Published: June 16, 2011
Senior executives say their companies manage key trade-offs well, yet see barriers to better performance: rising risk, lack of collaboration, and low CEO involvement.
As economies around the world step back from the financial brink and begin adjusting to a new normal, companies face a different set of supply chain challenges than they did at the height of the downturn—among them are rising pressure from global competition, consumer expectations, and increasingly complex patterns of customer demand. Executives in this McKinsey survey[1] are divided on their companies’ preparedness to meet those challenges, and fully two-thirds expect supply chain risk to increase. What’s more, the survey highlights troubling signs of struggle associated with key, underlying supply chain processes and capabilities, including the ability of different functions to collaborate, the role of CEOs in supply chain planning, and the extent to which companies gather and use information.
As companies have managed their supply chains over the past three years, the challenges they faced and the goals they set have reflected a single-minded focus on weathering the financial crisis. The most frequently cited challenge of the past three years is the increasing volatility of customer demand (Exhibit 1). This is no doubt a result of the sharp drop in consumer spending that has reverberated throughout all sectors across the globe. Looking at challenges over the next five years, though, the focus shifts: respondents most frequently cite increasing pressure from global competition. Some issues that receive a lot of public attention, such as climate change and natural-resource use, have remained a low priority since our 2008 survey.[2] Still, the share that identify environmental concerns as a top challenge in the next five years nearly doubled, to 21 percent, over the proportion saying it was a top challenge during the past three years. This suggests that companies anticipate returning to a new normal,[3] wherein they can focus on issues other than cost at least some of the time.
With regard to goals for supply chain management, the results show a similar shift between past and future, perhaps another indicator that companies are focusing on pursuing growth in addition to cost containment (Exhibit 2). Of course, executives are not ignoring supply chain costs altogether; after weathering a downturn, they know their companies can manage and control future expenses, now that this issue has been on their radar consistently. Indeed, reducing operating costs remains the most frequently chosen goal over the next five years—as it was over the past three—followed by customer service. In a 2008 survey, 43 percent of respondents said improving service was one of their companies’ top two goals for supply chain management, and though it fell as a priority during the crisis, it is now number two for the next five years.
Executives also indicate that many of their companies have met past goals, with supply chain performance improving in both efficiency and effectiveness as they come out of the downturn. For example, nearly half say their companies’ service levels are higher now than they were three years ago, 39 percent say costs as a percentage of sales are lower, and 45 percent have cut inventories.
What hasn’t changed much, though, is the amount of supply chain risk that executives foresee (Exhibit 3). More than two-thirds say risk increased in the past three years, and nearly the same share see risk continuing to rise. Respondents in developed Asian countries report more concern than those in any other region: 82 percent say their companies’ supply chain risk will increase in the next five years. [4]
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Though the strategic goals executives are setting suggest a hope that more predictable business conditions will prevail over the next five years, respondents are divided over how well their companies can manage the challenges (Exhibit 4). This finding holds true for large and small companies alike and among executives in different functions.
The good news is that on the three challenges cited most frequently (global competition, rising consumer expectations, and complex patterns of customer demand), the highest shares of executives say their companies are prepared to meet those challenges. The bad news is that the shares saying their companies are well prepared are still below half.
Most executives recognize the importance of managing the functional trade-offs related to these challenges and think that their companies are effective at doing so. Among trade-offs, the highest share of respondents—85 percent—say balancing cost to serve and customer service is important to their companies’ supply chain strategy. The lowest share (59 percent) say balancing centralized production against proximity to customers is important. Respondents also report that the managers who make decisions about supply chain trade-offs are well informed.
Yet the cross-functional discussions that companies need if they are to make informed decisions are not happening often. For each of the six trade-offs the survey explored, regular cross-functional meetings are cited as the most common process for making decisions, but between 31 and 40 percent of respondents say their operations teams never or rarely meet with sales and marketing to discuss supply chain tensions. Furthermore, respondents across functions say sales/marketing has the most difficulty collaborating with other functions, with 23 percent citing a problem between that group and manufacturing, and 21 percent between it and planning. Additionally, one-third of respondents say the biggest barrier to collaborating when managing trade-offs is that functional areas don’t understand their impact on others.
This disconnection is likely exacerbated by the relatively low levels of CEO involvement reported: the vast majority of CEOs do not actively develop supply chain strategy or work hands-on to execute it (Exhibit 5). Respondents do, however, expect more CEO involvement over the next five years—a hopeful sign for companies aspiring to mend key cross-functional disconnections.
Many of the future supply chain challenges will require companies to keep better information on individual costs and customers.
The results show a similar disconnection between data and decision making: companies seem to collect and use much less detailed information than our experience suggests is prudent in making astute supply chain decisions (Exhibit 6). For example, customer service is becoming a higher priority, and executives say their companies balance service and cost to serve effectively, yet companies are most likely to take a one-size-fits-all approach when defining and managing service-level targets. Half of the executives say their companies have limited or no quantitative information about incremental costs for raw materials, manufacturing capacity, and personnel, and 41 percent do not track per-customer supply chain costs at any useful level of detail.
Many of the future supply chain challenges will require companies to keep better information on individual costs and customers. Yet only about a quarter of respondents expect their companies will invest in IT systems over the next five years, and only 10 percent of respondents say their companies currently use social media to identify customers’ service needs.[[[PAGE]]]
Contributors to the development and analysis of this survey include Trish Gyorey, an associate principal in McKinsey’s Chicago office; Matt Jochim, an associate principal in the Atlanta office; and Sabina Norton, a consultant in the Seattle office.
The contributors would like to thank Andreas Brinkhoff, a consultant in the Cologne office, for his exceptional contributions to this work.
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