Direction In Supply Chain Management

Masters of Supply Chain: Direction in Supply Chain Management Bill Copacino Title slide This is Bill Copacino, I’m the managing partner of Accenture’s global supply chain practice, and I am delighted to have the opportunity today to talk to you about some recent work in recent research that we have done in the area of supply chain management. Let me give you a summary of what you will hear today in one slide, and I’ll come back in the next forty-five minutes or so and provide evidence and build upon the key points that I would like to lay out. Slide 1 But in brief, we see a fundamental shift in the past five years in the position of supply chain management, most importantly, I think, supply chain management is becoming a much more strategically and competitively critical variable. It used to be something that is nice to do, but increasingly today, not in all industries, but in many industries, it is becoming a much more important and vital strategic and competitive variable, and I will talk about that a little bit during the presentation today. Secondly, what we found is the gap between the leading and the average players is widening, that is, the best is getting better faster than the average company. This has profound strategic implications and I will show you some evidence and speak to examples in a number of industries. Thirdly what we found is that we believe that average companies and laggards, those who have not developed strong supply chain capabilities or performance have a window of opportunity to catch up. Clearly as supply chain is competitively more important, and if the gap is widening, the average players and the laggards, will really be marginalized. We’ll see below average performance, and their businesses will be really threatened if they don’t address the issues that they are facing in this arena. And then finally, we’ve identified six critical factors, or six levers that the supply chain leaders have focused on, have gotten right, and are important for strong supply chain performance going forward, and I will outline those six levers. So let me talk about the first area, that supply chain management being competitively and strategically a more important competitive variable. There’s a lot of anecdotal evidence we see on this. Let me speak to a few points, first of all, you know, F.D. Scott, who is the CEO of the largest retailer in the world, Wal-Mart, at two hundred and twenty billion dollar retailer, he grew out of the logistics function, he served as the head of transportation and subsequently the leader of their logistics group, and we’re seeing in more circumstances companies promoting people from the logistics and operations side to the more senior executive positions. Secondly, Alan Greenspan had recently noted that, who is head of the Federal Reserve - as you know - in the U.S., that supply chain management might well be the most important productivity factor behind the long expansion in our peacetime history, speaking about the economic expansion from ’92 through 200, so he attributed it to supply chain management as the key driver for that. Additionally, we have seen corporate advertising touting companies’ supply chain management capabilities, companies like Microsoft, IBM, UPS, and others have put that forward, and that is unheard of. So clearly there has been anecdotal evidence where people have been emphasizing their supply chain management capability. We also see leaders in many segments using supply chain management in Internet-based capabilities as a fundamental lever for competitive advantage. For example, Zara Corporation, the Spanish retailer and merchandiser of fashion merchandise, has developed a design to replenishment time of two weeks, so from

design to replenishment they’ve compressed their cycle to two weeks. This is three to five times better than any of their competitors, so store managers, in essence, send information directly to designers, merchandisers, and supply chain planners on what is moving, what is the customers reactions to goods, what are the hot items. And they are then able to get rapid replenishment of those items within season. Normally fashion retailers need to make a bet what is going to sell. Most have a single replenishment, with Zara able to do multiple replenishment they’re able to both get a second wave for the hot sellers, and then secondly, they are able to discount earlier slower moving merchandise to move it out, which is a critical profitability lever for retailers. Importantly, they are also able to understand customer preferences, and not surprising through this supply chain capability Zara has outperformed its competitors it has the highest growth and highest returns in the industry in Europe. Similarly, General Electric has used supply chain management in the Internet processes to achieve fundamental competitive advantage. They purchase twelve percent of their goods through auctions. They are a leader in design collaboration, particularly in their more complex product groups, like imaging, aircraft engine group, power systems, and so forth. They’ve set up a very effective, using technologies, they happen to use MatrixOneto really link with their suppliers in a very effective way, and shorten and improve the design cycle and the design products. In doing so, in many businesses they have been able to achieve a significant cost advantage, up to ten percent in some businesses. You know, similarly, United Technology has used advanced supply chain concepts in Internetbased processes to double profits over the recent period of time. Slide 2 We have also seen compelling evidence that supply chain management is strongly linked to shareholder value. If we look at the shareholder value framework, you can see that supply chain management influences all of these levers. It clearly has a strong effect on revenues as customer satisfaction, customer service become a much more increasingly important competitive dimension. Supply chain management is critical for making the right product in the right place at the right time and making it available for sales. Similarly, supply chain management influences seventy percent of most companies cost structure, so it has a critical impact on operating efficiency, cost and profitability. And finally, it has a significant impact on a company’s capital structure, both fixed capital and working capital. Plant equipment represent a significant portion of fixed capital for many companies, and inventory is a critical part of working capital. So we see supply chain affecting all shareholder value levers. Slide 3 Most compelling, we see a growing gap between the leading and the average companies on all of these dimensions, in terms of cost, in terms of service, in terms of inventory performance. And let’s take a look at this a little bit deeper. Slide 4 We have found the gap in logistics cost between the average and the best performers is significant in many cases, and is widening. The data shown in this slide clearly needs to be adjusted based on the markets companies serve and the characteristics of the product. That being said, there is a compelling difference in many cases on individual companies’ cost structure. Slide 5 On the next page we see that lost sales also impacts customer service. In this case, this was a study that Accenture did with the Coca-Cola retail council, and it looked at lost sales from stock-outs, so this was at store level, so if the product was in the back room of the store, was in transit to the store, was in the retailers warehouse, it didn’t count, we were looking at available stock to sell at the store level. And we went to seven hundred stores over a period of time, tracking the in-stock availability of every item in that store, and what

we found was that, on average, on the store level, and this was grocery and drug channels, was that 8.2% of the items were out of stock. That represented a 6.5% loss in sales. On average, there were substitution or alternative purchases for 1.5% of the items, so net loss sales were 5%, which is a significant impact. Slide 6 More importantly we found, however, that the gap performance between the leading and the average retailers was very significant. This slide shows the percentage of items that are out of stock at least once a month. So, on average, 48%, or almost half the items were out of stock at least one day per month in the average, across all retailers. However, I think more interesting, is that the best performers only had 24% of the items out of stock for at least one day, and in general it was a shorter amount of time that they were out of stock. The worst performers were out of stock 68% of the time, one item was out of stock at least once per month. So, a tremendous competitive gap if you are working with 68% out of stock at least one time to 24%, and the sales losses would be significantly higher in that case. And again, we see a loss of performance in that dimension. Slide 7 Finally, in the inventory area, we see a gap in performance in inventory performance. This is in the consumer products area. We are looking at both manufacturers and retailers. In the case of manufacturers we are looking at total inventories as well as finished good inventories. We see on the average a 33 to 50% gap on the performance between the best in class and the average performers Slide 8 I’d like to talk a little bit now on the gap in performance between the leading and the average retailers. In industry after industry we see a growing gap in performance, and let me give you a few examples. Let’s take personal computers. Dell is now the leader in pcs, it averages over sixty-four turns, which when we find inventory turns or inventory time supply, the reciprocal of that being a very good measure of aggregate supply chain performance. Their competitors are operating at 14-30 turns. Gateway, which also has a direct model, is operating at thirty turns, others are operating below that, which is a substantial competitive advantage, particularly in an industry where the price of an item deteriorates about .5% per week. So where you have a depreciating product the management of inventory is more critical. And Dell has developed a very powerful operating model. It used to be for most companies people’s suppliers delivered to a companies plant on to two times per week. Dell has a very different operating model. They pull down from suppliers every two hours to their plant, generally on two shifts, so over sixteen hours, over eight times per day. They are rescheduling their plant pulling down from suppliers, delivering every two hours, exactly what they need for that next two hour period of time. They have created fourteen supplier hubs around the plant. They built significant integration to their suppliers so that they can replenish those hubs and they have minimal inventory that they own. Discount retailing is another example. Wal-Mart has used advanced supply chain concepts in private exchanges to achieve low inventory and high service. From 1995-2000, Wal-Mart’s inventory turns improved from 5.87 to 8.3 turns. Their leading competitor moved from 4.65 inventory turns in 1995 to 5.01 in the year 2000. They didn’t even reach the level that Wal-Mart was operating at in 1995, and are 40% lower today. In consumer goods we see a similar pattern. Proctor and Gamble has levered channel integration programs and collaborative planning to have an inventory advantage. From 1995 to 2000, P and G’s inventory turns improved from 9.7 to 11.5. The industry as a whole moved from 9.7 to 11.1, so it has a full turn and a half cost advantage. P and G has been the leader in CPFR, Collaborative Planning and Forecasting and Replenishment. For example, in a pilot that they did, they improved their stock position from 87% to 98%. Their lead-time was reduced from 21 to 11 days. Their on hand inventory was cut by two weeks, and sales increased by 8.5 million in one chain alone. In contract manufacturing we see Flextronics operating at 8.86 turns, and Selectron at 4.92 turns. In home improvement,

Home Depot operates in seven turns, its nearest competitor operates with 5.6 turns. So clearly there is a growing gap in performance. Slide 9 There’s some data on the next slide on the performance management group. It shows a similar effect if you look at the best in class, this is cash to cash cycles, so it includes clearly the inventory cycle is part of this. It also includes the receivable portion of it, but we see almost a two to four times advantage, 3.7 advantage in different industries of the best in class versus the average performer. So I think that in industry after industry we see a growing gap. Slide 10 We asked ourselves then, why is this happening? If it’s competitively, strategically more important, and there is a growing gap, why are the leaders continuing to advance and go ahead and why haven’t the laggards and average companies done better in catching up. We think that there are a few reasons for this. Number one is that supply chain is not easy to do. You can’t wake up tomorrow and say, you know, we need to make our supply chain capabilities and performance world class. It takes years to do. You need to do many things well, you know, not just managing your suppliers and integrating with your suppliers, and in your procurement and purchasing area, and in your manufacturing, and in your distribution and transportation, and how you face off to your customers and integrating your sales programs and demand shaping, and a number of other strategies to optimize overall performance. And you need to develop integrated IT support in a capability that links supply and demand, we call it supply chain planning and collaboration, and it just takes a fair amount of time to build the culture and to build in these kinds of capabilities, the cross-functional capabilities that are needed for success, operating with one forecast, avoiding narrow functional measures, focusing on economic profit and return versus just revenue maximization, and building understanding of cross-functions so that they can work more effectively. So that not only do you need to work effectively across the various elements within the supply chain, but across all business functions, marketing, sales, finance, and so forth, as well as operations. We need to melt into our harmonious, integrated capability, and it takes a long time to change that culture. So that’s one of the reasons many companies like the ones I alluded to have been doing this for a decade and they have built this capability. Secondly, we are seeing scores of new tools evolve in the supply chain area. Over the past three years there has been many tools developed. Let me just allude to a few. In design collaboration we now have PTC and their windshield product in their MatrixOne, which allow you to collaborate with your suppliers in a much more effective way, shorten your design cycle, do much more effective product data management, re-use components, work with standard modules and components can substantially reduce your cost structure. One of my colleagues has said a significant portion of the supply chain cost are set in the design process. If that is not done well, your cost structure is going to be high. Secondly in the area of e-procurement and strategic sourcing, we have seen a lot of capabilities evolve, new auction services in ERFP capabilities. I’ll talk about an example in Dow that uses emarkets effectively, and clearly the whole use of strategic sourcing, e-procurement using tools like Ariba, BDE, Frictionless Commerce, Portem, which is very strong in Europe, and so forth, has provided companies with tremendous opportunities to fundamentally change their cost structure. We have seen a growth in procurement outsourcing. Additionally the area of supply chain collaboration, a whole slew of CPFR tools in areas like event management, which was not on the screen two or three years ago, provides capabilities so companies can synchronize their operation sin a much more effective way and manage much more tightly with that. The arena of distributed order management and EDI tools, and things around reverse logistics in the emerging area of silent commerce also provide more tools. So, all companies have not implemented these tools very well, but what we have

found is the leading companies have been very thoughtful in selecting the capabilities that make sense to them and they have been very effective in implementing the focus on the process, not the technology, and they have focused on program management for effective implementation, they’ve put a lot of attention to change management and these things have made a huge difference for them. So that’s why I think we see the gap. Slide 11 The good news is that we have identified the six core capabilities that we find, what we call the masters of the supply chain, that the leading companies have used. Let me speak to these briefly and I will come back and speak to them in a little bit more depth. First of all is what we call “functional excellence. You can’t be good at the supply chain if you are not good at blocking a tackle, so companies need to develop the basic capability in procurement, manufacturing, procurement, transportation, warehousing, customer service, supply chain management, etc. Secondly, companies need to be able to manage surge and uncertainty. I’ll talk about this a little bit, but it’s a critical variable, once your cost structure is set, what really makes the difference is how you mange the uncertainty and unexpected events is part of that. Thirdly is IT enablement. Fourth is really extending the supply chain capability, the connections with customers and with suppliers. Fifth is selectively leveraging virtual logistics, and lastly is putting a focus on organization and capability development in advancing the supply chain n skills. That was one of the reasons that motivated us, frankly, to create Supply Chain Academy as a tool for companies to be able to do that. So let me go through these in a little bit more depth, and then I’ll summarize the key points at the end. Slide 12 Next slide. The first is functional excellence. As I mentioned, functional excellence is the blocking and tackling of the excellence of all the key functions that underpin supply chain as well as being effective in being able to manage them collectively. And we have seen companies make many advances in this area, but if you don’t have sound manufacturing using cell manufacturing, lead manufacturing capabilities, just in time principles, set up production, focus on yield management, and waste reduction, which are critical value levers, thinking through the structure in manufacturing strategy, rationalizing facilities, using low cost centers where appropriate, using focus capabilities, etc, especially in distribution, putting in the best capabilities and techniques. So the blocking and tackling is important. We’ve seen companies like Dunlop tire put in a whole new forecasting and inventory approach, and the results of that were increased four points in market share through better availability of products and visibility, 37% reduction in finished goods inventory, 24% drop in raw material stock, and a 22% increase in inventory. True Serve, the Howard co-operative used supplier integration and collaboration, and in this case they used the Celarix tool to improve customer service by 10%, to reduce the SKUs by 20%, to shorten delivery time from the warehouse from 5 days to 24 hours, and reducing logistics costs from $165 million to $126 million, by effectively 25%. ChemEx, the Mexican cement company sees a lot of delays and cancellations of projects, and they put in a centralized production and scheduling and dispatch capability. They also put GPS, Global Positioning Systems on their trucks. They reduced delivery time of their trucks from three hours to twenty minutes, and they found that they need much more fewer trucks from the better utilization, and shorter time in transit. So, the blocking times and transit is important. I think all companies focus work on this, some do it better than others, and for most companies there are some areas to improve.

Slide 13 The second area I would like to talk about is a key area, and it is called the management of surge and uncertainty. I think this has as much of an impact on supply chain performance as almost any lever. And clearly all companies work hard to balance

supply and demand, many don’t have a fundamental planning process in place. They don’t conduct a sales and operations planning meeting, but you know, what effectively influences this more than anything is unexpected events. End of period loading, where companies at the end of the month, end of quarter, end of year, try to push things out from the channel in order to meet their short term sales targets. Poorly planned trade promotions that are uncoordinated, and broadly poor coordination between marketing sales and sales, and nonaligned capacity strategies where you may have a marketing forecast that suggests one thing and a financial forecast that suggests another, and people try to build capacity for the marketing forecast. Poor channel visibility, where you really don’t see what is happening within the channel. You have weak demand planning capabilities, which as I was alluding to a moment ago, where you don’t have the sales and marketing teams take responsibility and accountability for forecasting, where you don’t conduct a sales and operation planning meeting, and where there isn’t a coordinated event to decide on production strategies and inventory strategies, or when you have long cycle times. The whole effort towards cycle time reduction, both in the planning processes and in the operating processes, is fundamentally focused on the area of managing surge and uncertainty. Slide 14 So what happens? You can see that retail sales, is relatively flat. There is some variation, but it is not terrible variation. And then if you look secondly, you would expect that the shipments would parallel retail sales, but if you look at the blue line, you see that the variability increases a bit. And similarly, the production line, which is the dotted blue, again, would vary even more. And then thirdly, if you look at the inventory, you get wild swings within the inventory. And all of these practices are very costly for companies where the fundamental demand pattern is not askew, and getting rid of unproductive things like the end of month, end of quarter, end of year spikes, illogical promotional activities, managing seasonality in a more effective way. Proctor and Gamble has been the star, if you compare them with most consumer products companies, they do a very effective job of managing uncertainty, and of integrating their processes very effectively, and not doing things that in the end might produce the short term revenue lift, but fundamentally profits and customer service and customer satisfaction. Slide 15 A second major concern is a visibility within the channel, because the effects here are very exaggerated as these demand signals are passed down through the supply chain to suppliers. I like to go to the example of poor visibility within the chain. If you take a look at this, the top line on page fifteen represents the production levels, the bottom line represents the sales levels, and you can see for the first four or five weeks supply and demand are effectively in balance. What happens at the fourth week is that the demand begins to deteriorate. It takes a period of time for the problem to be identified, because there is poor visibility ahead into the channel, and then it takes another period of time to initiate action. So what happens then, change in production is disproportionate to change in demand. For a small change in demand, the change that ultimately needs to be changed in productions is almost twice as much, in this case, effectively 20-40%. So it tends to create a very irregular pattern in effectively what people often refer to as jerking-around operations, which turns to be very costly and results in very poor service levels. Slide 16 On the next slide you see the bull-whip effect, which has been popularized by How Lee of Stanford university, where as these changes then, the changes in production are passed down in the supply chain through distributors to suppliers and manufacturers and suppliers. That effect is exaggerated, but if you operate with visibility, it could be considerably damped. Leading companies, in addition to the things that I mentioned like a very strong sales and planning process, with the sale s and operations planning meetings with the visibility into the channel and responsibility of forecasting, with functional ownership

of forecasting, etc, in addition to those activities, other companies have gone a step further. Slide 17 The next slide shows data that was taken off the Internet. This was taken from purely public sources, it shows four vendors of computer equipment for sellers, if you will, of computer equipment, and their pricing over a two month period. So if you look at the orange, the white and the very light blue line, you see the pattern you would expect, prices stay stable for a time, in this case this is the Pentium 500 computer. Prices stay stable for a period of time, and then when chip prices go down prices drop, and then prices stay stable for another period of time, and you see that effect for three of the competitors of Dell. If you look at Dell’s line, which is the dark blue, every three to seven to ten days the prices change, they go up a little, or they go down a little bit, and they change over that period of time. And you know, we asked ourselves what is really happening here, and Dell was practicing a new technique, which was called demand shaping, the idea that you can use pricing to shape demand based on what you are able to make. Dell has the challenge that they promise orders in roughly three days, three to five days from an order their products are shipped. However, their component lead times are sixty to ninety days in some cases, so they need to forecast what they are going to make and purchase their components. You know, generally speaking, they do a very good job of that, but they are not going to be perfect. Sometimes they are going to purchase more of one item and fewer of another. For example, in this case, they sell more of the Pentium 500, or less of the Pentium 500 versus the Pentium 600, they could shift demand between those, for example, if demand for the Pentium 500 is more than they expected and demand for the Pentium 600 chip is less, they can lessen the price difference between the two, in effect to shape or shift demand from the Pentium 500 to the Pentium 600 where they have components where they are able to make the product. We call this demand shaping, or I like to call it sell what you can make. Clearly companies want to make what customers want to buy, but you are not going to be perfect. In the end, you have to sell whatever you make, either throw it away, or you sell it in a discounted way. So this demand shaping technique, we are seeing this technique being applied to the auto industry, and a number of other industries going forward, and I think it will become much more prominent in the future. Slide 18 I’d like to jump to the third lever now which is the extended supply chain, which is effectively linking with customers and with suppliers. This technique has been around for a significant period of time. I believe I wrote the first piece on this in 1983, I wrote a piece on what I called at the time “Intercorporate Logistics”. The term intercorporate logistics didn’t stick, but clearly the concept has. Each of the players in the channel has the supply chain, clearly by coordinating them significant benefits can be achieved. By coordinating a collaborative, forecasting and planning, having visibility into what is selling and be able to translate that back into actions using techniques like vendor-managed inventory and collaborative forecasting and replenishment, integrated transportation management is becoming what is now called transportation management, is becoming a much more important capability. Using event management, electronic linkages to have visibility of the status of both the incoming as well as the inventory of the channel. Thinking about direct shipment, what we call nose-skipping, being able to build truckloads at a plant to go directly to the source, and in some cases we see entities, some three suppliers collaborating, each sending a third of a truck and they are sourced in the same area. We are seeing this happening in the food industry, a truck will go to each of those three locations, pick up a third of a truckload, and go directly to a plant, rather to an intermediate warehousing location with all the additional handling, and so forth. So, the case for this is very well known, and very powerful, clearly a reduce in transaction costs, reducing waste in the channel, you can enhance customer service, as I mentioned, from a number of examples earlier, operate with a significantly lower inventory and reduced transportation costs. Slide 19

The next six or seven pages goes through and example of this within the food industry. I am not going to go through it in detail, but basically it shows the impact on different levers on different functional areas of channel collaboration. We identify here about eight tools that are available for forecasting, trade promotion, materials handling, logistics rationalization of capacity across the channel, quick replenishment, EDI, event management, and electronic linkages, product line rationalization of flexible manufacturing, and we look at the impact in this case on the food industry, on the manufacturers and the retailers of effectively impacting the manufacturing cost structure by 6%, and potentially the retail cost structure by 2.7%. Now the retail side, when you are on that side dealing with a 2-4% margin, you can have a significant impact, and in addition on the manufacturers side, a substantial potential profit improvement from putting in channel linking and coordination programs. The next five or six pages break that down by individual tactic. I will not go through those in detail, but you can see the impact of those. Slide 26 Page 26 looks at the impact of trade promotions. And again, this is a major lever, better coordinated and more thoughtful trade promotions can have a significant impact. This is the issue of surge and uncertainty that I had mentioned, if you were cross-channeling we have seen manufacturers improve their cost of sales by 2.5%, and retailers by almost a full percentage point to trade promotions. Slide 27 On the next two pages for the manufacturers the value chain improvement in the levers are shown where that 2.5% can be created from, and similarly, for the retailer the leverage points of where cost and operating expenses and inventories are taken out of the system up to .9%, almost a full percent increase. So channel integration, channel collaboration, intercorporate logistics, the extended supply chain, whatever you want to call it, offers a major advantage to leading companies leveraging this in a very effective way. It is quite interesting because I see the leaders focusing more attention on the issue of what I call operating mild design. Fundamentally thinking through the channel structure in the inner relationships within the channel, I mean, Dell is a very famous example of that as they built their whole point of differentiation on direct to the customer, and effectively gained a huge advantage in that industry without all the depreciating inventory sitting in the channel at the distributors and resellers and other intermediaries, and they have been able to achieve a significantly lower cost structure in a pricing advantage will be a number of their competitors.

Slide 28 You know, similarly, if you look at the GE Appliances very innovative operating model design with Home Depot, rather than put all the appliances in the store, they put samples within the Home Depot stores and shipment occurs directly from General Electric warehouses directly to the customers, huge inventory savings, huge channel integration, collaboration with an advantage. You look at Saturn spare parts management, and this is for auto parts at dealers, Saturn operates with about seven turns, the majority of other operators operates in the one to two turns. Now you see some operating at three, but he vast majority are operating with one to two turns. And what Saturn did was put in the capability to monitor parts availability throughout the system. Every night they allow the dealers to do parts planning, but they provide recommendations to the dealers based on very deep materials management capabilities and skills, you know, which most dealers don’t have and can’t afford. They provide recommendations of what should be the replenishment policies, additionally they provide visibility to other spares within the channel. Additionally within a region, they allow one entity to serve as the master warehouse, so they carry a bit of surplus to help replenish for that. So by looking at the inventory from broader than the single dealer point of view, by allowing of sharing of parts across the dimensions, one is able to achieve a significant cost advantage, and almost

seven times better inventory performance than some competitors. So thinking through the operating model and design is a critical factor that needs to be considered.

Slide 29 The next area that I would like to speak to is the IT enablement, and as I mentioned earlier that we find that the leading companies have effectively and selectively used IT capabilities for advantage. You know, historically companies operated with very unintegrated IT applications.

Slide 30 And the great benefit of the ERP was that it allowed integration of financials, materials management, sales and distribution and production planning. That being said, there were a number of systems around that that were important to integrate. Things like supply chain planning, supply chain optimization, warehouse and logistics and transportation execution systems and manufacturing executions systems and supplier relation management, as well as customers and product management. And companies have spent a lot of time the last decade not only getting in fundamental ERP systems, but also linking those together. You know, we are finding that the leading companies have done an effective job in linking together some of the key capabilities.

Slide 31 Clearly, the capabilities that are available have expanded, and selected vendors in a number of areas are shown here, but we continue to hear the horror stories about unsatisfactory implementations, not achieving the business case, not achieving the full benefits, and what we have found is that the leading players approach this in a much more thoughtful way. First of all, they focus on the process versus the technology, so a lot of attention to the process of design. They carefully select the technologies to make sure that they are both appropriate and that their company is ready for them. They spend significant attention to the issue of program management during implementation with very rigorous program management methodologies. And they spend a fair amount of time on the change in people management related issues, and therefore have much greater success and an advantage to their business cases, and so they deliver the results that they plan on. So, supply chain technologies have taken a little bit of a bad rap. I believe that the capabilities that have been developed over the last three to five years, as I mentioned earlier, are enormous. That being said, a lot of companies have done a poor job selecting and implementing, but the leading companies have been attentive to that, and they have increased their competitive advantage because of that.

Slide 32 The fifth area I want to speak to is the area of virtual logistics, clearly we have seen a trend of traditional outsourcing growing. During the decade of the nineties we have seen it grow from an embryonic business to a fifty billion dollar business in warehousing transportation, and additionally contract manufacturing. That core outsourcing is expected to continue to grow, however we are seeing new forms of outsourcing emerging, in procurement, in spares management, in what we call managed logistics services, so that in procurement, clearly in the indirect spend it’s a non-strategic and non-critical category. There’s new capabilities that are available for that, and there’s aggregation opportunities on much of the spend and so we have seen a growing interest among our clients, and a very profound value proposition in that arena. We have seen more and more companies begin to outsource elements or segments of their direct spend as well. The service parts and spare parts area has been the second area where there has been robust growth and robust

interest in the area of outsourcing of spares management. It is a very specialized area. It requires distinctive techniques and so we’re seeing growing interest in that area And lastly, in the area of managed logistics services, what used to be called perhaps four PL of companies considering outsourcing more of their warehousing and transportation area, but a whole broader step of supply chain function. There’s embryonic interest with that, and we expect those areas to grow. What we have found is that the leading companies have selectively outsourced these capabilities, and we’ll expect more of that to grow in the future. Slide 33 The last area that I want to speak to is the focus on capability development. We find that the leaders are clearly working to differentiate themselves on this dimension. It is something that is very challenging to fix quickly. It takes years to attract, retain, develop capabilities and skills within your companies, however, it’s clearly a major focus of companies in the next decade. It’s critical for supply chain performance. As I mentioned, it was one of the reasons we created Supply Chain Academy, and we view this as a growing area of focus.

Slide 34 So in conclusion, we have found that supply chain management is becoming a much more important strategic and competitive variable for many industries and many companies, and that the gap in performance is growing between the leading and the average players, but we believe there is a window of opportunity to close that gap, and that we find that the leading companies have focused on six levers, or six core capabilities that has enabled them to create a supply chain advantage, and therefore a strategic advantage, functional excellence, managing surge and uncertainty, IT enablement, managing the extended supply chain and building links with customers and suppliers, selectively using virtual logistics, and putting a focus on organization in capability development. Thank you.