How To Improve Your Company

Transcription

1 BOOSTING COMPANY PERFORMANCE Supply Chain Risk Steering & Working Capital as success drivers Stuttgart, May 2012

2 Companies that actively steer their Supply Chain Risk level achieve significant higher Company Key question of the study Result Excellent references There is a trade-off Companies' weak spot Recommendation How can companies align the drivers of operational excellence to achieve superior Company? Firms that have implemented a Supply Chain Risk Steering outperform others by 14% in Company 1) The results are based on 274 top-class manufacturing companies and more than 20 interviews with top executives Strong Company requires a significant Supply Chain Risk level at the expense of working capital performance In most companies, there is no active cross-functional Supply Chain Risk Steering that creates transparency and optimizes risk-profitability decisions Companies need to review their existing business models and implement Supply Chain Risk Steering in terms of policy, organization, processes and execution EXECUTIVE SUMMARY 1) Sales, sales growth, market share, profitability 2

3 Contents A. Study results Page 4 B. Recommended course of action Page 19 This study was conducted within the scope of the PhD thesis of Christian Faden. Members of Roland Berger Strategy Consultants, the University of Hohenheim and the Eidgenössische Technische Hochschule Zurich have been involved in the process. In addition the feedback of numerous senior experts working for different companies has been included in the study results Roland Berger Strategy Consultants 3

4 A. Study results 4

5 Key question: How to line up the drivers of operations excellence to achieve superior company performance? Scope and objectives Supply Chain Risk level 1. What are the key operational drivers of COMPANY PERFORMANCE? Working Capital Company 2. What are the KEY DRIVERS OF WORKING CAPITAL performance? Supply Chain Manufacturing 3. What is the BEST STRATEGY to achieve SUPERIOR COMPANY PERFORMANCE? 5

6 BACKUP How to steer Supply Chain Risk exposure? Drivers Supply Chain Risk level [extract] STARTING POINT RISK DRIVERS EXPLANATION PRODUCT CHARAC- TERISTICS UPSTREAM SUPPLY CHAIN A. B. C. D. E. F. G. H. I. Product lifecycle Number of product variants Demand uncertainty Order changes Outsourcing degree Supplier dependency Supplier concentration Single sourcing Global sourcing Time until new product release Facelifts, features, colors, etc. Volatility of the product market Extent of order changes Value added by company Knowledge, capacity, etc. Number of suppliers used Only one supplier used Sourcing overseas DOWN- STREAM SUPPLY CHAIN J. K. L. M. Customer dependence Global selling Financial strength of customer Sales channel complexity Customer concentration Selling overseas Credibility of customer Number of sales channels used 6

7 Managerial implications are drawn based on the combination of the empirical survey and published financial data of participants Process HYPOTHESES SURVEY ANALYSIS CONCLUSIONS The expected main drivers and correlations have been drafted Measures for the variables have been defined according to state of the art research German, Swiss and Austrian manufacturing companies have been asked to join the survey In total 274 companies included in survey Financial data of companies Consolidated answers in combination with the financial data have been analyzed High end statistical models have been used for calculation Expert Interviews Managerial implications will be drawn based on statistical results and insights from senior experts interviews 7

8 All main German manufacturing companies participated in the survey CONSUMER GOODS (55) PROCESS INDUSTRY (88) ENGINEERED PRODUCTS (75) ELECTRICAL EQUIPMENT (21) AUTOMOTIVE PRODUCTS (35) In total, the survey incorporates 274 companies All of the main manufacturing companies listed in the DAX index participated ( ) Total number of companies per industry segment 8

9 What are the key operational drivers of COMPANY PERFORMANCE? 1 2 What are the key DRIVERS OF WORKING CAPITAL performance? Drivers of Company and Working Capital with statistical methods identified Study results COMPANY PERFORMANCE 1) 1 DRIVERS of Company Working Capital has a significant positive impact on Company Higher levels of Supply Chain Risk cause higher levels of company performance Additional drivers of Company are: Manufacturing Supply Chain Manufacturing Supply Chain Working Capital Supply Chain Risk level 2 DRIVERS of Working Capital Three drivers steer Working Capital : Manufacturing Supply Chain Supply Chain Risk level Positive impact Negative impact 1) Sales, sales growth, market share, profitability 9

10 What are the key operational drivers of COMPANY PERFORMANCE? 1 2 What are the key DRIVERS OF WORKING CAPITAL performance? Trade-off is existing: To maximize overall performance companies need to achieve optimum Supply Chain Risk level Implications Correlations Manufacturing Supply Chain Working Capital Company Risk trade-off: Supply Chain Risk level supports Company but lowers Working Capital + + 1) I As Manufacturing + + and Supply Chain have the same direction of causality Supply Chain Risk Level - Positive correlation Negative correlation + - Risk trade-off 1) Implicit + II Key is to find the level of Supply Chain Risk that maximizes Company 10

11 What is the BEST STRATEGY to achieve SUPERIOR 3 COMPANY PERFORMANCE? A company has four main strategic options to position its operations Strategic options Manufacturing / Supply Chain I Company's operation risk exposure "QUALITY" Superior manufacturing ensures short lead time, quality and flexibility Limited supply chain complexity ensures high reliability "HOME GROWN" Ordinary Manufacturing Local and focused customers Low complexity in the up-/ downstream Supply Chain "CHAMPIONS" Manufacturing excellence in line with lean processes Leveraging cost & profit advantages in the supply chain while ensuring deliverability "PRICE" Cost focus Competitive advantage optained by price Drawbacks in reliability and deliverability Ordinary business risk & risk management in place "GAMBLE" High risk exposure Very volatile profitability Existential threat in case of 'black swan' events Disproportionate risk Supply Chain Risk level II 11

12 3 What is the BEST STRATEGY to achieve SUPERIOR COMPANY PERFORMANCE? however the chosen strategic option is directly linked to Working Capital & Company Average performance per option Manufacturing / Supply Chain Ø "QUALITY" Company performance 1) "CHAMPIONS" 67 3) Working Capital Company 2) "HOME GROWN" +6% +8% "PRICE" Working Capital "GAMBLE" Company's operation risk exposure Working Capital Company Company Ø Ordinary business risk & risk management in place Improvement strategies 1) Scale 1-5 (5 being best) 2) Cash conversion cycle [days] 3) # of companies in quadrant Working Capital Disproportionate risk Supply Chain Risk level 12

13 3 What is the BEST STRATEGY to achieve SUPERIOR COMPANY PERFORMANCE? The highest Company is achieved in a situation were Working Capital is not at its maximum Strategic Working Capital Management Working Capital (Secondary target) A Companies are able to increase Company by Increasing Manufacturing/Supply Chain ("Home Grown" to "Quality") A B B Increasing Manufacturing/Supply Chain and improving risk management ("Price" to "Quality") To achieve superior Company companies need to increase Supply Chain Risk level based on proper risk management Improvement strategies Company (Primary target) 13

14 3 What is the BEST STRATEGY to achieve SUPERIOR COMPANY PERFORMANCE? The strategy focus strategy has shifted over time New proposed concept considers all drivers simultaneously Company strategy focus in time schematic Company Company Company Company SC Risk Manufacturing Company Supply Chain Supply Chain Risk Working Capital Manufacturing Quality vs. cost leadership Supply Chain Value chain Management Globalization Working Capital Value-based management Shareholder Value Lean concepts Cost of capital Risk management Sarbanes-Oxley Basel I & II Ratings Financial crisis Integrated approach Integrated approach to maximize company performance All operational drivers of company performance considered simultaneously ~ ~ ~ ~ TO BE 14

15 Experts confirmed overall study results Suggestions and remarks have been included in the study Quotes expert interviews Extract (1/2) STATEMENTS OF EXPERTS (Extract In total more than 20 interviews on CxO or director level have been conducted) "Operational risks are often quantified and analyzed separately in the company's functions. To achieve overall transparency, however, these puzzle pieces need to be put together across functions." Dr. Antje v. Dewitz, CEO, Vaude "The focus of current operational risk management is on preventing serious negative incidents. Instead, operational risk management should become a proactive tool designed to assure maximum profitability." Bernhard Scherer, CEO, Zeppelin Systems "Many companies experienced significant growth rates in However the potential operational risks have risen as well To make those risks transparent and steer them properly is outstandingly important." Franz Hermes, Head of Controlling, ZF Group "The classic risk-profitability curve is valid for most company decisions. It is therefore essential for operations that companies achieve profitability in line with their risk profile and question current risk taking." Dr. Bruno Niemeyer, CFO, Wagner Group 15

16 Experts confirmed overall study results Suggestions and remarks have been included in the study Quotes expert interviews Extract (2/2) STATEMENTS OF EXPERTS (Extract In total more than 20 interviews on CxO or director level have been conducted) "Supply chain requirements, such as on time delivery, are clearly defined in most companies. The challenge in a business with high amount of variants is to find the right level in working capital performance to support these supply chain requirements." Bernd Baader, Head of Logistics, MTU Friedrichshafen (Subsidiary of Tognum Group) "There is certainly a direct correlation between 'operational risk level' and 'net working capital performance'. The optimum working capital allocation can only be achieved with an end-to-end process excellence and cross-functional commitment." Federico Ruckert, Coordinator of the group wide Net Working Capital Initiative, Tognum "Operational risks vary significantly between the different branches in manufacturing industries. A tailored, even company specific operational risk steering is required for this reason." Prof. Dr. Hubertus Christ "Operational risks need to be quantified and evaluated cross-functional already early in the product development process followed by a steady review of the existing product portfolio e.g. via simulation tools." Rainer Dickert, Head of Logistics, ZF Group 16

17 STUDY RESULT Responsibilities for Supply Chain Risk Steering are most often not clearly defined in practice Study results functional responsibilities SUPPLY CHAIN RISK STEERING 1) R&D Procurement Production Sales Supply Chain Management Product/ feature alternatives Competition benchmark Supplier market information Price transparency Evaluation of manufacturing time, cost, quality and flexibility Sales planning Customer expectations & behavior Controlling Most companies manage functions and cross-functional disciplines Supply Chain Management & Controlling according state of the art Cross-functional responsibilities for alignment, evaluation and definition of target risk levels however are lacking in most cases 1) A term commonly used in both practice and academic research is "supply chain risk management". The authors have consciously chosen to depart from this nomenclature, however, as this term is normally associated exclusively with downside risk. By contrast, supply chain risk steering is posited on the conviction that a reasonable level of supply chain risk is required to achieve above-average firm performance, while at the same time recognizing that active involvement is needed to maintain the desired level risk exposure. Potential for improvement Advanced performance level 17

18 STUDY RESULT Lacking overall management approach for Supply Chain Risk Steering leads to four main obstacles in practice Study results existing obstacles OVERALL RISK TRANSPARENCY DE- CROSS-FUNCTIONAL A TRANSPARENCY B CENTRALIZED UNITS C OPTIMIZATION CROSS FUNCTIONAL D ACTIVE STEERING 'Transparency' 'Black box' Company Risk Risk transparency HEADQUARTER AREA 1 SITE 1 SITE 2 SCM R&D Procurement Production Sales Risk A Risk B Risk C 'Black box' Critical risk Many companies focus on financial risks Full transparency of operational risk drivers and their attitude lacks in many companies Usually only specific risks like solvency of suppliers are monitored Often risk transparency is highest on corporate level Transparency on operational risk however is usually very limited in decentralized units Headquarter usually lacks an efficient steering tool Risk management usually takes place in the functions, e.g. supplier risk management, country risk, product variants In most cases no structured cross-functional alignment to ensure company optimum is in place It is common that borders for 'critical risks' are set Functions report if border is crossed Only in this case measures are triggered to react on situation No ex-ante steering of risk drivers to optimum takes place 18

19 B. Recommended course of action 19

20 To achieve superior Supply Chain Risk Steering four consecutive steps are mandatory 4 steps to successful Supply Chain Risk Steering 1 POLICY Derive Supply Chain Risk policy based on corporate company vision & strategy 2 ORGANIZATION Define organizational responsibilities for Supply Chain Risk Steering 3 PROCESSES Link Supply Chain Risk Steering to company processes 4 EXECUTION Implement & execute operative Supply Chain Risk steering 20

21 1 A company tailored Supply Chain Risk policy needs to be deducted based on company vision and strategy Deduction of Supply Chain Risk policy VISION > 5 years Desired future state of the company POLICY ON SUPPLY CHAIN RISK STEERING FLEXIBILITY STRATEGY ~3 5 Years Product strategy Core Competencies Financial Plan Competitive Strategy Technological Strategy Business Model TIME QUALITY COST OBJECTIVES ~1 3 Years Sales Plan Budget Capacity planning Risk Management Supply Chain Risk Steering Financial Risk Management Define company targets for cost, quality, time and flexibility of its supply chain Name guiding principles for risk taking 21

22 2 Several organizational options for Supply Chain Risk Steering responsibilities exist Decision needs to be taken Organizational options for Supply Chain Risk Steering responsibility 1) A Supply Chain Management B Staff position C Controlling Staff function R&D Procurement Sales R&D Procurement Production Production Sales R&D Procurement Production Sales SCM SCM SCM Controlling Controlling Controlling Advantage: High operational expertise of supply managers supports daily work Disadvantage: Operational focus may influence risk evaluation since function is affected directly in it's daily work 1) Excerpt No claim to comprehensiveness Advantage: High attention of Supply Chain Risk Steering to top management Disadvantage: Potential missing back up in the company and reduced operational touching points Advantage: To be considered as neutral institution in the company which facilitates discussion on contrary positions Advantage: In most companies controlling is already in charge for financial risk management Disadvantage: If not existing controlling needs to build up specific operational know how 22

23 3 Supply Chain Risk Steering needs to be linked to new product development process and ongoing business processes Linkage of Supply Chain Risk Steering to company processes SUPPLY CHAIN RISK STEERING REMARKS Idea generation and screening Concept development and testing Business analysis and market testing New product development Technical implementation Commercialization Ongoing business t Supply Chain Risk Steering needs to be involved in the new product development process early on Once products are produced in series a periodic review of Supply Chain Risk exposure needs to be conducted and actions if required 23

24 4 To achieve superior Company an holistic approach balancing risk and operative requirements is mandatory Required integrated approach INTEGRATED APPROACH BOOST MANUFACTURING PERFORMANCE R&D Production REMARKS To achieve superior Company companies need to apply an integrated approach balancing risk and operative requirements Procurement SUPPLY CHAIN RISK STEERING Sales Manufacturing, Supply Risk Steering and Supply Chain need to be driven simultaneously Supply Chain Management Controlling Successful Supply Chain Risk Steering can only be achieved by cross-functional collaboration BOOST SUPPLY CHAIN PERFORMANCE 24

25 4 BACK UP Multi-site companies need to address each location Corporate headquarter has to ensure overall optimum Approach for multi site companies CORPORATE HEADQUARTER AREA 1 AREA 2 SITE 1 SITE 2 SITE 3 REMARKS Each site needs to be addressed Corporate headquarter has to ensure overall optimum e.g. natural hedges between the sites have to be considered Local business environments have to be accounted for Once targets for each site are defined corporate headquarter has a powerful steering tool at hand 25

26 4 As a first step in Supply Risk Steering the companies specific risk sources need to be defined and linked to their risk drivers 1. Define risk sources/drivers Example [illustrative] SUPPLY CHAIN RISK SOURCES SUPPLY CHAIN RISK DRIVERS Level 1 Level 2 Level 3 Level 4 Level 5 # product variants Supplier density Global sourcing Political instability Catastrophic risks Natural disasters America Supply side risks Quality problems Capacity constraints Part A Part B Europe Asia Supply Chain Risk level Demand side risks Volatile demand Competitor moves Part C Example Risk steering options 26

27 4 For all identified risk drivers transparency of as-is situation has to be achieved 2. Create transparency Example RISK RISK EXPOSURE EXPOSURE CALCULATIONS CALCULATIONS FOR FOR EACH EACH IDENTIFIED EVENT RISK SOURCE - EXAMPLE Impact: Impact: What What are are the the consequences consequences of event occurring? of event occurring? Major Major > $ > 1 $ Billion 1 Billion Significant Significant $ 500 $ 500 Million Million 1 Billion 1 Billion Moderate Moderate $ 100 $ Million Million Minor Minor $ 50 $ Million Million Insignificant < $ < 50 $ 50 Million Million Expected Likely Likely Possible Possible Unlikely Unlikely Remote Remote Major Major Significant Moderate Minor Insignificant < < 11 Year Year Years Years Years Years Years Years > > Years Years Develop Mitigation Strategy Develop Mitigation Strategy Develop Mitigation Strategy Monitor Future Changes Monitor Future Changes Require Immediate Action Develop Mitigation Strategy Develop Mitigation Strategy Develop Mitigation Strategy Monitor Future Changes Require Immediate Action Require Immediate Action Develop Mitigation Strategy Develop Mitigation Strategy Develop Mitigation Strategy Require Immediate Action Require Immediate Action Require Immediate Action Develop Mitigation Strategy Develop Mitigation Strategy Remote Unlikely Possible Likely Expected Probability: How How often often can/does can/does this this event event take take place? place? Require Immediate Action Require Immediate Action Require Immediate Action Require Immediate Action Develop Mitigation Strategy REMARKS Risk assessment matrix (impact x probability = risk exposure) Adjustment to company/functional specifics required Conscious decision if assessment is done qualitatively and/or quantitatively 27

28 4 In corporation with all stakeholders desired risk levels need to be defined for all risk drivers 3. Define desired risk level Example STARTING POINT PRODUCT CHARAC- TERISTICS SUPPLY RISK DRIVERS AS "STEERING TOOLS" A. B. C. D. E. Product lifecycle Number of product variants Demand uncertainty Order changes Outsourcing degree Risk adjustment leads to higher company performance UPSTREAM SUPPLY CHAIN F. G. H. I. Supplier dependency Supplier concentration Single sourcing Global sourcing Critical Supply Chain Risk level identified In case of 'black swan event' serious loss potential (e.g. Japan earthquake) DOWN- STREAM SUPPLY CHAIN J. K. L. M. Customer dependence Global selling Financial strength of customer Sales channel complexity As-is To be Critical risk 28

29 4 In order to close gaps measures have to be defined and implemented by defined responsibilities 4. Steer operations Example supplier default risk REMARKS For each/key risks, clear process with roles and responsibilities required Interfaces to be clearly defined Frequency to be defined Link to systems/ tools to be defined RISK DRIVERS XXX POTENTIAL IMPACT XXX Proposed actions XXX XXX XXX XXX XXX Responsible Status A? B C D E? 29

30 4 Regular reports ensure ongoing transparency and top management awareness 5. Monitor risk gaps Example Risk report Risk cockpit REMARKS Regular overall reports to maintain top management awareness Pragmatic risk cockpit tailored to target groups/ organizational levels Clear, meaningful and simple to calculate KPIs KPIs to allow aggregation along company structure and to steer BU's 30

31 SUMMARY Firms that actively steer their Supply Chain Risk level achieve significant higher Company performance Study conclusion Manufacturing / Supply Chain "QUALITY" A "CHAMPION" 2. Practice Supply Chain Risk Steering B Working Capital A B 1. Achieve operational excellence "HOME GROWN" "PRICE" Supply Chain Risk level Company (Primary target) TOP PERFORMING COMPANIES STEER ACTIVELY THEIR SUPPLY CHAIN RISK LEVEL 31

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