Analyse This: Analytics in Supply Chain Management
A leading academic from the Center for Transportation and Logistics at the Massachusetts Institute of Technology recently stated that the investment in an Analytics department for the supply chain is the next logical development for organisations. It is a sentiment that is agreed upon in one form or the other by most of the region’s leading experts.
“Supply chain, across industries, constitutes about 50-80% of the value add. Therefore, full understanding of the supply chain and managing it is a logical business requirement,” says Kaveh Taghizadeh, vice president MESA SCM & Procurement at KPMG.
Dr. Philipp Biermann, who is a partner in the Competence Center Transport & Logistics at Simon-Kucher & Partners, agrees. He says: “Supply chain activities account for a substantial part of many industries’ cost. Some sectors sometimes spend up to 10% of their revenues on all logistics related activities. Unfortunately too many companies have not established an integrated view on their supply chain. For example, they ignore the cost of late deliveries or other quality issues of their logistics supplier. However, in a faster moving world your supply chain might even become a competitive differentiator because you are able to respond faster to new consumer trends.”
While there is an increasing number of firms in the Middle East that have understood the need for an ongoing comprehensive analysis of their supply chains, many are yet to fully understand the importance of this kind of investment, and view it as an unnecessary cost. “Multinational corporations use their elaborate analytics software across all countries, while mid-sized companies have more difficulties in realising the benefit of a comparatively large investment to monitor their supply chains,” says Dr.Biermann. “This particularly applies to countries with attractive labour costs where a software investment is not amortized as quickly as in high labour cost countries such as Western Europe or North America.
“In addition, because of the overall positive economic development of most countries in the Middle East, with growth rates higher than in Europe, local companies tend to focus less on maximised efficiency. In Europe, where growth rates have been less promising, companies are bound to look for all possible solutions to minimise costs and maximise operational efficiency, to which SCM systems can contribute substantially,” he adds.
Katharina Albert, managing director of Kat Logics, a company specialising in simulation solutions, has also come across this trend in her interaction with firms in the region. “Usually the big oil companies have a decent planning strategy with appropriate software and manpower allocated to the task. But there is still a lack of optimisation and advance planning for even some of the regional ports and airports and, in general, in the logistics industry, where processes became increasingly complex. Too many resources are spent on fire-fighting problems, rather than on allocating sufficient funds to get the planning and IT support right,” she says.
And for many firms in the region, the mistakes go far deeper than just being unwilling to invest in proper analytics. Plenty of people have not grasped the concept, according to KPMG’s Taghizadeh. “For one thing, many firms mistakenly take ‘logistics for the supply chain’, usually defined as material transportation, as their ‘supply chain’. This shows a profound lack of understanding of supply chains. A supply chain is more than that. To name a few things, it is: procurement, spare parts management, inventory and working capital management, contract management etc. If analysis is limited to logistics, then simply the scope is flawed,” he says.
“Also, firms do not generate the right supply chain data in the first place. Because crucial data exists on paper, it may not be practically available for analytics. For example, in the ‘procure to pay’ process, many companies, especially in the Middle East, do not apply state-of-the-art solutions - which not only improve the process significantly, but also generate valuable data for analytics.”
This misunderstanding often leads to investments in the wrong type of support systems. Kat Logic’s Albert says: “Traditionally companies have implemented software solutions only for Financial Accounting or specialised Warehouse Management Systems. Supply Chain Management (SCM) means to also look upstream towards the suppliers and their capacities as well as downstream towards the customers’ demand, and the processes in between which harmonise the material flow in terms of optimal order quantities, optimal order frequencies and optimal stock levels.
“It is important for successful SCM to have collaborative planning and electronic data interchange across several tiers, too, for example from the raw material supplier via producers, and distribution centres all the way to the retailers, and repair shops,” she adds.
All three believe that, when implemented correctly, an investment into the improvement of the Analytics of the supply chain is something that firms should be undertaking.
“Ultimately, the improvement of the supply chain directly impacts the earnings of the company. Every single dollar saved on the procurement side, translates 100% to the bottom line of the business. In contrast, achieving the same bottom impact through the sales or revenue side will need a multiple of five/seven of improvement, as our experience shows,” says Taghizadeh.
“Through Analytics, the business will be put in a position to control the supply chain through visibility and deep understanding of the supply chain complexities. As for benefits, if for example, the business applies ‘spend analytics’ [procurement] appropriately, it will have the data basis to identify significant cost reduction opportunities, such as identifying that the same or very comparable material or services are being purchased from different suppliers at a significant price difference.”
And essentially a lack of investment could end up costing you more in the long run. Albert says, “If SMEs shy away from analysing their processes and can’t keep up with the technological developments, they will fall behind more and more of those who do. Only firms in full control of their cost structure will be able to provide high service at the lowest rates. They will win the most lucrative deals with high-volume customers who are looking for reliable long-term partners.
“Therefore companies with successful Analytics have the financial power to expand and acquire. Hence it will become more difficult for low-efficiency companies to survive even in periods of economic recovery as they cannot sustain low margins,” she adds.
And firms can generally see a quick return on their investments, according to Dr. Biermann. “While more service-oriented businesses probably face less pressure to focus on this area, others should seriously consider this investment,” he says. “Companies that operate in the consumer goods, retail or the utility sector are very likely to see a quick return on investment. It also helps to look at what competitors are doing. Typically the most successful competitors use the most advanced technologies.”
But should companies invest in their own Analytics department or rely on specialised external consultants? Taghizadeh says it depends on the state of maturity of the business. “First of all, when companies are at a low maturity level regarding their supply chain, they will need improvements, even before supply chain analytics comes into play,” he says. “Such improvements will be most effective if performed with a project approach. It is much more economical to engage external consultants for such a project, as opposed to building your own project organisation.
“Secondly, the quality of the results will be higher, owing to the specialised expertise of consultants. And, results will be realised much faster. Overall, the return on investment will kick in more swiftly and in a larger magnitude.
“But after having reached a reasonable maturity level, it is advisable for companies to build their own capacities in-house,” he adds.
But Taghizadeh warns of the importance of working with companies that have the structures and skills to transfer know-how to the company’s in-house teams. Dr. Biermann concurs: “If internal structures and capabilities do not allow for a comprehensive implementation, the investment for the external team will not be amortized. Hiring an own internal group of analysts is certainly less expensive in the beginning, but may be missing some broader opportunities and ideas,” he says.
“The ideal approach is to combine both options, i.e. having a well-qualified internal analyst team that has been supported and coached by an external expert team at the very beginning,” adds Dr. Biermann.
Meanwhile, in terms of the technology available on the market, Albert reveals that it has advanced significantly to a stage where it can be used and understood with little training. “While large corporations should have a performance improvement team with in-house specialists for continuous improvement, it is sufficient for most companies to seek out expert advice only to implement and calibrate such software solutions. Not much training is required to use the system and correctly interpret the data,” she says.
“The reports and so-called “management dashboards” or “management cockpits” are much clearer and easier to understand than they used to be a decade ago. Nowadays they come in colourful graphs and diagrams. The art is to focus only on a few, and the most relevant, reports for each department instead of getting flooded by endless possibilities in generating reports.”
“Also it is important that the software you choose should have a drill-down facility in the aggregated reports, that helps further analysis down to the job-level. For example, if the chart shows that the delivery deadline for 5% of the jobs was missed, then one click should give the list of jobs concerned for further investigation into the root causes.”
In conclusion, most top managers realise that keeping out unproductive initiatives from the supply chain are as valuable as introducing innovative ones – even though the prevention measures don’t get shown in the annual review – and to get this right, an investment into Analytics is as important as any for a firm.