Closing the supply chain performance gap will release up to $50 million EBIT per $1 billion of sales

Dr. Christoph Kilger
October 1, 2021
Revenue Optimization Concept

All supply chains are lagging behind their optimal performance. This is what we call the supply chain performance gap. With the first nine articles of this series, we analyzed the issues of Supply Chains lagging behind their potential. Today we will close the journey and ask ourselves what the characteristics of a high-performing Supply Chain are and how we can make a difference. In 2016 the magazine Inbound Logistics asked several CEOs and Supply Chain executives: "What are the characteristics of a great supply chain?". These are the success factors, as well as possible reasons for failure.

Before we answer that question, let us change the perspective on what we call our eight root causes for the supply chain performance gap. We have assumed this thesis so far: If the supply chain performance is deficient due to one or multiple of the described root causes, the supply chain performance gap will get bigger, the company will lose EBIT and growth potential. Up to now, we have taken a risk perspective of supply chain performance and described in the preceding blog articles how to reduce the impact the eight root causes may have on the supply chain performance by specific optimization measures. Now we want to shift perspective and ask whether the risk factors – the eight root causes – might even drive the supply chain performance and be turned into enablers for the supply chain.

Do we want to focus on risk, or would we instead look at potential?

The first root cause of product portfolio complexity shows us that the increasing demand from customers for individualized products is driving up the number of variants enormously. Certainly, we agree on the assumption that optimizing product portfolio complexity has a positive impact on the supply chain performance gap. Conversely, it is indisputable that an overall more efficient supply chain frees up capital, which in turn can be used to optimize product portfolio complexity - and of course, any other root cause. If you run your supply chain better, more efficiently, and more economically, you generate potential instead of just minimizing risk. That is how each root cause can transform from a risk to be minimized into an enabler for the overall supply chain performance.

Our second root cause is speed of innovation. Supply chains face three types of innovations that can hugely impact their supply chain performance: business model innovation, product and service innovation, and process innovation. If we look at these three types of innovation from an enabler's perspective, we find that all three have the potential to reduce the supply chain performance gap. For business model innovation, in particular, it is also true that it emerges as a result of the reduction of the supply chain performance gap.

We find that new types of competition, the third root cause, is a driver for the supply chain performance gap. Companies need to make regular efforts to avert the risk from this root cause to improve supply chain performance. Therefore, a more efficient supply chain significantly influences whether and to what extent the company can counter this risk.

Multi-channel sales complexity and the complexity of supplier network can also be classified as two-sided: On the one hand, the reduction of risk contributes to a better supply chain performance and thus acts as an enabler because you can reinvest the freed-up capital in the entire supply chain. Conversely, as with all root causes, the risk from both root causes can be reduced by the overall optimization of supply chain performance.

Both regulatory complexity and sustainability requirements are increasingly coming into focus. Companies are no longer confronted with these issues only voluntarily but are experiencing more and more regulations at the national and EU level. These regulations are linked to financial and non-financial sanctions (such as loss of reputation). This fact makes both causes a high-risk factor in terms of supply chain performance and consequently requires high investment. "As a first step in this process, companies should carefully examine their global value chains and thereby identify their direct and indirect suppliers and other business partners. That should give them a clear picture of their supply chain risks. Depending on the outcome of this risk analysis, companies should then put in place a supply chain compliance program and, most importantly, implement certain tools to select, monitor, and control their supply chain partners, says BCG in its white paper "Managing Supply Chain Risk - A legal and strategic perspective "from June 2021. As the following figure shows, in recent years, the EU, Germany, France, the Netherlands, the UK, Switzerland, and the USA alone have established regulations that generate a significant increase in due diligence requirements for companies with globalized supply chains.


In terms of sustainability, companies are confronted with almost the same requirements. Solutions such as the Circulor software enable companies to fully manage their supply chains and drive responsible sourcing and recycling, reducing their risk in increasing the supply chain performance gap. Raw materials can be tracked as they change states through manufacturing. Machine learning and business logic are used throughout the supply chain to detect anomalies that could indicate suspect activities.

Finally, we look at the root cause of internal complexity: In large companies, cross-functional collaboration is in demand. Supply chain management spans almost all business functions: Sales, Logistics, Production, Product Development, Quality Management, Order Management, Purchasing, Strategy, etc. All functional areas must be optimally networked and work together and are conversely affected by inadequate processes. Interface management is in focus: The simpler the internal structures, the better the interfaces function. It is the task of management to reduce the degree of vulnerability.

The more complex a company is structured, the more risk factors and, equally, enablers exist. Automation is crucial here, especially concerning supply chain control and planning using AI methods, as available to companies as SCAAS (supply chain as a service). Expert knowledge is required here. Conversely, the more enablers exist in the company, the more can be invested in risk minimization. One method is the so-called lights-out planning, i.e., automated supply chain planning by software. The investment in internal planning is eliminated. While purchasing a SCAAS solution can generate significant risk mitigation and significantly increase planning reliability, it also offers the enormous potential to improve overall supply chain performance.

So now, let's come back to our initial question:

What are the characteristics of high-performing supply chains?

We started our journey assuming that companies run behind their actual supply chain potential and thus accept an EBIT loss of up to $50 million per $1 billion of sales. To close this gap, we set out to analyze risk factors and offer optimization potentials, which we continuously improve with our software. Today, we are broadening the risk perspective and giving our root causes a new face: they are no longer just risks; they have become enablers. What makes the difference?

A supply chain that acts in a risk-fixated manner will always remain reactive. The only chance to succeed within such a philosophy is to identify emerging risks as early as possible and develop measures to avert the risk as quickly as possible. Accordingly, the threat of undetected risks is enormously high. What characterizes a high-performing supply chain, a high-performing company, is the proactivity of its measures. A strategy designed to enable generates creativity, motivation, power. A risk-based strategy is characterized by fear, which makes it passive. This is true for the employees and also for the company itself. The switch from risk to enablement may seem insignificant, but it can be crucial.

Analyzing the risks and the eight root causes for the supply chain performance gap needs to lead to tactical optimization measures to improve supply chain performance and close the gap. Typical measures are related to the products & master data, supply chain planning, production & logistics, inventory management, and sustainability & compliance. A high-performing organization does not stop at making the decisions but pursues a systematic approach to execute the decisions. By this, the actual impact is generated, and the performance improves. To systematically execute tactical improvement decisions, four aspects need to be considered:

1. The metric that is to be optimized needs to be defined.

2. The scope of the decisions needs to be set. For example, the scope may comprise certain products or SKUs, the respective bill-of-materials, or related factories or suppliers.

3. One or multiple measures need to be derived from the decision, and an action plan for the measures needs to be set up. The planned activities are then executed and logged.

4. The impact of the execution on the target metric is measured, and a continuous improvement process for tactical optimization measures needs to be set up, enabling us to learn from the past.


We call this the approach "closed-loop supply chain performance management." Now it's your turn: Is your supply chain still only avoiding risks, or are you closing the loop and driving the performance based on the eight root causes of the supply chain performance gap?

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Meet the Writer
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Dr. Christoph Kilger
Christoph is the CEO Revenue & Solutions of aioneers and a member of the supervisory board of Doehler. He holds a PhD in computer science from KIT, is a lecturer in supply chain management there, and has co-edited the book "Supply Chain Management and Advanced Planning." Christoph works with global industrial organizations to shape the future of supply chains.


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