the automaker’s performance. While thesuppliers appear to appreciate the openness to identifyopportunities and misalignments, the automaker hasnoted that even though suppliers tend to overrate theirabsolute performance, the rate of directionalimprovement is similar over time. Ultimately, theseefforts have been unlocking value while revealingimprovement opportunities for both parties.

Companies are also deploying lean and Six Sigmaconcepts upstream in the supply chain, as several studyparticipants discussed:

Two examples of where we’ve put our post-contractexcellence process to work. We do work from a lean SixSigma framework and we approach the QBRs(quarterly business reviews) with a lot more rigor. Infact, we have an annual planning strategy day withmajor suppliers. In addition, with our top ten indirectsuppliers we are holding strategic planning sessions thatare entirely forward looking. Most QBRs are in arrearslooking at performance data, looking at measurements,tests, etc. We’ve tried to flip that on its edge and have aforward planning approach whereby with thosepartners we’re measuring the value that we can createtogether post-initial contract. The premise being thatyou have rates and fees from the most competitivemarket that you can tweak, but it’s what you do afterthe contract that often spells partnership or not.

Through some industry partnerships, we’re trying toextend the whole lean training and thinking andoperating excellence down into our supply base andwe’ve been able to reach into some of our keysuppliers that way. However, we have limitedresources, so we’ve started to tie in with an industryassociation to go after state funding and have createdsome standard lean Six Sigma training that reacheddown into more of the lower tier, smaller supplierswhich we might not have the breadth to go after. Wefind that as companies do that, the dynamics that weneed them to do to get better improve.

We will also be working directly with suppliers ontheir cost structures. We’ve got a Six Sigma process.We are leveraging our black belts working withselected suppliers to take cost out of their supplychain. We will be doing more of this. Some of thesmaller companies don’t have the resources or they’renot working at the pace that we need them to beworking at so we offer to pony up the resources tocome in, team with them, pull out cost so we canmutually benefit and ensure in that savings.

We do have a lot of subcontractors that participate onour Six Sigma teams and we see some synergy withrolling out lean into some of our suppliers so that’ssomething that we’re going to be working on in thefuture. It’s tremendously cost intensive and laborintensive and it’s as much cultural as cost.

Companies have also provided training to theirsuppliers, and there have been cases where third-partyprivate equity firms have purchased supplier companiesand achieved performance improvements that havebenefited major buyers. Of course, in other casesprivate equity firms have kept the fruits of theseimprovements to themselves for the benefit of theirinvestors.

Overall, supplier development has been practiced tosome degree by most large companies over the past tenyears. In the decade ahead, this strategy will becomemore important with strategic and preferred suppliers asa means to accelerate supplier performance andcapability improvement. Open two-way dialogue will beapplied to drive improvement in processes andperformance at the buying company, improveintegration and reduce waste across extended supplychains.

In addition, as more companies establish suppliers inemerging markets, finding and developing new (andexisting) supplier capabilities will become moreimportant. In emerging markets, the approaches takento supplier development may be different than in more


mature economies. For example, Six Sigma and otherapproaches may not fit a given culture or available data.Finally, as companies better understand the risks thatthey are taking with emerging suppliers worldwide,they will make more investments in understandingsupplier capabilities throughout the supply chain andbe forced to take on supplier development activities of areactive (problem solving) and proactive (value adding)nature at different tiers of the supply chain, where theymay have the greatest degree of influence.

Conclusion

Based upon our research, three dominant themesemerge around developing and managing suppliers inthe decade ahead. First, the supply managementfunction will have to clearly understand company needsand align with suppliers that have the capabilities, bothcurrent and future, to provide innovation and helpcreate value to keep the company competitive.

Additionally, working relationships between buying andselling companies that are strategically important toeach other will have to improve in order to unlockvalue-creating potential. The approaches used to achievehard performance goals will influence the likelihood ofsuccess. The future will require more bilateral (ormultilateral) and collaborative approaches as dictatorialand price-dominated approaches fall out of vogue atcompanies that want to achieve value creation throughthe supply base. This supply base will include supplynetworks, many of which will be in competition witheach other, requiring leading companies to provideleadership and manage interacting supply networks, notjust individual suppliers, to gain preferential treatmentand competitive advantage.

Finally, companies will invest in reactive and proactivesupplier development efforts to maximize the valueachieved by the supply base. As strategic suppliersdevelop, they in turn will be afforded opportunities tohelp improve the buying company through continuoustwo-way communications and feedback.

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Looking toward 2010 and beyond, supply chains thatare seamless and driven by end user or customer needswill be the norm. Revenues will flow to companies thatcan get the correct product or service bundles tocustomers at the lowest landed and total costs. It seemsclear from our research that supply chain innovationand the use of multiple supply chains will be key tofuture revenue and market share growth.

Supply chain excellence used to simply mean drivingout unnecessary cost, squeezing cycle times andimproving service. Then, companies like Dell, Nokiaand Wal-Mart raised the bar with supply chains thatoperated at world-class levels on these classic measureswhile adding a new dimension — the ability to senseand respond to change quickly, giving them anadditional advantage over less nimble competitors.

Customer demands will only increase moving forward.Those companies that create supply chains that meetand exceed customer needs and service requirementswill become the industry leaders. Traits like velocity(the ability to move quickly to meet customer needsand demands), responsiveness (immediate attention tocustomer service requests) and resilience (the ability torespond to perturbations in supply chain operations)will be hallmarks of supply chain and company success.

The bar that defines excellence will continue to rise dueto external forces. The speed of change will accelerate,the magnitude of change will grow and the pressure ofchange will continue to be relentless, driven by far moredemanding customers, massive industry restructuring,breakneck technology advances, the new challenges ofglobalization and new business risks.

In tomorrow’s world, the ability to respond to changewill just be the price of admission. Competitiveadvantage will require agility, while supply chainexcellence will be defined by the ability to:

• Anticipate changes in customer requirements,product offerings, supply conditions, regulationsand competitor actions

• Adapt to the changes by deftly reconfiguringexisting supply chains or creatively assemblingnew ones

• Accelerate implementation of change to capturethe new opportunities ahead of the competition

Make-to-order or assemble-to-order product/servicebundles that fill distinct and possibly numerous marketniches will quite obviously require the management ofseveral supply chains simultaneously on a global scale— only multiple supply chains will be able to make acompany this flexible. When constructing flexiblephysical supply chains, speed and agility throughout thesupply chain will be critical operational strategies.

Figure 9.1 highlights the unique mix of productcharacteristics and customer importance that must beconsidered when designing and operating multiplesupply networks. As the following quotation from astudy focus group participant notes, supplymanagement will play an important role in managingthese diverse supply chains:

A lot of what’s happening to us is being driven byportfolio changes in our supply chain, disbursementnetworks, and manufacturing networks. Thosenetworks are becoming global and there is a lot ofrelentless rationalization of the portfolio, moving outof various countries and growing into new countries. Itreally does drive what is required from procurement.

Modular Versus Integral Supply Chains

In a future business environment where there will be nomargin for error in the areas of cost, quality andcustomer service, a key indicator of success will be the

Chapter 9 — Designing and OperatingMultiple Supply Networks


fit between product/service and supply chain design(architecture).10 According to Professor Charles Fine ofMIT, architecture is defined as “the arrangement ofcomponents and the way they interrelate.” ProfessorFine defines two different types of supply chainarchitectures: modular and integral.

Modular supply chains are designed to be flexible inoperation and structure. They attain flexibility bystructuring supply relationships that are interchangeablegiven the specific needs of various customer/marketniches. As an archetypical example, consider thestructure of supply chains at Toyota, in which eachsupplier clearly understands how its specific subsystemor component interacts within each vehicle with otherrelevant subsystems and components.

In contrast, integral chains feature supply relationshipsthat are unique, tightly structured and uniquelycoordinated. Products and services that flow throughintegral supply chains tend to have subsystems that arecustomized explicitly for a particular product. The

Apple iPod provides a good example of an integralsupply chain in operation, as suppliers within thissupply chain possess significant design capability andunique technical know-how.

Managing Multiple Supply Chains

Far too frequently, companies construct and alignmultiple supply chains with minimal regard to productor service characteristics and design. Companies thatengage in this process typically envy the moresuccessful companies that jointly design their supplychains, product/service bundles and complementaryaspects of competitive strategy with their key partners.The critical importance of key partner participation indesigning and operating multiple supply chains washighlighted by one of our focus group participants:

We have between 60 and 90 percent outsourcedsupply in one area so that OEM and ODM suppliers

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Figure 9.1: Supply Chains Will Be Segmented by Product/Customer

Unique/Fashion

Configured

Standard

• Quick Response• Small Quantities• Build to Forecast• Multiple Channels

• Low Costs• Lower Service Levels• Large Quantities• Longer Lead Times• Limited Product Selection

Customer Importance

Prod

uct C

hara

cter

istic

s

10Fine, Charles H. “Are You Modular or Integral? Be Sure Your Supply Chain Knows.” Strategy + Business, Summer 2005: 44-51.

are taking over development and most of the supplychain management and our crucial task is really tomanage our outsourced supplier base.

Figure 9.2 presents the data captured in the researchproject e-survey around the critical strategies beingapplied both today and tomorrow to support the designand operation of multiple supply chains.

Four strategies were rated as most important goingforward in the design and operation of multiple supplychains:

• Standardize processes across companies in thesupply chain

• Identify and manage the lead times throughoutthe supply chain

• Employ an ongoing process to implement andmanage outsourced activities

• Create, lead and manage global supply networks

The need to align customer, product/service bundlesand supply chains is too often overlooked as a source ofsustainable competitive advantage. Those companiesthat have been applying this approach to supply chaindesign and management have met with exceptionalresults.

A company must seek answers to some importantquestions before designing its supply chains. What isthe primary focus of each supply chain? Is it speed ofdelivery, low cost, flexibility, innovativeness in design,minimum total cost, etc.? What are the service and costtargets needed for each supply chain so that it cancompete effectively for its customers’ business? Whatare the strategic breakpoints in performance that willyield a real advantage over the competition?

The answers to some of these questions involvetradeoffs of complexity versus value versus efficiency.These tradeoffs play a key role in the balance betweenrevenue and profits. The ideal lies somewhere betweena single supply chain for all product/services andcustomers and the complexity that would result fromthe use of many unique and separate supply chains.

Figure 9.3 provides a graphic representation of thecoordination complexities of managing key strategicpartner input and coordinating value-added outputfrom multiple supply chains.

DaimlerChrysler’s supply chains offer a case example ofmismanagement and misalignment, as the 1998 mergerof Daimler-Benz and Chrysler Corporation combinedtwo very different firms within the same industry that



Standardize process across companies in the supply chain 3.94 2.62 1.32 1Identify and manage the lead times throughout the supply chain 3.89 2.68 1.21 1Create, lead and manage global supply networks 3.86 2.56 1.30 2Employ an ongoing process to implement and manage outsourced 3.81 2.84 0.97 1activitiesImprove the environmental performance of products/services and 3.58 2.55 1.03 4processes throughout the supply chainUse supplier-managed inventory 3.57 2.58 0.99 3Collaboratively share risks/rewards among companies in the 3.52 2.28 1.24 4supply chainCollaborate with customers and suppliers to establish insourcing/ 3.51 2.21 1.30 4outsourcing decisions that best allocate work in the supply chainCreate supplier logistics centers to assure availability and 3.23 2.26 0.97 4minimize inventory investmentOutsource upstream supply management responsibilities to first 2.98 2.32 0.66 4tier or lead suppliersJointly invest in and share assets among companies in supply chain 2.88 2.00 0.88 4Purchase for suppliers 2.60 2.21 0.39 4Increase the number of suppliers to assure supply 2.57 2.60 -0.03 3Outsource supply management for indirect materials and services 2.40 1.60 0.80 4Outsource supply management for direct materials and services 1.77 1.42 0.35 4

Figure 9.2: Designing and Operating Multiple Supply Networks — Supply Management Strategy Gaps

had very different customer/market niches andcustomer satisfaction demands. As DaimlerChryslerattempted to meld the Chrysler and Mercedes-Benzsupply chains, the combined firm lost its edge on cost,pricing, demand, and quality.11

The automotive industry also offers an emerging tale ofsupply chain success in the form of Central Europe’semergence as an automotive assembly hotspot. Just asthey manufacture cars in the U.S. to reduce shippingcosts and time to market and stay closer to thecustomer base, so also have South Korean automakersKia and Hyundai built new assembly plants in Slovokiaand The Czech Republic, respectively. In doing so, thesecompanies have joined PSA Peugeot Citroen,Volkswagen and Toyota as companies taking advantageof the region’s low relatively low labor costs, readyavailability of parts and proximity to the WesternEurope marketplace.12

A Prescriptive Design ApproachA four-step approach to designing multiple supplychains that satisfies a company’s full range of customerand product/service needs can be employed with the

input of all functions and partners along the entiresupply chain. The resulting chains will not, of course,be totally separate physical chains; common activitiesand physical assets will be shared among them.

The first step is to determine customer and marketniche requirements — that is, to define exactly whatcustomers want and need, as well as the logisticalrequirements of supplying different products andservices. Companies should design their supply chainsaround customer-oriented variables that are relevant toindividual customers. Even when products or servicesare identical, customers often have different serviceexpectations. Figure 9.1 above depicted the customer-related and product/service-related variables that shouldbe considered when segmenting into multiple supplychains.

Segmentation requires original or creative thinking, andoffers the potential for discovery of innovative strategydevelopment. For example, one aerospace companyanalyzed its supply chains and discovered that its repairand overhaul business was doing work for three verydifferent customer groups. The first was composed of

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Figure 9.3: Supplier Networks Will Be Strategically Configured

Supplier A

Tiered SupplyBox

Partners,Alliances, JVs

SegmentedSupply Chains

Supplier B

Supplier C

Supplier 1

Supplier 2

Company

Market n

Market 2

Market 1

Outsourcedfunctions, operations

11For a more detailed discussion, please see: • Dyer, Jeffrey H. Collaborative Advantage: Winning Through Extended Enterprise Supplier Networks. New York: Oxford University Press, 2000.• Edmundson, Gail and Kathleen Kerwin, “DaimlerChrysler Stalled.” Business Week, September 29, 2003.

12“Skoda Jokes Look Passé as Carmakers Pile into a New Production Hotspot.” The Economist, June 21, 2007.

customers with products that had common configura-tions and only required fairly typical repair work. Thesecond group of customers had products with uniqueconfigurations, mandating more variable work. In thethird group were customers for which the scope ofwork was highly unpredictable, as no two productconfigurations were the same. Each customer groupthus had a different cost to serve, suggesting that thecompany should devise entirely separate service setupsfor each of the segments according to theirattractiveness.

The second step entails logically constructing distinctsupply chains. How many distinct supply chains areneeded to serve all customer segments? The answer willdepend on the company’s products and customers. Insome cases, each segment will require its own distinctsupply chain. The key is to strike a balance between thelevel of customization and management complexity.Each supply chain should be broad enough to havesufficient scale and narrow enough to avoid loss offocus.

Oftentimes, companies have too few rather than toomany distinct supply chains, resulting in higher costsand the over-servicing of some segments. One U.S.-based telecommunications service company that wassupporting more than 10,000 business customers andone million households relied on more than 15,000different products, ranging from inexpensive tools andphone sets to bulky network construction equipmentand expensive data systems. These materials were storedin four warehouses, 4,000 remote locations, dozens ofwork centers and 6,000 technician vans across thecountry. Yet a one-size-fits-all supply chain was in use,resulting in poor customer service despite unconven-tional inventory “stashing” by technicians andwarehousers that led to extraordinarily high inventorylevels and operating costs. The company undertook amultistep analysis that segmented the supply chainalong the dimensions of customer and service types,ultimately arriving at five distinct supply chains thatallowed it to increase on-time order fulfillment from 80to 95 percent while reducing operating costs andinventory by more than 20 percent.

The third step requires matching business models andstrategies to the multiple supply chains. How close tocustomers should they be? Does one supply chain needto focus on value creation? What capacity should eachsupply chain have? Companies must determine whattype of capacity buffer will best minimize risk andpotential disruption. How should assets be deployed?What tasks can be delegated to supply chain partners?Flexibility and innovation are keys factors to consider.

Several years ago, U.K. supermarket chain Tescoredefined its activities in relation to its manufacturers.In doing so, it decided to turn its distribution centersinto cross-docking operations, where products fromdifferent suppliers that were destined for the same storewould be consolidated. This required the manufacturersto perform inventory-holding and order-pickingactivities that had previously been Tesco’s responsibility,allowing the company to reduce inventory by one-thirdand supply chain cost per case by 20 percent.

The fourth step is to define a reconfiguration plan thatturns these concepts into practical, detailed plans.Eventually, companies must reconcile any inconsisten-cies, overlaps and redundant processes in their multiplesupply chains. The degree of sharing across supplychains will depend on the tradeoffs between efficiency,effectiveness and value of customization.

Models and SimulationsPipeline visibility from the supplier through to thecustomer will be critical as companies pursue “lean”approaches throughout the supply chain. One studyparticipant discussed the need to make selectiveresource investments:

We have some resources in our consumer electronicsbusiness dedicated to managing the supply andmanaging the uninterrupted supply. The unit operatesunder extremely small or even negative workingcapital, meaning that inventories are small and thefluctuations from retailers is comparably big. So youhave to invest more resources in managing the actualsupply chain performance. Most of it is outsourcedproducts and so you have to invest a bit moreresources but we do not feel that we have moreproblems because of the longer supply lines fromChina because every company’s supply chains arerunning from China.

In situations where the customer needs to schedulework based on materials availability, information is asimportant as physical delivery of the product. With real-time demand information, can suppliers self-manageinventory better than the customer itself can by placingorders?

Moving forward through the next decade, complexmodels will be used to evaluate supply chain risk,continuity, performance and design, as depicted inFigure 9.4. Leading-edge companies will use modelingtechniques to evaluate strategic supply options, costsand risks. Risk models will cover more types of risks aswell as plans for disaster anticipation and mitigation.Applying total-cost approaches to streamline supply


chain operations will help drive decision making duringthe design phase. Such modeling will allow firms tomore aggressively manage fixed assets as they gain anunderstanding of end-to-end costs while factoring riskinto the value proposition

Risk management will be factored in at the design stagefor both products and services. For example,specifications may be evaluated based upon suppliercapabilities in various regions and the stability of supplyfrom those regions. In turn, this may prompt companiesto consider reformulating product/service specificationsbased on their ability to tolerate and mitigate risk.

Companies will increase their ability to perform “whatif?” simulations across a range of variables and scenarios.The answers generated through this scenario planningwill help satisfy the company’s need for greater supplychain responsiveness and resiliency to deal withcomplexity, customer demands for product/servicecustomization, shorter product/service lifecycles andlonger supply chains due to global sourcing. There willbe much more volatility or degrees of freedom to dealwith when designing multiple supply chains. Forexample, our research found that consumer durablescompanies want the ability to perform large-scalesimulations of operational strategies and operationalchanges to determine their basic feasibility (e.g., howmuch current capability can be flexed) and understandwhat an optimal strategy/plan is. Companies will want

the ability to simulate conditions like a doubling of thenumber of supply chain models, severe shortening ofproduct lifecycles, increased global suppliers and therisk of supply chain disruption.

Assuring Supply Chain Agility

Anticipating change requires that one don a pair oftrifocals, as there is a need to get a close-in view ofpossible temporary blips versus operating plans, anintermediate view of shifts in customer and marketdirection and a long-distance view of factors that maychange the rules of the game.

The Now View — Anticipating Temporary“Blips”Most supply chains are equipped to handle thosetemporary “blips” that are caused by unexpecteddemand and supply changes. Just-in-case inventories,excess production capacity, premium transportationservices, unplanned overtime and emergency orders tosuppliers are among the tricks of the trade. But most ofthese tricks come into play after the change hasoccurred, and some of them can be quite costly toemploy.

Keeping a close watch on the pulse of the supply chainwill help companies anticipate the changes and take

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Figure 9.4: Complex Models Will Be Used To Evaluate Supply Chain Risk, Costs, Performance and Design

$ Operating Costs

$ Capital Costs

Optimization and Simulation

Modeling and Scenario Testing

Supply Chain Design Total Costs and Risk

Risk Profile and Assessments

Customer Demands

Supply Base

action before the customer even realizes there was thepotential for a problem. For example, tracking andreporting retail sales to upstream members of the supplychain will help them anticipate and accommodatereplenishment needs, versus just responding when anunexpectedly large order hits. (This type of informationsharing can have other benefits — e.g., health careprofessionals have found that a spike in demand forsome over-the counter medicines can be a goodpredictor of a looming outbreak of a contagious disease.)

Alternatively, predictive technologies will be used tomonitor usage rates and anticipate demand spikes. Inindustrial settings, onboard sensors will monitorequipment performance, anticipate failures and triggerthe dispatch of service crews and repair parts beforefailures occur.

The Near View — Anticipating Directional ShiftsLooking out to a period of anywhere from six months toa few years ahead, companies must be alert fordirectional shifts that signal an upcoming change instrategies and markets for their company, its customersand its suppliers. These will trigger a rethinking ofsupply chain structures, processes, technology andrelationships.

New customer strategies will change their orderingpatterns. A shift to more frequent new productintroductions or moving to a make-to-order strategywill place very different requirements on a supplier.New products or markets will likely require newchannels of distribution. New processes supported byadvances in information technology by one companywill often affect the technologies that its tradingpartners must use.

Industry and cross-industry collaborative efforts willtypically require new processes and technologies. Newenvironmental or security regulations will mean newrequirements for product tracking and recycling/reuselogistics.

Limited income and distribution constraints in someemerging-market countries will require nontraditionalsolutions. In India, Hindustan Lever Limited (asubsidiary of Unilever PLC) set up manufacturing anddistribution for single-serve packs of personal careproducts priced at the equivalent of a single penny. Inthat same country, Arvind Mills sells ready-to-sew kitsof blue jeans components distributed through a networkof thousands of local tailors. Significantly lower costs

and widespread distribution has made Arvind themarket leader.

The Next View — Anticipating DisruptiveForcesFinally, companies will need to take a longer view thatanticipates the effects of the fundamental shifts that willbe caused by industry restructuring, technologybreakthroughs and new business models on decisionsabout supply chain structures, production capacityneeds, infrastructure investments and asset ownership.

For example, digital photography has essentiallysupplanted traditional photography in the consumermarket over the course of just a few short years.Manufacturing plants, distribution systems and photo-finishing labs that had centered on 35-millimeter film,light-sensitive papers and chemicals have largely beenreplaced by retailers selling glossy paper and printer inkfor home use and providing drop-off or email-inphotofinishing via one-hour mini-labs. And even forgetting the family photos to grandma, postal andmessenger services have largely been replaced by theInternet.

Looking farther out, experts predict that as many as onein five automobiles will be fuel cell powered by 2020.This situation will require two different types of supplychains to make, sell and service two very different typesof autos. One supply chain will be in ramp-up mode forseveral years while the other will see an erosion inhistoric growth patterns, and perhaps even a decline asthis and other new technologies gain in prominence.

Conclusion13

Many supply chain design strategies, viewpoints andsolutions have been introduced to assist companiesthrough a range of situations. There is an abundance ofinformation that details every new concept and idea onhow to meet market and customer needs. But eachcompany, market niche and customer has a differentneed; the supply chain design for one company will notnecessarily work for another. Companies thatindiscriminately design multiple supply chains will findtheir efforts resulting in poor performance or even leavethem saddled with supply chains that are effectivelybroken.

Leading companies will pioneer tomorrow’s supplychains by combining multi-company capabilities in new


13A thorough overview of supply chain design issues can be found in the A.T. Kearney white paper entitled “How Many Supply Chains Do YouNeed? Matching Supply Chain Strategies to Products and Customers,” available at www.atkearney.com.

ways. They will create total service offerings that extenddeep into the customer’s value chain. They willanticipate changes, adapt their supply chains by using ablend of insight, strategy, creativity and technology, andaccelerate the achievement of results.

Figure 9.5 highlights the difficulty and complexity inthe management of multiple supply networks whereproduct flow needs to be balanced with a “service flow,”as is becoming the norm with companies that deliverproduct and service bundles to customers. In addition,the product and service flow is only one aspect thatneeds careful management. These multiple networkswill also need and have integrated financial flows,information flows, and geographic-centric process/workflows. Creating a virtually integrated company willmean that organizations must align their strategies,systems and capabilities not only within their ownorganizations, but across the entire supply network.

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Figure 9.5: Supply Network Flows

Information Flows

Product Flows

Financial Flows

Process/Work Flows

$ Spend $Spend $Spend &Collect $Collect

SellDesign Create Distribute

Ten years ago, when we conducted the original FuturesStudy, the use of information technology in supplymanagement was just emerging. The Internet had notyet been employed for purchasing and supplymanagement. Most companies had minimal insight intospend management visibility, leaving senior executiveswondering how they could control external spend whenthe multiple accounts payable and purchasing systemsgave conflicting data as to the size of this spend.

In the ensuing years, an enormous amount oftechnology has been introduced to make supplymanagement “easier” and more effective. In the next tenyears, there will be both a continuation and expansionof technology introduced over the past decade and theintroduction of totally new technological advances thatwill expand the scope of supply management evenfurther. These new technological advances will extendbeyond current supply management executives’ abilityto conceive precisely how the technologies will be used.

This chapter will briefly recount the advances madeover the last decade to provide some context of wherethe continuation will lead, followed by a report on thetechnology strategies that supply executives expect torequire in the future before closing with a picture of justhow radically new technological advances will bedeployed in the coming decade.

A Decade of Technology Change

Ten years ago, there were only the beginning signs ofthe broad-based technological metamorphosis that hastaken place in supply management. At the time,procurement cards (or “p-cards”) had been introducedto provide a kind of business credit card for people whoneeded to buy low-value spot items from businessretailers. In some industries (notably automotive),

electronic data interchange (EDI) had been implementedto facilitate ordering and payment for repetitivepurchases. Purchase-to-pay modules were just beingadded to enterprise resource planning (ERP) systems,which were typically monolithic software architecturesthat had been 20 years or so in the making. In mostcases, supply management executives were onlynominally affected by technology back in 1997.

Figure 10.1 provides a categorization of supplymanagement software according to the function that itaddresses:

• Spend management refers to collecting andclassifying external spend by time periods(typically quarterly or annually), spend category,operating entity or supplier

• E-sourcing refers to negotiating or re-negotiatingfuture items or category costs for various spendcategories

• Contract management means capturing the resultsof sourcing in a way that enables compliance tocontract provisions and reminders when contractsare due for renewal

• Procurement transaction processing refers to theprocess for placing an order or requisition,receiving and paying for materials or services

• Supplier management refers to interactionsbetween suppliers and buyers for purposes ofregistration, operating feedback or collaborativedesign

Other than EDI or p-card providers, few if any of thekey technology suppliers existed at the time of ourprevious study. For example, Ariba shipped its firstsoftware product, the Operating Resource ManagementSystem (ORMS) in 1997, then shifted its emphasis tospend management in 2001. E-sourcing in the form ofreverse auctions burst upon the scene with a March 12,

Chapter 10 — Leveraging TechnologyEnablers


1999 Wall Street Journal article that described “arevolution sweeping companies as they harness thepower of the Internet for buying and selling.”14 Whilethe Freemarkets’ event described in the Journal articlewas actually conducted on a private network, A.T.Kearney’s eBreviate unit conducted an auction fortelemarketing services for Sprint in May 1999 over theInternet. Contract management had largely beenmanaged with large paper file folders and contractrenewal calendars before companies like diCartaproduced software to electronically capture and managecontractual requirements. Supplier managementtechnology began with supply chain optimizationproviders like i2 and Manugistics before productlifecycle management (PLM) providers like UGS, Agile,Matrix One and Parametric Technologies began tointroduce ways for purchasers to work with designersfrom buyers and sellers to promote collaboration.

As Figure 10.1 indicates, each of the functional areashas seen a significant number of technologiesintroduced in the last decade.

After patching together rudimentary data cubes fromdisparate account payable systems, spend managementsoftware suppliers began to offer tools that wouldcapture data in usable, refreshable formats that providedvisibility. These data sources could then be analyzed andused for reporting against demand or consumptionmanagement requirements

The electronic reverse auctions that lie at the heart of e-sourcing introduced purchasing to the dot.com boom.

Soon, senior executives like Jack Welch of GeneralElectric were setting mandatory usage targets. Thetechnology migrated backwards to electronic RFxs(requests for proposals, information, quotes and bids),and forward to optimization for complex categories andexpressive bidding to provide supplier alternatives. Few technological introductions caused more visceral reactions by suppliers, supply managers, academics and other observers. The debate on when and how to use e-sourcingtools will almost certainly continue well into the future.

While document management software and services hadtraditionally been extremely expensive, new contractmanagement tools combined computing and communi-cations advances in a single economically attractivepackage. Users and legal advisors could now collaboratemore easily and suppliers could be monitored moreefficiently. As new regulatory requirements like theSarbanes-Oxley Act became mandatory, this technologyhelped companies with compliance.

Procurement transaction processing began as a way toallow people to buy replacement materials and servicesas easily as they might buy them as personal consumers.The emphasis was on enabling purchases from qualifiedsuppliers through an interface that resembled anelectronic catalog. While catalogs were difficult to set upand connect to qualified suppliers in the early days, thetechnology gradually improved. Their application hassince expanded to provide the basis for electronicinvoicing as well as ordering, including dynamicdiscounts for earlier payment. Transaction processing isalso the bedrock of a good compliance program.

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Figure 10.1: Technology Tool Evolution

Spend Management

E-Sourcing

Requisitioning Catalogs

Configurable Compliance Processes

Enabled 3-Way Match Process Status Visibility

Settlement

Forecasting

Self-Administered Registration

Multi-Tenant Architecture

XML/HTML Order Management

Performance Monitoring and Tracking

Capability Mapping

Auctions RFx Optimization

Contract Management

Expressive Bidding

Procurement Transaction Processing

Supplier Compliance Monitoring

Regulatory, SOX and Transaction Compliance

Enablement

Supplier Management

Data Cube

EDI

Document ManagementCollaborative Documents

VisibilityAnalytics Reporting

1980’sArea 2000 - 20071990’s

14Appel, Timothy. “Companies Use Internet Auctions To Purchase Industrial Supplies.” The Wall Street Journal, March 12, 1999.

Over time, EDI made a painful transition to XML/HTMLorder management as initial forays into suppliermanagement were made. Then suppliers were invited toself-register through a company’s Internet portal.Company websites were designed to meet supplier’s aswell as customer’s needs. Using the websites, companiescould trade performance and tracking information in alimited fashion. Recently, companies employing moresophisticated technology have begun to track changingsupplier capabilities over the Internet.

Despite continuous concerns over cost, security,reliability and responsiveness, technology has delivereda great deal over the past decade. A supply managementRip Van Winkle who fell asleep at the 1997 ISMInternational Conference would be stunned at thetechnology on display at the 2007 session.

Supply Executive Goals for Technology Over theNext Decade

What do supply executives want from technology in thefuture? Initially, they were reluctant to use it until theycame to see how it was improving the capabilities ofleading-edge early adopters. Over the next decade, theywill want ease of access (both internally and externally);visibility through web-based tools; collaborationplatforms for everything from product development to

operations to schedules, tracking and simulation; newerand more powerful tools for risk, compliance andsupply market analyses; and user interfaces that can begrasped as intuitively as consumer-focused e-tailers’sites are.

In our analysis of supply management strategies,respondents rated the importance and degree ofimplementation today. Technology strategies thatrespondents felt were most important and for whichthere was the most to do in order to successfullyimplement were largely centered around commoncompany databases for supplier information, item andservice data, integrated ERP-based applications andembedded process best practices that could be sharedacross their companies, as shown in Figure 10.2.

Supply executives are relatively unconcerned with theirability to implement software or provide transparencyfor new products or services. They also seem confidentthat they can integrate customer and supplierinformation with their own.

In the past, supply managers focused on capturingenterprise resource planning (ERP) information thathelped them understand their companies’ spend interms of category, direct, indirect and capital expendi-tures. Purchasing modules were often the last to beoffered by ERP software providers, and they were oftenlimited to those suppliers that were already active with



Use a common companywide database for supplier information 4.33 2.84 1.49 1Use a common companywide database for item/service data 4.19 2.70 1.49 1Use integrated ERP-based applications for supply management 4.13 2.70 1.43 1Embed best practices in supply management workflow/process 4.02 2.68 1.34 1toolsProvide transparency of operational information (e.g., demand 4.00 2.33 1.67 2requirements, inventory levels and forecast) throughout the supply chainShare supply management best practices knowledge across units 3.94 2.70 1.24 1of the companyEmploy “best of breed” software solutions for supply management 3.84 2.56 1.28 2Implement product management software (that includes product/ 3.70 2.53 1.17 4service design, item specification controls, sourcing, contract compliance, etc.)Develop industry-level multifactor benchmarking and databases 3.55 2.06 1.49 4on supplier performanceProvide transparency of new product/service development 3.36 1.96 1.40 4information throughout the supply chainIntegrate customer and supplier information systems with the 3.26 1.98 1.28 4company’s own systems

Figure 10.2: Critical Success Factors — Technology Enablers

their companies. As sourcing processes focused more oncreating competitive situations with external suppliersthat were not already incumbents, supply managersrequired information on supplier capabilities that werenot already captured by their ERP systems — that is,they needed information on their potential supply basethat existed outside the company’s systems firewall.

In the future, supply managers will focus increasinglyon collaboration technologies (see Chapter 11),advanced analytics will become common, and neededinformation and interaction with suppliers will becomeexternal rather than internal. The need to createinteractive linkages with existing and potential suppliersor share company information from ERP systems withsuppliers outside the company’s firewall may createconcerns about security and confidentiality that will beovercome as partnerships develop.

Technology over the Next Decade

As Figure 10.3 indicates, there will be continuingimprovements to supply management applicationscoupled with technological advances that will integrateapplications and data, improve people’s personaleffectiveness and facilitate collaboration.

Continuation and Expansion of TechnologyIn 2007, we have “crossed the chasm,” using GeoffreyMoore’s market introduction metaphor, for most of thefunctional areas for which we will have continuedrefinement of technologies already introduced.

Spend management will continue to expand itsflexibility for analytics and will have fewer barriers toimplementation — companies will be less challenged bythe need to perform setup data cleansing. Spendmanagement will also become more closely aligned withspecific contract provisions.

Optimization will continue to expand features to e-sourcing as the discipline becomes more sophisticated.Contract management software will become moreintegrated with spend management, particularly interms of compliance. Collaboration software will alsoenhance the ability to streamline the contract manage-ment process. Performance monitoring and capabilitymapping will continue to expand supply management’spotential. The flexibility provided by user definition androle-based access will enrich the potential for addedsupply management.

In the area of PLM, sourcing for capabilities will becomemore than a price- or cost-based effort due to collabora-tion. Cross-program visibility will be introduced to test

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Figure 10.3: Technology Tools Will Evolve Even Further

2007-2016

Expected Challenges: Management, Capabilities, Resources, Leadership, and Process

Continued

Analytics

User Defined Work Flows

User Defined Dashboards

and Analytics

Issue, Project and Process Stakeholder Workspaces

Knowledge Management

Integrated Data Across

Functions and Applications

Role-Based Access

Internally and Externally

Spend

OptimizationSourcing

Auto-ComplianceContracting

Status VisibilityForecasting

Procurement

Performance Monitoring

Capability Mapping

Supplier Management

Sourcing

Cross Program Visibility

PLM

Technological Advances

adoption of new or reuse of proven designs andtechniques.

Everyone from laggards to leaders are adopting newtechnologies for sourcing. One study participantremarked:

Now we have extensive use of e-tools: 90 percent oftenders are “e.”

The cost advantages of e-sourcing have been made clear.Next, the focus for technology will go beyond sourcingand compliance into more value-based areas.

Introduction of Completely New TechnologicalAdvancesIn addition to the continued evolution of existingtechnologies, there will be a set of new technologicaladvances. Workflows for different supply chains willhave different sets of processes that can be defined byusers and meet data signpost requirements. Data will beintegrated across functions and applications, withvariable role-based security restrictions that manageaccess for external as well as internal participants.Knowledge management collectors and processors willcapture knowledge for use in supporting similarsituations in the future and for training futureparticipants. Issue, project and process stakeholderworkspaces will be developed and used in a fluid, as-needed way for collaboration. Users will be able todefine their own dashboards and analytics to supporttheir projects or their roles in other stakeholders’projects. While some of these advances seem far-fetchedin a business environment, others merely representextensions of what we already see in our personaldigital lives.

Linking Collaboration Tools to PLMBy linking collaboration tools to PLM technologies, theinfluence and visibility that supply management hasover interactions with engineering, both internally andwith suppliers, will be extended. Collaboration toolswere first developed for the automotive industry tofacilitate communication between the design andengineering groups. The collaboration functionality thatthe industry developed is driving much of thefunctionality of these new tools. The automotiveindustry has solved many of the complex problemscritical to collaboration with their PLM tools.

Toyota leads the automotive industry in profitability andtime to market because it is the leader in designcommonality and parts reuse. Collaboration tools play acritical role in achieving these goals; through the use ofthese tools the company’s suppliers actively share andcollaborate with Toyota.

Today, other industries are adopting collaboration tools.For example, Procter & Gamble uses the same tools asGM to facilitate its brand management and productdevelopment processes from idea generation throughproduction. The tools offer data integration capabilitiesto help manage product formulations, packaging designand artwork, and labeling regulations. As a result, P&Greduced its new product launch time by 50 percent andhas an almost error-free process for producing artworkand labels. P&G plans on looking at Tier 2 and 3suppliers for innovation as well as for supply assurance;gaining this visibility will require more resources andtechnology even if it is only done on a selective basis.

For supply management executives, the informationprovided by collaboration tools will play a critical rolein improving the effectiveness and efficiency of sourcinginitiatives. The data from these tools will help supplyexecutives understand spend by part number,specification and supplier. The level of specificationinformation provided will make discussions withsuppliers much more productive, and also allowengineering and supply management to work moreclosely together.

Another benefit of collaboration tools is that theownership of all intellectual property is documentedand traceable, allowing companies to maintain controlof their intellectual property. This benefit is particularlyimportant when working with low-cost countrysuppliers.

Future Benefits

Emerging technology solutions will leverage improvedanalytics, broader data integration and collaboration.The key element of these tools is “user-defined.” Eachhas advanced to the point where supply professionals,as well as those with whom they interact, can set uptheir workspaces without having to employ an ITperson or programmer.

Collaboration tools will also have a significant impacton a company’s top and bottom line, as will bediscussed more fully in the next chapter.

Future Challenges

Technology developers have emerged to provide a richerset of offerings for supply management. But thechallenges moving forward will be many. Managementwill be a challenge, as the new technology will bring upconcerns about inter-functional collaboration and loss


of intellectual capital. Each of these new technologiesalso requires practitioners who have the capabilities —the knowledge, insight and interests — to get the mostout of them. In part due to the adoption of technology,the head count of supply management resources hasbeen pared down over the past decade, which maymake obtaining additional resources to learn andimplement new technologies a challenge. And whilesupply managers have to be more open toexperimentation with new technologies, a process ofintroducing new technology that captures learningsfrom false starts and builds on successes will berequired.

Conclusion

Technology has responded to the needs of thetraditional competitive world with tools for spend,sourcing, contracting, procurement, suppliermanagement and product life cycle needs. In the futureits application will be broaden to network-based,flexible technological advances that will support thenew collaborative world.

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Traditionally, supply managers have focused on creatingcompetition in their supplier markets in order to usethe “invisible hand of the marketplace” to maximizevalue from competitively sourced suppliers. They havealso tended to attempt to influence potential non-competitive practices that may have been introduced byinternal stakeholders as well as external marketstructures. Collaboration, if practiced at all, was usuallylimited to product design and development efforts withcounterparts at supplier companies (as discussed inChapter 10), through supplier development efforts (as

discussed in Chapter 8) or introduced through SixSigma quality management programs.

In our most recent study, collaboration was noted as akey success factor by many of the supply managementexecutives interviewed. Collaboration, both internallyand externally, also scored higher in the survey as oneof the key strategies to be pursued in the next decade,albeit with a large gap between existing and futureimplementation requirements, as shown in Figure 11.1.

Chapter 11 — Collaborating Internally andExternally


Figure 11.1: Collaboration Strategies

Internal Import. Impl.External Supply Management Strategy Score Score GAP

Internal Use cross-functional teams for category and supplier strategy 4.40 3.17 1.23development and implementation

Internal Establish shared goals and objectives between the supply 4.40 3.09 1.31management organization and with other internal organizations

Internal Integrate business planning and supply management processes 4.28 2.70 1.58External Collaborate with suppliers and customers to reduce supply chain 4.25 2.71 1.54

costsExternal Provide transparency of cost and financial information throughout 4.07 2.53 1.54

the supply chainExternal Collaborate among supply chain companies to root out waste 4.00 2.69 1.31Internal Share supply market intelligence across units of the company 3.98 2.93 1.05Internal Ensure early involvement/integration of supply and engineering 3.91 2.70 1.21

and/or users/internal customersInternal & Integrate sales and operations planning across the supply chain 3.84 2.47 1.37ExternalInternal & Provide transparency of capacity and capability information 3.81 2.21 1.60External throughout the supply chainInternal & Integrate business goals and business models with companies in 3.74 2.49 1.25External the supply chainInternal & Manage time to market and innovation velocity 3.71 2.42 1.29ExternalInternal & Integrate suppliers into the new product/service development 3.69 2.45 1.24External process

At most companies, supply management has collaboratedto some extent with other corporate functions andbusiness units while maintaining a competitive or evenconfrontational stance with suppliers. Collaboration withboth groups will only increase in the future, requiringsupply management to undertake new strategies.

Key Success Strategies for Collaboration

While collaboration was cited as an important successfactor for the future, it was also noted that it does noteasily fit in with the traditional view of supplymanagement’s role in the organization. Four mainthemes around collaboration emerged from the surveyinstrument and focus groups:

• Internal collaboration and integration mustadvance further if companies are to capitalize ontheir future needs

• External collaboration will signal a shift from purecompetition to partnership for some segments of acompany’s supply base

• Technology will be necessary to enable thisincrease in collaboration — internal systems willhave to provide more visibility to multiple dataviews, while external systems will have to shareinformation safely and effectively

• The tension between the potential for strategicadvantage through supplier collaboration and theconcerns about managing risk and protectingintellectual property will not be easily resolved

Keys to External Collaboration

What are the key reasons why supply managers wish tocollaborate more (and ostensibly compete less) withtheir supply bases?

Managing Strategic SuppliersAs companies have reduced their supplier counts, theyhave reduced potential alternative sources of supply asself-created duopolies or oligopolies are more difficultto engage in competition. Alternatively, suppliers havechoices about which customer they will give newtechnology to first. They have choices regarding scarceor newly planned resources. Consequently it hasbecome much more important to become a “preferredcustomer” for a key supplier. A study participant from alarge telecommunications company described the newsupplier reality:

My company is probably 60-70 percent dependent onits supply base. As we have aggregated spend, we

dramatically reduced suppliers. Now I want thosefewer suppliers to pay more attention to me as acustomer. They have to be more willing to share theirplans for the future with me, to collaborate with meon their technology roadmaps.

Obtaining InnovationIn the future, companies will need to use collaborationto keep their innovation pipeline filled. For some, thismay be as simple as having purchasing interface withtheir own product development organization as well astheir suppliers. More complex collaborations will enablecompanies to link the “push” of technological advancesto the “pull” of customer demand that will acceleratethe pace and need for product and service integration.

If linking customer needs to supplier capabilities iscomplex, it will be even more difficult to extendvisibility another layer or two back in the supply chain— even though some companies will want tocollaborate with those suppliers to manage theinnovation chain. One study participant described thissituation:

In the future, it will be necessary to look at Tier 2 & 3suppliers for innovation in addition to supplyassurance. This visibility will require more resourcesand more technology even if only done selectively.

Blocking CompetitionStrong relationships built through collaboration mayintentionally or unintentionally block competitors fromaccessing key sources of supply. Competitive blocksmay take the form of technological exclusivity, or theymay be as simple as tying up supplier capacity. But eachsuch advantage is likely to have a relatively brieflifespan, as one study participant noted:

To us the biggest issue is retaining competitiveadvantages created by working with suppliers andtheir proprietary technology. We can only getcompetitive advantage for a limited time until thesupplier wants to sell it elsewhere. They wantincreased sales as much as we do.

Increasing TransparencyIn addition, companies that establish relationships withsuppliers that will allow technology to provide visibilityfor increased operational effectiveness will be valued bystrategic suppliers. Companies will expect both theirown internal systems and those of suppliers to providegreater transparency of financial and performanceinformation. One study participant related how this hasworked to date:

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Today we have X level of data and clarity aroundspend, supplier performance, market trends, procureto pay, controls, etc. Each year that increases from10% to 15% to 20%. But the fact is — five years andout — we’re going to simply have better informationand clearer data allows for cleaner and faster speed tovalue supply management decisions.

Added another:

All of us are interfacing with suppliers, measuringwhat we can and it simply will become a more fact-based framework in the future. The clearer the data,the faster and cleaner the decisions will be.

Supply management executives will use the additionaldata obtained through new data transparency effortsacross their companies and back through their supplychains to create greater analysis and decision-supportcapabilities in the future.

Keys to Internal Collaboration

Supply executives tended to see the need for internalcollaboration initially with engineering and productdevelopment, particularly in manufacturing companies.In others, it is just as important to collaborate internallywith functions like marketing, information technologyand business unit management. In the past, systemshave been largely focused on historical transactionaldata. Supply management needs to be focused on futureneeds, so it needs to collaborate to obtain functionaland executive stakeholder views on their future needs.

Current corporate behaviors appear to be constraining aformal program of integrated product development. Asone participant said:

I think people try to share supplier contacts but it’ssuch an intimate relationship, it involves a lot of trust.R&Ders may be defensive about previous work, thatthe company has already tapped the incumbentsupplier’s innovation.

Different approaches will be used to integrate supplymanagement (and suppliers) into the new productdevelopment process. One study participantcommented on co-location:

We’ve actually put in what we call “new productengineers,” which are sourcing people co-located in thelaboratories, again, to assist the labs in finding the rightsources of supply, developing the target class where theyneed to be so that we’re launching products that weknow we’re going to be able to make money at, etc.

Another noted the emerging importance of targetcosting:

Our use of target costing has grown. It engagesmultiple groups: it engages sourcing, it also engages across-functional team in developing the cost structurethat’s needed — sales and marketing so that youknow you can compete with the product. You guardagainst having the lab develop a new product with noconcern about cost or competitiveness. It helps usmake better business decisions on the front end.

Another participant discussed process mapping withcycle times:

We have used historical data to track and analyzehow long does it and should it take to commercialize anew product? We look at each segment of the process,including sourcing and supply. We’re trying to under-stand causes for time and effectiveness so we can buildin process improvements.

Supply management has also endeavored to achievebetter positioning in the organization and earned therespect needed to make true internal collaborationhappen. A decade ago, supply management often didnot have a role in collaboration. This is no longer thecase, as three different study participants attested to:

I report to the CEO for one of the four companies, thelargest of the four. I am well positioned, but we havenot yet done enough across the group to gain synergiesfrom our supply chains. But that would be thedirection that I would see us moving in.

I report to the chief technology officer. I sit on theExecutive Committee. We get lots and lots ofinteraction with the CEO. We get lots of supportbecause I think people understand that excellence insupply-based management is a source of competitiveadvantage.

I’m one level removed from our CEO. I report towhat’s called the Chief Administrative Officer. Otherkey reports include the CIO, and the Vice President ofStore Operations, and the Vice President of StorePlanning. So I have lots of visibility to the executivelevel.

Supply has also had success by seeking out or initiatingcollaboration with other internal units. Commoninterests can be the beginning, as one study participantsaid:

We have collaborated with our R&D organization toinsure that we align our sources of future chemicals


and resins with supply partners that can be ourpartners for the next 5-10 years. That’s kind of thelongevity we need due to regulatory and bioequivalency issues.

In other instances, holding formal business partneralignment meetings can help, as another participantexplained:

We’re working with our businesses differently today.When we identify an opportunity, we go to thepresidents of the businesses to convince him that anoperating or innovation idea or an innovative ideacould work in his business.

CEO viewpoints have changed over the years, as oneparticipant noted:

Six years ago our CEO wasn’t really interested in oursuppliers or our relationships with suppliers, they weremore downstream focused and purely customeroriented, with globalization and with higher levelrelationships. Now CEOs are becoming moreinterested in some of the supplier relationships andhelping to manage at a high level, typically around theinnovation.

Fully documenting and sharing the supply strategyacross the organization is also key, as one studyparticipant commented:

Written supply strategies are a real important tool sothat everybody, including all the people in purchasingbut also the all the leadership in the company, knowswhere it is you are headed and what your keyelements are. These should be driven down to theactions for each individual and even put into theirperformance evaluation. I would say probablysomewhere between 1/4 and 1/3 of the Fortune 500have written plans now. This will double or triple inthe next several years.

Technology Support

Technology has progressed in leaps and bounds overthe past several years to improve collaboration betweenthe technical organizations of the buyer and supplier.Product data management and three-dimensionalsimulation tools have been developed to allow people toexchange designs and make interactive collaboration areality through product lifecycle management (PLM)tools.

Previously, a barrier to collaboration was the difficultyof setting up three-way activities that included both

parties’ engineering or technical communities andsupply management. Now, the implementation of PLMtechnologies is making better, faster design that includesall three groups a possibility, as one study participantcommented:

We’re in the process of putting in PLM, ProductLifecycle Management. It has a collaboration piece inthat engineering design tool — we’re expecting all ofour suppliers to collaborate in the design of our newproducts. This new technological tool is drivingsuppliers to collaborate like never before.

PLM encompasses the process of managing the entirelifecycle of a product from conception to design andmanufacture and all the way through to service anddisposal. PLM tools help companies managecommunications and information throughout theprocess with their customers and suppliers as well asinternal stakeholders.

PLM tools support collaboration in a number of ways.Integrated data management (PDM, CAD, RFx, etc.)with three-dimensional definition, documentmanagement and collaboration bring teams together,while secure intellectual property exchange servicesensure that only authorized parties view the works inprogress. The extension of design data managementallows concurrent management of structural, electronicsoftware and embedded systems. Process design withintegrated data management technologies enablescollaboration partners to track changes consistentlythroughout the process. Expressive bidding andscenario-based optimization functionalities allowsuppliers to provide input to alternative approaches oradded capabilities — input that collaborative supplierscan supply proactively without having to be “pulled” todo so. Supplier portals that feature innovation andcapabilities mapping (virtual RFI and analytics) allowsuppliers to introduce new capabilities or features asthey become available.

The use of collaboration tools can have a significantimpact on a company’s top and bottom lines. As anexample, consider how these tools could be used tomake the processes around a small change in ashampoo bottle more efficient. Currently, a corporatepackaging engineer would set up a meeting and likelytravel to meet with several suppliers — including thebottler, closure manufacturer and cap maker — todiscuss and review the impact of the change. Withcollaboration tools, changes can be made more quicklywhile costly travel is eliminated.

Another benefit of collaboration tools is that theownership of all intellectual property is documented

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and traceable, allowing companies to maintain controlof their intellectual property. This benefit is particularlyimportant when working with low-cost countrysuppliers.

For procurement executives, the information providedby collaboration tools will play a critical role inimproving the effectiveness and efficiency of sourcinginitiatives. The data from these tools will help themunderstand their spend by part number, specificationand supplier. The level of specification informationprovided will make discussions with suppliers muchmore productive. These tools will also allow engineeringand supply management to work more closely together.

While technology tools have traditionally been complexand expensive to access, the barriers to entry arelowering. Collaboration will benefit from the wideavailability of technology as part of increasinglyubiquitous desktop technology. In Microsoft OfficeUltimate 2007, significant functionality has been addedvia an application called Microsoft Groove that includesthe capability to build templates, workflows, reportsand dashboards that can not only extract and exchangedata feeds to and from ERP systems but also to andfrom external sites. The new application will provide foruser-designed roles and bring user-defined collaborationto the desktop at low cost.

The release of Microsoft Groove and similartechnologies means that collaboration workspaces tofacilitate any team will become widespread. These toolswill facilitate the enrollment of suppliers to participatein collaboration efforts with the companies they supply.Supply organizations will have the ability to set upworkspaces, name the members to the site, decide onuser-defined access rules, post content to the site andultimately email the workspace to other users.

It has taken more than 20 years for enterprise resourceplanning (ERP) technology to be developed, acceptedand deployed to begin to get the cross-enterprisevisibility into needed information. While electronicrequests for proposals (RFPs) and Internet negotiationsare nearly a decade old, these technologies sometimesstill seem to be in their infancy. The next decade willbegin to see important development work in the use ofcollaborative technology.

Protecting Intellectual Capital

As with the advent of any new technology, there will besecurity concerns about expanded collaboration withboth internal stakeholders and external suppliers. Suchconcerns are always brought up whenever information

is made more readily available — recall that back whenautomated teller machines were introduced, manypeople had physical and technological security concernsthat have since been largely overcome.

The risk of intellectual property loss is a centralconcern. To the extent that collaboration means sharing,it also means showing. As companies see someintellectual property, they will want to see more. Legalagreements will have to be structured to provideprotection, but also provide flexibility to allow sharing.While suppliers want to sell, they also are interested inshowing their capabilities as well as sharing. Exclusivityis a feature that has a limited-time value — in someindustries, an ever-shrinking time value.

Internal collaboration will be challenged by organiza-tional and reputation influences that will question whysupply management has to get involved, what valuesupply management can provide, how importantconfidentiality is to the product development processand how intrusive collaboration is.

The importance of collaboration will prove to be suchthat management processes must be developed toovercome concerns about the time and the risksinvolved in doing it. Senior management will have tostep up to make sure that collaboration is not eradicateddue to well-meaning concerns.

Conclusion

In the past, supply management has been largelydedicated to setting up a competitive environment forpurchasing — a practice that was enhanced through theuse of multi-disciplinary category sourcing teamsworking to ensure that all issues were addressed in thiscompetitive environment. In the future there will be anincreased need for similarly systematic approaches forsetting up and operating collaborative environments tomanage strategic suppliers both internally andexternally. Collaboration will be enhanced bytechnology enablers linked to the product lifecyclemanagement software along with access to networksthat ease collaboration among internal stakeholders andexternal parties through typical desktop workstations.Before this state is reached, a more significant barrierhas to be overcome — that of convincing suppliers andsupply practitioners that have been trained in acompetitive environment to embrace and employ theopenness and trust that will be needed in a genuinelycollaborative environment.


In the coming decade, supply management organizationswill take on increased responsibility and a higher valuerole. Success will hinge on whether the supplyorganization can attract, develop and retain individualswith the right skills and capabilities to meet the future.

Clearly, tomorrow’s business environment will demandmore of the supply management professional than just agreat set of negotiations skills. Further, the loomingtalent shortage coupled with the complexities ofmanaging a diverse, globally dispersed workforce willalter the approaches that companies will use to build,motivate and get the most out of the supplymanagement team.

We believe that there are three main areas thatcompanies will need to focus on in the decade ahead:

• Identifying needed skills and capabilities• Attracting, developing and retaining talent• Managing a diverse, dispersed workforce

This chapter discusses the future requirements andchallenges in each area, and offers a viewpoint on thepotential approaches that leading companies will use.

Identifying Needed Skills and Capabilities

A great deal will be expected of tomorrow’s supplymanagement professionals, as they will be charged withdeveloping and executing value acquisition strategiesthat find new value in the supply base, deliver value asquickly as possible within the cost parameters definedby the demand market and maximize the return to thecompany. To do so, they will need to find and leverageexternal sources of innovation, contribute to revenue

generation, expand efforts to manage costs and ensurebusiness continuity and sustainability.

To meet all of these requirements, supply managementprofessionals will need the skills and capabilities tounderstand and interpret supply market dynamics,analyze complex supply options and risks and developinnovative value acquisition strategies that integratewith and support business and functional strategies.Supply leaders will also be asked to create and managecollaborative supplier relationships and lead cross-functional and cross-organizational teams on a globalbasis. Figure 12.1 presents an overview of the manyskills and capabilities that supply managementprofessionals will need to succeed.

Current and Future Supply Management SkillsThe foundational skills for supply will continue tocenter upon a combination of supply market knowledgeand supply process expertise. Market knowledgeincludes understanding and tracking the currentcompetitive landscape, supply and demand drivers, andpricing models and cost structures. Also required willbe awareness of the future forces at work on theindustry (e.g., emerging supply markets, M&A activity,potential new entrants and technology trends). Supplypractitioners will rely on a blend of first-handknowledge, constant research, networking with industryexperts and strong analytic skills.

Requirements for supply process expertise will includethe ability to develop robust forward-looking strategies,to conduct a rigorous sourcing effort using a range ofdata collection and analysis tools, to carry outnegotiations and contracting, and to drive supplierdevelopment/operational improvement programs(including applying tools such as lean techniques andSix Sigma.)

Chapter 12 — Attracting and RetainingSupply Management Talent

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The need to be skilled in and knowledgeable of bothsupply markets and supply processes could stretchtoday’s typical supply professionals. It is already aconcern for some study participants, as onecommented:

We’re challenging our people to be content experts andspend area experts on a global basis and asking themto be the process owners.

Cross-Functional SkillsSupply management professionals will increasingly needboth broader general business knowledge and multi-discipline skills. A working knowledge of businessfundamentals, including finance, accounting andbusiness law will be needed, as will projectmanagement skills. Exposure to or experience inoperations, engineering, product and servicedevelopment, marketing and sales, and businessplanning will also help supply professionals to workeffectively across functional and organizationalboundaries. Understanding how their own businessoperates and competes will be key to identifying anddelivering new value-creation opportunities fromsupply. Understanding how key suppliers operate andcompete will help enhance overall value received,reduce costs and ensure business continuity.

One study participant described the need for broaderskills this way:

We definitely need an upgrade of our function inmany areas. If you outsourced manufacturing then

your supply managers are business managers,responsible for 80% of the profit and loss in certainareas because there is not too much in-house whereyou add value. So we actively tried to build up a morebusiness manager type of profile to manage theoutsourced business.

Another participant from a systems integrator thatworked with a number of subcontractors underscoredthe need for such broad knowledge and experience. Amanager from the company was assigned to eachsubcontractor relationship, and that individual wasexpected to have the business acumen to fullyunderstand the subcontractor’s business and monitor itsperformance:

As our roles expand, the demands expand and thetype of skills that we need continue to grow and weneed specialists in certain areas but we need broadgeneralists as well and we need people who reallyhave good business acumen. It’s harder and harder tofind people that have all those skill sets.

Cross-Cultural SkillsThe ability to work cross-culturally will increase inimportance as companies further expand geographicallyand continue to offshore activities and pursue suppliersin the next wave of low-cost countries. Individuals withinternational experience will bring to their organizationsa broader perspective and understanding of how towork in different settings, and will act as a bridgebetween cultures.


Figure 12.1: Future Skills and Capabilities for Supply Management Professionals

“Soft-Side” Skills

Leadership Ability

Collaborative Style

Innovative Spirit

International Experience

Foreign Language Skills

Broad Business Knowledge

Multi-Disciplinary Experience

Supply Market Knowledge

Supply Process Expertise

Cross-Cultural

Cross-Functional

Current and Future

Foreign language skills will be valued even more as ameans to make business, technical and socialcommunication more effective. One study participantcommented:

In the future, we will need global people with sourcingcompetencies, not global sourcing people.

“Soft-Side” SkillsFinally, having strong “soft-side” skills will be a keydeterminant of success. These soft skills includeexhibiting and fostering a collaborative style of working,possessing an innovative spirit that challenges the statusquo and seeks new solutions to problems, and havingthe ability to lead others effectively. In the future, theability to lead virtual, geographically dispersed teamswill be a must, driven by more emphasis on cross-functional and cross-organizational initiatives, increasedglobalization and talent scarcity, and enabled by theavailability of collaboration technology.

The supply executives we studied pointed to theimportance of soft-side skills for achieving the futuresupply mission, offering comments such as these:

We will need the ability to think broadly and moveflexibly within the company as the environmentchanges. The ability to handle ambiguity is critical.

Not only do you need to have content expertise butyou also have to be much more adept at being a teamleader, being able to communicate and relate to toplevel management within our businesses and persuadethem and to lead them into a much more holisticperspective on their management of their business.

At the same time, many of the supply executivesacknowledged that their current supply managementteam is deficient in soft-side skills:

One of the things that we found is that we had peoplewith good technical skills but they just didn’t have thesoft-side skills to fit the organization. We’re trying tosource, beyond a technical skill set, what you need toknow to be able to operate in a global business.

Purchasing is a relationship-oriented role the way wedo it; to do it well, we need people that can optimizethe value within whatever culture they are placed.

A blend of skills will be critical, as one supply executivediscussed:

People need to have more marketing experience alongwith analytical ability because a lot of times many ofour negotiations are becoming increasingly more aboutinternal issues and obtaining buy-in and cooperationand selling programs.

During the focus group sessions, several supplyexecutives noted that the combination of all four ofthese skillsets closely matched that of an entrepreneur— someone able to think beyond what already exists,and to organize and lead major change.

Formalizing the Skill RequirementsAlong with identifying the needed skills andcompetencies for success in the future, it will also becritical to formalize it into a knowledge and skillcompetency model for supply management. Our surveyrespondents ranked this strategy highest in importanceamong talent management strategies and fourth amongthe entire set of 105 strategies covering all areas ofsupply management. Figure 12.2 presents the data forsupply talent management strategies.

Companies that employ a knowledge and skillcompetency model will be more rigorous and formalwhen defining their skill and capability requirements.Significant thought and effort will go into defining the

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Establish a knowledge and skill competency model for supply 4.40 3.23 1.17 1managementRecruit and/or develop talent with broad general management 4.26 2.62 1.64 1expertise for supply management rolesRecruit and/or develop talent with specific technical or functional 4.14 3.05 1.09 1domain expertise for supply management rolesInclude supply management in the company’s career rotation/ 3.74 2.08 1.66 4progression systemFoster an entrepreneurial, risk-taking culture in supply management 3.71 2.45 1.26 4Appoint CPOs from outside the supply management function 2.74 2.45 0.29 4

Figure 12.2: Supply Strategies for Attracting and Retaining Supply Management Talent

exact mix of skills and capabilities needed to staff eachrole on the supply management team. Competencymaps, defining both current and future needs, will becommonplace, providing rigorous skills assessment andtesting of current staff and potential internal transfers ornew hires. Performance criteria will be defined in ameasurable way for each skill and role, and linked toexpectations based on tenure and experience level toallow individuals and the organization to gauge progressagainst expectations throughout their careers.

Some of today’s skill sets will be left out of tomorrow’srequirements. Notable by their absence from thediscussion above are skills related to the more tacticalside of supply management, including data coding andmaintenance, order release, change order management,and receiving and inspection. Already, studies show thatstaffing for these tasks is in decline, as supplyorganizations face continued pressure to cut headcount.In response, companies are adopting alternatives suchas outsourcing, automation or outright elimination ofthese tasks. In the future, this decline will accelerate.Most supply organizations will not have these skills in-house; those that do retain these skills will house themin offshore shared services centers. Further, manysupply executives express doubt that individuals inthese roles today will be suitable for higher value supplyroles in the future, as they lack the skills andeducational backgrounds to fulfill tomorrow’s needs.

Competency-Based Delivery Model for theFutureWhile tomorrow’s supply management organizationsmay aspire to have all team members possess the full setof skills described earlier in this chapter, the scarcity oftalent and simple economics will not make it practicalor even desirable. An alternate approach will be toadopt a competency-based delivery model in whichcategory managers blend category expertise with thecross-cultural, cross-functional and soft-side skillsneeded to drive strategy and lead improvement efforts,while a shared pool of expert specialists for supplyprocess give support in areas like analysis, processredesign, IT and knowledge management.

Acquiring, Developing and Retaining Talent

Defining future skill and capability requirements will bethe easy part. Far more challenging will be finding,attracting and keeping the individuals who can fulfillthose requirements. One study participant described thechallenge this way:

As our roles expand, the demands expand and thetype of skills that we need continue to grow and weneed specialists in certain areas but we need broadgeneralists as well and we need people who reallyhave good business acumen. It’s harder and harder tofind people that have all those skill sets.

The overriding issue is the escalating “war for talent.”Global demand for talent is rising rapidly as companiesin emerging markets seek to build their industrial andcommercial bases, and those in developed markets fightto protect theirs. Even within companies, requirementsare converging and battles looming — the cross-functional, cross-cultural and soft-side skills that will becritical for supply management will also be critical forall other parts of the business. Supply organizations willface stiff competition from within and outside theprofession for tomorrow’s talent.

Demographic trends are widening the gap betweensupply and demand. With the exception of the U.S.,populations in developed countries are forecast toshrink in the next several decades. Even in the U.S., asthe baby boomer generation approaches retirement age,a shortage of 17 million workers is expected by 2020.15

Additionally, career expectations have undergone aseismic shift.. Those who have been in the workforce inthe past decade realize that bankruptcies, businessrestructuring and downsizing have eliminated thepromise of long-term employment with a singlecompany. Newer entrants into the job market neitherexpect nor want it. Individuals are already moreaggressively taking charge of their own careers, andthere is little reason to expect the trend will slow. As aresult, tomorrow’s processes for talent managementmust anticipate and accommodate frequent staffturnover.

In this environment, companies will need a thoughtful,multi-pronged strategy to acquire, develop and retainindividuals with these skills and competencies, asshown in Figure 12.3.

Recruiting externally for industry expertise and/orsupply management expertise, adding industry/domainexperts from other departments, campus recruiting,ongoing training of their own staff and individual career path development will all prove to be just part of the mix.

Talent AcquisitionIn the next decade, companies will need to cast a widernet and be far more aggressive and creative in identifyingand attracting supply management talent. Individual


15“Bank on Workforce for Growth: Panel.” The Times of India, April 18, 2003.

companies will create unique acquisition strategiesaccording to their needs, drawing on experiencedexternal hires, internal transfers and campus recruiting.

Talent will be sourced and deployed globally.Relationships will be established with the leadingexternal talent suppliers, including universities,executive recruiters and training providers. Jointdevelopment efforts will tailor services to specific needs,and integrate these services into the company’s internalprocesses. Significant funding will be provided to bothfaculty and the university to gain access to students. Inessence, strategic sourcing and strategic suppliermanagement principles will be applied to talentacquisition.

External recruitment of experienced staff will remain animportant source to fill specific needs for supplymanagement expertise or industry expertise. Companieseager to build supply management teams will aggressivelyrecruit experienced supply professionals for theirspecific areas of expertise (e.g., deep categoryexperience or proven success in implementing SixSigma techniques with suppliers). In situations where anew supply executive is brought in to quickly turnaround a weak supply organization, the executive couldchoose to bring in a team of experienced individualsfrom the outside en masse.

Increasingly, companies will recruit individuals fromindustries that supply them, and then train them in

supply management techniques. One study participantremarked upon the move to bring in non-supply talent:

Because of our diverse technology portfolio we hirechemical engineers and mechanical engineers. We alsohire chemists so they’re technically competent in thecategory that they’re managing and then we have beenproviding training to them to make them into sourcingprofessionals.

[A recent move to get into outsourced manufacturing]required a different skill set within our organizationand that’s why we started hiring more manufacturingengineers and training them to be sourcingprofessionals.

Although individuals with supply industry understand-ing, technical competence or previous supply manage-ment experience will be attractive candidates, companieswill need to screen for the broader, upgraded skills thatwill be expected of tomorrow’s supply managementprofessionals. As shown in Figure 12.2, the surveyrespondents believe that it will be more important torecruit and develop talent with broad generalmanagement expertise for supply management rolesthan it will be to recruit and develop talent with specifictechnical or functional domain expertise. They alsoindicated that the implementation gap was much larger.

Internal candidates will also be an important source oftalent. Because of the growing importance of supply

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Figure 12.3: Talent Acquisition, Development and Retention Strategy

Talent Strategy

Baseline: Competency Mapping and Capability Requirements

Evaluation and Career Path Development

Training

Compensation and Reward System

Campus Recruiting Experienced

Hires Internal Transfers Advancement

management, companies will increasingly consider arotational tour in supply as a must for high-potentialgeneral executive candidates. Career paths anddevelopment plans will reflect this.

Where the supply organization needs to add specificindustry or domain expertise, transfers from otherdepartments will become an even more attractive optionin the future. Related disciplines such as manufacturing,logistics, engineering and R&D have historically beenthe source of these transfers, but as supply managementexpands its influence into nontraditional areas such ashuman resources or marketing, people with domainknowledge and established relationships in thosedepartments offer advantages over external candidates.

As supply management continues to grow as anattractive career field, companies will expect universityprograms to produce more and better qualifiedgraduates. With increased competition for talent,however, companies will also need to become moreaggressive and selective in their campus recruitingefforts. Campus recruiting will require a blend ofstrategies, including establishing or strengtheningrelationships with universities that have leading supplychain programs or strong programs in related fields likedesign and engineering. In developing markets,companies will target leading universities to hire peoplewith local market knowledge and language skills. Somewill also opt to work with other companies to helpdefine universities what skills recruits will need in orderto help shape educational programs. As part of recruitingefforts, companies will continue to use summer internand co-op programs to screen and groom young talentto fill entry-level positions and supplement campuscandidate interviews with problem-solving businesssimulation exercises in small team settings

Finally, a trend that will emerge in the coming decade isthe recruiting of talent from “foreign” sources throughtwo strategies that will emerge in tandem. First,companies will look for talent from abroad to offsetshortages at home and tap into a large and increasinglybetter educated global pool of workers. Second,companies will shift supply management activities intothose markets to access people with local marketknowledge and expertise (e.g., to support low-costcountry sourcing) and as a cost-saving measure enabledby information and communications technologies.Thus, jobs will be going “overseas” for two reasons —both because that is where the talent is and that iswhere the sourcing activity is.

Evaluation and Career Path DevelopmentThe demands for increased performance by the supplyorganization will directly translate to higher

performance expectations for individuals. At the sametime, the supply management organization mustprovide attractive growth opportunities for professionalstaff that motivate the individuals to perform well andremain a part of the team.

Specific approaches will differ based on overallcorporate human resources policies, but the future willrequire that evaluation and career path development forsupply management adhere to a number of guidingprinciples. Employees will be evaluated against specificskills and performance goals based on formalcompetency maps. Formalized, multiyear skilldevelopment plans will be established and regularlyupdated for all supply individuals, and progress againstthe plans will be incorporated into the employeeevaluation processes. Time and funding will be madeavailable to enhance skills and capabilities throughtraining. Formal ongoing mentoring will be employedfor all supply management resources and used to guideand enhance individual development. Formal programsto encourage highly qualified employees throughout theorganization to become involved in supply managementinitiatives as a part of their career development will belaunched. Supply management staff will have clearcareer path options within supply as well as the optionto transfer to or rotate to other departments. Staffrotation will be expected and used to drive careergrowth and introduce new thinking and skills to thesupply management organization.

Staff rotation may become a two-edged sword forsupply organizations. Those that are particularlysuccessful at acquiring and developing strongindividuals could become a net exporter of talent to therest of the company. The team members will have manyof the same skill sets that other departments seek. Plus,with greater involvement of supply management incross-functional teams, top performers will get visibilitythroughout the company, resulting in rotational offersfrom other executives. Some study participants reportthat this has already begun to happen.

Talent succession planning will also be important, assupply organizations face the loss of knowledge andexperience to retirements and recruitment efforts byother companies. In the event of a departure, cross-functional teaming and the pairing of experiencedindividuals with newer ones will be important ways tokeep such knowledge within the company. Systems tocodify and share knowledge also will play an increasedrole.

However, in the future companies will need a robusttalent succession planning process, containing elementslike those outlined by one of the supply executives who


participated in this research. At this company, successionplans are in place across a number of levels of thesupply organization, ranging from vice president tomid-level manager. For most of these roles, two or threeinternal candidates are continuously being developed,and candidates are regularly evaluated as to whetherthey are ready immediately, within 12 months orbeyond in the event that a move be required. Forexecutive-level positions, the company also attempts tohave at least one external candidate identified forconsideration should a position be vacated.

Underlying the evaluation and career-planningprocesses, many companies will need to invest in betterinformation on skill profiles, performance levels, anddevelopment interests and needs for supplyprofessionals. One mining company executive whoparticipated in our study pointed out that the companyhad better insight into its ore-moving equipment thanits staff:

We have substantive information about every aspect ofour supply chains. For example, we know when a tirewent flat, after how many miles, where in the world,where on the tire, why, etc. But we still know next tonothing about the capabilities of our employees. Wefound that our employees were leaving after five yearsin an assignment. Why? We started to realize thatnew jobs frequently ask for five years of experience.

Figure 12.4 offers a stylized version of tomorrow’ssupply management career path, with several on and offramps. People will enter supply management from anumber of different directions, be they external recruitsbrought in for their industry or supply managementexpertise, transfers from other departments sought fortheir industry or domain expertise or campus recruits.Ongoing staff training and individual career pathdevelopment will also be part of the mix.

Much like today, companies will likely rotate entry-levelpeople through a series of different areas to pick upbasic experience in supply management and receivefoundational training in analysis techniques as well asnegotiation, communication, presentation, diversity andproject management skills. What will differ is thatnewer employees will tend to have differentexpectations and look for rapid rotation to gain a varietyof experiences quickly.

As individuals develop skills and experience buying,sourcing, managing and then leading supply manage-ment activities, additional career opportunities will lieahead. One path could be to take on a broaderresponsibilities for supply chain or operations, whileanother could lead to leadership in other areas,including general management.

With so many business skills needed for success, therole of supply chief will continue to be part of the

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Figure 12.4: Supply Management Career Paths

Supply Chain, Operations Leadership

Operations

Buying Sourcing Managing Leading FutureCareers

Supply Chain Management

M & A Management

Enterprise and Business Strategy

CRO, SBUPresident

Functional Path

BusinessPath

D i r e c t H i r e s

C o l l eg e I n

te r n s

M B A R e c r u i tm e n t

I n te r n a l Tr a n sf e

r s

E x e c u ti v e R e c r u i tm e n t

R o ta ti on a l P

r o g r a m s

journey rather than the final destination for some. Manyof the major automobile manufacturers — includingGM, Ford, Toyota and Chrysler — have or have recentlyhad CEOs who had previously served as head of theircompany’s procurement organizations. Time will tellwhether the road to the top in other industries willfollow a similar path.

TrainingFor a variety of reasons, the ways in which companiesadapt their training approaches over the next decadewill become even more important to supply success.Training curricula will need to be expanded andconstantly refreshed to support the broader skill setsand deeper expertise required of individuals and thechanges in approaches and supporting technologies todeliver value from supply markets. Training programswill need to support not just the individual, but alsocross-functional teams (and even cross-organizationalteams including supplier staff) for some subjects.

To support cross-functional supply initiatives androtational programs into supply, training in supplypractices will be made readily available to non-supplystaff, who will be encouraged to participate as a part oftheir career development. To offset the effects of staffturnover within supply management, training programswill need to integrate tightly with knowledge manage-ment to capture what the organization collectively knows,and make it available in ways that allow new staffanywhere in the world to more quickly overcome thelearning curve. Companies will make greater use oftailored learning programs, blending formal classes,collaborative team learning, self-paced learning and on-the-job experiences in a mix appropriate to the subjectand tied to each individual’s own learning pace and style.

Companies will use a variety of approaches fordeveloping and delivering training, with practicality andapplicability the watchwords. For the more basic orgeneric subjects, they might use external suppliers oftraining materials and courses rather than develop theirown courseware. For more specialized or advancedtraining, companies will center training around theirown case examples and experiences, and in some casesprovide opportunities to apply what is learned to real-life situations as a part of the formal training program.

Online learning will continue to grow as an “anytime,anywhere” delivery medium. But access will not belimited by availability of a computer. Some companiesare already delivering training to supply professionalsvia devices like iPods and smart phones.

While it might not be considered traditional skillstraining, companies will create opportunities for

individuals to become more culturally aware and morecomfortable dealing in a global business world. Oneapproach would be to rotate an individual to foreigncountries on a short two- or three-month assignmentbasis as a part of his or her personal development plan.Another approach could be to place multinational teamsof people at worldwide locations on a project basis toprovide extra support to meet workload peaks. Thistype of temporary assignment will provide teammembers with exposure to a mix of cultures, and helpthem build a global network of contacts within theorganization.

In contrast, some companies are finding that recruitsfrom developing economies may require a somewhatdifferent approach to development. Some westerncompanies operating in China are sending local recruitson rotations of one or two years to the U.S. or Europefor development purposes in recognition that theyrequire longer development and training cycles.

Compensation and RewardsSeveral supply executives commented that supplymanagement compensation levels in their organizationsare artificially low today, in part because their company’shuman resources staff has had difficulty establishingcomparables. In the decade ahead, greater demand forsupply management talent globally will cause compen-sation levels to rise. So these companies will need tomove away from internal benchmarking against otherfunctions and look to the market. Compensation levelsand program structure will need to be regularlybenchmarked against leading supply managementorganizations regardless of industry.

To retain high performers, compensation systems willneed to fix the so-called “one-percent dilemma” (i.e.,top performers receive 4 percent raises while poorperformers receive 3 percent) and clearly differentiatebetween levels of performance. Superior individualperformance will need to be reflected in both base payand incentives while poor performance should be metwith flat or declining compensation levels or directlylead to personnel action. Getting there will require thatthe evaluation process be designed so that managersobjectively evaluate performance and deal with bothends of the performance distribution curve.

Compensation and incentive programs will need to beredesigned to reflect both group performance againstcompany supply management goals and individualperformance against personal objectives anddevelopmental goals.

Non-monetary rewards will also be important. With ahost of external options readily available to supply


Trends: Acquire

Develop

Diverse, Distributed

Working Environment

Retain

• Globalization

• Shortage of people

• Highly experienced baby boomers to retire

• Cross-organizational collaboration

• Technology

Challenges:Manage and motivate

individuals and teams across

• Functions

• Organizations

• Geographies

• Cultures

• Generations

Seek out the most capable workforce regardless of background or location

professionals, companies will need to think creativelyabout development and career path opportunities forhigh performers as a part of their talent retentionstrategy. High-profile projects, foreign assignments andpost-graduate educational benefits will be among theoptions to consider.

Managing a Diverse, Dispersed GlobalWorkforce

One of the biggest challenges (and unknowns) fortomorrow’s supply organizations will be how to leadand motivate individuals and teams in a far morediverse and distributed working environment. As Figure12.4 shows, factors such as globalization, demographicshifts, greater cross-organizational collaboration andenabling technologies are creating a situation where aconstantly shifting cadre of supply professionals fromdifferent cultures and generations are creating new waysof working across organizational and geographicboundaries. Companies are still in the early stages oflearning how to manage in this new environment, butsome insights are already available, as shown in Figure12.5.

The generation of workers that has entered the work-force since the current century began (i.e., thosecurrently aged 28 and younger) have different expecta-tions from employers than past generations have had.While they no longer expect or plan for a one-companycareer the way previous generations did, they willdemand greater flexibility and free time, place great

importance on personal growth opportunities andexpect more frequent feedback on performance. Theyhave different working styles as well, patterned after thedifferent styles of communicating and interacting theyuse in their personal lives.

The generation that will enter the workforce in thecoming decade will likely exhibit the same views towardemployment, and quite likely drive even greater changein working styles. They will represent the first generationfor which large-scale social networking is a way of lifeand where its members are all “native speakers” of thetechnologies that enable it.

The trend toward more cross-organizational collaborationwill provide a fertile testing ground for evaluating howwell social networking skills transfer to the workplace.But over time, supply management processes and staffroles and responsibilities will be reshaped to take fulladvantage of the multitasking and social networkingskills of tomorrow’s workforce.

As companies welcome the new generation ofemployees, they will need to find creative ways toovercome intergenerational friction in the workplace, asbaby boomers find themselves in new and unfamiliarworkplace settings. At the same time, they must findways to leverage the experience of baby boomers beforethey walk out the door and into retirement, includingincreased mentoring of less experienced staff, use oftechniques to capture knowledge and phased retirementvia part-time work.

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Figure 12.5: Managing the Workforce of Tomorrow

Providing more time and place flexibility in the work-place could be a key strategy to satisfy workers at bothends of the age spectrum. U.S.-based retailer Best Buyhas implemented a “results-only work environment”that gives its office employees flexibility around whathours they work, as well as where they work, so long asthe work gets done. Business Week reports that theprogram contributed to a 75 percent decrease involuntary turnover among the Best Buy sourcing team.16

Supply executives will need to find ways to buildrelationships and maintain contact with their teammembers across geographies as well. Advances incommunications technology will make it easier todistribute work and enable collaboration around theworld. Already some supply executives lament the factthat they have never met in-person with some teammembers from faraway lands to who they giveperformance reviews. More frequent travel, or locatingkey executives in foreign markets, could be part of theanswer.

Conclusion

In many ways, talent management could be thedeciding factor between success and failure fortomorrow’s supply management organizations. Ingeneral, companies will have access to the same supplymarket information, the same suppliers and the samesupply management best practices and tools. What willbe different is how each company uses that information,works with those suppliers, and applies those practicesand tools, which will come down to the skills andcreativity of its people and the relationships thosepeople build with others.

The individual opportunities to contribute and grow insupply will be major, many and varied in the comingdecade. One could envision that by 2017, theopportunities will attract talent that is equivalent to thatfound today in private equity firms and venture capitalcompanies. Skilled and talented people with a diversefunctional and cultural background will have a brightfuture and strong career path ahead in supplymanagement. Success will come to those companies thatseek out the most capable workforce regardless ofbackground or location.


16Conlin, Michelle. “Smashing the Clock.” Business Week, December 11, 2006.

Past research conducted by CAPS Research has clearlydemonstrated that supply management organizationshave been in a state of constant change over the past 20years.17 However, over the past decade companies haveresponded to strong competitive pressures by increasingthe centralization of supply management. Thesecompetitive pressures have created the need to reduceprices paid for goods and services, create strategicalliances with key suppliers, increase service and qualityfrom suppliers, gain access to the best and latesttechnologies from the supply base, and create andimplement best practices across the organization. Tomeet these needs, many companies moved toward morecentralized supply organization, creating various formsof center-led, hybrid and shared service organizations.Generally speaking, companies that implemented thesecentralized organizations reduced costs, increasedcontrol over spend and increased the value attainedfrom the supply base.

As shown in Figure 13.1, the survey data from ourresearch indicates that the currently dominant center-led model for supply management will continue to be akey strategy over the next decade. Furthermore, thesurvey responses indicate that supply managers see littleneed for implementing decentralized strategies in thenext decade and that they believe that an excessiveamount of supply decentralization continues to linger intheir organizations.

Moving Away from the Center-Led Model

Despite the importance and success of the center-ledmodel, analysis of data from the research interviewssuggest that in some companies the supply organizationwill need to be tailored to respond to the external forcesdiscussed in Chapter 3 and align with the business

Chapter 13 — Managing and Enabling theSupply Management Organization

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17See:• Johnson, P. Fraser and Michiel R. Leenders. Supply’s Organizational Roles and Responsibilities. Tempe, AZ: CAPS Research, 2004.• Leenders, Michiel R., and P. Fraser Johnson. Major Changes in Supply Chain Responsibilities. Tempe, AZ: CAPS Research 2002. • Leenders, Michiel R. and P. Fraser Johnson. Major Structural Changes in Supply Organizations. Tempe, AZ: CAPS Research, 2000. • Fearon, Harold E. and Michael Leenders. Purchasing’s Organizational Roles and Responsibilities. Tempe, AZ: CAPS Research, 1995. • Fearon, Harold E. Purchasing Organizational Relationships. Tempe, AZ: CAPS Research, 1988.


Use a center-led model for supply strategy development with 4.14 3.28 0.86 1decentralized executionCentralize strategic supply responsibilities 4.00 3.21 0.79 1Give user organizations greater responsibility for sourcing and 2.51 2.77 -0.26 3supplier managementDecentralize strategic supply responsibilities to business units or 2.04 2.11 -0.07 4geographies

Figure 13.1: Survey Data on Organization

model changes discussed in Chapter 4. External forcesand business strategies will impact supply managementorganization in the next decade and create the need forsome relaxation of the center-led model.

Need for Local LeadershipManaging a global workforce is a major challenge that isespecially difficult to do from a centralized platform.Setting goals with, coaching and evaluating personnelthat are only seldom or never seen is difficult to dowell. Therefore, local leadership and authority, and notjust expensive expatriates, will be needed to build aneffective supply management team in developingeconomies. Local leadership will be necessary todevelop local market knowledge and networks. Localleaders will serve as role models for the indigenousworkforce. Because supply talent will remain in shortsupply in developing economies, it will be necessary tokeep very close contact with the top local people tomitigate the risk of having them recruited away.Moreover, it will be important to build expertise at thesecond and third level of management, not just at thetop.

The challenges of developing talent in developingeconomies will require that supply organizations betailored to meet local demands, which will put pressureon the center-led organization approach. Other changeswill also create the need for more tailored, localizedsupply organizations.

Cost Savings from Aggregation andStandardizationThe greatest driver of centralization over the pastdecade has been the need to reduce the cost ofpurchased goods and services. These savings have beenachieved by analyzing spend across business units andregions, agreeing to standard specifications for similaritems, aggregating the demand of the standardized itemsacross the organization and reducing the number ofsuppliers. This has allowed for a stronger negotiationposition on price and other terms and conditions,resulting in year-over-year cost savings. Presumably thishas also allowed suppliers to reduce costs and pricesthrough economies of scale.

Once these savings have been achieved, the argumentfor centralization loses some steam. Admittedly, a returnto decentralization might bring a return to differentstandards and specifications, but this is unlikely if italso brings a return to higher costs. Therefore, businessunits will be unlikely to abandon commonspecifications and suppliers because they will not wantto incur the resulting cost increases. Thus, once the costrewards of centralization have been achieved, therationale for centralization may be less compelling.

A Decline in Upward Pressures on CommodityPricesTight supply markets in the early part of the 21stCentury and resulting price increases supported themove toward center-led category management to helpensure availability and slow down price increases. If,over the next few years, rising commodity prices slowas higher prices bring on new capacity and sources ofsupplies, the pressures for center-led categorymanagement for these commodities will decline. Ifprices actually start to decline, category leadership maydevolve to the business units.

Embedding Best Practices and Processes inTechnologyAnother strong driver of the center-led movement wasthe need to develop and deploy common best practicesacross the organization. Common practices were neededto achieve good performance and ensure that contractcommitments were honored. Leadership teams incentral organizations researched best sourcing andpurchasing processes and created implementation plansfor deployment.

Many of these best practices have been embedded intonew software systems that have been rolled out on aglobal basis across the organizations. Some have beenembedded in ERP systems, while others have taken theform of new suites of applications developed specificallyfor supply management. In both cases, once thesoftware was deployed the embedded best practicesbecame common practice throughout the organization.

Thus, the need for a center-led group to oversee andenforce the use of the best practices will decline and bereplaced by technology.

Increased Mobility and “Instant” Productivitythrough Common ProcessesAs the need to maintain process-knowledgeablepersonnel at central locations disappears, thedeployment of best practices through technology willallow them to remain highly productive as they changelocations. Common processes will allow people to betransferred and immediately focus on learning newmarkets and products without having to learn newprocesses. Skilled category managers will be able tooperate from any location or from within any businessunit. As one study participant noted, deployingcommon processes across the global enterprise will bean important strategy in the next decade:

We always look at globalization as having consistentprocesses and having people tied together more thanhaving a consistent supplier.


Cross-Unit Collaboration through TechnologyTechnology will allow virtual collaboration (see chapters10 and 11) among category teams and free them fromthe necessity to be co-located at or constantly travel to acentral location. Knowledge management systems willallow personnel to have access to the same informationregardless of location.

Increased Control for Business UnitsHow large is large enough? Large business units may beable to experience most of the advantages of centraliza-tion without close coordination with other parts of thebusiness. For those executives who have compensationtied closely to their business unit’s performance, closecoordination is typically seen as a hindrance.

Aggregation of demand may benefit the corporation as awhole, but it can still be detrimental to the performanceof a specific unit. While centralized-versus-decentralizedcontrol is an old argument, large business units mayhave the superior argument in the future, to the detri-ment of strong centralized supply organizations. Bestpractices created by center-led organizations can beimplemented by business units that then no longer seethe need for control from the center.

Location of ExpertiseThe question of where to physically locate supplyexpertise will pose an interesting riddle for companiesto answer over the next decade. There will be moreemerging markets centers of supply managementactivity in emerging markets, as witnessed by IBM’smove of its global supply headquarters to China. A keyfuture question is whether to locate the spend poolcompetencies in emerging or developed markets.

It seems apparent that most western-based manufacturingcompanies will develop an Asian strategy for their supplymanagement organization. Buying hubs in westernlocations will be severely challenged to manage or evensupport efforts in China, India and Southeast Asia.

As companies move manufacturing offshore to getcloser to their customers, they will need local supplyexpertise with indigenous talent. Local resources will berequired to understand the culture, negotiate in thelocal language, interface with the business unit andcorporate headquarters, and help drive growth in thatmarket.

Integrating Supply with Other Functions

Regardless of where it ultimately ends up on thecentralized-decentralized spectrum, to be successfulsupply management will have to be well integrated withcorporate leadership, business units and internalfunctions. While the survey data in Figure 13.2 suggeststhat supply management is currently well aligned withother business units and functions, integrating supplymanagement on a global basis is not as important to therespondents.

Analysis of the quantitative data suggests that in thenext decade companies will take different paths tointegrating supply management with the rest of theorganization, with the two main scenarios pictured inFigure 13.3 most likely.

Supply Management in a Supporting RoleAt some companies, the supply organization willbecome one of several pillars in a larger supply chainorganization that will also include manufacturing/operations and logistics/distribution and perhapsquality, safely, compliance, new product developmentand accounts payable as well. While the marketing/salesand finance functions will remain outside of supplychain, integration with these functional areas will bekey.

Within the supply chain organization, supply manage-ment will have the principal responsibility for managingthe supply base and insuring that internal operations

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Align supply management strategy with corporate-wide and SBU 4.47 3.13 1.34 1business and technology strategiesAlign supply management strategy with related internal customer 4.28 3.07 1.21 1strategies such as marketing, manufacturing engineering, and product/service developmentFoster global integration of the supply management organization 3.74 2.47 1.27 2

Figure 13.2: Survey Data on Integration of Supply Management

have the goods and services needed. One studyparticipant explained how this will look:

Supply chain will be absorbing other functions thattraditionally were not within supply chain. Supplychain will take on responsibility and accountability forother things so they can influence it better instead ofhaving to coordinate with other functions.

This organization design will most likely be adopted bycompanies that maintain a strong manufacturingfunction, either domestically or off-shore, or have astrong operations function, such as financial andhospitality service companies.

Supply Management in a Leading RoleIn the second likely scenario, supply management willtake on a leading role to manage both external andinternal supply. The top supply management role willclosely resemble today’s chief operating officer’s jobdescription. This organization will prevail at companiesthat outsource all or most of their manufacturing oroperations.

In this organizational structure, supply will manage theexternal supply base and contract manufacturers. Doingso will require a tight integration with engineering tohelp ensure the proper management of new product

introductions and continuous improvement in legacyproducts and processes.

Under this model, supply management will have near-complete responsibility for the management of allexpenditures in the corporation, with the supplymanagement leader acting as the chief cost managementofficer. One study participant discussed how this realityis coming to be:

We are very much involved in spend at the operatinglevel, but even within our own corporate office more ofthe spend is coming under our auspices. We are findingourselves facilitating the process, spearheading things, and doing global contracts. We are assuming the budgetsfrom multiple areas of our enterprise and pulling ittogether under the auspices of supply management.

Cross-Functional Teams

The survey data shown in Figure 13.4 demonstratesthat supply managers view the use of cross-functionalteams as a highly important supply strategy for the nextdecade. However, they also indicate that there is oppor-tunity for additional implementation of these teams.Based on these results, the use of cross-functionalsupply teams will likely increase in the future.


Figure 13.3: Organizational Enablement

Strategic Sourcing

Tactical Buying

Contract Manufacturers

Outsourced Operations

Supply Management

Product/Service Development

Product/Service Development

Operations Distribution

Supply Management

supports

Supply Management

leads

SCM

SM

The use of cross-functional teams will be an importantsupply management strategy because they provide abroader base of knowledge for decision making and canlead to decisions that take into account the needs of allthe major stakeholders in the organization. Includinginternal users on sourcing teams acknowledges theirexpertise in their particular areas and leads to muchbetter cooperation, which in turn leads to bettersupplier agreements in which internal users have avested interest. As discussed in chapters 7 and 8, cross-functional teams will be used in particular for categoryand supplier strategy development and implementation.

Cross-functional teams focused on processes will also becritical in the future. Companies will develop globalsystems capability and functional processes to aligntheir global systems. However, problems will arise whenglobal processes are not supported by cross-functionalteams. Companies may have best-in-class financial,operational and supply chain processes, but significant“white space” or disconnects between the functionalprocesses may still exist. Cross-functional teams will beused to help fill this organizational white space andconnect the disparate systems.

Outsourcing Supply Management

Continued pressure on supply management headcountwill drive more companies toward automation oroutsourcing of select parts of supply management.Companies will centralize and automate transactions,reducing the absolute supply headcount while freeingup headcount slots for higher value supply managementwork, such as strategic sourcing or analysis. Thiscentralization and automation will create the opportunityfor companies to offshore and/or outsource theirtransactional supply activities, which many will do.

Outsourcing of the non-tactical activities in supplymanagement will occur only very selectively. Thestrategic importance of supply management to thecompany will make outsourcing a high-risk proposition.Although it might make financial sense on paper, it willonly selectively be pursued. First, corporate executiveswill feel more comfortable with a face and a name that

is down the hall and not across the country or acrossthe ocean. Secondly, outsourcing can seriously hamperspeed and agility in decision making. To understand thedetails of requirements, supply needs to have a closeand integrated connection with internal customers. Costsavings that may be gained through aggregation with athird party will not compensate for any uniqueadvantages that a company may have in the supplymarketplace.

Nonetheless, companies will continually review andanalyze supply outsourcing opportunities and will likelyoutsource supply management for some categories.Companies may not want to devote the necessaryresources to categories that have low strategicimportance and high market complexity, such as energy,specialty chemicals, facilities management, andmaintenance, repair and operations. These categoriesmay be outsourced to third-party companiesspecializing in these materials and services. Companieswill continually review these situations and outsource orinsource as it makes management and economic sense.

Many companies are adopting an offshore sharedservices model, with the possibility of outsourcing asthe next phase. Accounts payable management, orderinvoice management, shipment notice and othertransactions will be concentrated in these centers. Onceconcentrated and offshored, these centers will be primecandidates for outsourcing.

Measuring Supply Management Performance

Today, supply managers think that they have goodalignment between measures of supply performance andlinkage with corporate measures and that this linkagewill become more important in the decade ahead. Notsurprisingly, they also think they currently have goodoperational measures for supply management and that itwill be highly important to maintain these measuresover the next decade.

In addition to the importance of internal metrics, supplymanagers feel that common metrics across tradingpartners in the supply chain will be an important strategy

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Employ a governance model for supply management cross- 3.98 2.72 1.26 1functional teaming (funding, resourcing, benefits sharing, leadership, program management)

Figure 13.4: Survey Data on Cross-Functional Teams

going forward. They clearly think that there is room forimprovement of such measures, as shown in Figure 13.5.

In the next decade, companies will need to developmeasures of supply’s contribution to the success of theorganization beyond cost savings. Supply managementmetrics will become more important as the functionbecomes more strategic and increases its scope andresponsibilities. As companies become larger and spreadmore widely across the globe, relevant and effectivemetrics will be developed to manage and control theglobal operations. Furthermore, metrics will be neededthat clearly link the performance of supply managementto the strategic performance of the organization.

A balanced scorecard approach to measuring thecontribution of supply management to the success ofthe company will be in common use. A framework forsuch a scorecard is shown in Figure 13.6.

Financial MeasuresCost savings will continue to be an important measureof performance for supply management in mostorganizations. Finance, working with supplymanagement, will formalize the definition of costsavings and help validate the reported savings. Costavoidance measures will be used internally in supplymanagement but will not be a major metric ofperformance outside the function.

In addition to cost savings, total cost and lifecyclemodels will be developed that indicate the wider impactof sourcing decisions on other parts of the organization.Total cost of ownership and lifecycle costs — value-based measures — will replace cost savings as the mostimportant measure of future financial impact ofsourcing decisions.

Customer and Supplier MeasuresCompanies will shift their performance metrics to bemore customer oriented. For supply management, thismeans that metrics related to both internal and external

customer satisfaction will be important. Surveys ofinternal customer satisfaction with supply will beroutinely used. For external customers, measures ofsatisfaction will be devised that reflect the contributionof supply management to the customer experience. Inaddition to customer satisfaction, other importantmetrics in this category will include cycle times for newproduct development, cycle time to market, quality andcontribution to revenue enhancement.

On the supplier side, industry-level data on supplierperformance will be collected and published to theindustry. This will provide valuable benchmarking datathat companies can use when evaluating supplierperformance. Traditional metrics of supplier performancewill continue to be used, including quality, delivery and cost. Additional metrics will include supplier contribution to new product development, revenue enhancement,speed to market, customer retention, quality, processcapability, supply continuity and delivery performance.

Operational Excellence MetricsCompanies will continue to use metrics to helpdetermine the amount of resources that need to bedevoted to the supply function. These will include suchtraditional measures as spend per person and number ofsuppliers per person. However, the goals for thesemeasures will shift as transactions are centralized and/oroutsourced and technology is employed that helps toleverage the efforts of each individual.

Innovation and LearningCompanies will measure supply management’scontribution to new product innovation and revenueenhancement. Metrics will be developed to measuresupply management’s ability to find suppliers thatsupport product development with new ideas and newtechnology. The direct impact of supply management inthe “design of record” will be important — and one ofour study participants reported that this impact isalready being noted:



Link strategic supply metrics to business strategies and financial 4.30 2.88 1.42 1metricsMeasure supply management performance on strategic functional 4.29 2.88 1.41 1objectivesMeasure supply management performance on operational 4.16 3.07 1.09 1functional objectivesDevelop common performance metrics across the companies 4.28 2.62 1.66 1in the supply chain

Figure 13.5: Supply Management Metrics

Some of the top-line contribution is coming frominnovation that’s happening upstream that can betranslated into value downstream.

As discussed in Chapter 12, increased attention will bepaid to developing and retaining supply talent.Concomitant with that effort, new metrics will beemployed to indicate the amount of activity and thesuccess of the effort. Metrics in this category willinclude hours and categories of training completed,turnover rates, number or percentage of individualstrained on a specific supply subject inside or outside thesupply management organization, and percent of keypositions with succession plans and identifiedcandidates “ready now.”

Value beyond CostIn addition to using the balanced scorecard approach toincrease the breath of measures around supplymanagement performance, companies will also beexpecting supply management to deliver much morethan just cost savings. Metrics will be developed andused to track performance in these new areas, includingcontribution to revenue growth, risk management andsocial responsibility.

Predictive MetricsIn all areas of the balanced scorecard, companies willdevote resources to developing predictive metrics in

order to predict future performance, as contrasted toreporting past performance. Some key areas for whichpredictive metrics will be developed and implementedinclude supplier performance, supply continuity, costsavings, total costs and personnel performance.

Systems and DatabasesUnderlying the creation and use of the new metrics willbe improved methods for collecting, storing andrationalizing data that are needed for the metrics. Thetechnology developments discussed in Chapter 10 willmake it possible to collect and analyze data across thecompany and display it in user friendly and easilyreconfigurable dashboards.

Cost Savings Tied Directly to BudgetsCost savings will be documented using standardtemplates and processes and be audited and signed offby the chief financial officer. On the direct side, costsavings will be tied to material requirements planningsystems. Projected or actual cost reductions will beincorporated into the factory budgeting process fordirect material and the savings extracted from thebudget at the start of the fiscal year. This will align thework of supply management directly with themanufacturing units of the firm.

Indirect spend tracking and cost savings will be moredifficult to implement. Although cost savings can be

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Figure 13.6: Balanced Scorecard for Supply Management

Financial

OperationalExcellence

Customer

InnovativeLearning

Robust, Integrated Metrics

Cost Savings

• Year-on-year

• Financial Audit

• Tied to budgets

Total Cost

• TCO

• Lifecycle costs

• Comprehensive supplier rating

Value Beyond Cost

• Innovation

• Supply continuity

• Revenue

• Social responsibility

• Customer centric

Predictive Metrics Balanced Scorecards

• Supplier stability

• Risk exposure

• Future cost savings

• Market demand- supply balance

Contribution to SBUs and Corporate

• Revenue

• Margins/profit

• Asset productivity

• Competitive positioning

defined and audited, tying them to budgets will be achallenge. Companies will devise policies that dictatewhether the savings are returned to the corporation orreinvested in the business unit — or both. Savings to bereturned to the corporation will be extracted frombudgets at the start of the budget year and tied directlyto the cost savings reported by supply management.

Companies will increasingly evaluate supply strategiesand supply management performance on total-costmeasures and market-based selling price benchmarksfor end products. Companies will look at the costdifferential of entire assemblies rather than individualparts. Companies will look at the average selling priceof products in relationship to material-only cost trendsinstead of reported cost savings and benchmarkcompetitors’ average selling price, as one participantnoted:

The whole point is to take basically the material-onlycost at a subassembly level and how that total bundleis coming down. Then you lay on top of that theaverage selling price of that unit in the market and ifyou see that the curve of the selling price is comingdown faster than your cost reduction, well, you have aproblem. You can sit there and tell the CFO, “wesaved you all this money,” which is a lot of times whatpurchasing organizations do. We saved a hundredmillion dollars last year and the CFO says, “yeah, butmy gross margins went from 32% to 28% so I don’tknow what you’re bragging about.” So that’s not avery happy situation to be in so, we just try to showthat here’s the ASP, the average selling price for thisunit, and here is the total cost bundle of what thecontrollable costs are, the material-only cost in thatsame bundle and if you can show how those twocurves move in relation to each other, then youactually can make real decisions.

Measuring Total Value of Supply ManagementAlthough many new and innovative metrics will bedeveloped, representing the total value delivered bysupply management will remain a challenge. Forexample, demonstrating to management that long-termrelationships are really delivering value beyond — or inlieu of — cost savings will remain difficult. There willno one metric or even a small set of metrics thatdemonstrates total value. Supply managers will continueto be challenged to present the right combination ofmetrics and supporting discussion to demonstrate thevalue they return to the organization and to justify theresources devoted to supply management, as one studyparticipant noted:

In supply we see the conceptual value but todemonstrate it is not always easy. To get the company

to consider changing certain corporate policiesregarding frequencies of bidding and schedules andaudit schedules is not easy because you see the valuebut you can’t demonstrate it regularly or easily orquantifiably, so it can look like opportunity lost.

Conclusion

Supply management organizations have been in flux forthe past decade, and will continue to change over thenext decade. Much of this reorganization has beendriven not so much by what is good for supply manage-ment, but by changes in the parent organization.Mergers, acquisitions, divestitures, leadership changesand the evolving competitive landscape have all led toorganizational changes and, consequently, supplyorganization changes. Despite these numerous changes,it is well documented that the overall trend has beentoward a center-led model.

The traditional view has held that only a centralistmodel gives companies any hope of leveraging thecategory, supply, and talent strategies discussed above inthis report. On the other hand, the very global forcesand business model changes discussed above maymitigate or reverse to some extent the move towardcentralization. The demands of global business and theneed to develop local talent call for more authority andresponsibility at a country or region level. Furthermore,it is not clear that the new mega-companies that havebeen and will be created through acquisitions andmergers can be managed effectively from the center, asthe scope and complexity of activities may simply betoo great. Strategic business units or regional organiza-tions may become the highest organizational levelaround which supply activities are managed in thelargest organizations.

New information technologies hold out the promise ofachieving the many advantages of center-led organiza-tions without the disadvantages. Information aboutglobal supply markets, prices and quality will be moreeasily shared across organizations without the need for acentralized group to collect the information and do theanalysis. Also, best practices will be embeded within thetechnology, so a central group will not be needed toimplement and enforce use of the technologies in thebusiness units.

New information technology will also enable newmetrics to be crafted that reflect process activity andorganization performance at all levels of the organiza-tion. Data standards will be developed that will allowunique and ad-hoc measures to be constructed forvirtually any analysis needed on a near real-time basis.


New information feeds from RFID and other sensoringtechnologies will open new vistas for activity trackingand performance measurement.

The challenge will be to match the new technology toorganizational structures in order to make them agileand flexible to meet new business conditions. This willbe a radical change from the monolithic ERP systems inuse today.

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Section IV — Conclusions andRecommendations


Our research indicates that the pace of change in supplymanagement is more likely to increase rather thandecrease in the future, as evidenced by changing marketfactors, globalization and the ongoing march oftechnology. The seven key strategies for the comingdecade that we propose above reflect the need to adaptto a period of rapid change.

Forces of Change

Market demands and external forces will forcecompanies to rethink their new product development(NPD) processes, supply chain processes and categorystrategies. Specifically, consumers everywhere willdemand the latest trendy items, and companies willdevelop and position products to meet this demand.However, consumers in emerging markets will requirelower-cost or differentiated alternatives tailored to theireconomies and local tastes. These trends will drive rapiddesign changes as well as the need to quickly developalternate specifications.

Rapid advances in information and materialstechnologies will force companies into “make versusbuy” decisions to develop needed expertise, and thiswill (at least initially) require different approachestoward supplier identification, selection andmanagement than have been used in traditional marketsand technologies. Supply networks and NPD processeswill need to change to support rapid product lifecyclesand new technologies. Innovation-based suppliers willview customers as market channels for their creations,and give preference to those that can generate (andshare with the supplier) the most value from their ideasand innovations

Global growth will continue to pressure markets for rawmaterials. Escalating demand from developingeconomies will create sharp price escalations and lead tothe creation of supply and buying cartels. To maintaincost control, new category strategies will be needed. Thecombination of long-term demand increases coupledwith shorter-term economic slowdowns will bring aboutincreased price and capacity volatility for key commodityitems such as metals and petroleum-based materials.

Companies will face more aggressive and powerfulsuppliers, leading to disruption in traditional supplymarket dynamics. Low-cost or “ruthless competitor”companies will emerge in most global industries,causing incumbent companies to radically reduce theircosts for traditional products or face collapsing marketshare.

Consolidation of traditional suppliers due to mergersand bankruptcies will accelerate, affecting price andavailability and disrupting existing relationships. Privateequity firms will control more suppliers in manyindustries. An emphasis on cash flow will dominatetheir decisions, affecting supply market dynamics andhistoric supply base strategies.

To pursue new sources of revenue, suppliers willaggressively move downstream into their customers’revenue space, building capabilities that rival thecustomer’s. This will cause customers to rethink howthey balance the desire to collaborate with suppliers togain innovation and efficiency with the need to protecttheir own business. Both customers and suppliers willhave a greater capability to measure and understand“cost to serve,” leading to tougher price negotiationsand increased joint efforts to root out waste and non-value-adding activities.

Chapter 14 — Research Summary and Potential Supply Challenges

for the Decade Ahead

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Supply Mission — The Era of Great Expectations

At successful companies, supply management will takeon a greater role in company-wide strategic costmanagement; we expect that its mission will expand toinclude cost management for all aspects of theorganization. Strategies and processes will beimplemented that will require total cost and valuesourcing decisions, with the measurement of theirimpact visible on both the income statement andbalance sheet.

Supply management will take on the formal duties ofevaluating competitiveness against market alternativesin all areas of the company and recommendinginvestments in internal capabilities, acquisition,outsourcing or divestment. Supply management willhave a lead role in ensuring business sustainability byinfluencing decisions on capital expenditures andcapital equipment maintenance, technology choices,product and component design, materials andpackaging selection, supply chain design andgeographic sources of supply, and will extend itsinfluence on such decisions back through the supplybase. Supply management will proactively help thecompany design and develop its supply networks andsupply chains to support strategic shifts in the businessmodel (e.g., from a manufacturing-based revenue, costand asset model to more of a services-based model, orfrom a vertically integrated business model to anetworked business model).

In the future, supply management will frequently teamwith the finance function regarding strategic asset andcapital management decisions around acquiring,upgrading/maintaining and disposing of assets, and takea lead role in the company’s execution of these activities.

Supply management will have a lead role in definingand managing the company’s external risk profile,including financial risk to margins and prices,reputational risk, loss of intellectual property andsupply chain continuity risk. Predictive approaches willbe used to assess supplier risk and establish riskmitigation strategies. Supply management will be heldaccountable for revenue growth via value acquisition,including the acquisition of new technologies that bringcustomer value, supporting “perfect” new productlaunches and accelerating new product development byintegrating suppliers early in the process.

Category Strategy — The Era of Dynamic ValueAcquisition Strategies

Dynamic category strategies will be a “must have” for allkey purchases and will replace traditional strategies.These new strategies will be agile by design, withshorter half-lives, and be easily reconfigurable asconditions change. Access to innovation and creativitywill become a major goal of value acquisition strategies.These strategies will influence supply marketsworldwide.

At the same time, strategies will be future looking,planning for the divergence, convergence and evolutionof markets and technologies using approaches liketechnology road-mapping and market trend andforecast analysis. Early-warning approaches such aspredictive metrics and algorithms will triggerreexamination of strategies.

Strategy development will require executive engagement,and executive-level personnel will lead and be engagedwith senior supply and other functional representativesin developing and implementing strategies for criticalgoods and services.

Developing and Managing Suppliers — The Eraof Customer-centric Supply Base Strategies

The number of supplier options in nontraditionalsupply markets will continue to increase. Today’spreferred emerging markets/low-cost countries will seerapid wage increases by 2017, drastically reducing theopportunity to take advantage of labor arbitrage bysourcing from them. However, as governments seek todevelop their industrial and commercial base, andcompanies and individual entrepreneurs take advantageof investment opportunities, a flood of new supplierswill blossom in new nontraditional markets. This willcreate more options for customers, but the supplychains that result will amplify supply risks due to boththeir length and the unknowns that they pose.

Suppliers will be expected to be leading innovators fortheir products and services and will be expected to havedirect access to knowledge about consumer preferencesand develop innovations to meet those preferences.

The “interchangeable supplier” will emerge in someindustries. Emerging technologies will further thecreation of tactical firms providing goods and servicesthat will be somewhat interchangeable and virtual,based on performance and price/cost competition.Greater standardization in supply chain processes and


information technologies will decrease switching costsfor the purchases of commodity-type items and increasethe frequency with which companies rebid or evenswitch sources.

Value-based sourcing — the practice of evaluating howthe full capabilities of a supplier or group of supplierscould be leveraged to gain competitive advantage —will be fully applied for key categories. Suppliers will berequired to participate in collaborative efforts to fullyleverage their joint capabilities and improve the valuecreated by the company’s end product.

There will be an increase in investment for developingand growing key supplier relationships. These invest-ments will focus on transference or joint efforts oncurrent operational improvements (e.g., Six Sigma/lean),future capability development and collaborative risksharing.

Developing and Operating Multiple SupplyNetworks — The Era of Complex and DynamicSupply Networks

At successful companies, assumptions about supplychain design will be rigorously challenged. Physicalassets will be configured for mobility, flexibility andresiliency, and positioned or repositioned in response tobusiness dynamics. Different supply chains and supplynetworks will exist for “innovation push” versus“demand pull” product and service introductions andwill be finetuned throughout the lifecycle

The search for external sources of value will makeexternal relationships more complex as suppliers alsobecome buyers, partners and competitors. Supplynetworks specifically designed to gain competitiveadvantage will be created by joint leadership teams,with representation by executives from the keycompanies in the network.

Multiple configurations for supply chains and networkswill be employed to meet unique requirements ofdifferent market segments for speed, quality, cost andcustomization. New products and services will becreated by a network of suppliers, the company and itscustomers. Collaborative risk sharing, joint investmentand asset sharing among firms in a supply chain willincrease.

Collaboration — The Era of CollaborationWithout Boundaries

At successful companies, information will be easilyaccessible to those who need it and flow freely amongparties. Technology will enable ad hoc collaborationteaming, with the ability to turn access to collaborationtools and related information sources on and off as teamcomposition changes. This will enable suppliers,stakeholders and customers to “sit together” at a virtualtable, regardless of physical location.

All parties will employ fair and effective models forsharing the benefits of collaboration.

To foster more collaboration with suppliers, somecompanies may assign responsibility for identifying andintegrating innovation-based suppliers to the R&D/engineering organizations, while assigning theintegration of production-based suppliers to theoperations or supply chain organization.

Technology — The Era of Networked Analytics

At successful companies, the basic access to and flowsof accurate/timely information will be a given. Thisubiquitous access will enable supply to deliver value ina variety of ways, including faster analysis of themarketplace and visibility into both the buy and sellside of the business.

Knowledge management and decision support tools willbe widely used for supply management. Knowledgemanagement — the systemic access to and sharing ofknowledge — will become a key competitive activity forsupply chain management.

Analytical modeling will become a major decisionsupport tool. Much of this expertise will be provided bythird-party firms.

Collaboration technology will significantly impact bothproduct/service design and supply chain operations,and in turn affect strategic sourcing and the manner inwhich supply and cross-functional teams operate.Supply chain and supply market data will be readilyavailable and shared among trading partners.

Best practices training and tools will be deployed deepinto user organizations, letting them take on far greaterresponsibility for sourcing and supplier management, inaddition to transaction processing, for traditionalpurchases

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Talent Management — The Era of Killer Talent inSupply Management

The demand for experienced supply talent in developedcountries is almost certain to outstrip supply. Companiesmay ultimately be forced to pay out-of-scale salaries forlocal talent or offshore supply activities to countrieswith lower wage scales. Experienced people will be inshort supply in India and China, but will cost less.Many companies will offshore and/or outsource theirpurchase-to-pay activities.

A general shortage of executive talent could cause seniorexecutives to place supply beneath other functions thathave stronger executive leadership in order to fullyleverage available talent.

At some companies, supply will be staffed with talentthat is equivalent to that found today in private equityfirms and venture capital companies. These individualswill be focused on value acquisition strategies to findnew value in the supply market, deliver it to thedemand market as soon as possible at a defined cost,and maximize return to the company.

Strategic sourcing and strategic supplier managementprinciples will be applied to global talent acquisition.Relationships with and the capabilities of external“talent suppliers” (including universities, executiverecruiters and training providers) will be developed andintegrated into internal processes (much like keysuppliers for other categories).

Creative techniques will be used to leverage theexperience of baby boomers, including increasedmentoring of less experienced staff, use of techniques tocapture knowledge and phased retirement/part-timework. On the other side of the spectrum, supplymanagement processes and staff roles and responsi-bilities will be reshaped to take full advantage of themultitasking and social networking skills of the next-generation workforce.

Organizational Design — The Era ofEmpowerment and Adaptation

A variety of forces including talent shortage, improvedtechnology and greater options for outsourcing supplyactivities will create a tipping point for rethinkingsupply management processes and organizations.

Organizations will face a loss of experience and knowl-edge as the baby boomer generation retires at the very

time that there will be a scarcity of younger, well-trained supply professionals. As recruiting efforts turnto other companies and functions, salaries and bonuseswill rise in tandem with turnover levels.

The value chain will be the main organizationalprinciple, and supply management will come to beviewed as the value acquisition management functionwithin the value chain organization. Informationtechnology will be used to enable a distributed andeasily reconfigurable organizational structure.

Increased outsourcing of supply activities, along withtechnology that enables users to execute their ownsourcing and buying within policy guidelines, willhollow out the staff in larger supply organizations.

Manufacturing companies will shift more of their supplyheadquarters, people and responsibilities to developingcountries. These activities will be located near majormanufacturing centers.

The additional value created by future supply initiativeswill tend to show up in the key metrics of other parts ofthe organization rather than the supply organization’straditional metrics, which will require the supplyorganization to be vigilant around demonstrating andeven promoting its value.

Supply management’s success will be measured on itsability to develop and execute a competitive supplystrategy that goes beyond a cost reduction focus inorder to fully support corporate, regional and businessunit strategies.


While the reader has likely extracted a number oftakeaways and implied recommendations from thepreceeding pages, this chapter presents our recom-mendations to those who will live and work to succeedin the dynamic world of supply in the decade ahead.

The study team drafted a series of key takeaways thatwill be useful as a summary to guide recommendations,but as with all of our findings these should bestructured to meet the varying needs of supplymanagement’s key constituents, including chiefpurchasing officers, other senior executives at buyingcompanies, executives from supplier companies,academics, and other interested parties such asproviders of technology, strategies or operatingprocesses for supply management.

Key Takeaways

From the research team’s perspective, the key takeawaysfrom our study are as follows.

The CEO Will Ask More of Supply Management— Broader Scope, Higher Performance andIncreased ValueThroughout the study, it was apparent that with CEOscontinually asking for more, supply executives werefeeling pressure to deliver. Our CEO survey respondentssaw a continued increase in globalization and strategicimportance for supply management. As the scope forsupply management broadened and spread globally,CEOs viewed risk management and supply continuityas a companion concern for management. CEOs sawthe need for high performance and greater value —value beyond cost reduction that included new sourcesof value from supply partners, improved collaborationacross business units, the expanded geographic scope

and faster time to market. CEOs had noticed theincreased capabilities from their supply managementleadership, but they expected more moving forwardbecause they felt it was needed in the complex, globalfuture. Supply management will need to constantly findnew ways to add value in order to meet executiveexpectations and increase shareholder value.

Supply Chain Complexity Will Increase, Drivenby Globalization, Market Dynamics, CustomerDemands and RegulationConsumers used to be fairly easy to understand — theywere largely middle-class people with fairly predictablepurchasing patterns who lived in developed economies.Now, there are multi-dimensioned sets of economicdemands across a variety of global and regionaleconomies with unique social frameworks that requiredifferent variations in materials for food, clothing,shelter and pleasure. Consequently, where majorcompanies were once able to get by with a single supplychain (the Model-T Ford in the early twentieth century)or a few supply chains (the value-added reseller plusdirect orders for personal computers employed by IBM,HP and Dell in the late 20th Century), in the futuresupply will need to develop and maintain multiplesupply chains and tens or even hundreds of variationsto meet the various global, market, consumer and socialneeds of markets.

Collaboration, Both Internally and Externally,Will be a Major Source of Value CreationPreviously, supply management endeavored to create acompetitive situation between the company and itssuppliers. This has been especially true over the pastdecade, during which companies have focused onimproving or optimizing that competitive processthrough strategic sourcing and electronic tools foraccelerating the process.

Chapter 15 — Recommendations

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In the next decade, external collaboration will berequired to obtain the added value from supply basesand to manage the burgeoning number of supply chainsto meet increased customer demands. Internally, supplymanagement has worked hard to get invited to theexecutive table. A decade ago, CEOs reported that itwas necessary to assign key supplier relationships tonon-purchasing executives, as they did not trustpurchasing managers of that era to have the skills tohandle large-scale relationships. Now, and increasinglyin the future, supply management will be part of oractually lead major spend category management. Inaddition to traditional direct materials and indirectmaterials and services, supply will need to lead or takeon an important role in managing multidisciplinaryteams of executives for key supply relationships.

Technology Will Transform SupplyManagement Strategies and ProcessesIn the past decade, technology has been applied tomanage the competitive environment for supplymanagement. While this practice will continue in thenext decade, new applications that will enable externalas well as internal collaboration will be introduced. Thistype of technology will take companies far beyond therigid, internally focused world of ERP systems and intothe fluid, network-based world represented by personaltechnologies like myspace and youtube. Supplymanagement will need to remain open to adopting newtechnologies and learn to embrace technologies early onto stay on the leading edge rather than waiting until the“me too” stage that marks the end of a technology’sability to lend significant competitive advantage.

The Supply Management OrganizationStructure Will Continually Change to FitBusiness Models and Strategic NeedsSupply management’s organizational position willcontinue to vary from company to company — does itlead, or does it support? This will be driven by anumber of factors, including the culture and tradition ofthe organization, the philosophy and preference of theCEO or the current focus and strategy of the company.In any case, there will be no one right way to look atsupply management’s position in the organization. Theonly constant will be that supply management’s role willbe continually increasing and changing, which willrequire supply leaders to be prepared for continuedevolution.

Global Talent Management Will be a MajorChallengeIn the past decade, there have been three forces thathave combined to create a talent management challengefor supply:

• Supply management has broadened its influence over an ever-increasing number of spend categories.

• Steady pressure on containing SG&A costs hasmeant that the number of people in supplymanagement has decreased relative to the amountof spend influenced.

• Replacements for the retiring baby boomers willhave to be found.

A fourth factor, the requirement that supply managersbe located closer to the source of supply, has made thepotential talent shortage even more severe. A decadeago, a study like ours could have focused only on thoseparts of the world that had developed economies, asthat was where supply managers were needed andwhere they worked. In the next decade, supply managerswill increasingly be located where sources of supplyhave been relocated, where functions have beenoutsourced and where key markets must be served.

Recommendations

What should be done to respond to the changes tocome that are noted in our key takeaways? What shouldbe done at the end of another decade — in, say, 2017?To some extent, this will depend on the individual’srole, so we have structured the remainder of thisdiscussion accordingly.

Supply ExecutivesIn the past, the leader of the supply function was eithera long-time employee of the company’s purchasingfunction who had gradually worked his or her way tothe top position or a high-potential executive who wasgetting a functional “ticket punched” on the way to aseat in the executive suite by doing a term of service tolearn about supply. But in the past decade, the conceptof an executive recruited from the outside to take overthe supply chief position has grown as the role, statureand influence of the position increased.

In the future, supply executives will need the leadershipskills to interrelate successfully with other members ofthe senior management team, experience living andworking in international locations, skills with bothcollaborative and competitive spend categories and ahistory of success in building a global program fortalent management to meet the requirements for futuremultiple multinational supply chains.

Where will these leaders come from? There will be acontinuing increase of cases in which an executiverecruiting process brings in a new supply leader fromthe outside, and more high-potential executives will berequired to learn the supply function. There will be


more international supply leaders — that is, those whocome from a different geographical region than thehome country of their organization. Supply executiveswill need to be more adept at linking customer needs totheir supplier marketplace capabilities.

Supply PractitionersAs they take on new collaborative roles, supplypractitioners will need to improve working relationshipswith their strategic suppliers. To achieve differentialvalue from suppliers, firms will have to focus onbecoming “preferred customers.” This will requirechanges in the work streams or processes with whichbuyers and suppliers interface and some behavioralmodifications and interpersonal skill development,especially around relationship building. Internally,practitioners will also have to develop relationships withfunctional stakeholders — demonstrating their value tothe technical, marketing and corporate functions as wellas manufacturing and engineering.

Practitioners will also have to develop international andleadership capabilities. It will no longer be sufficient to beable to demonstrate purchasing capabilities in one regionor in a narrow set of spend categories. In addition tokeeping abreast with the full range of advances in supplypractices, supply practitioners will need to developcollaborative skills to succeed in the future.

Business Unit LeadershipIn most cases, an increased interest in supply will bekey to an executive’s success. The boss’s boss — be itthe CEO over one of his or her direct reports, or theboard of management over the CEO — will demand thekind of sophisticated supply management leadershipthat is described throughout this study. They willdemand that operating unit leaders be equally familiarwith key customers and key suppliers, and thatoperating unit leaders be as familiar with their supplychannels as they are with sales channels. They willunderstand the opportunities as well as the risks.

CEOs will influence their business unit leaders to take acloser view of the supplier base. Who are the keysuppliers? What is being done to ensure that they aresupportive, reliable or contributing to the company’scompetitive position? These types of questions willtypically kick off discussions between corporate anddivisional executives. CEOs will also insist on obtainingthe benefits of cross-divisional supplier synergy — theywill hold back the complete control over supply basesthat divisional senior executives may desire.

Functional ExecutivesThe relationships between functional executives andsupply management typically vary by function.

Manufacturing executives have often looked onpurchasing as a hard-to-manage conduit to neededmaterials — and sometimes even as a bottleneck whenpurchasing develops too close of a relationship withsuppliers. Engineering might look at supply as anecessary evil once it decides on a preferred supplier.

By 2017, leading companies will develop supplymanagement organizations that will be thought of asvalued partners by traditional stakeholders —manufacturing, engineering, and finance — and willhave made great strides toward equality with sales,marketing, information technology, legal and research.Functional executives at leading companies will need tofeel confident in their ability to interact with keysuppliers and supply management using collaborativetechnology tools. They will also need to include anddepend on supply management’s view on existing andpotential resources for future strategies.

SuppliersSuppliers in 2017 should have a clear idea of wherethey fit in each customer’s supply strategy. They willknow whether a particular customer has adopted acompetitive or collaborative stance. Where they aresatisfied with this position, they will try to become a“supplier of choice” to their customer due tocompetitive value or collaborative strategies. If notsatisfied, they will seek ways to change or improve theirposition. Suppliers will need to use their increasedvisibility with buying companies’ senior executives toimprove relationships.

AcademicsSupply management will provide a plethora of newopportunities for academics in the decade ahead.Supply management will be raising its stature,increasing uses of competitive technology andembarking on emerging uses of collaborativetechnologies — all of which will provide opportunitiesfor research and writing to document advances andanalyze shortfalls. In addition, the impending talentshortage and demands for globalization will createopportunities for international academic cooperation inplace of the traditional local or regional focus ofacademic research. Academics who specialize in supplymanagement will need to be prepared to seize thesenew opportunities.

Service and Outsourcing ProvidersSupply management will continue to grow as animportant market for software providers, outsourcedservices and advisors. Technology enablers will multiplyas companies and organizations seek additional valuefrom competitive tools and learn how to usecollaborative offerings. As companies seek to outsource

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additional non-strategic, non-core activities, outsourcerswill have to learn how to serve and add value inaddition to landing initial contracts. Advisors willexpand beyond today’s consultants and trainers; forexample, there will be an important role for informationand research gatherers and virtual portals forgeographical or technical exchanges.

Conclusion

It is clear that supply management has gone through adecade of significant change since 1997. To those whomight wonder how much more we can expect in thenext decade, we point to the beginnings, those initialfew pieces of evidence that change will continue ratherthan dwindle. Watch as the supply leaders of severalmajor multinational companies relocate to theAsia/Pacific region due to its importance as both asupply base and as a future market. One of the world’slargest companies will reveal that is has changed itsentire philosophy regarding sources for innovation,which will go from from internal to external. Executivesearch firms will begin to establish specialized practicesor units dedicated to supply management or supplychain. Collaborative technology will be introduced toeveryone’s desktop, ready to seamlessly link them alltogether.

We are seeing the beginning signs of what we arepredicting from this study. Those who will succeed inthe next decade will be those who see the signs,embrace them and turn them to their advantage. Thosewho do not will be left behind.


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A P P E N D I X A

You’ve come a long way, but you still have a long wayto go!

— The typical CEO’s view of supply management

As part of our study of supply management, severalCEOs agreed to be interviewed. Their input was clearand confirmed many of our working hypotheses.

The CEOs interviewed came from companies ranging insize from less than $500 million in annual revenues tomore than $70 billion. They were predominantly NorthAmerican and represented a variety of industries —capital-intensive, consumer products and services.

The CEOs were asked to share their thoughts on fivekey subjects:

• Globalization and strategic importance• Risk management and supply continuity• Supply management strategies beyond price• Senior supply relationships• Capabilities and organization

The CEOs’ anecdotal results were particularly usefuland helped to supplement the statistical results of thestudy.

Globalization and Strategic Importance

Despite some concerns that the strong and ever-increasing influence of globalization might wane due tosome unanticipated factor (e.g., Chinese financialinstability, geopolitical instability due to terrorism or apandemic, etc.), the majority of CEOs felt thatglobalization was going to increase. In fact, several feltthat it would increase significantly. Globalizationcombined with competitive forces were the two factorsthat were cited as making supply management even

more strategic for their companies. As the CEO of onelarge services company remarked:

North American market presence is still important forany global company. The economy is still relativelystrong and investment in the North American marketis still attractive.

Given a strong presence in North America, the CEO of amajor industrial company said that his company sawreal growth elsewhere:

Developing countries are where the growth will be(infrastructure, critical mass, capacity utilization).China had a steady rate, then a step functionfollowed. Now it’s back to a more linear rate ofgrowth.

A major consumer products company noted that:

[There is] continued interest in international marketsand growth potential for U.S. businesses intodeveloping, non-U.S. economies.

The CEO of a diversified manufacturing companycommented as well:

Wealth creation and the increase in middle classmembership [are] key drivers for continuedglobalization.

Competitive forces have become more global due to anumber of factors, including wealth creation indeveloping countries, the burgeoning needs and desiresof the global middle class, high labor costs in the U.S.,pursuit of international markets and the increasinglyeasy movement of goods and services, technology andinnovation.

CEO Survey Results


A P P E N D I XARisk Management and Supply Continuity

While most of the CEOs we interviewed said thatsupply risk management was either a high or very highstrategic priority, this viewpoint was not universal. OneCEO of a global services company downplayed it out ofbelief that his company’s business model inherentlymitigates risk.

One executive indicated that the sense of urgency hasdiminished with time as the eye-opening events of 9/11have receeded into the past:

Supply risk management is always important, butreally important in a riskier environment. Given theongoing volatility and uncertainty in the world, supplyrisk will continue to be on our radar screen.

Somewhat surprisingly, many CEOs felt that riskmanagement and supply continuity was a managementissue, but not necessarily a concern for the board. Oneremarked that it would only become a board issue if theboard were dissatisfied with how it was being handled.Another reported that it would become a board-levelconcern only in case of severe parts shortages,international trade disruption or port insecurity. Evenwithout board-level pressure, most CEOs expect toincrease their capability to deal with risk managementand supply continuity by 2012.

Supply Management Strategies Beyond Price

CEOs were asked how important supply management’srole was in achieving a selection of business objectives.Most saw supply taking on an increased role for someinitiatives, but not for all.

Unsurprisingly, CEOs saw a significant role for supplymanagement in reducing the total costs of products orservices, creating new sources of value through supplypartners, and achieving faster time to market.

About half of the CEOs believe that supply managementshould play some role in geographic expansionstrategies, while the remainder feel that it should play asignificant role.

No real consensus was obtained regarding supplymanagement’s role in mitigating the shifting balance ofpower for suppliers that have a strong influence overtheir companies (mega-suppliers). Many of the CEOswere not clear on which suppliers were strategic orconsidered to be mega-suppliers. Creating a clearunderstanding regarding which suppliers are strategic

and the rationale behind this status should be anobjective for supply managers.

While the marketplace’s interest in outsourcing andoffshoring continues, this interest is not unanimous.Some CEOs said that it did not apply to theircompanies, while others thought that it would declinein importance. Thus, supply’s importance in identifyingand examining opportunities for outsourcing oroffshoring was not a major topic of concern to theseparticular CEOs.

Nearly all of the CEOs surveyed felt that supply has akey role to play in realizing synergies across thecompany’s business units. Supply management hasbecome one of the key drivers of cross-divisionalbenefits through a combination of strategically sourcingcommon components and improved supplymanagement processes.

The CEO interviews revealed other areas in whichsupply should play a key role. One CEO commented on the part that supply should play in finding new markets:

Supply management should be creating a strategicsupply chain view globally. With such a view, supplymanagement should be a creator or enabler of newmarkets.

A CEO in the consumer durable goods industry notedthat supply management has a role to play ininnovation:

[Supply should be] commercializing new materials,new services that are necessary to meet consumerneeds. They are as important as our researchorganization for innovation.

This same CEO commented on supply’s role inmonitoring and reacting to supply volatility:

[Supply should] be managing supply marketavailability and volatility through strategic sourcingapproaches.

Another CEO focused on quality:

Supply management should drive continuousimprovement in quality through its influence on oursupply base.

Senior Supplier Relationships

Most CEOs reported that they are well aware of theirmost important supplier relationships — and added

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A P P E N D I X Athat it was more important that each of their operatingbusiness unit leaders know their own top suppliers. TheCEO’s top suppliers tend to be suppliers to the corporatecenter — that is, suppliers that support humanresources, finance, information technology, legal andcorporate marketing.

Keeping abreast of the top suppliers for each operatingdivision ensures that the key raw materials or servicessuppliers are known, as well as the competitive forceswithin those supplier industries. Many CEOs felt that itwas as important for their divisions to know theirstrategic suppliers as it was for them to know their topcustomers.

Supply Management Capabilities andOrganization

CEOs were generally satisfied with the capabilities andleadership potential of supply management in theircompanies, though they were concerned that someskills may become scarce in the future. They weregenerally disappointed in supply management supporttools, be they electronic, analytic or external services.

Regarding organizational design, CEOs favored acentralized organization more than we had anticipated.They see supply management as a clear example of howto benefit from cross-unit synergies and scale, and theyare willing to put up with integration obstacles toachieve these benefits, particularly with indirectmaterials and services. For some direct materials theyare more willing to cede control to operating units forpurposes of local quality assurance and customerservice.

Conclusion

In 1997, when we first undertook the futures study,CEOs were beginning to see the increasing importanceof what was then generally referred to as purchasing.But back then they were reluctant to entrust key supplyresponsibility and decision making to their purchasingexecutives. They felt that while purchasing was avaluable support function, responsibility for keymaterial and service acquisition was best left in thehands of functional or operating unit executives.

Since that time, the capabilities and leadership potentialof supply management executives have begun to berealized by many CEOs. Over the past decade, supplymanagement has come to influence an increasingproportion of most companies’ external spend. In fact,

supply executives are now being called upon for effortsaimed at increasing globalization, increasing supplierinnovation and improving customer service.

Supply management has come a long way, but it willneed to go even further in the next decade. It will haveto deliver on the promise for globalization, innovationand improved service. It will also have to achieve valuebeyond cost improvement. CEO expectations havegrown, and they will only continue to do so.


A P P E N D I XB

The 2007 Futures Study has been completed with a wide breadth of input and validation from several sources. Theresults and findings were based on multiple research streams in four regions: North America, Europe, Asia/Pacificand Latin America. These research streams included 78 participants in early discussions to help frame the researchhypotheses, 113 participants in focus groups, conference calls and interviews and 180 company participantsthrough an e-survey.

Figure B.1 details the different forum locations and the distribution of the respondents to the survey. Note thatNorth America and Europe accounted for more than 90 percent of the survey responses.

Figure B.1: Global Coverage

Study Participant Demographic Profiles

Forum Locations

Amsterdam

Atlanta

Chicago

Dallas

Madrid

Survey Respondents

Europe12%

Asia/Pacific3%

Latin America3%

North America82%

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A P P E N D I X BFigure B.2 details the distribution of revenue size of the respondents to the survey in fiscal year 2006. Medium-and large-size companies accounted for 90 percent of the survey responses.

Figure B.2: E-Survey — Revenue Size

The e-survey respondents created a significant global presence (marketing and operations) covering all major supplymarkets. Figure B.3 details the global presence of the respondents to the survey in fiscal year 2006.

Figure B.3: E-Survey — Respondents’ Global Presence

Participants in forums and interviews represented both manufacturing and services companies, with manufacturingcompanies accounting for almost 60 percent of the participation. Figure B.4 details the broad distribution ofindustries that participated.

Respondents’Revenue Size

Large(Over $10 billion)

45%

Small(Under $1 billion)

9%

Medium(Between $1 to $10 billion)

46%

86% 88%North America

57% 53%EMEA

46% 41%Asia/Pacific

38% 29%Central/SouthAmerica

Respondents Marketing Presence Respondents Operations Presence


A P P E N D I XBFigure B.4: Interviews and Forums — Industry Coverage

The e-survey also had broad industry coverage, but with higher participation from manufacturing companies, agroup that accounts for almost two-thirds of total survey participants. Figure B.5 highlights the industry coveragefor manufacturing and services sectors.

Figure B.5: E-Survey — Industry Coverage

Manufacturing

113 Participants Worldwide

Services

Mass Manufacturing

(18)

Project Industries

Non-Durable Consumer Goods

(23)

Raw Material Processing

(14)

Asset Intensive Services

(12)

Information Intensive

Services (35)

• Automotive

• Components and Systems

• Technical Appliances and Equipment

• Mass Manufacturing – Other

• Aerospace

• Heavy Machinery

• Food and Nutrition

• Household and Cosmetics

• Pharmaceuticals

• Chemical, Oil and Gas

• Metals/Glass Processing

• Pulp and Paper

• Raw Material Processing – Other

• Tele- communications Services

• Transportation Services

• Utilities

• Facilities Services

• Financial Institutions

• Professional/ Information Services

• Information Intensive Industries – Other

Count of Participants

Manufacturing

180 Participants Worldwide

Services

Mass Manufacturing

(24)

Project Industries

(26)

Non-Durable Consumer Goods

(25)

Raw Material Processing

(30)

Asset Intensive Services

(26)

Information Intensive

Services (49)

• Automotive

• Components and Systems

• High-tech Manufacturing

• Technical Appliances and Equipment

• Mass Manufacturing

• Aerospace

• Construction

• Engineering

• Heavy Machinery

• High-Tech Network Infrastructure

• Food and Nutrition

• Household and Cosmetics

• Pharmaceuticals

• Chemical, Oil and Gas

• Metals/Glass Processing

• Mining

• Pulp and Paper

• Raw Material Processing – Other

• Tele- communications Services

• Transportation Services

• Utilities

• Facilities Services

• Financial Institutions

• Healthcare

• Media/ Entertainment

• Professional/ Information Services

• Retail

• Information Intensive Industries – Other

Count of Respondents

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A P P E N D I X C

A. E-Survey Type A

Guidelines and instructions

The survey is structured as follows:

Part I Participant description — Contact information and demographic data about your companyPart II Forces of change — The degree to which marketplace and competitive forces may impact yourcompany’s business modelPart III Business strategy elements — The importance of various business strategy elements to the futuresuccess of your company’s business modelPart IV Supply mission, goals and performance expectations — The importance of various elements ofsupply mission, goals and performance expectations towards supporting your company’s business strategyPart V Supply strategies, processes and Enablers — The importance of various supply strategies, processesand enablers towards achieving your company’s supply mission, goals and performance expectationsPart VI Supply base profile — Expected magnitude/direction of change in the size and geographic location ofyour supply base

Instructions for completing the surveyPlease pre-select a particular unit of your company (e.g.; corporate, division, SBU, region, site) and answer allquestions from the perspective of that unit. The term "Company" in this survey refers to the specific unit youselect

DefinitionsBusiness Model: The way a company plans to generate revenue and profits from its various markets andproducts/servicesOperations: Activities that transform inputs into products or servicesSupply Management: The strategic organizational function that is responsible for all aspects of acquiring goodsand services from the supply market placeProcurement/Sourcing: Organizational processes that include identifying and selecting sources, negotiation,buying activities, contract administration, inventory control, traffic, receiving, and Stores

Confidentiality noticeIndividual responses will not be attributed and will not be released

This survey will take approximately 1 hour to complete. You can complete the survey over multiple log-insessions.

E-Survey Questionnaire


A P P E N D I XCI. Participant description

Please enter the following information- Name- Title- Company name- Address- City- State- Country (Please select)- Postal Code- Telephone- Email

Please indicate the unit of your company for which you are responding (e.g., corporate, division, SBU,region, site). This unit is referred to as "Company" through the reminder of this survey- Unit type (□Corporate □Division/SBU □Region/Site)- Unit headquarters location — Country (Please select)- Please indicate your company’s primary industry (Please select — Please Specify)- Please indicate the approximate 2006 annual revenue for your company — please convert to US dollars

(Please Select)- Please indicate the countries/regions where company has significant (representing 10% or more of your

business) operating or marketing presence — check all that apply•• Region/Country Operating or manufacturing locations of your company (products and services)

□ North America□ Central/South America□ Europe, Middle East, Africa (EMEA)□ Asia/Pacific

•• Markets served by your company□ North America□ Central/South America□ Europe, Middle East, Africa (EMEA)□ Asia/Pacific

II. Forces of Change

In this section, we ask you to estimate how disruptive various forces of change will be to your businessmodel by 2012.

Please rate the following forces of change on the scale listed to the right by checking the appropriatebox.

Level of disruption to your business model by 2012

(1 = Minimally Disruptive; 4 = Moderately Disruptive; 7 = Extremely Disruptive)

Forces of change 1 2 3 4 5 6 7

1. Expansion of emerging markets □ □ □ □ □ □ □

2. Rise in regionalism/protectionism □ □ □ □ □ □ □

3. Emergence of new technolog □ □ □ □ □ □ □

4. Regulatory changes □ □ □ □ □ □ □

5. Pressures to improve corporate governance □ □ □ □ □ □ □

6. Trade liberalization □ □ □ □ □ □ □

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A P P E N D I X C7. Changing customer requirements/buying habits □ □ □ □ □ □ □

8. Demographic shifts in populations □ □ □ □ □ □ □

9. Offshoring/outsourcing □ □ □ □ □ □ □

10. Increased environmental regulations □ □ □ □ □ □ □

11. Increased emphasis on recycling and recovery □ □ □ □ □ □ □

12. Rising oil/raw materials prices □ □ □ □ □ □ □

13. Increased emphasis on supply chain security □ □ □ □ □ □ □

14. Rising interest rates □ □ □ □ □ □ □

15. Increased competition from new entrants □ □ □ □ □ □ □

16. Increased competition from established competitors □ □ □ □ □ □ □

17. Industry consolidation □ □ □ □ □ □ □

18. Global supply consolidation and growth of cartels □ □ □ □ □ □ □

19. Commoditization □ □ □ □ □ □ □

20. Increased focus on corporate social responsibility □ □ □ □ □ □ □

21. Pressures on corporate finance □ □ □ □ □ □ □

(e.g.; pension fund liabilities, downgrades to credit rating)22. Global supply market fragmentation □ □ □ □ □ □ □

23. Major change in the value of the US dollar □ □ □ □ □ □ □

24. Spot shortages of key raw materials □ □ □ □ □ □ □

25. Terrorist-inspired instability □ □ □ □ □ □ □

26. Other (Please Specify) □ □ □ □ □ □ □

III. Business Strategy Elements

In this section, we ask you to rate importance of various elements of business strategy to the success ofyour company’s business model by 2012.

Please rate the following elements of business strategy on the scale listed to the right by checking theappropriate box

Importance to the success of your business model by 2012

(1 = Minimal 3 = Moderate, 5 = Extreme)

Business Strategy Element 1 2 3 4 5

1. Achieve higher product and service quality □ □ □ □ □

2. Ensure business continuity □ □ □ □ □

3. Gain access and sell into new channels and geographic markets □ □ □ □ □

4. Increase level of product and service innovation □ □ □ □ □

5. Achieve faster time-to-market for new goods and services □ □ □ □ □

6. Create new sources of value by better leveraging value chain □ □ □ □ □

partner/alliance capabilities7. Move activities to lower cost offshore locations □ □ □ □ □

8. Outsource non-core activities □ □ □ □ □

9. Insource previously outsourced goods and services □ □ □ □ □

10. Reduce cost of externally purchased goods and services □ □ □ □ □

11. Reduce internal costs □ □ □ □ □

12. Improve working capital utilization □ □ □ □ □

13. Improve overall value for purchased goods and services □ □ □ □ □

14. Ensure post-sale customer support and service □ □ □ □ □

15. Realize synergies across divisions/SBUs □ □ □ □ □

16. Improve flexibility and responsiveness to customer demand □ □ □ □ □

17. Develop and market new value-added technology □ □ □ □ □

18. Other (Please Specify) □ □ □ □ □


A P P E N D I XCIV. Supply mission, goals and performance expectations

In this section, we ask you to rate the importance of various supply mission, goals and performanceexpectations to your company’s business strategy by 2012.

Please rate the following elements on the scale listed to the right by checking the appropriate box

Importance to business strategy by 2012


Supply missions, goals and performance expectations 1 2 3 4 5

1. Identify and acquire new value-adding technologies and innovations □ □ □ □ □

from supply markets2. Integrate suppliers into the new product/service development process □ □ □ □ □

3. Integrate suppliers into the company’s business and operations □ □ □ □ □

processes4. Drive company standardization/ deproliferation efforts □ □ □ □ □

5. Create new business opportunities and revenue streams in □ □ □ □ □

conjunction with suppliers6. Actively engage with tier-two and tier-three suppliers to drive □ □ □ □ □

improved supply chain performance7. Achieve year-over-year price reductions from suppliers □ □ □ □ □

8. Improve all aspects of supplier performance year-over-year □ □ □ □ □

9. Increase the ratio of total value to total cost of ownership for □ □ □ □ □

purchases10. Improve the utilization of company assets □ □ □ □ □

11. Ensure continuity of supply □ □ □ □ □

12. Define and manage the strategic supply-related risk/reward □ □ □ □ □

profile for the company13. Improve productivity/reduce cost of the supply management □ □ □ □ □

function14. Integrate long term business planning with key suppliers □ □ □ □ □

15. Design and manage upstream supply chain to meet needs of □ □ □ □ □

specific customer/product/service/market segments16. Implement and monitor company social responsibility policies □ □ □ □ □

and goals throughout the supply base17. Support company’s entry into new geographic markets □ □ □ □ □


V. Supply strategies, processes and enablers

In this section, we ask you to rate for several groups of supply strategies, processes and enablers, theirimportance towards achieving your company’s supply mission, goals and performance expectations in2012 and the degree of implementation today.

Please rate the following supply strategies, processes and enablers on the scales listed to the right bychecking the appropriate box

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A P P E N D I X CImportance to supply Degree ofmission, goals, and Implementation

performance todayexpectations by 2012 (1 = Minimal, 3 = Moderate,

(1 = Minimal, 3 = Moderate, 5 = Complete)5 = Extreme)

Cross-functional integration and 1 2 3 4 5 1 2 3 4 5executive engagement

1. Align supply management strategy with □ □ □ □ □ □ □ □ □ □

corporate-wide and SBU business andtechnology strategies

2. Integrate business planning and supply □ □ □ □ □ □ □ □ □ □

management processes3. Standardize processes across companies □ □ □ □ □ □ □ □ □ □

in the supply chain4. Collaboratively share risks/rewards □ □ □ □ □ □ □ □ □ □

among companies in the supply chain5. Jointly invest in and share assets among □ □ □ □ □ □ □ □ □ □

companies in supply chain

Strategic outsourcing

6. Employ an ongoing process to define and □ □ □ □ □ □ □ □ □ □

establish core competencies of the company7. Outsource core competencies where it □ □ □ □ □ □ □ □ □ □

leads to increased competitive advantage8. Collaborate with customers and suppliers □ □ □ □ □ □ □ □ □ □

to establish insourcing/outsourcing decisionsthat best allocate work in the supply chain

Category strategies

9. Aggregate and manage total expenditures □ □ □ □ □ □ □ □ □ □

for key categories across the company10. Employ a formal process to develop and □ □ □ □ □ □ □ □ □ □

manage supply strategies for importantcategories across the company

11. Improve price forecasts as input to □ □ □ □ □ □ □ □ □ □

category strategy development, contractingand financial risk management

12. Establish global contract management □ □ □ □ □ □ □ □ □ □

process

Supplier strategies

13. Outsource upstream supply management □ □ □ □ □ □ □ □ □ □

responsibilities to first tier or lead suppliers14. Increase the number of suppliers to □ □ □ □ □ □ □ □ □ □

create competition15. Decrease number of suppliers to increase □ □ □ □ □ □ □ □ □ □

leverage16. Improve working relationships with □ □ □ □ □ □ □ □ □ □

strategic suppliers17. Invest in and share assets with suppliers □ □ □ □ □ □ □ □ □ □


A P P E N D I XCSupplier management/development

18. Develop new suppliers □ □ □ □ □ □ □ □ □ □

19. Employ Six Sigma/lean process □ □ □ □ □ □ □ □ □ □

improvement techniques with suppliers20. Tie supplier payments/incentives to □ □ □ □ □ □ □ □ □ □

perfect new product/service launch

Strategic cost management

21. Conduct spend analysis across the □ □ □ □ □ □ □ □ □ □

company for both products and services22. Collaborate with suppliers and □ □ □ □ □ □ □ □ □ □

customers to reduce supply chain costs23. Use target/cost-based pricing □ □ □ □ □ □ □ □ □ □

24. Source from emerging/low cost markets □ □ □ □ □ □ □ □ □ □

25. Manage demand/consumption of □ □ □ □ □ □ □ □ □ □

indirect purchases26. Adopt industry standards for □ □ □ □ □ □ □ □ □ □

specifications27. Require suppliers to take a greater role □ □ □ □ □ □ □ □ □ □

in cost management28. Identify and manage the lead times □ □ □ □ □ □ □ □ □ □

throughout the supply chain29. Use supplier-managed inventory □ □ □ □ □ □ □ □ □ □

30. Improve the environmental performance □ □ □ □ □ □ □ □ □ □

of products/services and processesthroughout the supply chain

Integrated new product/service development

31. Integrate suppliers into the new product/ □ □ □ □ □ □ □ □ □ □

service development process32. Ensure early involvement of customer □ □ □ □ □ □ □ □ □ □

interfacing businesses with supply management

33. Co-design products/services with □ □ □ □ □ □ □ □ □ □

customer and suppliers and business units34. Manage time to market and innovation □ □ □ □ □ □ □ □ □ □

velocity35. Organize and operate a supply □ □ □ □ □ □ □ □ □ □

management team specifically to findsuppliers with product/service innovations

Organizational structure and governance

36. Develop hybrid supply management □ □ □ □ □ □ □ □ □ □

organizations that become “centers ofexcellence” for important technologies

37. Use cross-functional teams for category □ □ □ □ □ □ □ □ □ □

and supplier strategy development and implementation

38. Decentralize strategic supply □ □ □ □ □ □ □ □ □ □

responsibilities to business units or geographies

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A P P E N D I X C39. Outsource supply management for □ □ □ □ □ □ □ □ □ □

direct materials and services40. Outsource supply management for □ □ □ □ □ □ □ □ □ □

indirect materials and services

Human Resources management

41. Foster an entrepreneurial, risk-taking □ □ □ □ □ □ □ □ □ □

culture in supply management42. Recruit and/or develop talent with broad □ □ □ □ □ □ □ □ □ □

general management expertise for supply management roles

43. Include Supply Management in the □ □ □ □ □ □ □ □ □ □

company’s career rotation/progression system

Supply Management Information Systems

44. Use a common companywide database □ □ □ □ □ □ □ □ □ □

for item/service data (such as specifications,where used, approved suppliers, etc.)

45. Embed best practices in supply □ □ □ □ □ □ □ □ □ □

management workflow/process tools46. Integrate customer and supplier information □ □ □ □ □ □ □ □ □ □

systems with the company’s own systems47. Provide transparency of operational □ □ □ □ □ □ □ □ □ □

information (e.g. demand requirements,inventory levels and forecast)throughout the supply chain

48. Provide transparency of new product/ □ □ □ □ □ □ □ □ □ □

service development information throughout the supply chain

49. Share supply management best practices □ □ □ □ □ □ □ □ □ □

knowledge across units of the company50. Employ “best of breed” software □ □ □ □ □ □ □ □ □ □

solutions for supply management51. Use integrated ERP-based applications □ □ □ □ □ □ □ □ □ □

for supply management

Measurement and evaluation

52. Measure supply management □ □ □ □ □ □ □ □ □ □

performance on strategic functional objectives

53. Measure the impact on working capital □ □ □ □ □ □ □ □ □ □

of supply management strategy and decisions

54. Measure supply management on □ □ □ □ □ □ □ □ □ □

contribution to innovation55. Measure the level of complexity or □ □ □ □ □ □ □ □ □ □

standardization of products/services,components and parts

56. Develop common performance metrics □ □ □ □ □ □ □ □ □ □

across the companies in the supply chain57. Develop industry-level multifactor □ □ □ □ □ □ □ □ □ □

benchmarking and databases on supplier performance


A P P E N D I XCVI. Supply base profile

In this section, we ask you to indicate the amount of expected change by 2012 in the number of yoursuppliers and the relative importance of the geographic supply markets shown below.

Please indicate the expected amount of change on the scales listed to the right by checking theappropriate box.

Percentage change in number of suppliers you will actively do business with by 2012.

Decrease No Net Change Increase> 45% 31-45% 16-30% 1-15% 0% 1-15% 16-30% 31-45% >45%

Categories

1. Direct Goods □ □ □ □ □ □ □ □ □

2. Indirect Goods/Services □ □ □ □ □ □ □ □ □

3. Capital Expenditures □ □ □ □ □ □ □ □ □

What percent of your goods and services are sourced from the following markets today? And theexpectation for 2012?

Today Expectations for 2012Not a Moderate Major Not a Moderate Major

Market Market0% 1-10% 11-25% 26-40% >40% 0% 1-10% 11-25% 26-40% >40%

GeographicSupply Markets

4. China □ □ □ □ □ □ □ □ □ □

5. India □ □ □ □ □ □ □ □ □ □

6. Japan □ □ □ □ □ □ □ □ □ □

7. Other Asia □ □ □ □ □ □ □ □ □ □

Pacific8. Brazil □ □ □ □ □ □ □ □ □ □

9. Mexico □ □ □ □ □ □ □ □ □ □

10. Other □ □ □ □ □ □ □ □ □ □

Latin America □ □ □ □ □ □ □ □ □ □

11. Middle East □ □ □ □ □ □ □ □ □ □

12. Western Europe □ □ □ □ □ □ □ □ □ □

13. Eastern Europe □ □ □ □ □ □ □ □ □ □

14. U.S.A. / Canada □ □ □ □ □ □ □ □ □ □

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A P P E N D I X CB. E-Survey Type B

Guidelines and instructions

The survey is structured as follows:

Part I Participant description — Contact information and demographic data about your companyPart II Forces of change — The degree to which marketplace and competitive forces may impact yourcompany’s business modelPart III Business strategy elements — The importance of various business strategy elements to the futuresuccess of your company’s business modelPart IV Supply mission, goals and performance expectations — The importance of various elements ofsupply mission, goals and performance expectations towards supporting your company’s business strategyPart V Supply strategies, processes and Enablers — The importance of various supply strategies, processesand enablers towards achieving your company’s supply mission, goals and performance expectationsPart VI Supply base profile — Expected magnitude/direction of change in the size and geographic location ofyour supply base

Instructions for completing the surveyPlease pre-select a particular unit of your company (e.g.; corporate, division, SBU, region, site) and answer allquestions from the perspective of that unit. The term "Company" in this survey refers to the specific unit youselect

DefinitionsBusiness Model: The way a company plans to generate revenue and profits from its various markets andproducts/servicesOperations: Activities that transform inputs into products or servicesSupply Management: The strategic organizational function that is responsible for all aspects of acquiring goodsand services from the supply market placeProcurement/Sourcing: Organizational processes that include identifying and selecting sources, negotiation,buying activities, contract administration, inventory control, traffic, receiving, and Stores

Confidentiality noticeIndividual responses will not be attributed and will not be released

This survey will take approximately 1 hour to complete. You can complete the survey over multiple log-insessions.

I. Participant description

Please enter the following information- Name- Title- Company name- Address- City- State- Country (Please select)- Postal Code- Telephone- Email


A P P E N D I XCPlease indicate the unit of your company for which you are responding (e.g., corporate, division, SBU,region, site). This unit is referred to as "Company" through the reminder of this survey- Unit type (□Corporate □Division/SBU □Region/Site)- Unit headquarters location — Country (Please select)- Please indicate your company’s primary industry (Please select — Please Specify)- Please indicate the approximate 2006 annual revenue for your company — please convert to US dollars

(Please Select)- Please indicate the countries/regions where company has significant (representing 10% or more of your

business) operating or marketing presence — check all that apply•• Region/Country Operating or manufacturing locations of your company (products and services)

□ North America□ Central/South America□ Europe, Middle East, Africa (EMEA)□ Asia/Pacific

•• Markets served by your company□ North America□ Central/South America□ Europe, Middle East, Africa (EMEA)□ Asia/Pacific

II. Forces of Change

In this section, we ask you to estimate how disruptive various forces of change will be to your businessmodel by 2012.

Please rate the following forces of change on the scale listed to the right by checking the appropriatebox.

Level of disruption to your business model by 2012

(1 = Minimally Disruptive; 4 = Moderately Disruptive; 7 = Extremely Disruptive)

Forces of change 1 2 3 4 5 6 7

1. Expansion of emerging markets □ □ □ □ □ □ □

2. Rise in regionalism/protectionism □ □ □ □ □ □ □

3. Emergence of new technolog □ □ □ □ □ □ □

4. Regulatory changes □ □ □ □ □ □ □

5. Pressures to improve corporate governance □ □ □ □ □ □ □

6. Trade liberalization □ □ □ □ □ □ □

7. Changing customer requirements/buying habits □ □ □ □ □ □ □

8. Demographic shifts in populations □ □ □ □ □ □ □

9. Offshoring/outsourcing □ □ □ □ □ □ □

10. Increased environmental regulations □ □ □ □ □ □ □

11. Increased emphasis on recycling and recovery □ □ □ □ □ □ □

12. Rising oil/raw materials prices □ □ □ □ □ □ □

13. Increased emphasis on supply chain security □ □ □ □ □ □ □

14. Rising interest rates □ □ □ □ □ □ □

15. Increased competition from new entrants □ □ □ □ □ □ □

16. Increased competition from established competitors □ □ □ □ □ □ □

17. Industry consolidation □ □ □ □ □ □ □

18. Global supply consolidation and growth of cartels □ □ □ □ □ □ □

19. Commoditization □ □ □ □ □ □ □

20. Increased focus on corporate social responsibility □ □ □ □ □ □ □

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A P P E N D I X C21. Pressures on corporate finance □ □ □ □ □ □ □

(e.g.; pension fund liabilities, downgrades to credit rating)22. Global supply market fragmentation □ □ □ □ □ □ □

23. Major change in the value of the US dollar □ □ □ □ □ □ □

24. Spot shortages of key raw materials □ □ □ □ □ □ □

25. Terrorist-inspired instability □ □ □ □ □ □ □

26. Other (Please Specify) □ □ □ □ □ □ □

III. Business Strategy Elements

In this section, we ask you to rate importance of various elements of business strategy to the success ofyour company’s business model by 2012.

Please rate the following elements of business strategy on the scale listed to the right by checking theappropriate box

Importance to the success of your business model by 2012


Business Strategy Element 1 2 3 4 5

1. Achieve higher product and service quality □ □ □ □ □

2. Ensure business continuity □ □ □ □ □

3. Gain access and sell into new channels and geographic markets □ □ □ □ □

4. Increase level of product and service innovation □ □ □ □ □

5. Achieve faster time-to-market for new goods and services □ □ □ □ □

6. Create new sources of value by better leveraging value chain □ □ □ □ □

partner/alliance capabilities7. Move activities to lower cost offshore locations □ □ □ □ □

8. Outsource non-core activities □ □ □ □ □

9. Insource previously outsourced goods and services □ □ □ □ □

10. Reduce cost of externally purchased goods and services □ □ □ □ □

11. Reduce internal costs □ □ □ □ □

12. Improve working capital utilization □ □ □ □ □

13. Improve overall value for purchased goods and services □ □ □ □ □

14. Ensure post-sale customer support and service □ □ □ □ □

15. Realize synergies across divisions/SBUs □ □ □ □ □

16. Improve flexibility and responsiveness to customer demand □ □ □ □ □

17. Develop and market new value-added technology □ □ □ □ □


IV. Supply mission, goals and performance expectations

In this section, we ask you to rate the importance of various supply mission, goals and performanceexpectations to your company’s business strategy by 2012.

Please rate the following elements on the scale listed to the right by checking the appropriate box


A P P E N D I XCImportance to business strategy

by 2012(1 = Minimal 3 = Moderate,

5 = Extreme)

Supply missions, goals and performance expectations 1 2 3 4 5

1. Identify and acquire new value-adding technologies and innovations □ □ □ □ □

from supply markets2. Integrate suppliers into the new product/service development process □ □ □ □ □

3. Integrate suppliers into the company’s business and operations processes □ □ □ □ □

4. Drive company standardization/ deproliferation efforts □ □ □ □ □

5. Create new business opportunities and revenue streams in □ □ □ □ □

conjunction with suppliers6. Actively engage with tier-two and tier-three suppliers to drive □ □ □ □ □

improved supply chain performance7. Achieve year-over-year price reductions from suppliers □ □ □ □ □

8. Improve all aspects of supplier performance year-over-year □ □ □ □ □

9. Increase the ratio of total value to total cost of ownership for purchases □ □ □ □ □

10. Improve the utilization of company assets □ □ □ □ □

11. Ensure continuity of supply □ □ □ □ □

12. Define and manage the strategic supply-related risk/reward □ □ □ □ □

profile for the company13. Improve productivity/reduce cost of the supply management □ □ □ □ □

function14. Integrate long term business planning with key suppliers □ □ □ □ □

15. Design and manage upstream supply chain to meet needs of □ □ □ □ □

specific customer/product/service/market segments16. Implement and monitor company social responsibility policies □ □ □ □ □

and goals throughout the supply base17. Support company’s entry into new geographic markets □ □ □ □ □


V. Supply strategies, processes and enablers

In this section, we ask you to rate for several groups of supply strategies, processes and enablers, theirimportance towards achieving your company’s supply mission, goals and performance expectations in2012 and the degree of implementation today.

Please rate the following supply strategies, processes and enablers on the scales listed to the right bychecking the appropriate box

Importance to supply Degree ofmission, goals, and Implementation

performance todayexpectations by 2012 (1 = Minimal, 3 = Moderate,

(1 = Minimal, 3 = Moderate, 5 = Complete)5 = Extreme)

Cross-functional integration and 1 2 3 4 5 1 2 3 4 5executive engagement

1. Align supply management strategy with □ □ □ □ □ □ □ □ □ □

related internal customer strategies suchas marketing, manufacturing, engineering,and product/service development

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A P P E N D I X C2. Employ a governance model for supply □ □ □ □ □ □ □ □ □ □

management cross-functional teaming(funding, resourcing, benefits sharing,leadership, program management)

Supply chain structure and relationships

3. Integrate business goals and business □ □ □ □ □ □ □ □ □ □

models with companies in the supplychain

4. Collaboratively share risks/rewards □ □ □ □ □ □ □ □ □ □

among companies in the supply chain5. Collaborate among supply chain □ □ □ □ □ □ □ □ □ □

companies to root out waste6. Jointly invest in and share assets □ □ □ □ □ □ □ □ □ □

among companies in supply chain7. Create, lead and manage global supply □ □ □ □ □ □ □ □ □ □

chain networks

Strategic outsourcing

8. Employ an ongoing process to assess □ □ □ □ □ □ □ □ □ □

strategic insourcing/outsourcingopportunities

9. Employ an ongoing process to implement □ □ □ □ □ □ □ □ □ □

and manage outsourced activities10. Collaborate with customers and suppliers □ □ □ □ □ □ □ □ □ □

to establish insourcing/outsourcing decisionsthat best allocates work in the supply chain

Category strategies

11. Aggregate and manage total expenditures □ □ □ □ □ □ □ □ □ □

for key categories across the company12. Improve price forecasts as input to □ □ □ □ □ □ □ □ □ □

category strategy development, contracting and financial risk management

13. Take an ownership position in suppliers □ □ □ □ □ □ □ □ □ □

of supply-constrained materials/servicesand components

Supplier strategies

14. Allocate management attention and □ □ □ □ □ □ □ □ □ □

resources to the supplier portfolio basedon importance and potential value of therelationships

15. Increase the number of suppliers to □ □ □ □ □ □ □ □ □ □

assure supply16. Decrease number of suppliers to reduce □ □ □ □ □ □ □ □ □ □

administrative costs17. Grow the volume of purchases from □ □ □ □ □ □ □ □ □ □

strategic suppliers


A P P E N D I XC18. Collaboratively share risks, rewards and □ □ □ □ □ □ □ □ □ □

cost savings with suppliers19. Encourage suppliers to collaborate to □ □ □ □ □ □ □ □ □ □

provide an integrated portion of thefinished product/service

Supplier management/development

20. Help suppliers develop new capabilities □ □ □ □ □ □ □ □ □ □

21. Engage key suppliers directly with end □ □ □ □ □ □ □ □ □ □

customers to increase supplier knowledge and understanding

22. Tie supplier payments directly to the □ □ □ □ □ □ □ □ □ □

flow of finished products/services23. Develop revenue growth based incentives □ □ □ □ □ □ □ □ □ □

for suppliers based on their contributions to new product/service development

Strategic cost management

24. Collaborate with suppliers and customers □ □ □ □ □ □ □ □ □ □

to reduce supply chain costs25. Establish price benchmarks □ □ □ □ □ □ □ □ □ □

26. Un-bundle cost components of □ □ □ □ □ □ □ □ □ □

product/service mix27. Purchase for suppliers □ □ □ □ □ □ □ □ □ □

28. Use value analysis/value engineering □ □ □ □ □ □ □ □ □ □

techniques for purchased products and services

29. Reduce the number of unique items/ □ □ □ □ □ □ □ □ □ □

specifications purchased30. Use total cost to drive decisions □ □ □ □ □ □ □ □ □ □

Integrated supply chain

31. Integrate sales and operations planning □ □ □ □ □ □ □ □ □ □

across the supply chain32. Create supplier logistics centers to □ □ □ □ □ □ □ □ □ □

assure availability and minimize inventory investment

33. Collaborate with users/suppliers in □ □ □ □ □ □ □ □ □ □

statements of work and/or engineering releases

Integrated new product/service development

34. Ensure early involvement/integration □ □ □ □ □ □ □ □ □ □

of supply and engineering and/or users/internal customers

35. Co-design products/services with □ □ □ □ □ □ □ □ □ □

customer and suppliers and business units36. Manage time to market and innovation □ □ □ □ □ □ □ □ □ □

velocity37. Develop/share technology roadmap □ □ □ □ □ □ □ □ □ □

with suppliers

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A P P E N D I X COrganizational structure and governance

38. Give user organizations greater responsibility □ □ □ □ □ □ □ □ □ □

for sourcing and supplier management39. Develop sourcing organizations that are □ □ □ □ □ □ □ □ □ □

co-located within key suppliers who are considered “centers-of-excellence” forimportant technologies

40. Foster global integration of the supply □ □ □ □ □ □ □ □ □ □

management organization41. Use a center-led model for supply strategy □ □ □ □ □ □ □ □ □ □

development with decentralized execution42. Centralize strategic supply responsibilities □ □ □ □ □ □ □ □ □ □

Human Resources management

43. Appoint CPO’s from outside the supply □ □ □ □ □ □ □ □ □ □

management function44. Recruit and/or develop talent with □ □ □ □ □ □ □ □ □ □

specific technical or functional domain expertise for supply management roles

45. Establish a knowledge and skill competency □ □ □ □ □ □ □ □ □ □

model for supply management

Supply Management Information Systems

46. Use a common companywide database □ □ □ □ □ □ □ □ □ □

for supplier information (such as capability, approval status, supplier list, locations, etc.)

47. Implement product management software □ □ □ □ □ □ □ □ □ □

that includes product/service design, item specification controls, sourcing, contract compliance, etc.

48. Provide transparency of cost and financial □ □ □ □ □ □ □ □ □ □

information throughout the supply chain49. Provide transparency of capacity and □ □ □ □ □ □ □ □ □ □

capability information throughout thesupply chain

50. Share supply management intelligence □ □ □ □ □ □ □ □ □ □

across units of the company51. Employ “best of breed” software □ □ □ □ □ □ □ □ □ □

solutions for supply management52. Use collaboration tools for product/ □ □ □ □ □ □ □ □ □ □

service design inside the company and with/among suppliers

53. Use integrated ERP-based applications □ □ □ □ □ □ □ □ □ □

for supply management

Measurement and evaluation

54. Measure supply management □ □ □ □ □ □ □ □ □ □

performance on strategic functional objectives

55. Measure supply management performance □ □ □ □ □ □ □ □ □ □

on operational functional objectives


A P P E N D I XC56. Link strategic supply metrics to business □ □ □ □ □ □ □ □ □ □

strategies and financial metrics57. Measure the value related to supply □ □ □ □ □ □ □ □ □ □

capabilities that is created from new business and revenue streams

58. Establish shared goals and objectives □ □ □ □ □ □ □ □ □ □

between the supply management organization and with other internal organizations

59. Employ joint evaluation of the supplier- □ □ □ □ □ □ □ □ □ □

customer working relationship

VI. Supply base profile

In this section, we ask you to indicate the amount of expected change by 2012 in the number of yoursuppliers and the relative importance of the geographic supply markets shown below.

Please indicate the expected amount of change on the scales listed to the right by checking theappropriate box.

Percentage change in number of suppliers you will actively do business with by 2012.

Decrease No Net Change Increase> 45% 31-45% 16-30% 1-15% 0% 1-15% 16-30% 31-45% >45%

Categories

1. Direct Goods □ □ □ □ □ □ □ □ □

2. Indirect Goods/Services □ □ □ □ □ □ □ □ □

3. Capital Expenditures □ □ □ □ □ □ □ □ □

What percent of your goods and services are sourced from the following markets today? And theexpectation for 2012?

Today Expectations for 2012Not a Moderate Major Not a Moderate Major

Market Market0% 1-10% 11-25% 26-40% >40% 0% 1-10% 11-25% 26-40% >40%

GeographicSupply Markets

4. China □ □ □ □ □ □ □ □ □ □

5. India □ □ □ □ □ □ □ □ □ □

6. Japan □ □ □ □ □ □ □ □ □ □

7. Other Asia □ □ □ □ □ □ □ □ □ □

Pacific8. Brazil □ □ □ □ □ □ □ □ □ □

9. Mexico □ □ □ □ □ □ □ □ □ □

10. Other □ □ □ □ □ □ □ □ □ □

Latin America □ □ □ □ □ □ □ □ □ □

11. Middle East □ □ □ □ □ □ □ □ □ □

12. Western Europe □ □ □ □ □ □ □ □ □ □

13. Eastern Europe □ □ □ □ □ □ □ □ □ □

14. U.S.A. / Canada □ □ □ □ □ □ □ □ □ □

131CAPS Research

A P P E N D I X D

The analytical approach used in this research featured three distinct steps:

(1) Summary and analysis of raw data to provide basic profiles of the respondents and their view of the future ofsupply management.

(2) An exploratory data analysis with the objective of identifying underlying patterns in the data.

(3) The development of prescriptive models based on the supply strategies, processes and enablers used bysurvey respondents and the importance they perceived.

Each of these steps yielded unique insights into the future of supply management and procurement’s role within it.The first step required only basic descriptive statistical analysis techniques. The results of these techniques areincorporated into the main body of this report. The second and third steps required a far more sophisticated andrigorous approach to the analysis. For those readers interested in the technical details, this appendix describes thetechniques used and the results of the step-two analysis. The step-three analysis is ongoing and will be the subjectof a future document. The basis for information provided in this appendix will be the analyses performed for steptwo of the research design.

Analytical Techniques Used

For the step-two analysis, the research team used an analytical technique called factor analysis, a technique foranalyzing the underlying structures of a set of variables — in this case, individual responses. The basic idea is thatthe members of a set of variables, each of which has been measured for a number of observations, have some oftheir structure determined by certain underlying common constructs or factors.

Exploratory factor analysis requires that the investigators hypothesize beforehand the number of common criteria orfactors. The hypothesis regarding the number of criteria (factors) must be based upon the nature of the consideredvariables and an expectation of which factor is likely to load on which variable. This requirement was satisfied in theinvestigation by defining the major criteria and the stated subcomponents of each criterion in the survey question-naire. As mentioned previously, this subsequent survey instrument incorporating the major criteria was emailed topotential respondents in e-survey format. The investigators wished to use the survey responses to validate thehypothesized criteria and subcomponents and revise the model of supply management’s future directions and roles.

The initial step in the exploratory factor analysis involves a mathematical technique called principal componentsanalysis to determine the minimum number of factors that can adequately account for the observed variation inresponses. The resulting number of eigenvalues greater than unity (one) indicates that a certain number of factorsshould be extracted from the data. This result should be consistent with the investigators’ hypothesized model ofmajor criteria and their interaction.

Analysis Strategy and Results of Detailed Analyses


A P P E N D I XDAnalyses of the Entire Population

Three separate analyses will be presented flowing the logic of the research process model, which hypothesized that(A) Macro Forces of Change drives the development of (B) Firm Business Strategies which in turn impacts the (C) Supply Management Missions, Goals and Performance Expectations.

Exploratory Analysis

The tables in Figures D.1, D.3 and DC.5 show the scale items that were used in the exploratory factor analysis andtheir means, standard deviations and variable definitions rank order by mean score.

The Bartlett test of sphericity was used to test the statistical significance of the observed correlation among thevariables, the null hypothesis being that the observed correlation matrix is not different from an identity matrix (nocorrelation between scale items). The large value of the Bartlett statistic and the associated significance probabilityindicated that the null hypothesis is to be rejected and that the observed correlations are indeed statisticallysignificant. Without such significance the exploratory factor analysis could not proceed. The Kaiser-Meyer-Olkinmeasure of sampling adequacy is an index that measures how well the correlations between pairs of variables canbe explained by other variables in the analysis. The observed Kaiser-Meyer-Olkin value was adequate to justifyfurther analysis of all scale items (variables) data.

After ascertaining the statistical significance of the correlation matrix, the next step was to perform an exploratoryfactor analysis to see if the scale items (variables) could be condensed into a smaller set of independent factors. Thisis what the investigators mean by dimensionality reduction. The tables in Figures D.2, D.4 and D.6 show the initialfactor loadings, that is, the correlation of the variables with the factors extracted. The standard procedure at thisstage is to establish a cutoff point of, say, 0.40, and to treat all correlations or factor loadings below this cutoff valueas essentially zero. Although there is no precise standard value for a cutoff point that is prescribed by the factoranalysis procedure, values in the range 0.4 to 0.5 have been used in past research. Applying this procedure, FiguresD.2, D.4 and D.6 list those factor loadings that were retained as significant.

As mentioned previously, the initial step in the exploratory factor analysis involved principal components analysis todetermine the minimum number of factors that can adequately account for the observed variation in responses. Theresulting number of eigenvalues greater than one indicated the number of factors that were extracted from the data.Initial calculation of the factor matrix grouped the variables into eight factors for macro forces of change, six factors forbusiness strategy and five factors for supply mission, goals and performance expectations with no clear differentiationof sub-components. This result violated the empirical specification that there should be two or three variables clearlyloading on each factor. When variables load highly on several factors, interpretation becomes difficult. Based on thepattern of factor loadings we concluded that interpretability of these un-rotated factors was poor.

In order to improve the interpretability of the factors several rotation methods were tried. First, the quartimaxrotation method was performed. The results were better but not completely desirable. Next, the varimax rotation,which preserves the orthogonality of the factors, was performed. The pattern of loadings permitted the meaningfulinterpretation of the factors. Figures D.2, D.4 and D.6 show the resulting factor loadings for the variables. Theresulting pattern of factor loadings affords meaningful interpretation of the factors. The factors loadings with avalue of 0.40 or above (printed exclusively) were used to characterize the factor interpretations.

Exploratory Analysis — Macro Forces of Change

Figure D.1 shows the 25 macro forces of change scale items that were used in the exploratory factor analysis andtheir means, standard deviations and variable definitions rank order by mean score.

Figure D.2 shows the initial factor loadings; that is, the correlation of the variables with the eight factors extracted(Factor 1-Factor 8). The resulting number of eigenvalues greater than one indicated that eight factors were extractedfrom the data. The resulting pattern of factor loadings affords meaningful interpretation of the eight factors. The factorloadings with a value of 0.40 or above (printed exclusively) were used to characterize the factor interpretations.

133CAPS Research

A P P E N D I X D

Exploratory Analysis — Business Strategy

Figure D.3 shows the 17 business strategy scale items that were used in the exploratory factor analysis and theirmeans, standard deviations and variable definitions rank-order by mean score.

Figure D.4 shows the final factor loadings; that is, the correlation of the variables with the six factors extracted(Factor 1-Factor 6). The resulting number of eigenvalues greater than one indicated that six factors were extractedfrom the data. The resulting pattern of factor loadings affords meaningful interpretation of the six factors. Thefactor loadings with a value of 0.40 or above (printed exclusively) were used to characterize the factorinterpretations.

Exploratory Analysis — Supply Mission, Goals and Performance Expectations

Figure D.5 shows the 17 supply mission, goals and performance expectation scale items that were used in theexploratory factor analysis and their means, standard deviations and variable definitions rank order by mean score.

Figure D.6 shows the final factor loadings; that is, the correlation of the variables with the five factors extracted(Factor 1-Factor 5). The resulting number of eigenvalues greater than one indicated that five factors were extractedfrom the data. The resulting pattern of factor loadings affords meaningful interpretation of the five factors. Thefactor loadings with a value of 0.40 or above (printed exclusively) were used to characterize the factorinterpretations.

Item # Means Std QuestionFC12 5.33 1.61 Rising oil/raw materials pricesFC04 4.86 1.51 Regulatory changesFC24 4.81 1.74 Spot shortages of key raw materialsFC16 4.64 1.61 Increased competition from established competitorsFC13 4.43 1.47 Increased emphasis on supply chain securityFC25 4.32 1.74 Terrorist-inspired instabilityFC07 4.23 1.58 Changing customer requirements/buying habitsFC17 4.20 1.76 Industry consolidationFC10 4.15 1.78 Increased environmental regulationsFC23 4.12 1.66 Major change in the value of the US dollarFC03 4.07 1.71 Emergence of new technologyFC14 3.99 1.59 Rising interest ratesFC19 3.97 1.71 CommoditizationFC05 3.87 1.56 Pressures to improve corporate governanceFC15 3.87 1.77 Increased competition from new entrantsFC18 3.84 1.69 Global supply consolidation and growth of cartelsFC02 3.78 1.40 Rise in regionalism/protectionismFC11 3.57 1.59 Increased emphasis on recycling and recoveryFC08 3.51 1.71 Demographic shifts in populationsFC01 3.48 1.73 Expansion of emerging marketsFC09 3.38 1.56 Offshoring/outsourcingFC21 3.36 1.81 Pressures on corporate finance (pension fund liabilities, etc)FC22 3.33 1.28 Global supply market fragmentationFC20 3.32 1.47 Increased focus on corporate social responsibilityFC06 2.80 1.46 Trade liberalization

Figure D.1: Forces of Changes — Sorted by Mean Response


A P P E N D I XDFactor 1 Q1 (.8109) Q9 (.7300) Q6 (.6953) Q3 (.6539) Q8 (.5892)Expansion of Expansion of Offshoring/ Trade Emergence of Demographicglobal market emerging markets outsourcing liberalizaiton new technology shifts in

populationsFactor 2 Q10 (.8431) Q11 (.8152) Q12 (.6957) Q24 (.5731)Environmentalism Increased Increased Rising oil/raw Spot shortages of & natural resource environmental emphasis on materials prices key raw materialsconstraints regulations recycling and

recoveryFactor 3 Q16 (.8246) Q15 (7683) Q17 (.6878) Q7 (.5361)Changing Increased Increased Industry Changingcompetitive competition from competition from consolidation customerlandscape established new entrants requirements/

competitors buying habitsFactor 4 Q21 (.8547) Q20 (.7126) Q5 (.6368)Increasing Pressures on Increased focus on Pressures to stakeholder corporate finance corporate social improve corporatepressure responsibility governanceFactor 5 Q19 (.7830) Q22 (.6020) Q18 (.5788) Q23 (.4605)Changing supply Commoditization Global supply Global supply Major change in market dynamics market consolidation and the value of the

fragmentation growth of cartels US dollarFactor 6 Q2 (.8117) Q24 (.5805)Rising regionalism Rise in regionalism/ Spot shortages of

protectionism key raw materialsFactor 7 Q14 (.8014) Q4 (.5255) Q7 (.4002)Increasing cost Rising interest Regulatory Changing due to regulation rates changes customer

requirements/buying habits

Factor 8 Q13 (.8148) Q25 (.4633)Increasing concern Increased emphasis Terrorist-inspired with supply on supply chain instabilitydisruption security

Figure D.2: Forces of Change — Factors

135CAPS Research

A P P E N D I X DItem # Means Std QuestionBS10 4.23 0.67 Reduce cost of externally purchased goods and servicesBS11 4.07 0.86 Reduce internal costsBS16 4.01 0.85 Improve flexibility and responsiveness to customer demandBS01 3.93 0.91 Achieve higher product and service qualityBS13 3.93 0.70 Improve overall value for purchased goods and servicesBS06 3.86 0.86 Create new sources of value by leveraging value chain partner/

alliance capabilitiesBS03 3.83 1.08 Gain access and sell into new channels and geographic marketsBS15 3.83 1.12 Realize synergies across divisions/SBUsBS12 3.80 0.83 Improve working capital utilizationBS04 3.79 1.03 Increase level of product and service innovationBS05 3.74 1.07 Achieve faster time-to-market for new goods and servicesBS02 3.72 1.01 Ensure business continuityBS17 3.40 1.24 Develop and market new value-added technologyBS14 3.35 1.19 Ensure post-sale customer support and serviceBS07 3.10 1.19 Move activities to lower cost offshore locationsBS08 3.09 1.00 Outsource non-core activitiesBS09 2.03 0.91 Insource previously outsourced goods and services

Figure D.3: Business Strategy — Sorted by Mean Response

Factor 1 Q3(.8737) Q5(.7983) Q4(.7699)Revenue growth Gain access and sell into new Achieve faster time-to-market Increase level of product

channels and geographic and service innovationmarkets

Factor 2 Q6(.8660) Q13(.7260) Q16(.6367)Increasing supply Create new sources of value by Improve overall value for chain integration better leveraging value chain purchased goods and services Improve flexibility and

partner/alliance capabilities responsiveness to customer demand

Factor 3 Q11(.8658) Q10(.7495)Cost reduction Reduce internal costs Reduce cost of externally

purchased goods and servicesFactor 4 Q2(.8673) Q14(.6581) Q15(.5061)Business continuity Ensure business continuity Ensure post-sale customer Realize synergies across

support and service divisions/SBUsFactor 5 Q8(.8397) Q7(.7988)Low cost country Outsource non-core activities Move activities to lower cost sourcing (LCCS) offshore locationsFactor 6 Q9(.7163) Q17(.5830) Q12(.5772)Improved resource Insource previously outsourced Develop and market new Improve working capital utilization goods and services value-added technology utilization

Figure D.4: Business Strategy — Factors


A P P E N D I XDItem # Means Std QuestionSM08 4.14 0.69 Improve all aspects of supplier performance year-over-yearSM11 4.13 0.84 Ensure continuity of supplySM09 3.96 0.83 Increase the ratio of total value to total cost of ownership for

purchasesSM07 3.87 0.95 Achieve year-over-year price reductions from suppliersSM04 3.80 0.98 Drive company standardization/ deproliferation effortsSM10 3.80 0.95 Improve the utilization of company assetsSM14 3.80 0.78 Integrate long term business planning with key suppliersSM17 3.65 1.22 Support company’s entry into new geographic marketsSM01 3.64 0.87 Identify and acquire new value-adding technologies and innovations

from supply marketsSM03 3.62 0.91 Integrate suppliers into the company’s business and operations

processesSM12 3.55 0.93 Define and manage the strategic supply-related risk/reward profile for

the companySM02 3.54 0.99 Integrate suppliers into the new product/service development processSM13 3.48 1.01 Improve productivity/reduce cost of the supply management functionSM15 3.46 1.07 Design and manage upstream SC to meet needs of customer/product/

service/market segmentsSM05 3.23 1.13 Create new business opportunities and revenue streams in

conjunction with suppliersSM16 3.21 0.94 Implement and monitor social responsibility policies and goals

throughout the supply baseSM06 3.20 1.12 Actively engage with tier-two and tier-three suppliers to drive

improved SC performance

Figure D.5: Supply Mission, Goals and Performance Expectations — Sorted by Mean Response

137CAPS Research

A P P E N D I X DFactor 1 Q6(.7633) Q4(.7110) Q14(.6795) Q15(.6391) Q16(.5617)Supply base Actively engage Drive company Integrate long Design and manage Implement management with tier-two and standardization/ term business upstream supply and monitor

tier-three suppliers deproliferation planning with chain to meet company to drive improved efforts key suppliers needs of specific social supply chain customer/product/ responsibilityperformance service/market policies and

segments goals throughout the supply base

Factor 2 Q10(.8279) Q9(.7688) Q8(.6722) Q3(.6569)Improve total Improve the Increase the ratio Improve all Integrate suppliers company value utilization of of total value to aspects of supplier into the company’s

company assets total cost of performance business and ownership for year-over-year operations purchases processes

Factor 3 Q1(.7613) Q5(.7370) Q2(.5643)Supply innovation Identify and acquire Create new Integrate suppliers& integration new value-adding business into the new

technologies and opportunities and product/service innovations from revenue streams developmentsupply markets in conjunction process

with suppliersFactor 4 Q17(.8703) Q13(.5829)Support entry into Support company’s Improvenew geo-market entry into new productivity/

geographic markets reduce cost of the supply management function

Factor 5 Q11(.6351) Q7(.5700) Q12(.5180)Ensure continuity Ensure continuity Achieve year-over- Define and manageof supply of supply year price the strategic

reductions from supply-related suppliers risk/reward profile

for the company

Figure D.6: Supply Mission, Goals and Performance Expectations — Factors

CAPS Research was established in November 1986 as the result of an affiliation agreement between the W. P. CareySchool of Business at Arizona State University and the Institute for Supply ManagementTM. It is located at theArizona State University Research Park, 2055 East Centennial Circle, P.O. Box 22160, Tempe, Arizona 85285-2160,telephone 480-752-2277.

The Mission Statement: CAPS Research, working in partnership with its global network of executives and academics,is dedicated to the discovery and dissemination of strategic supply management knowledge and best practices.

Research published includes more than 70 focus studies on purchasing/materials management topics ranging frompurchasing organizational relationships to CEOs’ expectations of the purchasing function, as well as benchmarkingreports on purchasing performance in 26-plus industries.

CAPS Research, affiliated with two 501(c)(3) educational organizations, is funded solely by contributions fromorganizations and individuals who want to make a difference in the state of purchasing and supply chainmanagement knowledge. Policy guidance is provided by the Board of Trustees, consisting of:Jean Baderschneider, ExxonMobil Global Services CompanyChristine Breves, C.P.M., Alcoa, Inc.Craig Brown, Intel CorporationPhillip L. Carter, D.B.A., CAPS ResearchKen Carty, The Coca-Cola CompanyHarold E. Fearon, Ph.D., C.P.M., CAPS Research (retired)Tim R. Fiore, Terex CorporationKathleen R. Fuller, IBMBradley Holcomb, Dean Foods CompanyJudith Hollis, Fazoli’s Restaurants, Inc.Cecil House, Southern California Edison CompanyVince Hrenak, Raytheon Network Centric SystemsDonald Klock, Colgate-Palmolive CompanyDaniel Krouse, Hallmark Cards, Inc.Mary McDaniel, FedEx CorporationFarryn Melton, Amgen, Inc.Maureen Merkle, AT&T Services, Inc.Robert Mittelstaedt, Jr., W. P. Carey School of Business at Arizona State UniversityRobert Monczka, Ph.D., C.P.M., CAPS Research/ASUAnthony Nieves, C.P.M., Hilton Hotels CorporationPaul Novak, C.P.M., Institute for Supply ManagementJim Scotti, Fluor Corporation, Chair, CAPS ResearchDavid Sorensen, General Mills, Inc., Former Chair, CAPS ResearchTerry Sueltman, Temple-Inland Inc.

CAPS Research


CAPS Research

2055 E. Centennial Circle

P.O. Box 22160

Tempe, AZ 85285-2160

Telephone (+1) 480-752-2277

www.capsresearch.org

ISBN 0-945968-70-1

CAPS Research is jointly sponsored

by the W. P. Carey School of Business at Arizona State University

and the Institute for Supply Management