SCMR MarApr 2012 Z011

FEATURES
10 Spend Analysis: Lessons

from the Best-in-Class
By Constantine G. Limberakis
20 Global Trends Roundtable:
Whats on the Supply Chain
Horizon
By Patrick Burnson
28 9
th
Annual Global Supply
Chain Survey: Leaders Making
the Most of Visibility, Flexibility,
and Analytics
By Morgan L. Swink, Ronald R.
Johnson, and Francis J. Quinn
38 Embracing Green in China...
With an NGO Nudge
By Hau Lee, Erica Plambeck, and
Pamela Yatsko
46 A Strategy for Managing
Commodity Price Risk
By George A. Zsidisin and Janet L. Hartley
54 Air Cargo: Is 2012 the
Turnaround Year?
By Patrick Burnson
COMMENTARY
Insights 4
Global Links 6
Talent Strategies 8
SUPPLY MANAGEMENT 60
BENCHMARKS 78
S69 MODEX WRAPUP
New Show, New City,
New Solutions
MARCH/ APRI L 2 0 1 2
Progress in a
Demanding
World
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10 Spend Analysis: Lessons
from the Best-in-Class
New research from the Aberdeen Group under-
scores the importance of spend analysis. The
findings, however, also show a gap between
those companies struggling to implement a
spend analysis program and the best in class.
Aberdeens Constantine Limberakis relates the
lessons learned from these leaders that can
move you up the competency ladder.
20 Global Trends Roundtable:
Whats on the Supply Chain
Horizon?
SCMR has assembled a panel of experts to give
their insights into the trends and challenges fac-
ing supply chain professionals today. Among the
topics they address are global sourcing options,
risk management, volatile energy costs, and
intensifying global competition. Executive Editor
Patrick Burnson moderated the discussion.

28 9th

Annual
Global Supply Chain Survey
Leaders Making the Most
of Visibility, Flexibility, and
Analytics
This years survey focused on the progress being
made across three core supply chain capabilities
visibility, analytics, and flexibility. As in past sur-
veys, clear levels of competency emerged among
the respondents. Weve termed them the leaders,
followers, and laggards. Read how the leaders
superior performance across these competencies
translates directly to competitive advantage.

38 Embracing Green in China
with an NGO Nudge
A seven-person NGO in China is pushing big
corporations to adopt a greener mindset in their
manufacturing and sourcing activities. IPEs
approach seems to be working, says this report
from Stanfords Hau Lee and his co-authors. So
far, at least 50 companies have taken corrective
actions and agreed to IPE-supervised environ-
mental audits of their facilities.
www.scmr.com Sup p ly Cha i n Ma na gement Rev i ew Ma rch/ Ap ri l 2 0 1 2
1
Ma rch/ Ap ri l 2 0 1 2 Vol ume 16, Number 2
Supply Chain Management Review (ISSN 1521-9747) is published 7 times per year (Jan/Feb, Mar/Apr, May/Jun, July/Aug, Sept/Oct, Nov, Dec) by Peerless Media LLC, a Division of EH
Publishing, Inc., 111 Speen St, Ste 200, Framingham, MA 01701. Annual subscription rates: USA $199, Canada $199, Other International $241. Single copies are available for $60.00. Send
all subscription inquiries to Supply Chain Management Review, 111 Speen Street, Suite 200, Framingham, MA 01701 USA. Periodicals postage paid at Framingham, MA and additional mail-
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Editorial
Advisory Board
n
Jack T. ampuJa
Niagara University
n
Joseph c. andraski
VICS Association
n
James r. Bryon
IBM Consulting
n
John a. calTagirone
The Revere Group
n
Brian cargille
Hewlett Packard
n
roBerT B. handfield
North Carolina State
University
n
Jim kellso
Intel
n
nicholas J. lahowchic
Tompkins Associates
n
hau l. lee
Stanford University
n
roBerT c. lieB
Northeastern University
n
clifford f. lynch
C.F. Lynch & Associates
n
eric pelTz
RAND Supply Chain
Policy Center
n
James B. rice, Jr.
Massachusetts Institute
of Technology
n
larry smiTh
West Marine
FEATURES
COMMENTARY
4 Insights
Parsing Holds Key to Better S&OP
By Larry Lapide
6 Global Links
Lessons for Shippers from the
Maritime Disasters
By Patrick Burnson
8 Talent Strategies
Is Talent Management the Next
Frontier for S&OP?
By Jim Rice and Daniel Stanton
60 Spotlight on Supply Management
The Case for Supplier Development
By Mike Hales and Raj Arumugam
78 Benchmarks
Spend Analysis Delivers Big Benefits
By Becky Partida
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717-505-9701 x-128
46 A Strategy for Managing
Commodity Price Risk
Just about every organization is exposed to price
changes associated with the commodities they
buy. Yet left unmanaged, such volatility can affect
profitability, cash flow, and overall performance.
Authors George Zsidisin and Janet Hartley lay
out the details.
54 Air Cargo: Is 2012 the
Turnaround Year?
SCMR Executive Editor Patrick Burnson offers
this timely update on the current state and
future potential of the airfreight industry.
Cover by
David Tillinghast
MODEX
Report
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3
The Payoff in Persistence
I N T H I S i S S U E
C
alvin Coolidge was not one of our most lo-
quacious presidents. There was good reason
he was known as Silent Cal. But every so
often he came out with something truly ex-
ceptional. His quote I like best is about persistence:
Nothing in the world can take the place of persis-
tence. Talent will not; nothing is more common than
unsuccessful men with talent. Genius will not; unre-
warded genius is almost a proverb. Education will not;
the world is full of educated derelicts. Persistence and
determination alone are omnipotent. The slogan Press
On has solved and always will solve the problems of
the human race.
I was reminded of President Coolidges remarks
while reading the articles in this March/April issue.
Throughout, theres a subtext of persistence and
determinationa recognition that, yes, the economy
could be better and global trade is getting so com-
plex, but dammit our supply chain still must soldier
on in support of the business mission.
Our annual Survey of Supply Chain Progress,
now in its ninth year, has always stressed the virtue
of persistently striving to improve the supply chain.
The findings have shown the companies that work at
it most diligentlythe supply chain leadersconsis-
tently outperform the others along key metrics. In this
years survey report, we specifically examined how the
leaders competency in supply chain visibility, flexibil-
ity, and use of analytics translated to superior perfor-
mance and to overall supply chain progress.
The Global Trends Roundtable panel, moderated
by Executive Editor Patrick Burnson, confirmed the
need for persistence in coping with todays formidable
supply chain challenges. Our expert panelists painted
a picture of volatile energy prices,
growing supply chain risk, new reg-
ulatory requirementsin short, a
pretty tough environment in which
to operate a supply chain. But the
panelists say it can be done by
hanging tough, collaborating with
key partners, and using technol-
ogy to modify risks and streamline
operations.
One risk, in particular, can be especially troublesome.
Its the wild price swings that can accompany the vari-
ous commodities purchased. But while we may never
be able to completely take volatility out of the commodi-
ties equation, write George Zsidisin and Janet Hartley in
their article, we can take steps to mitigate the risk. The
authors offer six proven tactics for taming the beast that
is known as commodity risk.
Persistence comes in handy when youre try-
ing to make sense out of your corporate spend. As
Constantine Limberakis of the Aberdeen Group
points out in his feature article, too many companies
still struggle with getting a handle on their spend. The
poor quality of their spend data and related lack of
visibility results in sub-optimum sourcing decisions,
unnecessary work, and added costs. But by working
to become more like the best-in-class profiled in the
piece, companies can turn this situation around.
No, its not always smooth sailing out there. But
with a little persistence, progress will invariably follow.
Frank Quinn, Editor
fquinn@ehpub.com
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111 Speen St. (Suite 200),
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A Division of EH Publishing, Inc.
SCMR1203_Editorial.indd 3 2/29/12 1:19 PM
4
Sup p ly Cha i n Ma na gement Rev i ew Ma rch/ Ap ri l 2 0 1 2 www.scmr.com
G
rowth in globalization and consumer-
ism has led to complex supply chains
that support the sales of broader and
shorter lifecycle products into more and more
countries. At the same time, supply lines are
longer as companies manufacture and source
on an anywhere-in-the-world basis. These
developments have rendered the use of a single
Sales and Operations Planning (S&OP) process
unwieldy and cumbersome. Thus, as with any
complex task, the S&OP process often needs
to be parsed in order to divide-and-conquer.
But in doing so, theres an important caveat:
you need to carefully consolidate the individual
plans to get an accurate global enterprise view.
Research supports this view of S&OP. In
2006, a medical devices manufacturer asked
MIT to research how S&OP processes could
be effectively applied across its global busi-
ness units (BUs). At the time the company
was running two S&OP processesone for
each of its two BUs, which were focused on
different products. It wanted to know wheth-
er two was best, whether one might be bet-
ter, or should the S&OP processes be parsed
even further. The research questions became
the topic of a Masters thesis by Christopher
M. Honstain, titled Sales and Operations
Planning in a Global Business.
A number of practitioners and industry
experts from consulting and software firms
were interviewed. In addition, the research-
ers examined the S&OP practices of three
specific companies: a consumer-product
goods (CPG) company, a pharmaceutical
company, and a petro-chemical company.
The CPG company had some best prac-
tices in global S&OP. It conducted over 90
monthly S&OP processes around the world
and divided the process along BU, product
group, and geographical dimensions. The
company clustered business entities to best
represent pure profit-and-loss (P&L) cen-
ters in which demand-supply planning deci-
sions could be made assuming a unique set
of supplying plants for each demand cluster.
For each business unit there was a BU-based
process owner. In addition, there was a cor-
porate-wide process owner responsible for
coordinating efforts, as well as providing
rough process guidelines, self-assessment
tools, and assistance in assessing the perfor-
mance of each process. The finance organiza-
tion consolidated and harmonized the S&OP
plans to provide corporate executives with a
consolidated enterprise-wide plan.
Other research we conducted confirmed
the need to parse S&OP processes, focusing
on supply-demand characteristics. Demand
characteristics include geography, channels,
and product demand patterns; supply char-
acteristics include sourcing, production, and
distribution resources.
The research also underscored the need to
consolidate parsed plans in order to harmo-
nize them whenever there is limited world-
wide supply, and to ensure they are aligned
to meet corporate goals and objectives.
(Harmonizing in this context involves making
sure that plans are consistent, non-conflict-
ing, and supportive.) The processes should
follow a common set of rough guidelines and
I nS I GHT S
Parsing Holds Key
to Better S&OP
For many global companies, a single Sales & Operations Planning
process across the enterprise is no longer optimum. Whats
needed instead are multiple processes tailored to individual
business units and regions.
B Y L ARRY L API DE
Dr. Lapide is a lecturer
at the University of
Massachusetts Boston
Campus and is an MIT
Research Affiliate.
He welcomes comments
on his columns
at llapide@mit.edu.
SCMR1203_Insights.indd 4 2/29/12 1:21 PM
5
SUPPLY CHA I N I NSI GHT S
have a consistent set of process performance objectives.
Otherwise, plans would not be apples-to-apples, mak-
ing consolidation difficult or impossible.
A problem uncovered during the research was the
disconnect that often existed between marketing and
finance organizations. This was manifested in the fre-
quent misalignment of financial versus S&OP plans.
To correct this, finance organizations need to get more
involved in the processes, so that S&OP plans can be
more precisely translated into financial terms.
Recommended Parsing Criteria
A global S&OP process ought to be parsed into multiple
processes so that each represents a pure P&L center
(at least to the extent possible). Honstain in his thesis
offers this observation: Within the supply chain, the
characteristics of the manufacturing sites are
the deciding factors for the number of S&OP
processes. The specific characteristics that
are important are the number of plants within
each region, whether the plant is dedicated to
the region or it is shared between the regions,
and whether or not the plant is centrally con-
trolled or decentralized.
Regions are business units or market-
ing/sales territories, typically defined as North America,
South America, EMEA (Europe, Middle East, and
Africa), and Asia. Criteria on how to parse a global S&OP
process vary depending on four supply-based scenarios:
1. Single Worldwide Source: This is the simplest
scenario in which oneand only oneplant supplies
product on a global basis to all regions. Under this sce-
nario, one S&OP process suffices and there is little rea-
son to break it up.
2. Multiple Regional Source: Under this scenario,
multiple plants around the world supply product.
However, only one plant is dedicated to supply prod-
uct to each region. A plant may supply multiple regions,
but no other plant serves them. Parsing the S&OP is
recommended under this scenario. Each S&OP process
would be defined to include all regions that have com-
mon product supply. The demand forecasts for these
regions would be consolidated, thereby establishing a
pure P&L center for each S&OP process.
3. Dedicated Regional Source: Under this scenario,
multiple plants throughout the world supply product.
However, each plant is dedicated to supply product
to one and only one region; that is, plants do not sup-
ply multiple regions. Under this scenario, each region
would conduct its own independent S&OP process as
a pure P&L center.
4. Multiple Shared Sourcing: This scenario is com-
plex, yet it is the most prevalent. There are multiple
plants throughout the world that supply product and
each region can be served by one or more plants. This
is the most complex scenario because supply is shared
among regions. Centralized management is required
to ensure that global enterprise goals and objectives
are met when there is contention among regions for
constrained product supply. Each region with a supply
source should run its own S&OP process under this sce-
nario. Regions that dont have a supply source in them
should be grouped into regions that do. The outputs
from the individual processes would become the inputs
to an executive-level S&OP process that consolidates
them to develop the enterprise-wide global plan.
Consolidated View Needed
Since most global companies are comprised of some
combination of the four supply scenarios described
above, consolidating and harmonizing multiple S&OP
plans at an executive level is critical for obtaining a glob-
al picture of the future. As part of this, companies need
to accurately translate their unit-based (i.e., non-mon-
etized) plans into financial plans so as to align S&OP
plans with enterprise-wide goals and objectives.
Whenever Ive discussed parsing a global S&OP pro-
cess, Ive talked about the cautionary Humpty Dumpty
nursery rhyme. When he fell off the wall, all the Kings
horses, and all the Kings men, couldnt put Humpty
together again. In S&OP, you can use the criteria dis-
cussed above to parse your global S&OP process. But
if you dont parse correctly, like Humpty Dumpty, it is
not an easy task to put the S&OP plans back together
again. So be careful!
Finance organizations need to get
more involved, so that S&OP plans
can be more precisely translated
into financial terms.
SCMR1203_Insights.indd 5 2/29/12 1:21 PM
6
GLOBAL L I nKS
B Y PATRICK BURNSON
Patrick Burnson is
the executive editor
at Supply Chain
Management Review
He can be reached at
pburnson@ehpub.com
Lessons for Shippers from
the Maritime Disasters
Recent well-publicized vessel losses highlight the need
for stronger chain-of-custody laws and tighter controls
on Flags of Convenience.
W
hen the Italian cruise ship, Costa
Concordia, ran aground in the
Tyrrhenian Sea in January, lawyers
and investigators began a frenzied search for
actuarial evidence. Who owned the vessel, and
what were the terms of its charter agreement?
The same question was being asked months ear-
lier when the container vessel, Rena, crashed
against hidden shoals off the coast of New
Zealand. One incident (a consequence of negli-
gence) involved the loss of many lives. The other
(an Act of God) was an environmental disas-
ter. After weeks of diligence, it was discovered
that both vessels belonged to Diana Shipping, a
unit of Greeces Costamare, Inc. There was one
other common denominator, too: The Costa and
Rena were sailing under Flags of Convenience.
Supply chain professionals could learn several
lessons from these cautionary tales. But the main
one will be the implications of chain-of-custo-
dy rules on the high seas and on point-to-point
distribution of cargo in a segmented pipeline.
Flags of Conveniencea vessel carrying the
colors of a country not its ownhave prolifer-
ated with globalization and the constant pres-
sure for lower rates. Vessel operators have been
able to save on registration fees, low-wage labor,
and a very forgiving tax structure by flagging out
to a nation like Panama or Liberia. Consequently,
there is often no visible link or relationship to
the real owner. Some of these registers have
poor safety and training standards, and place no
restriction on the crews nationality.
Furthermore, because of language differenc-
es, seafarers are not able to communicate effec-
tively with each other, thereby putting safety
and the efficient operation of the ship at risk. In
many cases these flags are not even run from the
country concerned.
This may soon be changing, however. Thanks to
the efforts of the International Transport Federation,
Flags of Convenience (FOCs) may soon be
required by several regulatory agencies and sanc-
tion bodies to take into account the degree to which
foreign owned vessels are registered. The follow-
ing additional criteria also must be provided when
declaring to register an FOC:
The ability and willingness of the flag state
to enforce international minimum social stan-
dards on its vessels, including respect for basic
human and trade union rights, freedom of asso-
ciation, and the right to collective bargaining with
bona fide trade unions.
The social record as determined by the
degree of ratification and enforcement of
International Labor Organizations conventions
and recommendations.
The safety and environmental record as
revealed by the ratification and enforcement of
International Maritime Organizations conven-
tions and recorded by port state control inspec-
tions, deficiencies and detentions.
Rotterdam Rules
Booking freight on FOCs is not the only concern
shippers should consider this year. Indeed, argu-
ably a more significant risk factor may be relat-
ed to pending changes in the United Nations
Convention on the Law of the Sea (UNCLOS).
A whole new layer of actuarial exposure to risk
may soon be created with the U.S. adoption of
the Rotterdam Rules this year.
The Rulesformally the United Nations
Convention on Contracts for the International
SCMR1203_GlobalLinks.indd 6 2/29/12 1:20 PM
7
GLOBAL L I NkS (c o nt i nu e d)
Carriage of Goods Wholly or Partly by Seais a treaty revis-
ing the legal and political framework for ocean carrier trans-
port. The Rules establishes a modern, comprehensive, uni-
form legal regime governing the rights and obligations of not
only shippers, but also carriers and consignees under a point-
to-point contract. As a consequence, the Rules will extend
and modernize international compliance now on the books
and will achieve long-sought uniformity of
admiralty law in the field of maritime carriage.
Signers to new Rules include the U.S.,
France, Denmark, the Netherlands, and
Switzerland. Greece, which is one of the
leading FOCs, is also endorsing the law. This
is encouraging news for a variety of reasons
as Greece and these other five signatories
comprise up to 25 percent of world trade by volume.
The World Shipping Councila prominent supporter
of the Rotterdam Ruleshas joined the National Industrial
Transportation League in urging Senate ratification as has
the American Bar Association House of Delegates.
Besides obligating carriers to have ships that are seawor-
thy and properly crewed throughout the voyage, the Rules
eliminates the nautical fault defense that had prevented
carriers and crewmen from being held liable for negli-
gent ship management and navigation. At the same time,
it allows for more e-commerce and approves more forms
of electronic documentation. This particular aspect has
been welcomed by NVOs (non-vessel owner-operators),
and third-party logistics providers who heretofore had been
forced to generate mountains of costly paperwork.
Among other main provisions, the Rules extend the period
of time carriers are responsible for goods at sea which are then
moved to another modal link. It also increases the limit liability
of carriers to 875 units of account per shipping unit or three
units of account per kilogram of gross weight. It extends the
time that legal claims can be filed to two years following the day
the goods were delivered or should have been delivered.
There are some loopholes, however. Volume shippers
(the Walmarts of the world) can opt-out of some of the
liability contained in the Rules if they have other insurance
policies covering the full leg of the journey.
Speaking to WSC president, Chris Koch recently,
SCMR learned that Senate ratification of the Rules is
moving at a glacial pace. Koch believes, however, that pas-
sage is assured and that shippers should prepare for a new
order before the year is out. The chain-of-custody issues are
ignored at the shippers peril, as ever, and the liability related
to vanished cargoes is not limited to the FOCs only.
Containers Lost at Sea
Even with proper loading of the cargo into the container
and secure stowage aboard ship, a number of factors
ranging from severe weather and rough seas to more cata-
strophic and rare events like ship grounding or collision
can result in containers being lost overboard while at sea.
By their most recent estimation, the WSC notes that hun-
dreds of containers were cast overboard or so badly damaged
that they became virtually worthless last year. But while these
numbers are alarming, catastrophic events are rare.
Total industry losses obviously vary from year to year.
However these numbers are well below the 2,000 to
10,000 per year that regularly appear in the press, and rep-
resent a very small fraction of container loads shipped in a
12-month time frame.
Nevertheless, the industry continues to pursue measures
to reduce the number of containers lost overboard to zero.
One effort is the joint industry/government project, called
Lashing@Sea3, led by the Maritime Research Institute of the
Netherlands (MARIN). Another effort is the joint publication
of Safe Transport of Containers by Sea: Industry Guidance
for Shippers and Container Stuffers by the International
Chamber of Shipping (ICS) and the WSC, which provides
recommended best practices for ships, port facilities, and
shippers in the loading and handling of cargo containers.
A related effort is the joint decision by the IMO, the
International Labor Organization (ILO), and the United
Nations Economic Commission for Europe (UNECE) to
develop an IMO/ILO/UNECE code of practice for pack-
ing of cargo transport units, including containers. The
WSC participates in a group of experts tasked with prepar-
ing recommendations on the draft code of practice with a
target publication date in 2013.
A further, very positive development is the agreement by
the IMO to review the issues involved, including agreement
to consider the proposal of the WSC and ICS to require
that the actual weight of every loaded container be verified
and provided to the vessel operator prior to stowing aboard
a ship. This, say experts, is crucial because misdeclared
weights have contributed to the loss of containers overboard
as well as to other safety and operational problems.
What does all this mean for shippers now? The key con-
cern, as always, is to be certain all of your actuarial expo-
sure is protected by proper insurance policies. While more
transparency is being readied for the ocean cargo supply
chain, the Beneficial Cargo Owner is the one who must
in the end pay the price.
The chain-of-custody issues are ignored
at the shippers peril, as ever, and the
liability related to vanished cargoes is
not limited to the FOCs only.
SCMR1203_GlobalLinks.indd 7 2/29/12 1:20 PM
TALeNT

STRATeGI ES
Is Talent Management the
Next Frontier for S&OP?
Jim Rice (jrice@mit.edu)
is Deputy Director, MIT
Center for Transportation
& Logistics (CTL).
Daniel Stanton is Supply
Chain Professional
Development Manager,
Caterpillar Logistics Inc.
He can be reached at
Stanton_Daniel@cat.com.
By Jim Rice and Daniel Stanton
S
upply chain management is not the only
function that is grappling with the prob-
lems of matching supply and demand in a
highly uncertain business environment. HR faces
similar challenges. But with HR, the mandate
is to deliver peoplenot productsto the right
place, at the right time, at the right quality, and
in the right quantity.
In fact, the personnel supply chain obeys
many of the principles that govern its goods-car-
rying counterpart. Which begs the question: Can
demand management methods that have been
tried and tested in the goods distribution uni-
verse be applied to the movement of individuals?
We think that the answer is yes, in the form of
Sales & Operations Planning (S&OP).
As we describe below, Caterpillar Logistics
Inc. is using S&OP practices to manage its talent
pipeline. In addition to bringing more rigor to HR
processes, the company is using the process to
help improve its staff recruitment and retention
programs in critical areas such as supply chain
management.
Parallel Universes
The idea that the flow of talent is akin to the
flow of product is not new. Wharton manage-
ment professor Peter Cappelli describes the his-
tory of this relationship in detail in his new book
Talent on Demand: Managing Talent in an Age
of Uncertainty (Harvard Business Press, 2011).
Many of the talent management challenges that
companies face today are analogous to problems
that have already been analyzed in the operations
research field, Cappelli maintains.
Delve further and the challenges become
familiar. HR managers are wrestling with the
demands of globalization, business volatility, and
a more complex mix of skills, at a time when
planning horizons are contracting. They must
ensure that their inventory of talent meets
short- and long-term demands. When HR fore-
casts are off the mark, the result can be excess
talentand the possibility of damaging layoffs
or a scramble for new blood.
Supply chain managers also can relate to the
day-to-day challenges faced by their counterparts
in HR. Take, for example, the extreme swings
in demand that HR folks deal with. It is not
uncommon for a manager to navigate through a
protracted recruitment program and be ready to
send out job offers, only to find that the positions
no longer need to be filled. Also keep in mind
that, in general, it is far more costly to manage a
supply of people than a supply of widgets.
But the reasons for extending S&OP to the
talent pipeline go beyond the similarities between
the respective supply chains. Operations manag-
ers are trained to use and appreciate tools such
as S&OP; they are masters of program manage-
ment and applying technology to real world prob-
lems. Moreover, they are taught to evaluate and
redesign supply chains in line with the organiza-
tions strategic direction. HR managers, on the
other hand, seldom have the opportunity to learn
these technical skills. The HR team/function can
benefit greatly from these disciplinesand, by
extension, so can the companys talent manage-
ment strategy.
It is becoming increasingly important to take
talent acquisition and retention to a more effec-
tive level. As the MIT Center for Transportation &
Logistics described in its spring 2010 white paper
Are you Ready for the Talent Management Crisis?,
the supply chain profession faces a serious short-
age of talent. The types of skills required to run
a supply chain are changing, as are the methods
for finding and recruiting professionals. The emer-
gence of new channels such as social media sites,
online networks, and so forth, illustrates the many
new options available to companies when seeking
job candidates.
8
SCMR1203_TalentStrategies.indd 8 2/29/12 1:24 PM
TALeNT STRATe GI ES (c o nt i nu e d)
S&OP as Talent Management Enabler
In this environment companies that develop world class
recruitment and retention programs can attract the best
and the brightest. Cat Logistics offers a solid example.
Harnessing the planning capabilities of S&OP to build
and manage the Cat Logistics talent pipeline is part of the
companys strategy to deliver superior results by maintain-
ing global leadership and building the best team in the
industry.
From a supply chain management perspective, the
application of S&OP in the Cat Logistics talent manage-
ment program is basic. From an HR
standpoint, however, it is a leading edge
application that could become a signifi-
cant innovation in talent management.
For some time, Cat Logistics man-
agers have been required to submit a
five-year business plan forecast, but this
now includes an estimate of their groups
headcount requirements over the peri-
od. These estimates are used to analyze
workforce trendswhich groups are growing and the rate
of growth in different geographies, for exampleat the
departmental, divisional, and corporate levels.
And in much the same way that production forecasting
must respond to variations in demand, so the HR process
also has to be sensitive to demand signals. An economic
downturn or strategic course change can transform the
supply/demand picture quickly. There are also regional
nuances in demand patterns to consider. In India employ-
ees might need regional knowledge such as an understand-
ing of local differences in tax codes and infrastructural
limitations, in addition to more general supply chain com-
petencies. Postings in other countries, notably China, may
require a different set of skills.
The projections are assessed in terms of alignment with
corporate strategy to determine whether adjustments need
to be made. This process is called Strategic Workforce
Planning (SWP). It originates at the corporate level and
is carried out at the business unit level, providing Cat
Logistics with a global footprint of the human resource
needs over a five-year period.
This planning process includes a tactical element. One-
year estimates are derived from the five-year figures to
provide more accurate forecasts of future staffing needs.
By taking the number of people currently employed and
the projected staffing needs one year down the road, and
building in an allowance for losses through attrition, it is
possible to generate a robust recruitment target for the fol-
lowing year.
The number of sources of inventory available to fill
the gap between current and future needs is limited.
Talent is recruited internally, from educational institutions,
from other companies, or (increasingly) from the military.
Recruits can be new graduates, mid-career, or senior pro-
fessionals, employees or contractors.
S&OP enables Cat Logistics to manage these sources
of talent more effectively. Armed with a more accurate pic-
ture of how many individuals they need to hire and what
mix of skills is needed, Cat Logistics HR managers can
make smarter investments and derive more value from
recruitment channels such as universities and search firms
where appropriate.
At present, the S&OP process is housed on a mas-
ter spreadsheet that contains detailed forecasts at the
global, regional, facility, and functional levels. Possible
future refinements include automation of the data col-
lection from managers and the ability to automatically
update the reportsfeatures that would greatly stream-
line the process.
Developing a New Consensus
The deployment of S&OP disciplines in the HR arena, still
at an early stage, requires a more thorough knowledge of
the process. Supply chain and HR professionals need to
collaborate to further develop the approach. Cat Logistics
is bridging these two functions, recognizing that the clos-
er relationship is critical to the success of the companys
S&OP-based talent management approach.
In an environment where everyone is busy, it can
sometimes be difficult for HR to build support and
maintain engagement from the operational team. Linda
Smolek Abel, Strategic Workforce Planning Consultant
for Caterpillar Inc., says, An initial key to demonstrating
SWP value at Caterpillar has been an intense focus on
ensuring the process is easy, the data is accurate, and the
results are useful.
It is also important to recognize that the learning pro-
cess is two-way. Supply chain managers can benefit from
the opportunity to appreciate people issues that are often
overshadowed by the technical aspects of their role. These
so-called soft issues are growing in importance for opera-
tions and HR managers because impending supply chain
talent shortages impact both functions.
9
Can demand management methods that
have been tried and tested in the goods
distribution universe be applied to the
movement of individuals?
SCMR1203_TalentStrategies.indd 9 2/29/12 1:24 PM
10
VISABILITY CHALLENGES PROGRESS SUSTAINABILITY CHALLENGES
Spend Analysis:
LESSONS fROm
By Constantine G. Limberakis
Constantine G. Limberakis is
Senior Research Analyst, Global
Supply Chain Management at
the Aberdeen Group. He can be
reached at constantine.limberakis@
aberdeen.com.
New research from the Aberdeen
Group underscores the critical-
ity of spend analysis to overall
spend management. The findings
also show, however, that many
companies struggle with put-
ting together an effective spend
analysis program. The insight
and guidelines offered here can
help any company advance up
the competency ladder toward
Best-in-Classregardless of the
starting point.
C
ompanies today continue to struggle to
obtain a 360-degree view of spend data.
Those that can distinguish themselves as
Best-in-Class organizationstop-perform-
ing enterprises measured on a series of
distinct key performance indicatorsnot
only extract, cleanse, classify, and analyze
their spend data from multiple sources, but also leverage spend
analysis as a predictive measure to improve spend compliance
and reduce supplier risk through market and supplier data. The
Aberdeen Group recently concluded an in-depth report examin-
ing the crucial set of processes that encompass spend analysis
by exploring the pressures, strategic actions, and capabilities of
132 organizations surveyed globally. (For more on this research,
see accompanying sidebar.)
Our research found that spend analysis, when performed
correctly, provides the capability to increase visibility into
spending, promote insightful sourcing decisions, and identify
cost savings opportunities. However, the success of any supply
management program is largely dependent upon the ability to
properly access, organize, and analyze spend data. This requires
a unique combination of process and technology to get spend
analysis done right.
This article presents highlights of our research, focusing in
particular on the key attributes of a successful spend analysis
program and the characteristics displayed by Best-in-Class com-
panies. The article then lays out the steps necessary to continu-
ally improve the spend analysis process at your organization
regardless of your current maturity level.
Business Context
Aberdeen research confrms that spend analysis programs
remain a high priority for most procurement organizations. For
example, 67 percent of 132 of survey respondents to our recent
SCMR1203_SpendAnalysis.indd 10 2/29/12 1:22 PM
11
study, Dynamic Procurement: CPO as Collaborator,
Innovator and Strategist, indicated that spend analysis
is a high or top priority for their enterprise procurement
program. Interestingly enough, this statistic jumps to 88
percent when looking at C-level executives exclusively.
Considering that spend analysis is so high on the pri-
ority list for procurement, it proves to be a dynamic exer-
cise for most organizations. Effectively leveraging spend
analysis requires integration of disparate data sources,
clearly-defned data processes, and advanced technology.
But its important to emphasize that getting spend analy-
sis right is not just about technology. It also requires
coordination from several areas of the business like IT,
supply chain and fnancebut it starts with leadership
from procurement. As procurement organizations face
increased global market challenges in this current eco-
nomic environment, procurement leaders cannot run
the risk of missing savings opportunities and, therefore,
must be able to address the key pressures surrounding
spend analysis initiatives within their organization.
Our research continues to show that a core issue
surrounding spend analysis is the poor quality of spend
datadata coming from ERP, procurement, and sourc-
ing systemsthat results directly in an inability to iden-
tify and forecast savings opportunities. (Exhibit 1 lists
the other main spend analysis issues cited by respon-
Best-in-Class
the
Paul Vismara
12
Spend Analysis
dents in our most recent study.) With fully half of the
organizations having three and four systems generating
spend data, the quality of data becomes an exacerbated
challengeparticularly given the ongoing use of manual
spreadsheets or traditional data warehouses that are lim-
ited in the ability to accurately classify, normalize and
enrich spend data. In this regard, 32 percent of respon-
dents indicated they are still using basic spreadsheets as
the primary approach to spend analysis.
The answer to these challenges, as demonstrat-
ed by Best-in-Class organizations, is investment in
innovation. Automation is one example. Aberdeen
research has shown that Best-in-Class organiza-
tions are 50 percent more likely to automate spend
analysis processes and 124 percent more likely to
have automated spend data collection from multi-
ple sources than Laggards. (At Aberdeen, we define
maturity levels as Laggards, Industry Average, and
Best-in-Class, as discussed further below.) Another
report showed that companies lever-
aging a fully-automated system for
spend analysis experience an average
savings of 11 percent from sourcing
efforts, an example of converting auto-
mation into opportunity.
But as Exhibit 2 shows, even in those
organizations already leveraging spend
analysis as a strategic enabler, more
investment is needed in automating data
cleansing, classifcation, and enrichment
in order to more accurately identify spend
opportunities. In fact, 46 percent of
respondents point to the use of technolo-
gy to automate data-intensive processes as
being most critical to the success of their
spend analysis program. Yet today, many
organizations lack the ability to manage
such spend data initiatives in house. Weve
found that outsourcing spend analysis to
turnkey spend data management providers
(i.e., consulting/software-based solution
providers) has become more common due
to a lack of data analysis skills internally
for managing certain processes inherent in
spend analysis such as data cleansing and
data enrichment.
The Maturity Class Framework
Organizations that effectively use spend
analysis are marked by their capability to
capture spend from multiple sources and
to demonstrate savings as a result. The fndings of this
benchmark demonstrate that a variety of capabilities are
necessary for improving or implementing a spend analy-
sis program. Aberdeen Group analyzed the aggregated
metrics of 132 organizations to determine whether their
performance ranked as Best-in-Class, Industry Average,
or Laggard. We identifed the following three key perfor-
mance metrics to distinguish among the three maturity
categories:
Spend captured in spend analysis efforts (factor
focusing on automation/ability to manage from multiple
sources).
Cost avoidance savings based on spend analysis
efforts (factor focusing on effcacy of spend analysis on
working capital).
Duplicate payments (factor demonstrating effcacy
of spend analysis on P2P processes).
Exhibit 3 gives specifcs of spend analysis perfor-
mance for each of the three maturity levels.
EXHIBIT 1
Top Pressures for Spend Analysis Initiatives
Source: Aberdeen Group, September 2011
Poor quality of spend data from
procurement and ERP systems
51%
Inability to identify and
forecast savings opportunity
49%
Pressure to place more
spend under management
40%
Labor intensive process for
managing and collecting data
36%
Inability to identify and
prioritize top spend categories
33%
Lack of measurable insight into
success of cost reduction initiatives
24%
EXHIBIT 2
Automation in Spend Analysis
51%
38%
2%
Data Extraction
25%
54%
10%
Cleansing
30%
49%
9%
Classication
21%
51%
11%
Enrichment
Automated Manual Outsourced
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14
Spend Analysis
In addition to having common performance lev-
els, each class also shared characteristics in fve key
categories: (1) process (the approaches they take to
execute spend analysis operations); (2) organization
(corporate focus and collaboration among stakehold-
ers); (3) knowledge management (contextualizing
spend data and exposing it to key stakeholders); (4)
technology (the selection of the appropriate spend
analysis tools and the effective deployment of those
tools). These characteristics (shown in Exhibit 4, on
page 16) serve as a guideline for best practices, and
correlate directly with Best-in-Class performance
across the key metrics.
Capabilities and Enablers
Best-in-Class organizations have demonstrated a strong
reliance on specifc process, organization, knowledge,
technology enablers, and performance factors to effec-
tively improve spend analysis initiatives that lead to
results. An Aberdeen research report, Spend Analysis:
Transforming Data into Value, demonstrates that spend
analysis can lead to a direct increase in spend under
management from 20 percent to 35 percent. While
the competitive framework presented above pro-
vides an overview of capabilities in general for spend
analysis, the following discussion presents a deeper
analysis of the comparative capabilities demonstrat-
ed by the leadership of Best-in-Class organizations.
Lets begin by examining some key capabilities within
the context of a typical spend analysis process sequence,
as shown here.
Extracting Spend Data
Extracting spend data from multiple
sources, one of the initial stages of
the spend analysis cycle, is critical
for achieving true visibility into all
the areas of spend. As we noted ear-
lier, organizations are using a number
of systems that describe spend data.
And with 41 percent of respondents
citing too many data sources and
data compatibility as key barriers to
improving spend analysis, improving
the process of data integration for
extracting data into spend analysis
clearly is a must. We note, too, that
ERP solutions represent 76 percent
of all data sources extracted for spend analysis sys-
tems and 38 percent of all integration functionalities
used in spend analysis. As a result, there is a clear
need for adopting processes and technologies that are
certifed on enterprise platforms for providing more
seamless integration into spend analysis systems.
If spend data is not managed (i.e. extracted,
cleansed, enriched), not only will savings opportuni-
ties be missed downstream in the procurement cycle,
but also analysis on spend may not refect the true
picture of spend within an enterprise. This is particu-
larly so if processes for extracting data from multiple
sources are not resolved. Considering that data extrac-
tion is a key process goal, Best-in-Class organizations
demonstrate that they are 21 percent more likely than
all other organizations to collect spend data from mul-
tiple sources.
Increasing Spend Visibility
Another key process differentiator is the ability to
achieve spend visibility. An example is the ability to
get a quick snapshot view for reporting on the suppli-
er, category or item level; across all maturity levels 50
percent of respondents reported having this capabil-
ity. However, a clear difference among maturity levels
was established in enterprise visibility of spend. For
example, Best-in-Class organizations are 33 percent
more likely to achieve visibility into enterprise-wide
spend across all categories of goods and services. As a
result, the Best-in-Class were 1.25 times more likely
to achieve Level 3 visibility into their spend data and
suppliers. This translates to a higher item-level vis-
ibility into purchases within a given category as well
as the ability to aggregate category spend into small-
er sub-categories according to a standardized system
EXHIBIT 3
Top Performers Earn Best-in-Class Status
Best-in-Class:
(Top 20% of aggregate
performance scorers)
Industry Average:
(Middle 50% of
aggregate performance
scorers)
Laggard:
(Bottom 30% of
aggregate performance
scorers)
96%
9%
.1%
70%
8%
.3%
55%
5%
.5%
% Spend Captured in
Spend Analysis Efforts
% Cost Avoidance Savings
Based on Spend Analysis
% Duplicates of Annual
Payments
Dene
Spend
Scope
Extract
Spend
Data
Cleanse,
Categorize
& Enrich
Create
Spend
Prole
Analyze
Spend
Data
Identify
Opportunity
f
a
s
t
e
r
f
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r
t
h
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16
Spend Analysis
of classifcation. (Level 1 visibility is
considered to be supplier-level visibility
while Level 2 refers to visibility at the cat-
egory level.)
This advantage was also demon-
strated in the ability to achieve drill-
down visibility into suppliers, where
the Best-in-Class were 21 percent
more capable. However, the impor-
tance of spend visibility, of course, is in
the ability to identify strategic sourcing
opportunities and prioritize opportuni-
ties for savings within a spend catego-
ry. Best-in-Class companies are 11 per-
cent more likely to have this capability
than all other organizations.
Organization: Executive
Support and Building
Expertise
Perhaps more than any other aspect of
establishing effective spend analysis ini-
tiatives, it is organizational factors that
dictate the perception of spend analysis
value for other business units. Much of
the success of any program is getting
buy-in from all the players connected
to spend data (fnance, treasury, supply
chain, and so on) as well as from C-levels
that would sponsor initiatives as part of a
wider program. Based on the capability
of creating a consensus for understand-
ing the value of spend analysis, the Best-
in-Class were 19 percent more likely to
have established executive support for
spend analysis initiatives than all other
organizations.
Another critical aspect is the orga-
nizational focus on building the prop-
er resources for creating expertise in the field. On
this capability area, 32 percent of all respondents
indicated they had insufficient skills (for example,
lack of commodity knowledge, insufficient data
analysis capabilities) necessary to execute a spend
intelligence program. Overall, Best-in-Class orga-
nizations demonstrated a competitive advantage in
this area. For example, 63 percent indicated having
commodity expertise within sourcing or procure-
ment departments, compared to 46 percent for all
other organizations.
Knowledge Management: Establishing
Common Standards
Establishing visibility is a critical aspect to spend analy-
sis. From a knowledge management standpoint, common
spend visibility starts with creating common defnitions
of spend data and how they will be used for identifying
opportunities. This begins with the creation of enter-
prise-wide classifcation schemas for products and ser-
vices spend through commodity codes being leveraged
within the organization, an activity more often found in
the Best-in-Class companies.
Best-in-Class
Average
Laggards
EXHIBIT 4
The Competitive Framework
Reporting visibility into enterprise
spend across all categories
73%
50%
20%
Reporting visibility at the supplier,
category and transaction level
73%
60%
40%
Ability to collect spend data
from multiple sources
67%
50%
40%
Established executive support
for spend analysis initiatives
72%
58%
47%
Commodity management expertise within
procurement and/or sourcing departments
63%
49%
41%
Common enterprise-wide classication
schema for commodities and services spend
63%
52%
24%
Common visibility of goods and
services spend across the enterprise
56%
36%
29%
Extraction
91%
58%
38%
Data Cleansing/Normalization
61%
46%
24%
Enrichment
50%
38%
21%
Classication
48%
38%
32%
Ability to prioritize opportunities
for savings within a spend category
50%
38%
29%
Ability to identify opportunities
for supplier rationalization
46%
33%
32%
Process
Performance
Spend Analysis Technologies/Technology Services
Knowledge
Organization
17
From a knowledge management perspective, Best-
in-Class organizations also demonstrate a higher usage
of internally developed standards than other organiza-
tions88 percent vs. 78 percent for all others. This
underscores the need for coordination within the orga-
nization and among all spend data stakeholders to use a
common language and common defnitions. This is par-
ticularly important with higher custom use of taxonomies
that relate to special business or organizational require-
ments. Common standards also assist in the ability to
establish common visibility of goods and services spend
across the enterprise, an advantage of the Best-in-Class
over all other organizations (56 percent vs. 33 percent).
Technology Deployment:
Approaches and Enablers
Perhaps more than other solution areas in spend man-
agement, spend analysis is almost exclusively dependent
on technology for its use. How organizations are using
existing technology investments for their spend analy-
sis initiatives provides insights for those looking into
the optimal way to deploy or implement a spend analy-
sis platform. In this regard, Exhibit 5 shows that among
those respondents with a spend analysis solution, most
are using spend analysis on a stand-alone basis (32 per-
cent), followed by usage from an ERP platform (23 per-
cent), and usage as part of a sourcing suite (18 percent).
Based on these structures of deployment, those using
spend analysis typically already have e-procurement (53
percent), contract management (45 percent), e-sourcing
(44 percent).
Looking overall at deployments, 68 percent of organi-
zations indicated they are using on-premise or installed
software vs. 32 percent using SaaS (software as a ser-
vice). Moreover, looking at the top two means of deploy-
ment, for those leveraging their ERP systems the usage
of on-premise spend analysis was much more predomi-
nant at 94 percent. In terms of those
using a stand-alone system, the break-
down was much more even52 percent
for on-premise and 48 percent for SaaS.
This is an indicator that existing invest-
ments in ERP for spend management
have a strong infuence in determining
the approach or even platform of choice
for spend analysis at this time.
In examining spend analysis as an
application alone, we identifed fve key
areas of functionality that can be identi-
fed where organizations have adopted
technology. As shown in Exhibit 6, the
Best-in-Class have a high deployment (91 percent) of
data extraction components of spend analysis, a capabil-
ity critical for eliminating discrepancies and duplicates.
Best-in-Class organizations are 27 percent more likely
than Laggards to be automatically extracting data and 30
percent less likely to have manual processes. However,
the level of spend analysis deployment tapers off for all
maturity classes for other spend analysis enablers such
as spend visibility (53 percent among Best-in-Class),
which is essential for customizable reporting/dash-
boards; data enrichment (50 percent), for additional or
complimentary information on suppliers; and classifca-
tion (48 percent), critical for mapping data elements and
mapping spend data to industry standard classifcation
systems.
Performance Management:
Improving Visibility for Action
The overarching goal of spend analysis is to enhance vis-
ibility as a means for improving spend and supplier per-
formance within a procurement organization.
One key performance management area that distin-
guished Best-in-Class organizations is the ability to pri-
oritize opportunities for savings within a spend category
(Best-in-Class 50 percent vs. 34 percent for all others).
Prioritization within spend analysis is based on the abili-
ty to get insights through enhanced automation of spend
visibility and reporting (that is, drill-down and multi-
dimensional reporting). Sixty percent of Best-in-Class
respondents possess this capability.
The second is the ability to identify opportunities
for supplier rationalization (Best-in-Class 46 percent vs.
32 percent for all others), which ties in directly to capa-
bilities in analyzing spend combined with understanding
supplier performance and risk. In this regard, the Best-
in-Class have a 44 percent higher capability to measure
supplier business critically, or how important a supplier
EXHIBIT 5
Deployment of Spend Analysis
Stand-Alone Spend Analysis Platform 32%
Part of an ERP System 23%
Part of a Strategic Sourcing Suite 18%
Custom-Developed Application 13%
Part of an E-Procurement/SRM Suite 9%
Part of a Supplier Management Solution 5%
18
Scv v iv Cu\ i M\ \ cixi1 Piv i iw M\ ncu/ Av ni i : o : www.scmr.com
Spend Analysis
is to a business. The Best-in-Class also have 42 percent
higher capability in analyzing the overall strength and
stability of a suppliers business.
Action Steps Required
Regardless of their current capability levelLaggard,
Industry Average, or Best-in-Classcompanies must
strive to advance by continually looking for areas of
spend analysis optimization and improvement. The
action steps offered below can help companies at each
level achieve that needed progress.
Laggard Steps to Success
Increase automated integration of spend data with
spend analytics. Improving this process will increase
Laggards ability to push spend data for spend analysis
efforts, which currently stands at 50 percent for Laggards
compared to the Industry Average of 59 percent.
Improve the ability to enrich spend data. Laggards
are 1.2 times less likely than Industry Average orga-
nizations to enrich their spend data. Spend analysis is
increasingly becoming a transforming source of infor-
mation for building not only insight into spend, but also
intelligence around suppliers and the impact of that
spend. This includes the ability to track supplier parent-
age via corporate hierarchies reports, which is in place at
only 15 percent of Laggard companies.
Establish enterprise-wide classifcation schemas.
Establishing a common language is an integral part of
creating linkages through commodity codes that inu-
ence everything from catalogs to purchase orders. Where
only 24 percent of Laggards are capable of this currently,
56 percent plan to improve in this area in the next 12
months.
Industry Average Steps
to Success
Automate data collection from mul-
tiple sources. Given the number of spend
data sources for spend analysis, establish-
ing automation for extracting spend data
becomes essential for effciency and accu-
racy. Industry Average companies are 30
percent less likely than the Best-in-Class to
have implemented technologies for integrat-
ing/extracting data into spend analysis.
Develop the ability to cleanse and clas-
sify data. Another key facility of spend analy-
sis is leveraging cleansed and classifed data.
This promotes the means to more easily iden-
tify opportunities beyond manual processes
for increased category effciency and the abil-
ity to identify duplicates such as payments or suppliers. In
this regard, the Industry Average companies are 19 per-
cent less likely than the Best-in-Class to have technology
enablers in this area.
Increase visibility at the supplier, category and
transaction levels. Thirty-seven percent of Industry
Average organizations reported some major barrier to
their ability to identify and prioritize top spend categories.
Organizations that understand the dynamic of spend at
multiple levels are better able to identify spending trends
and to distinguish preferred suppliers through capabilities
such as power-user (i.e., users designated to designing
and building custom reports/dashboards), drill-down, and
multi-dimensional reporting. Thirty-seven percent of the
Industry Average plan to implement or add spend visibility
tools in the next 12 months.
Best-in-Class Steps to Success
Improve understanding of supplier risk through spend
analysis tools and dashboards. With only 17 percent of
Best-in-Class organizations having this capability in place,
it is imperative that organizations increase their investment
in linking spend analysis and supplier management capabil-
ities. In particular, improvements are needed for integrating
and enhancing supplier data such as fnancial, corporate,
and social responsibility-related information.
Develop a cross-functional review of spend data
for strategic planning. Only being executed in a third of
Best-in-Class organizations, improving the voice of the
procurement organization through cross-functional review
of spend data is a key action, particularly for the CPO. By
increasing involvement of spend analysis to groups out-
side of procurement, organizations are better prepared to
make strategic decisions on their spend and enhance their
EXHIBIT 6
Adoption of Spend Analysis Enablers
Data Extraction
91%
50%
Data Cleansing
61%
36%
Spend Visibility
53%
40%
Data Enrichment
50%
31%
Data Classication
48%
35%
Best-In-Class
All Others
www.scmr.com Scv v iv Cu\ i M\ \ cixi1 Piv i iw M\ ncu/ Av ni i : o :
19
ability to inuence key stakeholders (such as the CFO).
Increase the usage of third-party economic data. As
a means for improving insights into how economic and
world events impact existing data, the Best-in-Class need
to improve their usage of third party economic data that
includes commodity prices, infationary data, exchange
rates and market indices. On average less than a quarter
of Best-in-Class organizations are integrating this type of
data into their spend analysis systems.
A Holistic View
Spend analysis has come a long way over the past decade.
Initially focused on transaction-oriented insights, best-prac-
tice spend analysis today is providing a more holistic view
of spend through increased aggregation of spend data and
automation. Every organization has a different start and end
point with regard to technology; spend analysis is no differ-
ent. In this regard, the goal of spend analysis is to under-
stand how spend is being managed within an organization.
Therefore, increasing visibility into spend starts with stan-
dardizing formal spend intelligence (cleansing, categorization,
enrichment) processes and methods across the organization,
increasing automated integration of spend data from ERP sys-
tems and procurement-related systems, and improving user
access and the ease of use for spend analysis tools.
For those more advanced in their spend analysis ini-
tiative, taking the next step involves increasing the inte-
gration of supplier data with spend data and considering
how the emerging technique of predictive analytics can
provide greater insights into how economic and natural
events impact the performance and approaches to spend
management.
Research Methodology
I
n September 2011, Aberdeen examined the use, the
experiences, and the intentions of 132 enterprises using
supplier management in a diverse group of industries
and across multiple geographies. Aberdeen supplemented
this online survey effort with interviews of select survey
respondents, and by gathering additional information on
strategies, experiences, and results. The ensuing research
report was titled Spend Analysis: The Nexus of Spend
Management.
For more on this report and on other resources from
the Aberdeen Group visit www.aberdeen.com.
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Global Trends Roundtable:
SCMR Executive Editor Patrick J.
Burnson served as moderator for the
Global Trends Roundtable.
Our panel of experts examines what lies ahead for supply chain
professionals. The consensus: Cost pressures, competitive challenges,
and economic volatility will only intensify going forward. The keys to
success in this environment are flexibility, a willingness and capacity
to change, and an unwavering focus on the customer.
W
hat are the major developments that
will impact supply chain profession-
als in the months and years ahead?
What challenges will they face in
helping their companies compete in
an increasingly global environment?
To help answer these questions,
Supply Chain Management Review assembled a panel of promi-
nent analysts, consultants, and industry practitioners. These
experts explored a range of topics, including how rising fuel
prices, risk management, global sourcing, and new regulatory
compliance issues are reshaping the supply chain landscape.
SCMR will reconvene these panelists for a special web event
scheduled for March 29, 2012. To register for this webcast, go
to www.scmr.com/roundtable2012
VisibiliTy Challenges PrOgress susTainabiliTy VOlaTiliTy
roundtable Panelists
David Joseph Aquino,
CPIM: Vice President,
Supply Chain Planning,
Strategy and Performance
Houghton Mifflin
Harcourt, and formerly
research director at AMR/
Gartner.
Simon Ellis: Practice
Director, IDC
Manufacturing Insights
and author of IDCs
Supply Chain Top 10
Predictions for 2012.
Roddy Martin: Senior
Vice President Global
Supply Chain Competitive
Capabilities International,
Inc., and previously a
senior analyst with AMR/
Gartner.
James B. Rice,
Jr.: Director of the
Integrated Supply Chain
Management Program
(ISCM) at MITs Center
for Transportation and
Logistics.
SCMR1203_GlobalRoundtable.indd 20 2/29/12 1:20 PM
21
Supply Chain Management Review: With regard to
sourcing strategies, are there any emerging markets that are
lurking beneath the radar these days, or will supply chain
managers continue to target the usual suspects?
Simon Ellis: I think it is still the usual suspects,
mainly, although we are seeing, for example, growing
interest in Mexico and the Caribbean as a source of low
cost manufacturing for U.S. demand.
David Joseph Aquino: Since the global recession
began, organizations that viewed international markets
as icing to a heavy base in either North America or
Europe, have radically changed their strategies to avoid
catastrophic results. Clearly there has been an empha-
sispossibly too scattershoton fnding any way to
build market share and generate geographic diversity.
Roddy Martin: Thats true, and Latin America is
quickly emerging as an important market opportunity
in that regard. Lead time issues in the Asia Pacifc are
also making South America more attractive. Africa is also
starting to emerge, particularly in the south where there
is a more sophisticated infrastructure.
James Rice: I hear and see more about Vietnam and
Central America as emerging sources of production sup-
ply. Also, a few are talking about and working on Africa
as sources of production supplymainly pharma.
SCMR: Given the political volatility in the Middle East,
will fuel costs remain an issue going forward? How do ship-
pers protect themselves from sudden spikes in prices?
Rice: Fuel costs will continue to be an issue for a
long time. They will go up and down. I dont think that
there are genuinely any new approaches to this, although
the more advanced supply chain managers may use
options to hedge and balance risks.
Aquino: I agree. To manage fuel volatility, organiza-
tions should at minimum carefully monitor and review
pricing contracts and make a coordinated effort with
their transportation partners to evaluate potential risks.
Additionally, if there are clear opportunities to build in
dynamic shipping pricing for end-customer transactions
for fnal shipment, this can ensure that as pricing volatil-
ity crops up you are not behind in being able to address a
portion of the costs. Amazingly, the connection of pricing
changes in many organizations lags too far behind fuel
surcharges and resets of budgets. This is in part because
of a lack of awareness, poor data management, and an
absolute unwillingness to address customers about the
impacts.
Martin: Thats right, David. The key for any busi-
ness today is a solid understanding and segmentation of
global market demand at a detailed level. Leaders are
Whats on the
s
u
p
p
l
y
Chain h
o
r
iz
o
n
22
executing demand-back designs of both the demand
network and the supply network on a global basis and
then planning some aspects of global demand fulfll-
ment from central core planning capabilities. This is the
answer to agility and adaptability. And yes, the capabil-
ity to operate in this way will help companies make the
balanced tradeoffs to minimize the costs of fuel and the
risks of instability.
Ellis: It looks like we are all on the same page here.
Im afraid fuel costs will always be an issue. And while
Middle East instability is not helping, fundamentally
it is growing global demand that is at the heart of ris-
ing costs. That is not changing anytime soon. The good
news for the U.S. is that natural gas reserves can act as
a buffer to fuel costs for some parts of the manufactur-
ing marketplace. Shippers need to build rising costs into
their strategic plans and ensure that they are looking at
ways to mitigate these costs, such as using intermodal or
maximizing full-truck use.

SCMR: Near-shoring or a hybrid sourcing strategy seems
to be one solution to volatile fuel prices. But how realistic
are these tactics?
Ellis: Well, it depends. For businesses that are not
locked into large PP&E (property, plant, and equipment)
investments or contracts, the use of near-shoring is abso-
lutely an option. There may be some kind of initial capa-
bility ramp-up, but if the net landed costs favors closer
supply then it can be done.
Aquino: Regardless of the economic cycle, advanced
network modeling that considers product lifecycle, oper-
ating constraints, forecasting capabilities, total costs, and
impact of a lack of availability should be applied. This
helps in determining the ideal operating practices. The
gross decisionsespecially in the apparel industryto
attempt to eliminate local and/or near shore manufac-
turing without sensitivity or network analysis in specifc
cases has created unintended consequences. Theres
been longer lead-times, overall higher average inventory
investment, increased obsolescence risk, exponentially
increased complexity, and a lack of situational awareness
with respect to quality and supplier performance. What
Im really saying here is that advanced supply chain orga-
nizations that are more nuanced have more success.
For example, being able to have base load produced
off shore with reserved capacity locally for incremental
opportunities or issues has been a solid approach.
Rice: The good news about near-shoring and hybrid
sourcing it that it will likely be coupled with actual ana-
lytics that may include total cost rather than just pro-
curement costwhich was the lure in going to China
for many. Lets hope that is the case for most of those
considering using these approaches. Done properly, this
will be something that companies will take time to ana-
lyze and also unwind some of their other commitments
in other parts of the world. It wont happen overnight for
mass volumes.
Martin: We must realize that the
answer does not only involve near-
shoring and/or hybrid sourcing as a
single solution or option. It depends
on what the business is trying to
achieve and what the demand char-
acteristics are that drive near-shoring
or hybrid sourcing decisions. There
isnt a single canned solution that fts all scenarios. For
example, a footwear manufacturer making school shoes
with predictable demand and cycles could outsource
them to China with its long associated lead times. But
the same manufacturer making footwear for fashion
wear in the summer in the U.S. cannot tolerate long lead
times and must be more responsive. This supply chain
manager may choose to use manufacturing capacity in
Latin America. The takeaway is that businesses must be
agile in their decision making and have the capability to
deal with multi mode scenarios, not one or the other.
The key is that these decisions are driven by what the
business is trying to achieve and the demand character-
istics of the market.
SCMR: Turning to the much-anticipated Panama Canal
expansion to be completed in 2014, are supply chain man-
agers considering vessel redeployment strategies? The great
unknown here seems to be what gate rates the Panama
Canal Authority will charge.
Rice: Im not aware of supply chain managers
investing a lot of time or money in vessel redeployment.
There are surely companies making infrastructure
investments, but we wont really know the impact until
we get a little closer and until the pricing for the vari-
ous options becomes clearer. The cost for land-bridge
(rail and truck) may vary in response to the pricing by
the Authority.
Trends
Businesses must be agile in their
decision making and have the capability to
deal with multi mode scenarios, not one or the
other.
Roddy Martin
23
Martin: Once again there is no single, one-size-
fts-all answer for this question. The answers may even
change across a year based on market forces and sce-
narios. Todays expansion goals will be countered by
some other infrastructure development or tax incentive
in another country; these decisions are not static and
never will be. Logistics and transportation decisions
are strategically part of supply chain network decisions
and cannot be made as a separate silo based on costs
or on todays situation. The business must make these
decisions in the context of risk, responsiveness to
demand, and proftability.
SCMR: So to be clear, Roddy, you are saying that all the
layers of complexity with this issue have yet to be revealed?
Martin: Thats it exactly! At a recent panel I chaired
that included representatives of the Panama Canal and
the U.S. port and rail authorities, they pointed to the
fact that the goals are moving all the time. Therefore, it
is imperative that manufacturers, shippers, and distribu-
Bringing an expert risk
management perspective to
our roundtable is Rose Kelly-
Falls, Senior V.P., Supply
Chain Risk Management for
Rapid Ratings. Prior to join-
ing Rapid Ratings, Kelly-Falls
was head of Financial Risk-
Supply Chain Management
at Rolls Royce North
America.
SCMR: How should a supply
chain transformation strategy
incorporate the element of
risk and the ability to respond
to unanticipated changes?
Kelly-Falls: The strategy, or vision, has to include sce-
narios assessing how the business may evolve in the future
based on inevitable and unforeseen changing business condi-
tions. There is no right decision, but the strategy in place
needs to be nimble enough to account for the changes that
will undoubtedly occur. In the past, many companies were
so intolerant of change that they lost focus. Those that were
willing to engage in transformation became the leaders. A
recent example of this is Ford Motor Company. They were
able to fall down, but were well-prepared to get right back
up and try again. And theyve been very successful.

SCMR: How can companies implement and harmonize tech-
nology in their risk management initiatives?
Kelly-Falls: Choosing and properly integrating the right
tools and technology for your risk management initiative is
critical because there will never be a one-size-fits-all system
for managing risk. Most technologies are web-based and
can be mapped to a system or dashboard that pulls together
the necessary information from various resources for ease of
use and reference. With the technological capabilities that
exist today, implementation should be relatively straight-
forward, and most ERP systems allow customization to
include outside information. Many expect this to be difficult
or costly. But, in fact, a great deal of time and money can
be saved by mapping information to a system directly.

SCMR: Are companies paying sufficient attention to the
financial stability of their suppliers as a key indicator of
risk?
Kelly-Falls: Most companies review some of the finan-
cial information from their suppliers. The question is how
frequently they revisit the financial status. Firms should
take a systematic approach to reviewing that information,
doing so quarterly, biannually, or annually. Unfortunately,
most companies fear that such an approach would consume
excessive time and resources. The result: they review suppli-
er financials only when awarding new business or when they
hear rumors about a supplier in troubleby which time its
often too late. In order to use supplier financial viability as
an effective indicator, companies need to take advantage of
tools that offer a systematic approach. These allow com-
panies to assess financial risk by looking through the wind-
shield rather than the rear-view mirror, to see important risk
indicators clearly.
SCMR: How can companies assess and manage risk posed
by private companies?
Kelly-Falls:Establishing a relationship and collabora-
tion with private suppliers is essential for building trust so
that the private companies are comfortable enough to share
critical financial information that can be used to assess
risk. Further, an open, honest dialogue with suppliers about
how their information will be used, what the process is for
assessing their financials, and what may be done if the
assessment outcome falls below expectations is particularly
important. The key here is relationship management; work-
ing with private companies boils down to cooperation stem-
ming from mutual respect and collaborative engagement.
Rose Kelly-Falls: Senior
V.P. Supply Chain Risk
Management for Rapid
Ratings, an independent
ratings, research, and
analytics firm.
The Risk Factor
24
tors build the capabilities, organizations, and models to
continue to model, map, and optimize the network. That
way, they can make quick, agile choices based on oppor-
tunities that may evolve or risks that may need to be
dealt with. Deployed vessels and gate rates must be seen
in the context of the end-to-end value network system
and not in departmental silo performance.
SCMR: Global regulatory compliance is always a con-
cern. Are there new rules or changes in existing laws that
our readers should be aware of?
Rice: With regard to security, the new mutual rec-
ognition between US C-TPAT (Customs-Trade partner-
ship Against Terrorism) and the EU AEO (Authorized
Economic Operator) may open up some different trade
fows or possibly expedited trade fows. There are a few
other initiatives that may also affect some trade fows.
Martin: Global compliance and changes to regula-
tory requirements will always be a fact of life and largely
unpredictable on a global level. Unfortunately, too many
manufacturers have reactively dealt with compliance
issues and landed up with static compliance solutions
that are infexible and have to be continually repur-
posed and refocused as regulations change. Also, the
focus is on regulatory compliance integration rather than
embedding those capabilities as part of operating pro-
cesses. Changes should be made at a practice level. The
approach to regulatory compliance should be rather to
build sustainable performance improvement capabilities
that are systemically deployed as part of practices and
process capabilitiesand as not a reactive stick on.
SCMR: So, your answer is that manufacturers should
build process capabilities that are adaptable to new regula-
tory requirements that may be introduced?
Martin: Yes. In that way performance improvement
is also a criterion in deployment. This includes environ-
mental and product safety issues.
SCMR: The impact of ongoing slow steaming and port
congestion is causing shippers to examine landed costs in a
new light. Can you share any insight on this issue?
Rice: I think that this, along with fuel prices,
warrants looking at scenario planning rather than fore-
casting. That is to say, organizations should start embrac-
ing scenario planning for possible futures, then build
options to handle those various futures rather than trying
to predict.
Ellis: Thats right. Its no different than any other
cost. It is incumbent upon shippers
to ensure that they are factoring as
many cost elements as possible into
their assessment of net landed cost to
ensure that they are making the correct
decisions around sourcing strategies.
Martin: The key and only mean-
ingful way at looking at costs is total
end-to-end cost-to-serve, rather
than a silo component of cost. What
Im talking about is the cost end-to-end from supply
through logistics and distribution right to the shelf. Then
a company can look at the components and benchmark
them. Based on demand, there will be a window of costs
that are unacceptable and therefore alternatives need to
be sought, but only when one looks at the components
as part of the whole and its proftability.
If the issue of landed costs is being impacted by
component transport strategies, then it must be seen in
the context of the full end-to-end costs and addressed
in more detail. Even once the components are identifed
as part of the whole, one can look at strategies to mini-
mize their impact. U.S. ports and railways, for example,
are building strategies and capabilities to minimize the
impact of these issues.
SCMR: In a broader sense, managers are examining sup-
ply chain transformation strategies. What are some key
components of a successful transformation strategy?
Ellis: First and foremost, it is about supply chain
modernizationfnding ways to balance supply com-
plexity with demand volatility. The tactics that worked
even fve years ago probably dont work today. So sup-
ply chain managers are looking at where to outsource/
insource, where to deploy technology. They must learn
to leverage big datadatasets that grow so large that
they become awkward to work with using on-hand data-
base management toolsand how to make their supply
chains faster.
Aquino: Well-designed transformation strategies
are based upon being able to methodically and compre-
hensively understand the end consumer objectives and
needs. Supply chain managers must then design specifc
supply chain approaches back from that. Strong sup-
Trends
Organizations should start embracing
scenario planning for possible futures, then build
options to handle those various futures rather
than trying to predict.
James B. Rice, Jr.
SCMR1203_Ads.indd 25 2/27/12 1:23 PM
26
Trends
ply chain segmentation that allows for common drivers
and needed capabilities allows for an evaluation of cur-
rent performance against competitors and best-in-class
supply chains as well. Once the segments, consumer
requirements, and gaps in performance are understood,
development of a transformational approach becomes
clearer. Too many supply chain organizations have really
little idea what makes their customer happy. The edu-
cational process and enlightenment
of clear segmentation and a rigorous
effort to understand consumer needs
drives all subsequent elements of the
transformation.
Rice: Again, scenario planning
will win the day. Rather than orga-
nizations attempting to make the
right prediction, they ought to iden-
tify possible futures and then prepare
for each with various hedging, real options, and design
choices. The future will be won by those who can pre-
pare for various possibilities and then have the resilience
to execute. This is real sustainabilitythe ability to han-
dle the vagaries of global trade so as to keep the organi-
zation in operation and create economic success.
SCMR: How do these challenges weve been discussing
impact supply chain leadership and organization. What do
you see as the next big thing here?
Ellis: I think there are plenty of manufacturing com-
panies that do not have a chief supply chain offcer, or
at least anyone representing supply chain at the board
level, so perhaps that is a good place to start. Beyond
that, I have been advocating for years now that the
essential supply chain skill set has been slowly moving
from make to source. That means that negotiation
skills are becoming more important than factory skills.
This is not true in all manufacturing sub-segments, but
as outsourcing continues to grow, effectively managing
suppliers is critical.
Aquino: It has been clear through my prior research
(while at AMR Research/Gartner), which focused
on supply chain talent and organizational design, that
modern supply chains and their leadership have been
gaining quite a bit of traction in building structures that
support broad-based integrated models. This means
moving from very traditional functional areas to inter-
dependent broad based responsibility. This, in turn, is
manifesting itself in the Chief Supply Chain Offcer
roles, which includes responsibility for the development
and evolution of supply chains now defned as digital,
or virtual. Whether in media, publishing, consumer
electronics, or pharmaceutical, the effective manage-
ment of these assets as it relates to product develop-
ment, sales life cycle management, reporting, or fnan-
cial activities is a primary focus. Organizations that have
struggled to manage a traditional physical supply chain
will be destroyed with an ineffective or unmanaged digi-
tal supply chain.
Ellis: But in the end, communication is key. The
role of social networking and other media relationships is
growing in importance when it comes to relating supply
chain advantages. As supply chain organizations redis-
cover the need for differentiation, they must also deter-
mine what their supply chain really stands for. jjj
Well-designed transformation
strategies are based upon being able to
methodically and comprehensively understand the
end consumer objectives and needs.
David Aquino
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28
Leaders Making the
Most of Visibility,
Flexibility, and Analytics
By Morgan L. Swink, Ronald R.
Johnson, and Francis J. Quinn
Morgan L. Swink (M.Swink@tcu.edu)
is the Eunice and James L. West Chair
Professor of Supply Chain Management
at the Neeley Business School at TCU.
Ronald R. Johnson (rjohns50@csc.com)
is a partner in CSCs Global Business
Services National Supply Chain.
Francis J. Quinn (fquinn@ehpub.com)
is editorial director of Supply Chain
Management Review.
This years survey focused on the progress being made
across three capabilities that are essential to supply
chain success today visibility, analytics, and flexibility.
As in past surveys, clear levels of competency emerged
among the respondents. Weve termed them the leaders,
followers, and laggards. And its not surprising that
the leaders superior performance in these key areas
translates directly to competitive advantage.
S
upply chain managers are key contributors to
stabilizing the abrupt economic changes. They
do this by aggressively managing costs and
crafting a fexible supply chain to retain mar-
ket share through increasing customer service.
In this years Global Survey of Supply Chain
Progress
1
we see a continuing role of supply
chain managers as the economy rebounds. This ninth annual
survey explored three factors that we believe will be critical
to companies abilities to capitalize on growth opportunities:
these factors are visibility, analytics, and fexibility. (For more
details on this years survey, see the accompanying sidebar at
the end of the article.)
The survey results do indeed show that supply chain lead-
ers are building systems and developing partnerships that give
them greater depth of visibility into a wider set of factors.
Equally important, however, these leaders know what to do
ViSiBiLiTy ChALLengeS PRogReSS SuSTAinABiLiTy VoLATiLiTy
9
th
Annual Global Supply Chain Survey
SCMR1203_Survey_SCProgress.indd 28 2/29/12 1:23 PM
29
with the vast amounts of information that their visibil-
ity systems provide. First, they possess the analytical
capabilities to make sense of the information. Second,
they possess the fexibility needed to respond to new
needs and opportunities uncovered by their analytical
tools. Combining these areas of expertise creates a for-
midable and responsive supply chain. Our data show
that frms who are taking these initiatives are outper-
forming their rivals in many dimensions, including both
growth and proft.
Growth on the Horizon?
Several indicators suggest that supply chain perfor-
mance patterns are improving. Each year we ask the
respondents to give us a sense of the success of their
supply chain initiatives. Supply chain is becoming a
growth engine by managing costs and serving customers
growing demands for fexibility. The three-year average
of supply chains contribution to revenue increased from
4.0 percent last year to 8.5 percent this year. Similar
gains were recorded in cost management, a supply chain
cornerstone in a competitive market position. This year,
supply chains impact on cost reduction moved up from
6.0 percent to 6.9 percent in a rebounding economy.
(Exhibit 1 shows the impact of supply chain initiatives
on revenues and costs.)
We make comparisons each year across what we term
leaders, followers, and laggards. Leaders are respondents
30
Survey
who consider their overall supply chain competencies to
be above average for their industry; followers represent
the industry average; and laggards rate themselves below
average.
Leaders elevate the supply chain through organiza-
tional structure. They are 1.5 times more likely to pro-
mote supply chain leadership to a C level and twice as
likely to position the leading supply chain manager as a
direct report to a corporate offcer (EVP, CSCO, COO).
In past years, we have established that leaders tend
to have broader and more global views of supply chain
management, and they are typically early adopters of
new technologies and planning systems. Importantly,
supply chain leaders infuence revenue gain at double
the rate of laggards. Likewise, the leaders supply chain
initiatives produce cost reduction of 8.0 percent in com-
parison to the 6.0 percent produced by lag-
gards and followers, as shown in Exhibit 2.
The Visibility Advantage
How do we explain the performance of the
leaders relative to the others? Supply chain
visibilitywhich is central to both revenue
growth and cost managementis one key.
We asked respondents to tell us about the
range and quality of their visibility for 10 dif-
ferent dimensions of visibility, which extend
both upstream and downstream. Among
the factors included were access to data
describing customer demands and promo-
tional plans, as well as supplier inventories,
deliveries, and the like. (Exhibit 3 shows the
complete list.)
Seventy percent of our respondents over-
all have visibility of upstream information.
Not surprisingly, downstream visibility is not
EXHIBIT 1
Impact on Revenue and Costs
No Impact 12%
Increased 1%-5% 26%
Increased 6%-10% 19%
Increased More Than 20% 12%
Increased Other 1%
Dont Know/Not Sure 14%
No Impact 14%
Increased 1%-5% 29%
Increased More Than 20% 4%
Increased Other 1%
Dont Know/Not Sure 14%
What has been the impact if your supply chain initiatives on:
Revenue Cost
EXHIBIT 2
Leaders Outperform on Revenue
Increase and Cost Reduction
(
%

o
f

S
u
p
p
l
y

C
h
a
i
n

I
m
p
a
c
t
)
12
10
8
6
4
2
0
Laggards
Followers
Leaders
Revenue Increase Cost Reduction
EXHIBIT 3
Yes Responses on Dimensions of Visibility
Our major customers share their point of
sales/ actual sales information with us
43.7%
Our major customers share
their demand forecasts with us
56.3%
We gather information from various sources to
understand overall market level demand information
82.3%
Our major customers share their
inventory levels information with us
43.7%
We get information from various sources to
understand overall market level supply information
69.8%
Our major customers share information
with us regarding their promotional plans
48.4%
Our major suppliers share information with us
about order lead times/delivery dates
79.5%
Our suppliers provide us
with advance shipment notices
62.3%
Our systems/partners provide us with nished
goods locations status in the distribution network
54.4%
Our major customers share
inventory availability with us
52.1%
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32
Survey
as pervasive. The potential for improving downstream
visibility, however, is great. Key beneft areas center on
improved S&OP and advanced planning processes.
Our survey harvested responses from around the
globe, including pure manufacturers, wholesalers, retail-
ers, and more vertically integrated frms. Interestingly, the
vertically integrated frms reported signifcantly greater
breadth of upstream and downstream visibility than the
other frms. (Exhibit 4
shows the downstream
and upstream visibil-
ity dimensions present in
each of the sector respon-
dents).
Our data suggest
that integration allows
greater access to and
control of informa-
tion. This fnding har-
kens back to classic
examples of excellent
design and manufactur-
ing frms that have benefted from owning
retail operations (e.g., Dell through direct
sales, Zara owning their retail stores).
Ownership overcomes the barrier to data
sharing through network optimization.
Planners who work for the same compa-
ny as sales personnel are likely to obtain
faster access to dataand the data typi-
cally are presented in the more useful ways.
Similarly, upstream integration provides
quicker access and greater control over
supply data.
Visibility is clearly a distinctive charac-
teristic of the leading supply chain frms.
Leaders have greater total visibility across
all 10 dimensions as well as superior vis-
ibility to upstream and downstream infor-
mation overall. The differences in visibility
between followers and laggards are not sig-
nifcant.
In addition to breadth of visibility, the
quality of the information that frms receive
seems to vary considerably. We asked about
information quality received from their vis-
ibility systems in terms of timeliness, accu-
racy, completeness, and usability. Not sur-
prisingly, managers gave the completeness
of the data their lowest scores. Fewer man-
agers either agreed or strongly agreed that
their visibility data were as complete as they needed to
be. While they seem to be a bit more satisfed with data
timeliness, accuracy, and format, the overall average
scores indicates that their enthusiasm regarding the
quality of data they get is fairly mild. (See Exhibit 5.)
Our survey suggests that companies with wider
scopes of visibility and higher quality data are outper-
forming their industry rivals. There are two important
complementary capabilities that help these frms capital-
ize on the visibility that their systems provide.
Analytics Capability a Core Asset
We asked our responding managers to indicate the
degree to which their frms employed different analyti-
cal systems and processes such as simulation, optimiza-
tion, and regression These analytics are enabled by the
following: data decomposition, integration, and commu-
nication processes; data visualization techniques (dash-
boards, for example); and automated sensing, planning
and decision systems. We constructed an overall analyt-
ics capability score from the responses, with 30 points
being the maximum score. As expected, the levels of
EXHIBIT 4
Downstream and Upstream Visibility by Business Sector
(
N
u
m
b
e
r

o
f

D
i
m
e
n
s
i
o
n
s

P
r
e
s
e
n
t
)
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1.0
Manufacturers Wholesalers Retailers Manufacturers
and Wholesalers
Vertically
Integrated
Downstream
Upstream
EXHIBIT 5
Quality of Information from Visibility
The information we receive is:

(
%

t
h
a
t

A
g
r
e
e

o
r

S
t
r
o
n
g
l
y

A
g
r
e
e
)
60%
50%
40%
30%
20%
10%
0%
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34
Survey
capability varied considerably across frms in our sample.
Manufacturing frms reported about the same levels of
analytics capabilities as did services, with some variance
across sectors. (Exhibit 6 shows the analyt-
ics scores across the manufacturing and
service industries.)
With the average analytics capability
scores hovering around 17 out of the maxi-
mum possible score of 30, the survey results
suggest that there is still much room to
further employ analytical tools and tech-
niques. The data further indicate that ana-
lytics capability is a key differentiator of
leaders from followers, and followers from
laggards. For example, leaders are twice as
likely as laggards to be experienced users of
data analytics software.
Investments in analytics capabilities
look to be well justifed. Our data show
that experienced users of analytics tools
and processes extract more useful informa-
tion from their visibility data. Our survey
included 18 operational performance mea-
sures in seven major areas: service, cost,
quality, asset productivity, proft, growth,
and innovation. Across the board, visibil-
ity in combination with analytics capability
creates useful information. For example,
consider business growth, a composite
measure of sales growth, market expan-
sion, and market share. Firms in the top
20 percent of their industry in terms of
growth also reported above average levels
of visibility and analytics. Conversely, frms
with below average visibility and analytics
are growing signifcantly slower. Without
the combination of data and data analysis
capability frms fall somewhere in-between.
(Exhibit 7 shows the range of business
growth for the different levels of visibility
and analytics capability.)
Our conclusion: a frm with combined
visibility and analytics capabilities is almost
twice as likely to be a fast grower (top 20
percent of growth) than a frm that is below
average in both skill areas.
Flexibility Completes
Needed Skill Set
Flexibility was the third area that our sur-
vey examined. While visibility and analytics
produce vital information to drive effciency and target
growth, fexibility then gives us the ability to act upon that
information. Flexibility means being able to act quickly
(
R
e
l
a
t
i
v
e

I
n
d
u
s
t
r
y

P
e
r
f
o
r
m
a
n
c
e
)
4.5
4.0
3.5
3.0
Low Visibility
Low Analytics
High Visibility
Low Analytics
Low Visibility
High Analytics
High Visibility
High Analytics
EXHIBIT 7
Business Growth by Visibility/Analytics Capability
4.5
4.0
3.5
3.0
(
R
e
l
a
t
i
v
e

I
n
d
u
s
t
r
y

P
e
r
f
o
r
m
a
n
c
e
)
Low Volume Flex
Low Visibility
High Volume Flex
Low Visibility
Low Volume Flex
High Visibility
High Volume Flex
High Visibility
EXHIBIT 8
Cost Performance by Volume Flexibility/Visibility Capability
14 16 18 20 22
EXHIBIT 6
Analytics Capability Score: Manufacturing and Services Industries
(Maximum Score Possible = 30)
12
Manufacturing
Service
Automotive
Machine
Chemical/Pharmaceutical
Electrical
Consumer
Mining/Petrol
Other
Retail
Wholesale
Food
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Survey
and effciently reorient or signifcantly change your prod-
ucts, processes, and organizations. Flexible supply chains
change their operations quickly to respond to new oppor-
tunities or threats in the marketplace. Flexibility enables
lower inventory, higher customer service, and timely
response to market trends.
We explored fexibility in the following fve areas:
product volume (scalability); product variety (product
range capability); new products (introduction speed and
cost); product/service customization (tailoring to specifc
customer needs); and organizational change (adapting
structure). The survey results suggest that each type of
fexibility can be an important asset, depending on a
frms strategy and the operating environment.
To illustrate the point, consider the role of volume
fexibility in helping keep costs competitive.
The data shown in Exhibit 8 illustrates that
volume fexibility produces cost benefts,
even when there is low visibility into market
changes. The most powerful combination
comes when a frm has both high supply
chain visibility with customers and suppli-
ers and supply chain fexibility. This combi-
nation leads to an optimized capability that
enables the frms supply chain to accommo-
date changing internal and external needs,
leading to a healthier business.
Similarly, the data indicate that product
variety fexibility is important to achieving
higher levels of service. This is the ability to
shift production and deliveries quickly from
one product type to another across a wide
range of projects. The synergistic effect of vis-
ibility in combination with variety fexibility is
depicted in Exhibit 9.
As expected, the leaders in our sample
indicated that they had higher levels of fex-
ibility overall. In addition, there were differ-
ences among leaders, followers, and laggards
across each particular fexibility dimension.
In all cases the leaders and followers indicated
signifcantly higher levels of fexibility than lag-
gards. Yet leaders were distinct from followers
only in two dimensions: product customization and organiza-
tional fexibility, which appear to be the leading edge areas of
improvement potential. A majority of the supply chain man-
agers reported that they have already made strides in areas of
volume, variety, and new product fexibility.
It is important for managers to consider how the dif-
ferent types of fexibility relate to one anotherand how
they can be developed, synergistically, with the differ-
ent sources of visibility. Our results strongly suggest that
frms should optimize fexibilities in accordance with the
data from their visibility systems. For example, if a frm
is particularly strong in customer-facing visibility regard-
ing product demands and promotional plans, then vol-
ume fexibility is a likely target for improvement.
The data strongly indicate that the combination of
visibility and fexibility enables the greatest business
growth and proftability, as Exhibit 10 shows.
Get Yourself
Ready for Success
Things seem to be picking up. Stronger frms continue
to take market share from weaker ones, driving their
growth and proftability.
(
R
e
l
a
t
i
v
e

I
n
d
u
s
t
r
y

P
e
r
f
o
r
m
a
n
c
e
)
4.5
4.0
3.5
3.0
Low Visibility
Low Flex
EXHIBIT 10
How Visibility/Flexibility Relate to Business Growth and Prot
Low Flex
High Visibility
High Flex
Low Visibility
High Visibility
High Flex
Business Growth
Prot
(
R
e
l
a
t
i
v
e

I
n
d
u
s
t
r
y

P
e
r
f
o
r
m
a
n
c
e
)
4.5
4.0
3.5
3.0
Low Variety Flex
Low Visibility
High Variety Flex
Low Visibility
Low Variety Flex
High Visibility
High Variety Flex
High Visibility
EXHIBIT 9
Service Performance by Variety Flexibility/Visibility Capability
37
The goal of a responsive, flex-
ible supply chain has been the
Holy Grail of supply chain manag-
ers for a long while now. In this
years Global Survey of Supply
Chain Progress, we observe more
focus on visibility and analyt-
ics that create the foundational
capability to anticipate and then
respond to change. This begins
the transition that yields growth
in market share and profitability.
To be a leader, or to become one,
consider what investments might
be right for you. jjj Details on the
Survey
T
he 215 respondents to this years
survey were split evenly between
manufacturing and service organiza-
tions. The replies represented every
major geographical segment in the
world, the principal ones being North
America, Europe, and Asia/Pacific.
Twenty industries were represent-
ed in this years survey, 11 primarily
manufacturing firms and 9 primarily
service (e.g., financial, food, logistics,
and so on). The respondents included
both large and mid-sized companies,
with sales in a range from $250
million to well over $1 billion. The
number of employees varied from less
than 250 to over 30,000.
The respondents completed a
comprehensive survey questionnaire
designed to gauge their present com-
petencies in areas of supply chain vis-
ibility, use of supply chain analytics,
multiple types of flexibility, and per-
formance. There are general com-
ments throughout the report relating
to the differences between leading
firms and others in the sample. The
leaders are those that indicated
their overall supply chain competence
to be above the average for competi-
tors in their respective industries.
End Notes
1 The Global Survey of Supply Chain
Progress is a joint effort involving
CSCs Global Business Services
National Supply Chain, the Neeley
School of Business at TCU, Supply
Chain Management Review. We wish
to thank CSCMP for their assistance
in distributing this years survey.
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Embracing Green
in China...
By Hau Lee, Erica Plambeck, and
Pamela Yatsko
Hau L. Lee (lee_hau@GSB.Stanford.Edu)
is the Thoma Professor of Operations,
Information and Technology at the
Stanford Graduate School of Business
and the director of the Stanford Global
Supply Chain Management Forum.
Erica Plambeck (plambeck_erica@GSB.
Stanford.Edu) is the Walter Kenneth
Kilpatrick Professor of Operations,
Information and Technology in the
Stanford Graduate School of Business
and Senior Fellow in the Woods Institute
for the Environment. Pamela Yatsko is a
former Shanghai bureau chief for the !ar
!astern !conomic Peview. She can be
reached at pamelayatsko@comcast.net.
To date, more than 200 corporate giants have explained
to the seven-person Institute of Public & Environmental
Affairsa Non-Governmental Organization, or NGOwhy
their manufacturing facilities or suppliers in China violated
the countrys air and water laws. At least 50 companies
have taken corrective actions and agreed to IPE-supervised
environmental audits of their factories. Heres why supply
chain managers need to pay attention to influential little
watchdogs like IPE.
A
pple. Motorola. Pepsi. HP. Timberland.
Walmart. These are among the thousands of
global corporations that a small Beijing-based
nonprot organization has exposed as sourcing
from polluting factories in China over the last
six years.
The nonprotthe Institute of Public &
Environmental Affairs (IPE)has surprising clout. To date, more
than 200 corporate giants have explained to IPE ofcials why their
manufacturing facilities or suppliers in China were in violation of the
countrys air and water laws. To get off IPEs blacklist, at least 50
companies have taken corrective actions and agreed to IPE-supervised
environmental audits of their factories. A growing number of those
companies are now using IPEs Web site as a tool to screen and moni-
tor their Chinese suppliers environmental performance.
1
Thats not bad for a homegrown seven-man operation working
out of a modest ofce in a converted sixth-oor Beijing apartment.
By taking advantage of greater environmental transparency in China
and global corporations desire to protect their reputations, IPE has
become one of the countrys leading environmental watchdogs, pow-
erful enough to spur some multinationals to pay more attention to
VISIBILITY CHALLENGES PROGRESS SUSTAINABILITY VOLATILITY
With an NGO Nudge
SCMR1203_ChineseNGO.indd 38 2/29/12 1:17 PM
39
their Chinese suppliers environmental records and to lean
on offending suppliers to fx problems.
Not surprisingly, some companies see the little NGO
(non-governmental organization) as a nuisance, ignoring
its notifcations of suppliers environmental infractions
for as long as possible. Apple, for instance, paid no heed
to IPEs entreaties for months until embarrassing head-
lines, such as Apple Attacked over Pollution in China,
in August 2011, scandalized newswires.
2
But far-sighted
companies such as Walmart and Nike are embracing
IPE as a partner in improving their environmental man-
agement of their Chinese supply chains. The IPE Web
site provides a really good platform for us to reduce the
risk of environmental violations, says May Qiu, Nikes
health, safety, and environment manager for Asia.
With so much sourcing from ChinaWalmart has more
than 50,000 suppliers theresupply chain managers often
need all the help they can get keeping tabs on suppli-
ers environmental records. This not only includes their
direct suppliers, but also their suppliers suppliers, which
are increasingly coming under fre from environmen-
tal activists. Multinationals may even need to monitor
certain factories with which they have no supply rela-
tionship at allor risk guilt by indirect association. For
instance, in July 2011, Greenpeace International tar-
geted Adidas and Nike among other international brands
for hazardous chemical discharges most likely caused by
fabric factories that did not actually supply the two com-
panies. The connection? The Chinese textile group that
owned the offending factories also owned the sportswear
companies fnished garment suppliers.
3
Chinas New Environmental Transparency
A decade ago, IPE would not have been able to obtain
and publicize information on companies environmental
violations in China as it can now. Chinese authorities
traditionally guarded environmental information very
closely. However, in the early 2000s, the central govern-
ment established the publics right to know about factory
pollution and local environmental conditions.
Claire Fraser
40
China
For instance, the Cleaner Production Promotion Law,
effective in 2003, called for public participation and
required relevant government departments to name pol-
luting enterprises in the media. The environment minis-
try, in 2008, began requiring environmental agencies to
disclose information on enterprises violating discharge
standards, pollution complaints fled against companies,
and administrative and enforcement actions against pol-
luters. (Exhibit 1 lists the laws enacted since 1979.)
During the same period, the central government began
to allow orderly environmental activism by citizens and
NGOs such as IPE. Although subject to strict government
supervision, more than 500 grass-roots environmental
NGOs had sprung up in China by October 2008, some
300 more than existed just three years earlier, according to
a survey by the All-China Environment Federation.
The widening acceptance of environmental trans-
parency comes as Chinas ascendance to world
manufacturing supremacy has serious side effects on the
environment and on its citizens health. Only 23 percent
of Chinas 26 key lakes and reservoirs are safe for human
contact, according to statistics from Chinas Ministry
of Environmental Protection.
4
In mid-2007, industrial
waste, urban sewage, and fertilizer runoff created toxic
algae that overwhelmed historic Lake
Tai in east-central China, interrupt-
ing water supplies to about two million
local residents. More recently, a solar
panel maker south of Shanghai released
improperly stored fuoride-laced solid
waste into a nearby river, killing fsh and
livestock.
The central governments calls for
environmental vigilance to stem the rising
tide of public discontent over pollution
5
often go unheeded at local levels. Local
authorities in China historically are far
more motivated to protect local business-
es that create jobs and economic growth
than they are to uphold environmental
statutes. Chinas local environmental pro-
tection bureaus (EPBs) are underfunded
and inadequately staffed to perform regu-
lar inspections of factories. They rely for
income on pollution-related fnes, which
may discourage them from cracking down
hard on serious polluters. Bribery of off-
cials is also an issue. Companies often
fnd it cheaper to pay to pollute than to
improve environmental performance.
Small Group, Big Mission
Encouraged by the governments new disclosure poli-
cies, IPE uses public information to unmask polluters in
China. (Exhibit 2 shows IPEs corporate disclosure form
that is sent out to major companies.) It is the only NGO
in China to have created a comprehensive database of
environmental violations. In general, its focus on infor-
mation transparency and collecting data from all over the
country sets it apart from other Chinese environmental
NGOs, which tend to focus on education, raising public
awareness, and remedial actions, normally at the region-
al level due to the physical nature of such work. IPE
works in coalition with many of these green groups, such
as Friends of Green in Tianjin, the South China Nature
Society in Guangzhou, and Green River in Chengdu, to
carry out its methodology locally.
Working on a shoestring budget of roughly one mil-
lion yuan annually ($147,000), the little NGO focuses
its pressure tactics primarily on multinationals, even
though the majority of violators on IPEs list are domestic
companies. The reason is simple: Chinese-owned com-
panies are traditionally less motivated than multination-
als to protect their reputations in the global marketplace,
but they serve multinationals as part of the supply chain.
EXHIBIT 1
Selected Environmental Laws in China
Source: Information adapted from Ecolex, Ecolex website, http://www.ecolex.org.
The Xiamen PX Project: The Rule of Contract or Citizens in China Today, HBS No. 9-808-123,
Rev. April 7, 2008, p. 16 and from Organization for Economic Cooperation and Development,
Environmental Performance Reviews, China, 2007.
1979 Environmental Protection Law
1984 Law on Prevention and Control of Water Pollution
1986 Law on Land Administration
1988 Water Law
1995 Law on Prevention and Control of Environmental Pollution by Solid Waste
1995 Law on Prevention and Control of Air Pollution
1996 Law on Prevention and Control of Pollution from Environmental Noise
1996 Law on Coal Industry
1997 Law on Energy Conservation
1997 Construction Law
1998 Law on Promotion of Cleaner Production
2001 Law on Prevention and Control of Desertication
2002 Law on Environmental Impact Assessment
2003 Law on Radioactive Pollution Prevention and Control
2005 Law on Renewable Energy
2006 Regulation on Enhancing Public Participation in Environmental Assessment
2007 Measures on Open Environmental Information (for Trial Implementation)
2009 Food Safety Law
2010 Regulation on the Administration of Ozone Depleting Substances
2010 Water and Soil Conservation Law of the Peoples Republic of China
2011 Measures for Information Report of Environmental Emergencies
41
Few of them come to talk to IPE or pay any attention to
this sort of public pressure, says IPE founder and direc-
tor Ma Jun. The best way to reach them is to go through
the supply chain, to transfer the pressure from those
who care to those who dont.
Ma is hitting the nail on the head. NGO scrutiny is
Nikes greatest source of pressure for transparency, says
Amanda Tucker, Nikes director of sustainable manufac-
turing performance. IPEs efforts parallel the growing
movement among some multinationals, such as Nike,
to promote greater transparency and environmental
improvement in their supply chains. Since 2005, Nike
has implemented an intensive environmental engineer-
ing program at 40 footwear suppliers in China and else-
where in Asia. In addition, Nike audits its active con-
tract apparel suppliers, of which there are 130 in China
alone, for environmental, health, and safety compliance.
Likewise, Walmart in 2009 began phasing in a new sup-
plier agreement that requires factories to certify compli-
ance with laws and regulations where they operate, as
well as rigorous social and environmental standards.
IPEs Data-rich
(and Very Open) Methods
When Ma founded IPE in 2006, he set out to harness
government data and the power of the Internet to build
a public database of water, air quality, and pollution vio-
lations. This was no simple task. The data released by
local and regional environmental agencies varied in qual-
ity, format, and quantity. To collect and collate the data
from all over China, staffers scoured local government,
newspaper, and green NGO reports and wrote computer
programs to extract and check data.
By December 2010, the non-profts database con-
tained nearly 74,000 infractions amassed from environ-
mental agencies throughout China. This online database
is more complete and accessible than anything publicly
available from the central government. IPEs Web site,
www.ipe.org.cn (which includes an English translation)
contains data going back to 2004 and covering all 31 prov-
inces and more than 300 cities across China. Users can
go to the web site, click on the Pollution Map tab, and
access information on corporate environmental perfor-
mance by company name, specifc locations of pollution
sources, environmental news in China, and more.
IPE uses the data to provide the public with a list of
polluters operating in China and to write targeted indus-
try reports in a consortium with other Chinese green
NGOs, such as Friends of Nature and Green Beagle. In
some cases, multinationals contact IPE when they fnd
themselves or their suppliers in IPEs database. They
also may receive notifcation letters from IPE, normally
EXHIBIT 2
IPE Corporate Disclosure Form
Wastewater
Suspended Solids (kg/Year)
Total Phosphorous (kg/Year)
Volatile Phenols (kg/Year)
Petroleum (kg/Year)
Cyanide (kg/Year)
Sulde (kg/Year)
Mercury (kg/Year)
Lead (kg/Year)
Cadmium (kg/Year)
Arsenic (kg/Year)
Hexavalent Chromium (kg/Year)
Total Chromium (kg/Year)
BOD
5
(Tons/Year)
LAS (kg/Year)
Benzene Series (kg/Year)
Waste Gas
Nitrogen Oxides (Tons/Year)
Carbon Dioxide

(Tons/Year)
Fuel Coal Consumed

(Tons/Year)
Fuel Oil Consumed

(Tons/Year)
Fluoride and its Compounds (kg/Year)
Hydrogen Sulde (kg/Year)
Cyanide (kg/Year)
Hydrogen Chloride (kg/Year)
Chlorine (kg/Year)
Ammonia (kg/Year)
Sulfuric Acid Mist (kg/Year)
Chromic Acid Mist (kg/Year)
Nitrobenzene (kg/Year)
Fresh Water Consumption
(10
4
Tons/Years)
Mercury and its Compounds (kg/Year)
Lead and its Compounds (kg/Year)
Cadmium and its Compounds (kg/Year)
Beryllium and its Compounds (kg/Year)
Volatile Organic Compounds (kg/Year)
Non-Methane Hydrocarbons (kg/Year)
Chlorinated Alkanes (kg/Year)
Benzene Series (kg/Year)
Xylene (kg/Year)
Benzopyrenes (kg/Year)
Acrylonitrile (kg/Year)
Phenols (kg/Year)
Acetone (kg/Year)
Phosgene (kg/Year)
Methyl Alcohol (kg/Year)
Mercaptans (kg/Year)
Wastewater
Total Discharged (10
4
Tons/Years)
COD Discharged (Tons/Year)
Ammonia-Nitrogen Discharged
(Tons/Year)
Water and Energy Efciency
Water Efciency
(Tons of Water/10
4
RMB)
Energy Efciency (Tons of Coal
Equivalent/10
4
RMB)
Waste Gas
Total Emission (10
4
m
3
)
Sulfur Dioxide Emission (Tons/Year)
Soot Emission (Tons/Year)
Dust Emission (Tons/Year)
Characteristic Parameters (Optional) Basic Parameters (Mandatory)
Other Parameters or Relevant Pollutants Discharge Information Name (Print):
Signature:
Title:
Date:
Other Parameters or Relevant Pollutants Discharge Information Name (Print):
Signature:
Title:
Date:
42
China
in alliance with other environmental non-profts. Many
companies choose to ignore these entreaties. Those that
respond are typically embarrassed or angry at IPE to fnd
themselves spotlighted as polluters. When they enter
this room, not every one of them is happy, says Ma. After
learning that the data comes from government monitors,
however, companies are often ready to explain what went
wrong and how they are addressing the problem.
Of course, some observers question IPEs methods,
such as using information from Chinas problematic
environmental protection bureaus. The source data is
not always right and thats the diffculty of working in
China, says Adam Hughes, the commercial director
for U.K.-based BLC Leather Technology Center, which
conducts environmental audits of suppliers for members
of the Leather Working Group, a collaborative forum for
multinational footwear brands. Ma would agree. IPE
tries to validate information with multiple sources, but
it occasionally has posted violations that an EPB attrib-
uted to the wrong company or botched in some other
way. That said, Ma contends that the problem of under-
reporting violations is much greater in China than the
problem of false positives. He adds that if a company
can provide evidence that some information in IPEs
database is wrong, then IPE is more than happy to pub-
lish a correction on its website.
To have their violations deleted from IPEs database,
companies have a few options, some more onerous than
others. For violations more than three years old, a com-
pany can provide IPE with documents that prove it has
identifed the violations root cause, taken corrective
actions, and conducted follow-up monitoring. For viola-
tions classifed as violations of procedure (such as failure
to get the local EPBs sign-off on a requirements fulfll-
ment), a company can also simply undergo an IPE docu-
ment review.
For non-procedural violations less than three years
old, the company has to accept a third-party environ-
mental audit using a protocol developed by IPE, com-
missioning a recognized environmental auditor that is
approved by IPE to verify that the violation has been
corrected and that the company is in full compliance
with Chinese environmental regulations. IPE and an
alliance of 20 other NGOs then supervise the audit.
Representatives from IPE and/or a local environmental
NGO, such as Green Hunan or Green Anhui, go to the
factory to monitor the whole process as auditors inter-
view managers, walk through the site, and look at how
the problem has been addressed. Once the corrections
have been verifed, IPE writes a public report and shares
it with the NGO alliance. If none of the NGOs objects
within seven days, IPE deletes the violation from the
database and then posts the report on its Web site.
To avoid conficts of interest, the company receiv-
ing the audit pays the auditor at the prevailing market
rate, but does not pay either IPE or
its local NGO partner for overseeing
the audit. Rather, IPE pays its staff
and the NGO out of its own funds.
The audited company does, however,
cover their transportation, accom-
modation, and meal expenses. Aware
that this practice could be abused,
IPE requires that staffers oversee-
ing audits do not accept extravagant
meals or treatment. The point is for
our involvement to increase the credibility of the audit,
Ma said, Otherwise, whats the point?
IPE designed this NGO-supervised process to out-
perform the widely adopted ISO 14000 standards for
environmental management. Under ISO 14000, a com-
pany can be certifed as having the right process in place
for making continuous environmental improvements,
but have excessive toxic waste discharges and be out of
compliance with environmental regulations. As Marjorie
Yang, chairman of Hong Kong-based premium shirt
maker Esquel Group, puts it: ISO is only a beginning,
not the end. Thats the paper trail.
6
According to IPEs Ma, the commoditization of audit-
ing has further compromised ISO 14000: Certifcation
fees have fallen so low that well-known international
auditing frms no longer provide the service, leaving
domestic Chinese auditors to handle all of the ISO
14000 paperwork. Corruption is a widespread problem
in factory auditing in China, exacerbated by low margins
and local auditors with relatively poor reputations. IPEs
methodology goes beyond paperwork by verifying that
the violation has been resolved, pinpointing the prob-
lems cause, and sometimes even identifying additional
problems or violations.
For example, in 2007, Chinese authorities fned
By taking advantage of greater
environmental transparency in China
and global corporations desire to protect their
reputations, IPE is spurring some multinationals
to pay more attention to their Chinese suppliers
environmental records.
43
a Walmart store in Guangdong province 20,000 yuan
($2,930) for cooking food on-site without the necessary
pollution control authorization after local residents com-
plained about cooking fumes. IPE posted the violation in
its database and, according to IPE, Walmart contacted
the nonproft in April 2008 to discuss it. The company
said that it had since installed equipment to capture and
clean fumes and particles and had received the neces-
sary government approvals in January 2008. But IPE
said Walmart must go through a third-party audit, with a
local NGO present, to verify corrective actions before it
could be removed from the database.
In July 2008, Walmart hired IPE-accredited URS
to do an audit with a local environmental group, Green
Pearl River, observing the process. URS confrmed
that Walmart had fxed the problems and received the
necessary discharge permits, but suggested additional
improvements such as installing technology to absorb
the smallest smoke particles. In a subsequent audit,
URS confrmed the additional corrective steps. IPE
accepted the URS reports and removed the violation
from its database.
Seven Lessons for
Supply Chain Managers
To help supply chain managers lever-
age information sources such as IPE to
improve their supply chains environ-
mental performance and mitigate the
risks of public embarrassment, here are
some lessons from multinationals expe-
riences with the non-proft group.
Lesson 1: Respond quickly to
violation notifcations. Companies
that ignore IPEs entreaties to inves-
tigate and fx violations risk bad pub-
licity. Take Timberlands experience
in 2009. One newspaper headline
screamed: Timberland Linked to
Polluting Factories. The U.S. outdoor
footwear and accessories maker had
failed to respond to a letter sent by IPE
and another Beijing-based environmen-
tal non-proft regarding repeated prob-
lems at two of Timberlands leather
suppliers in China. Both suppliers had
ignored the NGOs earlier efforts to
clarify the violations. IPE and Friends
of Nature subsequently sent the letter
to Timberlands headquarters because
of the multinationals perceived infu-
ence at the two suppliers and its strong public reputa-
tion for transparency and environmental performance.
7
Timberland, for instance, reveals the identities of its
suppliers and has created a Green Index rating the
ecological impact of its products. After the bad publicity
that followed its lack of timely response to the NGOs,
Timberland promised to review its assessment process,
stopped working with one of the Chinese tanneries, and
required that the other undergo third-party validation to
certify that the issues had been resolved.
Lesson 2: Engage NGOs such as IPE and their
coalition partners in a dialogue and commit to
work with suppliers to fx problems. In 2010, the
little nonproft, in collaboration with 33 environmental
NGOs in China, had begun an extensive examination
of the IT industrys involvement in heavy metal pollu-
tion in China. Apple was one of 29 IT companies under
investigation. (Other big names included HP, Siemens,
Vodafone, and Intel.) Apple and its rivals have tradition-
ally refused to disclose their suppliers names. To fnd out
if Chinese IT factories with heavy metal discharge viola-
tions supplied Apple, Ma and his team sifted through
factory photos for incriminating
logos. They reviewed speeches
by Chinese offcials and execu-
tives for mentions of Chinese
factories with Apple connec-
tions. They even scoured news-
papers following the 2011 earth-
quake in Japan, searching for
reports on Japanese IT suppliers
using Chinese factories.
In April 2010, the NGO con-
sortium wrote to the chief exec-
utives of the 29 IT companies
linked to factories with ongoing
discharge violations. It tracked
their responses and willingness
to fx problems in a series of fve
reports released between that
time and August 2011.
8
Apple
ranked last by the time of the
fourth and ffth reports, which
were subsequently entitled:
The Other Side of Apple. Both
Chinese and international press
picked up the story. By the years
end18 months after the ini-
tial letterApple admitted that
15 out of 22 suppliers cited in
the reports were indeed part of
44
China
its supply chain and agreed to press the suppliers to fx
problems.
9
Under pressure from both environmental and
fair labor NGOs, Apple in January 2012 disclosed its
suppliers publicly for the frst time.
10
Lesson 3: Use IPEs databases to discover gaps
in your environmental information about your
own operations and those of your suppliers. IPEs
databases also reveal information gaps at companies that
are collecting, measuring, and analyzing environmental
data about their or their suppliers operations. Executives
are often surprised to fnd their Chinese manufacturing
site or supplier on the polluter list. In some cases they
even discover through their interactions with IPE that
a supplier has been concealing violations from them.
For instance, because General Electric regularly audits
its suppliers for environmental compliance, it was sur-
prised to learn from IPE that one of its suppliers had
three years of wastewater violations. When GE visited
the supplier shortly afterwards, the supplier disavowed
the violations. According to Ma, the supplier admitted to
exceeding wastewater standards only after GE confront-
ed factory managers with the data on IPEs Web site.
Lesson 4: Provide stronger incentives for envi-
ronmental performance. In the past, suppliers often
responded with deception to increased incentives from
buyers for environmental improvement rather than
with efforts to improve. This made buyers reluctant
to increase incentives. However, as the GE example
clearly demonstrates, decep-
tion becomes more diffcult
as transparency and NGO
scrutiny grow because envi-
ronmental violations are now
more likely to be detected.
Greater Chinese govern-
ment and public demand
for environmental improve-
ment is raising the cost of
being called out publicly for
violations of multinationals
and their suppliers. Chinese
authorities, for instance,
recently required Conoco
Phillips and its Chinese part-
ner to pay one billion yuan
($158 million) to clean up oil
leaking from their oil feld off
Chinas northeastern coast.
11
Given these trends, mul-
tinational buyers can have
greater confdence in the
future that enhanced incentives to improve suppliers
environmental performance will have the intended
effect. Managers should note that buyers need not
necessarily pay a higher price per unit when a supplier
responds positively to incentives to improve environ-
mental performance. They can instead reward suppli-
ers investments and efforts by making quantity com-
mitments (perhaps by consolidating the business with a
smaller number of suppliers).
Lesson 5: Use IPEs extensive database as a tool
to screen potential suppliers and monitor existing
ones. Rather than seeing NGOs like IPE as a nuisance,
GE is one of a growing number of companies that has
recognized the nonprofts potential as a tool for gaining
visibility into its complex, multi-layered supply chain in
China. More than 25 companies including GE, Nike,
Timberland, Walmart, and Esquel now regularly use
IPEs database to screen suppliers for compliance with
environmental standards.
The database, for instance, has become a systemat-
ic part of Nikes supplier assessment process in China.
Nike staff search IPEs site for air and water violations
at potential new suppliers before appointing a third-par-
ty auditor to conduct an initial compliance assessment
at those factories. Nike also supplements regular envi-
ronmental, health and safety audits of its roughly 150
active contract factories in China by checking IPEs site
at least once every six months for new violations. And it
receives alerts from IPE if one of its contract factories is
going to be listed.
Lesson 6: Gain visibility into your suppliers
suppliers. Nike also has started using IPEs database to
extend its reach further into its Chinese supply chain.
Like other brands, Nike has historically had little presence
at second-tier suppliers. But with the most serious envi-
ronmental degradation often taking place at upstream fac-
tories, environmental NGOs and the public are increas-
ingly training their sights on multinationals relationships
to them. Nike is focusing initially on monitoring some 200
key material suppliers (such as leather, fabric, and zipper
makers) to its contract footwear and apparel factories.
Lesson 7: Use data from IPE to help suppliers
self-identify problems and track their own suppliers.
Nike also encourages and even trains key suppliers to
use IPEs database to check on themselves and their
suppliers in China in order to maintain their green sta-
tus. Hong Kong-based apparel maker Esquel and two
Taiwanese footwear manufacturers, Pou Chen Corp and
Feng Tay Enterprises, were among those that did so reg-
ularly, to Nikes knowledge.
Because IPEs Web site also provides information
45
on various pollution problems and even
remedial approaches, suppliers and buy-
ers can turn to it for help preventing or
fxing violations. Esquel, for instance,
uses such information to learn and take
measures proactively before problems
occur.
Limits of Success
Like Nike, most of the companies now using IPEs data-
base to screen and monitor their Chinese supply chain
started doing so only after IPE contacted them about
violations. But rather than relying solely on such name
and shame tactics to encourage enlightened corporate
behavior, IPE also wants to provide positive examples of
green leaders in responsible supply chain management.
However, the results of its frst efforts did not meet
IPEs hopes. In August 2008, IPE launched the Green
Choice Alliance (GCA), under which buyers had to sign
letters committing them to walk away from suppliers
with outstanding environmental infractions that the sup-
pliers could not or would not fx. GCA members also had
to outline on the GCA site their plan to regularly screen
suppliers for violations using IPEs databases and report
results to GCA. And they had to encourage suppliers to
fx problems, submit to third-party verifcation by IPE-
accredited auditors, and do recommended follow-up
work and verifcation. With only Nike and Esquel sign-
ing commitment letters by the end of 2010, IPE lowered
GCAs original bar to grant membership to all companies
that regularly use the database to screen suppliers.
IPE has also struggled to get companies to release
environmental information voluntarily to the public.
In coalition with some 15 other NGOs, it has tried
sending letters to polluting companies reminding them
to disclose emissions, under the open environmental
information law. The letters remind companies to dis-
close emissions data within 30 days of appearing on a
local environmental bureaus violators list. By early last
year, the NGO coalition had sent 31 letters, but only a
handful of companies met the disclosure requirement
after being reminded.
So are NGOs such as IPE really changing corporate
behavior at domestic Chinese companies? Clearly, prog-
ress is slow, given the ongoing severity of Chinas pol-
lution problems and the scope of the challenges across
such a large and dynamic nation. But its fair to say that
the little NGO is making quite a dent. It punches far
above its weight, and will continue to do so. It is incum-
bent on supply chain managers everywhere to heed what
IPEand other watchdogs like ithave to say. jjj
It is incumbent on supply chain
managers everywhere to heed what
IPEand other watchdogs like ithave to say.
End Notes
1 This article is based on interviews conducted by the
authors and case writer Maria Shao from Nov. 24, 2008 to
Nov. 1, 2011 and on information from the IPEs website.
All quotes and references are from these interviews and
website content unless otherwise noted.
2 Leslie Hook and Katherine Hille, Apple Attacked Over
Pollution in China, Financial Times, August 31, 2011.
David Barboza, Apple Cited as Adding to Pollution in
China, The New York Times, September 1, 2011.
3 See Dirty Laundry: Unraveling the Corporate
Connections to Toxic Water Pollution in China,
Greenpeace International, July 2011. Adidas Group
Response to Greenpeace Report, Adidas Group, http://
www.adidas-group.com/en/sustainability/statements/2011/
Greenpeace_report_Dirty%20Laundry_July_13.aspx
(October 11, 2011). Jonathan Watts, Greenpeace Report
Links Western Firms to Chinese River Polluters, The
Guardian, July 12, 2011.
4 China Water Risk, Can Fashion Be Green, December 13,
2011, http://chinawaterrisk.org/resources/analysis-reviews/
can-fashion-be-green/ (January 18, 2012).
5 Sharon LaFraniere, Chinese Protesters Accuse Solar Panel
Plant of Pollution, NYTimes.com, September 18, 2011,
http://www.nytimes.com/2011/09/19/world/asia/chinese-
protesters-accuse-solar-panel-plant-of-pollution.html
(January 10, 2012)
6 Author Hau Lee is on the board of Esquel.
7 Will Clem, Timberland Linked to Polluting Factories,
South China Morning Post, August 7, 2009. http://archive.
scmp.com/results.php (October 11, 2011).
8 Apple: A New Chapter, China Water Risk, December 12,
2011, http://
chinawaterrisk.org/resources/analysis-reviews/apple-a-new-
chapter/ (January 10, 2012).
9 Besides the Financial Times (Hook and Hille, loc. cit.)
and the New York Times (Barboza, loc. cit.), other media
covering the story included: The China Daily, Reuters,
CNN, and CCTV (China State TV). See Hao Yan, Apple
Manufacturers accused of polluting, China Daily, August
31, 2011,
10 Apple, Apple Suppliers 2011, 2012, http://images.apple.
com/supplierresponsibility/pdf/Apple_Supplier_List_2011.
pdf (January 16, 2012); and Poornima Gupta, Apple
Reveals Supply Chain, Details Conditions, January 13,
2012, http://www.reuters.com/article/2012/01/13/us-apple-
suppliers-idUSTRE80C1KQ20120113 (January 16, 2012).
11 Conoco Phillips agrees $160m payout for China oil spill,
BBC, January 25, 2012, http://www.bbc.co.uk/news/busi-
ness-16713974 (Feb 1, 2012).
46
By George A. Zsidisin and
Janet L. Hartley
Dr. George A. Zsidisin, C.P.M. (gzsidis@bgsu.
edu) is an Associate Professor of Supply Chain
Management at Bowling Green State University
and co-Editor of the Journal of Purchasing
& Supply Management. Dr. Janet L. Hartley
(jhartle@bgsu.edu) is Professor and Director
of the Supply Chain Management Institute at
Bowling Green State University.
Just about every organization is exposed to
price changes associated with the commodities
they acquire for their operations. These
price movements can detrimentally affect
profitability, budgeting, cash flow, and overall
organizational performance. This article
puts forth a flexible process that companies
can implement to manage commodity price
volatility. It begins by understanding your risk
exposure and level of risk tolerance.
A
s the global economy
improves, managers are
faced with increasing
prices and greater price
volatility for key materials
and components, energy,
and transportation across
their supply chains. This article, which is a
summary of our recently published book titled
Managing Commodity Price Risk: A Supply
Chain Perspective (Business Expert Press),
describes a fexible approach for managing
fnancial risk from commodity price volatility.
When commodity prices are volatile, business
decisions associated with developing budgets
and proft projections, setting prices, deciding
when and how much to buy, and negotiating
contracts become all the more challenging.
The wrong decisions can cut into proft mar-
gins, reduce cash fows, and damage relation-
ships with suppliers and customers. To cite
one example, in 2011 Kimberly-Clark saw its
profts and sales drop due in part to higher-
than-expected prices for wood pulp.
1
As a
result, the consumer products company was
VIsIBILITy CHALLenGes ProGress susTAInABILITy VoLATILITy
SCMR1203_CommodityPricingRisk.indd 46 2/29/12 1:18 PM
47
A Strategy for
Managing Commodity
Price risk
forced to raise prices on diapers, a product category
experiencing declining sales and increasing competition
from store brands.
Commodities are goods that are not differentiated in
the marketplace such as metals, energy, and agricultural
products. Commodity prices are infuenced by supply
and demand as well as by trading and speculation; thus,
they can be highly volatile. To illustrate, from August
2003 to March 2004, world soybean prices rose from
$237 to $413 per ton, an increase of 74 percent. They
then fell back down to $256 over the next 24 months.
More recently, silver was trading at around $18 per
ounce in April and May of 2010. Less than a year later,
silver almost tripled in value to $49 per ounce during the
fnal week of April 2011.
2
As global economic develop-
ment increases the worldwide demand for commodities
(many of which have a limited supply), prices and vola-
tility will likely continue to increase.
Price volatility affects the direct costs of raw materi-
als, components, subassemblies, and packaging materi-
als purchased as well as indirect costs from the energy
consumed in operations and transportation. For example,
a food products company such as Kelloggs is exposed to
price risk from corn, soybeans, sugar and cocoa that are
used in its products; from paper and plastics used in its
packaging materials; from natural gas used as energy in
its manufacturing facilities; from diesel fuel for transpor-
tation in its distribution network; and from energy con-
sumed in its offces and distribution centers.
3

By understanding and effectively managing price
risk, supply chain managers can help their organizations
gain a competitive advantage. Managers who understand
commodity price volatility make better decisions on the
timing and amounts of purchases, and they are better
prepared for negotiations with suppliers and custom-
ers. Further, understanding commodity price volatility is
essential for effective budgeting. Organizations typically
develop operating budgets a year or more into the future.
The ability to forecast short- and long-term commodity
price movements and apply the appropriate management
strategies creates stability in an organizations cost struc-
ture. Although prices will fuctuate, a solid commodity
risk management strategy will enable a company to more
accurately assess costs and effectively determine pricing
strategies for its products and services.
Estimating Risk Exposure
In developing an appropriate strategy for managing com-
modity price risk you need to assess your organizations
risk exposure and level of risk tolerance. Lets begin
with risk exposure. The two key factors determining
an organizations exposure to commodity price risk are
(1) its level of dependence on the commodity and (2)
the extent of volatility in the commoditys prices. (See
Exhibit 1 on page 48.)
Assessing Dependence on Commodities
Key factors affecting dependence include the amount
of a commodity you purchase directly, the amount pur-
chased by upstream suppliers, and the fexibility and
ease of substituting the commodity. To assess depen-
dence, begin by conducting a spend analysis to identify
the amount of each commodity purchased, by which
organizational units, from which suppliers, and at what
prices. The spend analysis should include direct pur-
chases that are in the bill of materials for your organi-
zations products and indirect purchases such as energy
and transportation. Some commodities, such as natural
48
gas, may be both a direct and an indirect purchase.
For some companies and commodities, doing a spend
analysis may be a relatively easy task. Most trucking
companies, for example, can easily measure how much
they are spending on diesel fuel each year. Similarly, a
cereal manufacturer should have a good understanding
of how much corn it purchases each year. For organiza-
tions that have a multitude of products, operations, and
business units, however, a spend analysis can be com-
plex. In these cases, each product may use only a small
amount of a certain commodity; but across the entire
company the total spend for that commodity could be
signifcant, exposing the company to a high level of price
risk. A price risk management strategy needs to focus on
all commodities with high spend levels.
In addition to direct purchases, commodities are
embedded in parts, components, products, and services
purchased from suppliers. Of course, suppliers expe-
rience price volatility, too, and they may request price
increases and surcharges. In some cases, if commod-
ity prices signifcantly increase, the supplier may not
be able to fulfll contractual requirements. Thus, it is
important to assess not only the direct level of spend on
a commodity but also to identify upstream suppliers that
may be vulnerable to price volatility.
Dependence is also affected by the ability to quickly
and easily substitute another commodity for the same
purpose. Some examples: Either aluminum or copper
may be used in wiring; packaging materials could be
plastic or paper; building materials plastic or plywood.
If product designs or production processes are fexible
and customers are open to the change or the change is
not visible to theman organization can substitute com-
modities depending upon price. However, to make cer-
tain that a substitution is technically and commercially
viable, you often need to make the upfront investment in
R&D and market research.
Estimating Extent of Past Price Volatility
As shown in Exhibit 1, the second factor that affects an
organizations risk exposure is the commoditys degree of
price volatility. If historically a commoditys prices have
not varied much and no major changes are expected in
the future, exposure to price risk is low. In such cases,
monitoring of the situation, as opposed to active man-
agementthat is, implementing the various commodity
risk management tools, techniques, and strategies dis-
cussed in this articleis generally suffcient. Therefore,
it is important to know if a commoditys price move-
ments actually have an effect on your frm now or in the
future. Of course, unforeseen major events such as the
2011 earthquake and tsunami in Japan can affect com-
modity prices. However, the probability
of such an event occurring in any given
timeframe is very low.
You can apply several techniques to
assess commodity price volatility. One
method is to simply calculate the stan-
dard deviation of published weekly or
monthly commodity prices over a year.
If the overall standard deviation is relatively low in com-
parison with the mean (average) prices, then price vola-
tility may not be a signifcant issue. Another technique is
to take the range of monthly prices (highest minus low-
est observed price) in a year divided by the commoditys
mean price. This provides information with regard to the
percentage change in the price of the commodity in rela-
tion to its average annual price. If prices fuctuate only
a few percentage points from the average, this usually
indicates minimal historical price risk.
Forecasting Future Commodity Prices
As part of the dependence assessment process, its impor-
tant to estimate the direction and volatility of prices in
the future. The World Bank (www.worldbank.org) pub-
Price Risk
EXHIBIT 1
Determining Price Risk Exposure
Degree
of Price
Volatility
Level of Dependence
on Commodity
High
Low
Low High
Monitor
Situation
Actively
Manage
Price Risk
Companies have different levels of
tolerance when it comes to the extent of risk
they are willing to take in managing their supply
chains.
49
lishes annual commodity forecasts. In addition, a num-
ber of services provide market intelligence and forecasts
for commodities for a subscription fee. You can develop
your own forecasts for the short term (weekly, monthly,
quarterly intervals) using technical analysis and long-term
(more than one year) by applying fundamental analysis,
which can further help predict future price risk expo-
sure. We describe fundamental analysis in more detail
next. Typically, short-term forecasts are
more accurate than those further out
in the future. However, even the best
forecastsshort and long termalways
contain some margin of error.
A technical analysis assumes that
historical pricing patterns will predict
the future. You begin the process by
gathering historical commodity price
data for the past two to three years. Then you plot the
data to observe price patterns and judge if those patterns
will continue into the future. Depending on the price
patterns observed, statistical forecasting models can be
applied, such as weighted moving average, exponential
smoothing, trend-adjusted exponential smoothing, or
regression. Each forecasting model needs to be assessed
for accuracy, with the most accurate model usually used
to forecast short-term commodity prices. These mod-
els need to be monitored and adjusted as necessary.
(Business forecasting books can provide greater detail on
how to apply various forecasting tools.)
Long-term forecasting uses fundamental analysis,
a technique that assumes that the relationship between
supply and demand drives commodity prices. In funda-
mental analysis, you examine the underlying forces that
affect supply and demand, estimate how
supply and demand will change, and
then assess what impact the change has
on price. The key steps in this approach
are shown in Exhibit 2. The frst step is
to gather information on supply, demand,
and price. This entails plotting supply,
demand, and price data and looking at
their relationships. The next step consists
of understanding the basics of supply and
the underlying factors affecting supply,
and estimating how supply may change
during the future. Similarly, the next
two stepsnumbers four and fve in our
graphicdo the same for demand.
After doing a qualitative analysis of
supply and demand, the relationships
between supply, demand, and price
are examined using statistical tools such as correla-
tion analysis and regression. The correlation evaluates
the strength and direction of relationships with price.
If the correlation is signifcant, a model to estimate
price can be developed using simple linear regression.
If there is a futures market for the commodity, the next
step (Number 8) consists of incorporating future price
trends qualitatively into the analysis. All the knowledge
obtained about the commodityincluding prices from
regression models and futures pricesare combined to
develop the fnal forecast, using judgment such as past
experience and in-depth knowledge of the commodity
and its markets.
Your organizations overall price risk exposure can
be evaluated based on the degree of dependence upon
the commodity and the historical and predicted future
direction and volatility of commodity prices. A green-
yellow-red scale can visually categorize the level of
risk. Those commodities whose price risk is high, as
indicated by a red rating, should be actively managed.
Depending upon your organizations risk tolerance and
supply chain resources, you may also decide to actively
manage certain commodities that are categorized as
yellow.
EXHIBIT 2
Fundamental Analysis Process Steps
Gather information
and plot supply,
demand, and price
1
Understand
supply basics
2
Identify underlying
factors and percentage
change in supply
3
Understand
demand basics
4
Identify underlying
factors and percentage
change in demand
5
Examine
correlations
with price
6
Develop and use
regression models
7
Assess
future prices
8
Combine information
and use judgement
to forecast prices
9
Monitor
information and
adjust forecast
10
Commodity prices are influenced by
supply and demand as well as by trading
and speculation; thus, they can be highly
volatile.
50
Understanding Risk Tolerance
Organizations have different levels of tolerance when it
comes to the extent of risk they are willing to take in
managing their supply chains. Risk tolerance depends on
factors such as the organizations culture, industry, stage
of their products in the product lifecycle, customer base,
experiences, and corporate leadership. A companys risk
tolerance can be generally viewed on a continuum from
being risk averse, to risk neutral, to having a high risk
appetite. Managers must determine the level of risk
exposure at which active management becomes neces-
sary, which will depend on the organizations risk toler-
ance level. Risk tolerant organizations may be willing to
accept greater swings in price movements than their risk
adverse counterparts.
Creating a Commodity Price Risk
Management Strategy
When the risk exposure and tolerance assessment indi-
cates that active management is needed, a company can
consider a number of strategies, as outlined in Exhibit 3.
Its important to remember that in pursuing any of these
price risk management strategies that fexibility is key
just as it is with managing the overall supply chain. Also,
keep in mind that the decisions, actions, and policies
enacted today can signifcantly affect the options avail-
able for managing commodity price risk tomorrow. Each
of the components of the commodity price risk manage-
ment strategy is discussed below.
Substituting
When forecasts suggest that commodity prices will
increase, explore if your organization has an approved
lower-cost substitute material or energy source. If so
and if the total cost savings obtained by shifting to the
approved substitute is justifed by the commoditys lower
purchase pricework cross-functionally to implement
the change. A successful example of substitution can be
found at The Empowerment Plan, Inc., a Detroit-based
non-proft organization. This frm manufactures a con-
vertible coat/sleeping bag product they designed for the
homeless. According to Julie Benac of JuliAnn Designs,
design consultant for The Empowerment Plan, the prod-
uct required a wind and water-resistant outer shell. But
the heavy nylon that had frst been considered was, at
$4.50 per yard, too expensive for mass production. The
designers identifed an unusual substitute fabric that
could be found at construction and renovation sites
around downtown DetroitTyvek. This popular mate-
rial used for house wrapping possessed all the desired
properties of wind and water resistance, and could sim-
ply be hosed down to clean. At $2.75 per yard, Tyvek
became the ideal lower-cost substitute, and was easily
implemented into the coat design.
If the pricing of a potential substitute commodity
shows good initial promise, you then need to assess what
it would take to gain approval for the substitute material.
Successful substitution of materials in product or pro-
duction process design almost always requires the input,
buy-in, support, and cooperation of multiple internal busi-
ness functions as well as external supply chain partners.
Typically, product design, marketing, operations, purchas-
ing, and logistics are involved in developing and imple-
menting a successful substitution strategy for managing
commodity price risk. Be aware, though, that in some
cases the cost and time to approve the substitute mate-
rial may overshadow any cost savings. Further, other com-
panies are likely to make similar substitutions, thereby
increasing demand for that material, and ultimately even
its price. Again, careful analysis is needed to ensure that
the cost savings from substitution will, in fact, materialize.
Price Risk
EXHIBIT 3
Process for Creating a Commodity Price
Risk Management Strategy
Use Substitute if
Lower Price and Feasible
Substitute
Available
Yes
No
Contractual Clause
or Pass On
Pass/Share
with Customer
Yes
No
Pass/Share
with Supplier
Yes
No
Forward/Buy
Feasible to
Buy Ahead
Yes
No
Acquire
Futures/Options
Direct
Market Exists
Yes
No
Cross-Hedge
Substitute
Market Exists
Yes
No
Absorb Risk and
Reduce Demand
Price Increase Forecasted
51
Passing/Sharing Price Risk
When substitutability is not a viable option, consider
whether it makes sense to share or pass on the burden
of price risk to customers and/or suppliers. This strat-
egy depends, in part, on how much leverage your orga-
nization has in contracting with suppliers or customers.
In some industries, such as trucking, passing on price
increases to customers in the form of fuel surcharges
is a common practice.
4
With regard to steel, we note
that steelmakers have increased prices six times from
November 2010 through January 2011.
5
Some frms,
such as Caterpillar and Emerson Electric, plan to (or
already have) increased their product prices to custom-
ers in part to offset the 20 percent to 30 percent steel
price increases during this timeframe. Other frms, how-
ever, such as Whirlpool have found it diffcult to fully
pass on those costs to customers without losing market
share to overseas rivals.
6

In other industries, such as automotive, steel repre-
sents an estimated 4 percent of the
cost of a car, or $1,000 of a $25,000
car. So a 20 percent to 30 percent
rise in steel costs would have a par-
allel cost increase of $200. Many
automakers would be more likely to
absorb those increases than to pass
them on to consumers and thereby
potentially lose business. Again,
depending on the industry and the
market situation, it is not always
possible to pass on commodity-related price increases to
customers.
One option for sharing commodity price risk
with customers and/or suppliers is to insert escalator
clauses in the contract that distribute the price risk
between the two frms. An escalator clause allows for
a change in price when a factor (like an increase in
commodity prices) that is out of the control of either
party affects the products value. During negotiations,
the buyer and supplier can agree on what changes
would effectuate the escalator clause, such as an
increase or decrease in the commodity price that
reaches a certain level, say 5 percent. Frequently an
objective, third-party source such as the Producer
Price Index is used as a reference point for commod-
ity price increases.
7
Additional factors to consider
when inserting escalator clauses include the frequen-
cy of review, price remediation processes, and the per-
centage of price increase each party is responsible for
bearing.
Requiring suppliers to bear the price risk of commodi-
ties purchased that are part of the bill of materials for your
products has its own set of challenges. Price increases can
result in the supplier experiencing signifcant fnancial
losses if it does not have the resources and capabilities to
manage price risk. To make up for cost increases, the sup-
plier eventually may take shortcuts that can hamper qual-
ity or delivery schedules. The situation could deteriorate
to the point of a supply disruption if the supplier cannot
proftably make products for your frm.
An alternative to passing on or sharing the price risk
of a commodity is to assume the risk by pooling your
organizations overall spend with that of the supplier. If
your organization spends a signifcant amount on the
commodity and is able to take advantage of volume lever-
age purchases, then the supplier, who also requires that
commodity, may be able to piggyback off your contract.
In this scenario, the purchasing organization acquires
enough of the commodity to meet its requirements as
well as those of the supplier, and thereby assumes the
price risk of the commodity. This approach is often used
when the buyer acquires much higher purchase quanti-
ties of the commodity than its suppliers. If your organi-
zation has more resources and expertise than your sup-
pliers in managing a particular commodity, this may be
an attractive alternative.
Forward Buying
If passing or sharing price risk with supply chain part-
ners is not feasible, the next option might be to consider
forward buys, which locks in the prices of future pur-
chases. Forward buys are possible if frms acquire com-
modities via spot market purchases, and have the capital
and capability to acquire and store the material. Yet this
strategy also has several distinct disadvantages. For one,
forward buys are not compatible with lean supply chain
practices. Inventory that is held because of forward
buys ties-up capital, hides potential operating problems,
increases storage and handling costs, and increases the
chance for damage, obsolescence, and spoilage. In addi-
tion, forward buys are based on forecasts. So if the pric-
Your overall price risk exposure can
be evaluated based on the degree of
dependence upon the commodity and the
historical and predicted future direction and
volatility of commodity prices.
52
es decrease rather than increase, your organization may
have higher costs than competitors who use a different
risk management strategy. Thus, it is important to assess
if the potential price savings from forward buying will
offset the potential cost increases.
To determine if a forward buy is a viable option, ask if
your organization has the capability or desire to hold
additional inventory for a period of time. This is often
dependent on how the commodity is consumed, wheth-
er it is part of the bill of materials, or if it is used in sup-
port of other activities or processes.
Hedging Using Futures Contracts
When an organization does not have the ability or desire
to execute a forward buy, another option to consider is
hedging using futures contracts. A futures contract is an
agreement between two parties to buy or sell a commod-
ity at a particular time in the future for a particular price.
Contracts are standardized with respect to quality, deliv-
ery time, and delivery location.The only variable is price,
which is determined by trading in organized commod-
ity exchanges. One of the most popular exchanges in
the United States is the Chicago Mercantile Exchange
(CME, www.cmegroup.com), which trades contracts
for agriculture, energy and metal commodities. Futures
contracts are standardized with specifc quantity, qual-
ity and delivery terms. They are intended to be fnancial
instruments rather than a primary source of the physical
commodity.
Hedgers, who are producers or users of a commodity,
participate in the futures market to reduce exposure to
price risk. Hedging is possible because for commodities,
prices in the futures market and the spot market tend to
move in parallel to each other. Normally, though, futures
prices are higher than the price in the spot market until
the delivery month gets closer. Firms purchasing a com-
modity face the risk of a price increase from the time
that they contract with their customers until the com-
modity is actually purchased. To hedge, users of a com-
modity buy a contract now and then sell it later before
the due date when the price has increased. The gain in
the futures market offsets the loss from the increased
price when the physical commodity is purchased.
One beneft of hedging compared to forward buy-
ing is cash fow. To forward buy a commodity, a com-
pany must pay for the entire amount of the commodity
when it is purchased. Buying or selling a futures contract
requires only a percent of the actual purchase price as
an initial margin or performance bond. The initial mar-
gin is established by the commodity exchange follow-
ing government regulations. Commodities with higher
levels of price risk typically have
higher margins. As the commod-
itys price changes, an additional
maintenance margin may be
required.
Cross-Hedging
One of the limitations with hedg-
ing using futures contracts is that
some commodities are not traded
in futures markets. Thus, it is not
possible to directly hedge them.
In such situations, you need to identify a commod-
ity that is traded in futures whose price movements are
strongly related to the movements of the actual physical
commodity you want to purchase.
The frst step with cross-hedging is to identify
commodities whose price movements may be similar
to the commodity of interest. For example, before a
futures market was developed for diesel fuel, frms
such as Hershey Foods hedged their diesel fuel sur-
charges with home heating oil futures, which tradi-
tionally has a price movement correlation of over 0.95
with that of diesel.
8
Use correlation and regression to
understand the strength of the relationship between
historical prices of the two commodities, ideally
over at least a 10 year period. If a high correlation
is found (a 0.80 correlation is required by Financial
Accounting Standards Board standard 133), then do
a fundamental analysis of both commodities to esti-
mate the probability that the historical relationship is
likely to continue in the future. If so, you can consid-
er cross-hedging as a possible technique for managing
commodity price risk.
Absorbing Risk and Reducing Demand
While the techniques outlined above and depicted in
Exhibit 3 provide a fexible approach for creating a com-
modity price risk management strategy, there may be
situations where its simply not possible to pursue the
Price Risk
Price volatility affects the direct
costs of raw materials, components,
subassemblies, and packaging materials purchased
as well as indirect costs from the energy consumed
in operations and transportation
53
various alternatives presented. For
example, there may not currently be
any viable substitutes for the com-
modities your organization uses. Or
suppliers and customers may balk at
sharing riskor for a variety of rea-
sons may be unable to do so. With the
advent of lean supply chains, to cite
one common reason, fewer frms are
willing or capable of holding additional
inventory. Finally, futures markets may
not exist for some of the commodities,
or your organization may not have the
expertise and resources to use hedg-
ing or cross-hedging. For any or all
of these reasons, then, there may be
times when your frm has no other
immediate alternative than to absorb
the risk associated with commodity
price volatility.
Yet even when companies are
forced to absorb the immediate risk,
they can work to minimize risk expo-
sure for the future. For supply chain managers, one
principal way is to get involved in product and process
innovations designed to reduce the demand (usage) for a
price-volatile commodity. In the long term, organizations
can reduce their exposure to price risk by reducing or
eliminating their need for the commodity. For example,
many companies have installed new lighting fxtures that
use energy effcient light bulbs and sensors that turn off
lights when they are not in use to reduce electricity con-
sumption. Redesign of products, processes, and packag-
ing can signifcantly reduce the demand for a commod-
ity, lowering spend and reducing exposure to price risk
while also helping the environment. One example: In
2007, Arrowhead redesigned its water bottle to use 30
percent less plastic while maintaining functionality and
achieving a high level of consumer acceptance.
9

As with substitution, product and process innovation
requires collaboration both internally and externally with
supply chain partners. The redesign of products and
processes to reduce commodity demand may require
a large investment in R&D, marketing research, and
capital equipment. However, by successfully reducing
demand for a commodity, the company reduces its atten-
dant exposure to price risk.
Effective Management the Key
Volatility in commodity prices is an aspect of business
that almost every frm encounters either directly or indi-
rectly when managing its supply
chains. Further, globalization,
population growth, and economic
development are increasing the
price volatility of many commodi-
ties. Unless it is effectively man-
aged, risk exposure from price
volatility can detrimentally affect
fnancial performance.
Although price volatility is out-
side of the direct control of most
frms, supply chain managers
can use the approach described
in this article to develop effec-
tive strategies for mitigating price
risk. This approach can be used
by small and large frms alike and
for almost any type of commod-
ity. Through this approach, supply
chain managers can improve their
organizations fnancial bottom
line, provide cash fow stability for
budgeting, participate in design-
ing and improving products and production processes,
and prepare for detailed negotiations with suppliers as
well as customers. jjj
End Notes:
1 Ziobro, P. (2011, October 24). Kimberly-Clark cuts forecast
Amid Costs, Weak Demand, from The Wall Street Journal:
http://online.wsj.com/article/SB10001424052970204644504
576650820004619868.html
2 Christian, J. (2011). Why silver rose and fell, and why it will
remain volatile, Inside Supply Management, 22(5), 23.
3 Kellogg Company 2010 annual report. (2010).
4 Schlosser, M. A. & Zsidisin G. (2004). Hedging fuel
surcharge price fluctuations. Practix: Good Practices in
Purchasing and Supply Chain Management, Retrieved July 6,
2011, from CAPS Research: www.capsresearch.org
5 Matthews, R. G. (2011, February 3). Steel-prices increases
creep into supply chain. Retrieved June 28, 2011 from The
Wall Street Journal: http://online.wsj.com/article/SB1000142
4052748704775604576120382801078352.html
6 Matthews, R. G. (2011, February 3). Steel-prices increases
creep into supply chain. Retrieved June 28, 2011 from The
Wall Street Journal: http://online.wsj.com/article/SB1000142
4052748704775604576120382801078352.html
7 Producer Price Index-Commodities (n.d.).
8 Schlosser, M. A. & Zsidisin G. (2004).
9 Arrowhead develops super-light bottles. (2007). Design News,
62 (15), 36.
air cargo SPEciaL rEPorT
54
Will 2012 be the
Turnaround Year?
By Patrick Burnson
Patrick Burnson is executive editor for
Supply Chain Managment Review
While analysts say this
should be a growth year
for air cargo, pressing
challenges such as
increasing EU regulation,
the pent-up demand in Asia
Pacific, and the cost of
global security still weigh
heavy on the sector.
I
ndustry analysts are predicting that 2012 will
be a signifcant year for air cargo recovery, but
not without a new set of challenges that seem
to be facing shippers and carriers on all hemi-
spheric fronts.
For example, the troubled European Union
(EU) is making life difcult for all airlines by impos-
ing a unilateral carbon-trading scheme. Meanwhile,
aircraft manufacturers and shippers agree that bio-
fuels must be gradually introduced across the board.
Te Asia Pacifc, which is still the most vibrant mar-
ket for U.S. shippers, may be ceding some of its infu-
ence to Latin America. Shippers say that fuel and energy
costs associated with onerous environmental laws will
make near shoring more attractive over the next year.
(Exhibit 1 on page 56 shows the growing fuel imact on
air carrier operating costs over the past decade.)
And dont forget the security issue that is ongoing
for global shippers or carriers. However, with a more
harmonized security system in place, global shippers
may fnally get a break on compliance expenses.
So, with a slowly improving global economy
juxtaposed against this growing list of challenges, is
the air cargo industry poised for a comeback? Te
Boeing Company certainly thinks so. Having ended
2011 with a solid earnings report, the company says
it refects continued strong core performance across
its businesses.
Strong fourth quarter operating performance,
record revenue and backlog, and expanded earnings
and cash fow capped a year of substantial progress
for Boeing in 2011, said Jim McNerney, Boeing
chairman, president, and CEO. We enter 2012
with renewed momentum, and proven business and
SCMR1203_AirCrgo.indd 54 2/29/12 1:00 PM
www.scmr.com Sup p l y Cha i n Ma na gement Rev i ew Ma rch/ Ap ri l 2 0 1 2
55
56
Special Report: Air Cargo
product strategies, he says. With an intense focus on
productivity, were well positioned to deliver growth and
increased competitiveness in the air cargo arena
John Leahy, chief operating ofcer for Airbus, is equally
bullish, saying that the air cargo freighter feet alone will
double in the next 20 years. Meanwhile shippers moving
freight on passenger aircraft will drive even more growth,
says Leahy. Our global market forecast foresees investment
in freight-bearing aircraft exceeding $3.5 trillion in that
time frame, he says.
Industry analysts support these rosy predictions, noting
that more and more commodities are now regarded as per-
ishables and will be moved via air no matter what the cost
or challenge. In fact, food, pharmaceuticals, and bio-med
products are being joined by fashion and high-tech compo-
nents in the just-in-time universe of global sourcing and are
being packed into aircraft bellies at higher volumes.
Indeed, air transport, while still the most expensive
transportation option, is now increasingly used by compa-
nies to actually save money, says Luciana Suran, an econo-
mist with global real estate consultancy CB Richard Ellis
Economic Advisors. In some cases, companies can save by
fying in cargo to meet customer demand rather than spend
the money warehousing their goods and distributing them
throughout the U.S. and Canada, she said. Nike is a good
example.
So, while analysts say this should be a growth year for
air cargo, pressing challenges such as increasing regulation,
the pent-up demand in Asia Pacifc, and global security
improvements still weigh heavy on the sector. Heres a look
at those challenges and ways that both shippers and carriers
can work to overcome them.
EUs Pressure Point
As if the EU didnt have enough problems these days, its
also earned a great deal of enmity from its air cargo trading
partners as of late.
When the EU Emissions Trading Scheme (ETS) was
initially introduced last year, it appeared to be an intra-
European solution that would avoid uncoordinated tax
measures. But the scope was extended beyond Europes bor-
ders and there was no let-up in taxation.
Departure taxes in the UK, Germany, and Austria
introduced as environmental measurescost over 4 bil-
lion. At current prices for UN issued Certifed Emissions
Reductions, that would ofset aviations global CO2 emis-
sions about one-and-a-half times.
And ETS is coming on top of that, says Tony Tyler,
director general and CEO of the International Air Transport
Association (IATA). In fact, non-
European governments, including
the U.S., see this extra-territorial
tax collection as an attack on their
sovereignty. However, they are tak-
ing action.
Aviation can ill aford to be
caught in an escalating political or
trade confict over the EU ETS,
says Tyler. Te International Civil
Aviation Organization (ICAO)
is the only way forward. I sense a
greater appreciation in Europe that
a global solution under ICAO may
take time, but it will produce a
superior result. Its more important
than ever for Europe to be a fully
Air China, Boeing, and Chinese and U.S. aviation
energy partners conducted Chinas frst sustain-
able biofuel fight late last year. The two-hour main-
land fight from Beijing Capital International Airport
was witnessed by offcials from both countries and
highlights the viability of using sustainable aviation
biofuel sourced in China.
Exhibit 1: Fuel Impact on Operating Costs
Year
% of Operating
Costs
Average Price per
Barrel of Crude
Break-even Price per
Barrel Total Fuel Cost
2003 14% $28.8 $23.4 $44 billion
2004 17% $38.3 $34.5 $65 billion
2005 22% $54.5 $51.8 $91 billion
2006 26% $65.1 $68.3 $117 billion
2007 28% $73.0 $82.2 $135 billion
2008 33% $99.0 $88.9 $189 billion
2009 26% $62.0 $55.4 $125 billion
2010 26% $79.4 $91.0 $139 billion
2011 F 30% $112.0 $116.3 $178 billion
2012 F 32% $99.0 $101.1 $198 billion
Updated: 12/2011 Next Update: 3/2012 Source: Industry Financial Forecast Table (IATA Economics)
www.scmr.com Sup p l y Cha i n Ma na gement Rev i ew Ma rch/ Ap ri l 2 0 1 2
57
engaged participant in discussions at ICAO aimed at deliver-
ing a global solution.
Tis further isolates the EU from the rest of the world
and will keep in place a unilateral scheme that is counterpro-
ductive to concerted global action on aviation and climate
change, says Charles Chuck Clowdis, managing director
of global commerce and transport advisory services at IHS
Global Insight. Te irony is that all the worlds airlines want
to address climate change and make a move toward more sus-
tainable energy.
According to IATA, the aviation value chain is commit-
ted to improving fuel efciency by an average of 1.5 percent
annually to 2020, capping net emissions from 2020 with car-
bon-neutral growth and cutting its carbon footprint in half by
2050 compared to 2005 levels.
Improvements in technology, operations, and infra-
structure as well as the use of positive economic measures
are needed to achieve this, says Tyler.
To underscore this issue, analysts note that Air China,
Boeing, and Chinese and U.S. aviation energy partners
conducted Chinas frst sustainable bio-fuel fight late last
year. Te two-hour mainland fight from Beijing Capital
International Airport was witnessed by ofcials from both
countries and highlights the viability of using sustainable
aviation bio-fuel sourced in China.
Asia Pacifics Pent up Demand
Te fact that this new fuel demonstration took place in
China should certainly not come as a surprise. Airfreight
rates for Asia outbound shipments rose 4.6 percent in Janu-
ary over the same month a year ago, the frst year-over-year
increase in Drewrys Air Freight Price Index in 15 months.
Te Drewry index also jumped 8.4 percent from
December, signaling that demand remained relatively solid
after the late-2011 holidays as airlines kept capacity in
check. Te measure of 109.6 posted in December 2011 was
the highest point since the Drewry index reached its 2011
high of 114 in October.
And on that news, the Year of the Dragon was ushered
in with forecasts for continued air cargo growth in the Asia
Pacifc. Airlines in the region will take delivery of more than
9,370 new aircraft over the next 20 years, according to the
latest market forecast by Airbus. Valued at $1.3 trillion, the
deliveries will account for 34 percent of all new aircraft with
more than 100 seats entering service worldwide over the
forecast period, with the region overtaking North America
and Europe as the worlds largest air transport market.
However, Washington, D.C-based Airfowarders Association
(AfA) Executive Director Brandon Fried says that while Asia
remains a strong market for his constituents, other options are
emerging, too.
Te industry is already seeing some softening in Asian
markets where North American buyers are beginning to source
products from neighboring countries, says Fried. Tis means
that as time passes, more opportunities will develop through-
out Latin America as well.
Increasing Cost of Security
Irrespective of regional growth, however, is the ongoing
battle waged by the cargo community against global ter-
rorism. Shippers who have been burdened by the cost of
security may get little relief in the near future, say analysts.
However, IATA has urged broad cooperation among
industry and governments to realize the Checkpoint of the
Future. Given the growing quantity of freight moving in
the bellies of passenger aircraft, such a move may be crucial.
Although there are some
expectations for improvement in the
next 12 months, 44% of respondents
(to the IATA survey) are expecting
further deterioration in traffic.
IATA Economics
58
Special Report: Air Cargo
Te Checkpoint of the Future
envisages using passenger data col-
lected for immigration authorities to
diferentiate airport screening, says
IATAs Tyler. Secondly, it incorporates
technology expected to be available
in a 10-year timeframe to enable pas-
sengers to walk through checkpoints
without stopping or unpacking.
Along with support from Interpol,
the European Commission, the U.S.
Department of Homeland Security,
and the Chinese government, 16
states have endorsed the Checkpoint
of the Future concept. Te
International Air Cargo Association
(TIACA) endorses this view too, and
is promoting its own agenda for inter-
national growth.
We believe that countries should
view air routes as highways in the sky,
a competitive public good every bit as
important as surface transportation
infrastructure, says TIACAs Secretary
General Daniel Fernandez. Under a
fully liberalized aviation environment,
numerous new international highways
in the sky are possible that would
markedly improve the speed and
accessibility of a nations businesses to
their global suppliers and customers.
In so doing, says Fernandez, the
competitiveness of a nations business-
es will increase, more foreign direct
investment will be attracted and eco-
nomic development promoted.
Dr. Walter Kemmsies, Mofatt
& Nichols chief economist concurs
with Fernandez, but says any discus-
sion of highways in the sky means
more investment in existing infra-
structure. Shippers are paying for
enough logistical support as it is,
says Kemmsies. Its time for govern-
ments to start providing incentives
for addressing fuel costs, sustainabil-
ity, and security. As an American,
I say the buck stops here.
Patrick Burnson is Executive Editor
of Supply Chain Management Review
With their annual conference coming up in Miami this month, the Air Forwarders
Association (AfA) will focus on a variety of concerns addressed in these pages. In
an exclusive interview, AfAs Executive Director Brandon Fried shared his views on
some of the more pressing issues facing air cargo shippers as we roll into 2012.
SCMR: AirCargo 2012 places a heavy emphasis on opportunities for U.S. ship-
pers in Latin American. Why the geographic shift this year?
Brandon Fried: While the Asia Pacific remains dominant, we see some soften-
ing in the markets there. North American buyers are beginning to source products
from this hemisphere to save on fuel and total landed cost expenses.
SCMR: To what extent will your constituents be discussing carbon trading?
Fried: The European Union Emissions Trading Scheme has generated much atten-
tion to this important issue since the unilateral initiative threatens to increase airfreight
and airline passenger related costs significantly. No doubt several of our air carrier
attendees will be discussing this initiative that seems to be gaining momentum.
SCMR: What is the AfAs position?
Fried: Well, the AfA believes that excessive carbon burning is a primary cause
behind a worldwide problem of global warming and that any solution intended
to deal with the issue must be harmonized with all countries. We disagree with
the EUs unilateral approach that fails to consider the opinions of other nations
while imposing financial hardship to those carriers serving its member states.
The preferred solution is to work with other countries through the International
Civil Aviation Organization (ICAO) in drafting a workable plan that restricts carbon
emissions in a mutually agreeable manner. We regret that the EU has failed to
include outside country input in its program, and we urge a reconsideration that
focuses on a more global approach.
SCMR: What commodity groups are leading growth?
Fried: The two significant commodity groups that appear to be leading growth
are electronics and textiles. We expect this activity to continue throughout the year.
SCMR: Any new specific demands coming from emerging nations?
Fried: Probably the biggest demand coming from emerging nations is the need
for industrial and logistics expertise. These nations are just beginning to experience an
increased rate of growth calling for trained individuals who understand the challenges
of growing factory output and moving products overseas quickly and efficiently.
SCMR: How soon will bio-fuels become relevant?
Fried: Many of our members are beginning to incorporate fuel-efficient equip-
ment into their trucking and aviation fleets. Some are even powered with bio-
fuels that while experimental, hold much promise for the future. We are extremely
excited because the use of this energy is capable of reducing our carbon footprint
while decreasing dependence on foreign oil.
SCMR: Finally, are there any other issues global air shippers should be aware of?
Fried: The industry is becoming more technology-driven. We should expect
much more emphasis on bill of lading data element analysis before shipments
departhopefully resulting in less scrutiny and a higher level of trust for frequent
shippers.
Forwarders concerns
6. Baltimore! One of the countrys most interesting, captivating cities. Visit

the beautiful Inner Harbor, culturally rich neighborhoods, museums and
even the birthplace of Babe Ruth.
5. Scores of informative sessions with valuable takeaways.
4. Bonus admission to the Career Center, mega sessions, industry spotlights
and more.
3. Keynote speakers. Sometimes controversial, often funny and always
entertaining. Past speakers include Arianna Hufngton, Malcolm Gladwell
and Dave Barry.
2. Focused learning through Conference tracks: Developing and Leading
Impactful Supply Chains, Global Trends, Risk Management, Supplier
Development, Talent Management and others.
1. Networking! Simply put, if youre in supply management, the ISM
Conference is the place to be, every year.
Register now. www.ism.ws | 800/888-6276 or +1 480/752-6276, option 8

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6_reasons Conf Ad.indd 2 2/14/12 2:09 PM
SCMR1203_Ads.indd 59 2/27/12 1:23 PM
60
SUPPLY MANAGEmENT
SPOTLIGHT on
The Case for Supplier Development
Mike Hales is a
partner with A.T.
Kearney, based
in Chicago. Raj
Arumugam is a
consultant with
A.T. Kearney
and is also based
in Chicago. The
authors can be
reached through
mike.hales@
atkearney.com.
By Mike Hales and Raj Arumugam
The recent backlash
surrounding worker
conditions at one of
Apples supplier facili-
ties is a prime example
of why companies
need a focused sup-
plier development program as part of their overall
Supplier Relationship Management (SRM) initia-
tive. As companies like Apple and others have dis-
covered, the liability these supplier relationships
pose to the image of a company can be significant.
It is important to understand the key ele-
ments of an effective supplier development pro-
gram, which are designed to:
Establish, define, and govern the relationship
Observe, monitor, improve, and sustain
operations.
Transfer technology and lend financial
support.
Train management and the workforce.
Enforce environmental and social compliance.
Identify and mitigate all sources of risk.
Historically, most mid-size and large compa-
nies have had some type of supplier development
program, which typically included a supplier cer-
tification program. It was common for companies
to conduct on-site audits and implement perfor-
mance improvement plans. In recent years, how-
ever, with the advent of more sophisticated tech-
nology and intense cost-cutting pressures, many
companies have diluted their supplier develop-
ment activities. In fact, in many cases they no
longer require on-site supplier audits.
Companies that have diluted their supplier
development programs have lost an opportunity
to build better relationships with existing suppli-
ers and to begin solid relationships with new ones.
Moreover, they have left themselves open to a vari-
ety of risks. With a robust supplier development
program, companies can establish trust through a
heightened commitment to their supply partners.
Benefits of Supplier Development
We have seen a number of recent examples that
underscore the criticality of a supplier devel-
opment program. One company, for example,
effectively manages supplier continuity risk
through its healthy relationships with key sup-
pliers. So when a government action forced
a temporary plant closure of one of the com-
panys suppliers, the positive relationship that
the company had established ensured that the
supplier provided the company with the needed
supplies of the material, whereas other compa-
nies had their supplies cut off. In another case,
a company wanted to develop low cost country
sources to serve as an alternate supply source
to their main suppliers to gain price advantage.
The company invested in a supplier develop-
ment program with the low cost suppliers over
a two-year period before it actually started buy-
ing from these sources. This up-front investment
allowed the buyer to leverage these new sources
of supply in negotiations with their regular supply
base. The end result: major cost savings.
To succeed, a supplier development program
requires participation and cooperation from both
internal and external stakeholders. A cross-func-
tional team representing internal stakeholders and
with an executive sponsor needs to be created.
This team gets the internal stakeholders on board
and then ensures alignment of the external stake-
holders to successfully accomplish the initiative.
In the past, a supplier relationship may have
been considered strategic based on spend vol-
ume, location, transaction history, or longevity.
But in reality, these strategic relationships often
never went beyond fulfilling orders and exhibited
only superficial levels of collaboration. Further,
there was no effort to tap into the hidden poten-
tial of these relationships.
Importance of the Audit
To capture this potential, companies need to take
SCMR1203_SupplyManagement.indd 60 2/29/12 1:22 PM
EXHIBIT 1
Supplier Audit Scoring Sheet
6
People
Redesign Process
Leaky Warehouse
Change Scheduling Process
Action Items Completion Date Financial Cost
$125,000
$75,000
N/A
Supplier Name XYZ Company
Audit Team John Smith, Wei Chen, Pravin Patel, Ram Charan, and Alex Horn
Audit Date 12/12/2011
Category MRO
Raw Material Name Bearing 07125-05
2/1/2012
Expected Completion Date
12/30/2011
12/30/2011
Priority
John Yu
Responsible
Emily Yang
Emma Li
High
High
High
Process
8
Technology
8
Quality
7
Management
9
Finance
10
Innovation
4
Supply Risk
8
Environment
8
Accreditations
10
Total Score
78
Audit Score
Audit Score Segment
World-Class
Frequency
N/A Audited only when an issue arises, otherwise relationship maintained through regular meetings (strategic suppliers)
Audit Frequency (Per Year)
80-100
Tier II Annual Audited on an annual basis and effort put in to drive supplier toward world-class 60-79
Tier III Bi-annual Supplier development activities are carried out only if there is a strategic importance in qualifying supplier 40-59
Tier IV Quarterly Supplier development activities are carried out only if there is a strategic importance in qualifying supplier 20-39
Tier V Not Qualied Supplier not considered for approval 0-19
61
SUPPLY MANAGEmENT (c o nt i nu e d)
SPOTLIGHT on
a fresh look at the strategy and practices of their supplier
development program. A foundational component of any suc-
cessful program is the onsite audit at the suppliers facilitya
process that deepens knowledge of the supplier and sets the
agenda for managing the relationship. A proven methodology
for conducting an onsite audit is outlined below:
Organizationmanagement, people, quality, innovation.
Resourcestechnology, process.
Healthfinance, supply risk.
Responsibilityenvironment, and certifications.
The onsite supplier audit, carried out by a cross-func-
tional team, covers these various areas and includes corre-
sponding sub-sections. Each sub-section comprises a list of
questions that guides the team members during the audit
and uses a scoring system to record supplier performance.
Sub-section scores are tabulated and performance gaps
are identified at the end of the audit. The audit team draws
out a performance improvement contract and assigns a
final audit score based on sub-section scores. (Exhibit 1
shows a sample supplier audit scoring sheet.) The audit
score is used to determine audit frequency and to motivate
the supplier to achieve world-class status by providing a
road map in the form of a performance improvement con-
tract, signed by a key stakeholder from the supplier side.
Follow-up audits are scheduled based on these factors:
business priority, supplier classification tier, performance
improvement contract, and audit score. The audit score
and the performance improvement contract are updated at
the end of each audit. Typical audit frequencies are shown
at the bottom on Exhibit 1.
Companies are operating in an environment in which their
actions often are judged based on their environmental and
social responsibility impacts. Increasingly, they realize that it
is not just their actions that attract scrutiny and generate criti-
cism, but also the actions of their supply partners. As a result,
a number of major corporations have had to either alter sup-
plier relationships or force suppliers to take corrective actions.
Activism, consumer awareness, and the influences of
social media are factors that can magnify the damages to
a companys reputation when a surprise supplier discovery
surfaces. Companies that diligently monitor the activities
of supply partners on a regular and consistent basis protect
themselves from such external threats through proactive
management and the ability to mitigate issues as they arise.
SCMR1203_SupplyManagement.indd 61 2/29/12 1:22 PM
62
E XE CUT I V E I NS I GHT S
Q:
What are the biggest chal-
lenges facing supply chain
professionals today?
A:
Supply chain professionals
and the trucking industry
are facing a number of challenges
including slow economic recovery,
driver shortages, increasing fuel
costs, and tight capacity. However,
other looming issues include gov-
ernment regulation with regard to
hours-of-service (HOS), the nations
crumbling infrastructure, and the
increase of regulatory and equip-
ment-related expenses associated
with doing business. It is my belief,
that the uncertainty surrounding
possible changes to the HOS rule
will decrease productivity, worsen
driver shortage, and exacerbate
highway congestion.
With regard to infrastructure,
the countrys highways, bridges,
and roads are deteriorating at an
alarming rate and there has not
been any concrete plan put forth
to fix the problemor fund these
crucial repairs. The governments
failure to invest in our infrastructure
is not only hurting businesses but
the economy as a whole. An off-
shoot of this issue is the increase in
tolls being added at the state and
local level to fund budget short-
falls and finance repairs.
Q:
What are users looking
for most in providers of
transportation and
logistics services?
A:
Customers
continue to
seek out carriers
that offer consistent,
reliable service and
real-time data. They
want to make sure
every dollar they
spend on transpor-
tation counts by
choosing carriers
who offer them the
opportunity to shine in front of
their customers. A carrier must
understand their customers busi-
ness and shipping requirements.
Many shippers look for a partner
carrier that provides transparency
in their data, evolution in their
service and products, and the
latest technology with regard to
customer service and safety.
Q:
What are the keys to a
successful relationship
between user and services
provider?
A:
At the consignee, the car-
rier delivering their goods
is their shipper. Because a car-
rier is so important to the way a
consignee perceives the shipper,
it is important to have a strong
relationship with the
carrier you are trusting
to deliver your goods.
They must form a true
partnership where the
relationship is built on
mutual need, quality,
reliability, communica-
tion, and success. When
this is done, a customer
will receive personal-
ized service from their
carrier and real cus-
tomer service. When
issues arise, there is a desire from
both the carrier and the shipper
to work together for an immedi-
ate, successful resolution.
At the end of the day, a suc-
cessful relationship will show that
a carriers and a customers goals
are aligned and a trust is estab-
lished through performance and
communication.
Aligning Goals of Customer
and Carrier
Perspectives from the Top
Q&A with Rick ODell, President and CEO, Saia Inc.
Executive Insights is a special section in this issue of SCMR. In the following pages we
interview top executives from leading supply chain software companies, logistics services
providers, and professional associations. They offer their insights and observations on
market trends, emerging user preferences, and the shape of the supply chain future.
Rick ODell
ADVERTISEMENT
SCMR1203_ExecInsights.indd 62 3/1/12 10:42 AM
63
Q:
What are users telling you
they look for most in a sup-
ply chain solution today?
A:
Customers are increasingly
interested in global trade
management (GTM) solutions
that are flexible enough to sup-
port different supply chain seg-
mentation strategies. GTM solu-
tions must adapt to address the
different needs of multiple supply
chains within the same software
system and shared network of
suppliers, logistics providers, and
customers. In particular, systems
must be able to:
Extend processes to suppliers
and logistics providers.
Manage logistics and compli-
ance activities within one solution.
Tune or configure business pro-
cesses to support the segments
needs.
Provide one centralized view of
the global supply chain across all
segments.
Capture all associated data to
support reporting and predictive
analytics.
For example, an organization
may need supply chain processes
that are specialized to goods with
unpredictable demand, such as
the latest fashion. The same orga-
nization may also provide goods
with more predictable demand
that require steady replenish-
ment. Similarly, other goods may
have higher import and export
compliance requirements that
must be carefully managed.
Q:
Any suggestions on how to
make an effective business
case for investing in supply chain
technology?
A:
Although any business
case is dependent on the
timeframe and
complexity of the
proposed solu-
tion, some basic
guidelines apply:
Define the end
vision and deter-
mine which initia-
tives are needed
to realize that
vision. Initiatives
could be longer-
term/strategic
or shorter- term/
tactical, so strike a balance
between what can be achieved
quickly versus what may need to
be implemented in phases over a
longer period.
Gather metrics that can be tied
back to the vision, and determine
what those values are at present
and what they will look like in the
future state.
Understand the costs of work-
ing with your business partners.
These costs may include the dif-
ferent levels of service rendered
by your logistics providers and
the terms under which you oper-
ate with your suppliers. How will
these costs be affected by a sup-
ply chain solution?
An effective business case will
show manageable and quantifi-
able cost savings or revenue
growth as a direct effect of
implementing the supply chain
technology.
Q:
What are the most impor-
tant criteria for evaluating
and selecting a provider of sup-
ply chain solutions or
software?
A:
Because past suc-
cess is usually a
good indicator, look for
a provider that has previ-
ously solved complex
GTM problems for a
large, global enterprise.
Dont be afraid to request
a site visit with a customer
that has similar issues to
your own.
From a knowledge
perspective, look for a provider
that operates seamlessly in both
logistics and compliance domains
and that has experienced compli-
ance experts on staff, not just as
consultants.
Q:
What is the next big break-
through in supply chain
technology?
A:
I believe well see con-
tinuing convergence of
domestic and global supply
chain solutions as a require-
ment for effectively meeting the
needs of global organizations.
Todays fragmented solutions
cant meet the end-to-end pro-
cess needs of enterprises with
complex and diverse supply
chains.
A Convergence of Domestic
and Global Solutions
Q&A with Jim Preuninger, Chief Executive Officer, Amber Road
Jim Preuninger
ADVERTISEMENT
64
Q:
What are the main skills
supply chain professionals
will need going forward?
A:
Supply chain professionals
touch every business func-
tion. Business acumen is a con-
cept we hear all the time. What
exactly does that mean? First,
supply professionals must under-
stand the short- and long-term
strategy of the organization and
not only how supply fits into the
strategy but what they can do to
accomplish the goals. Second,
understanding finance and how
supply management contributes
to the overall financial health of
the organization.
In many instances, supply
management represents the
organization to the rest of
world. Globalization has not
only taken supply management
to the executive table but sup-
ply professionals are usually
the first feet on the ground
when a new facility or supplier
is secured in other parts of the
world. This requires under-
standing different cultures,
geopolitics, and values where
the organization is doing busi-
ness. We are already experienc-
ing shortages of key materials
and the potential for inflation is
present in every country.
Todays professionals will
need the skills to deal with
these issues.
Q:
What is the value of pro-
fessional development
and continuing education to
the individual and to his or her
organization?
A:
In an ever-
changing
environment there
is a constant need
to have knowledge,
skills, and abilities
that are current.
Professional devel-
opment is essential
to make sure skills
are up to the chal-
lenges of today and
tomorrow. Those
organizations that
invested in learn-
ing during the last
few years will have the competi-
tive advantage as the economy
continues to improve. Their staff
is up-to-date and poised for the
challenges that are part of supply
management. You might find that
companies that restricted profes-
sional development are struggling
to get up to speed and losing
opportunities along the way.
Q:
What is the role of pro-
fessional associations in
todays complex and global sup-
ply chain environment?
A:
Associations play a unique
role in todays environment.
Members look to their organization
not only to deliver knowledge, but
to provide knowledge that is rel-
evant to their specific needs. The
one-size-fits-all approach is no lon-
ger viable. The challenge for asso-
ciations is to stay on top
of what is needed and
develop and deliver that
knowledge. Fortunately,
technology provides
tools to obtain crucial
information about our
members. Associations
can use this information
to create a knowledge
strategy.
Q:
How does your
organization
keep current with the
evolving supply chain
needs of the membership?
A:
ISM uses our Board of
Directors, leaders of sup-
ply management, to scan what
is happening as well as identify-
ing emerging trends. They pro-
vide ISM with a macro-view of
global trends as well as trends
within their own industries. We
also look to the expertise of
our members for a micro-view
of supply management. CAPS
Research is our partner and we
can tap into their knowledge.
Combined, this expertise pro-
vides ISM with a backbone to
develop our programs and
activities.
Developing Skills for Today
and Tomorrow
Q&A with Paul Novak, CPSM, C.P.M., A.P.P., MCIPS,
Chief Executive Officer, Institute for Supply Management

Supply Chain Management Review
Q&A with CEO/Top Executive

Paul Novak, CPSM, C.P.M., A.P.P., MCIPS
Chief Executive Officer
Institute for Supply Management

Questions

What are the main skills supply chain professionals will need going forward?

Supply chain professionals touch every business function. Business acumen is a concept
we hear all the time. What exactly does that mean? First, supply professionals must
understand the short and long-term strategy of the organization and not only how supply
fits into the strategy but what they can do to accomplish the goals. Secondly,
understanding finance and how supply management contributes to the overall financial
health of the organization.

In many instances, supply management represents the organization to the rest of world.
Globalization has not only taken supply management to the executive table but supply
professionals are usually the first feet on the ground when a new facility or supplier is
secured in other parts of the world. This requires understanding different cultures,
geopolitics and values where the organization is doing business. We are already
experiencing shortages of key materials and the potential for inflation is present in every
country. Todays professionals will need the skills to deal with these issues.

What is the value of professional development and continuing education to the
individual and to his or her organization?

In an ever changing environment there is a constant need to have knowledge, skills and
abilities that are current. Professional development is essential to make sure skills are up
Paul Novak
ADVERTISEMENT
65
Q:
they look for most in soft-
ware and solutions today?
A:
Consumer oriented tech-
nologysuch as the iPad
and the smartphonehas forever
transformed the way people inter-
act with technology. Users today
are looking for similar mobility and
ease of use in business applica-
tions as well. What were seeing
with labor management systems
is that whether its a manager
accessing real-time staffing infor-
mation so they can reallocate
labor instantly from overstaffed
to understaffed ordersor field-
based workers looking to track
time against specific tasks or
deliveriesthe workforce is always
evolving. And labor management
solutions need to evolve as well
and be intuitive and easy to use
for quicker adoption across the
workforce.
Q:
case for investing in technology
for use in the supply chain space?
A:
In todays volatile supply
chain market capacity is
tight, margins are often razor
thin, and leaders are looking to
deliver the best possible services
often by getting more out of
the limited resources they have
available. When it comes to
labor management, outdated or
manual systems often can add
waste that erodes productivity or
adds costs that negatively affect
the bottom line. Lack of accu-
rate visibility into labor costs
associated with customers, tasks
or orders is the problem. The
first step toward making a busi-
ness case for labor management
should be mining the data you
have available.
There are three key areas of
information to evaluate when you
are developing a business case
for labor management:
Depth: How Much Data Do
You Have? How uniform are your
labor management approaches
across multiple warehouses?
Accuracy: How Reliable Is
Your Data? How accurately can
you allocate paid time to orders
shipped?
Visibility: How Actionable is
It? What would it mean to overall
workforce efficiency if you could
identify productivity issues and
take corrective action in real-time?
If you cant see how paid time
is spentfor which tasks, when,
and by whomyou cant control
labor costs, such as unnecessary
overtime and non-productive
time. Unseen and uncontrollable
labor costs can have a significant
impact on profit margins. Idle or
underutilized workers create non-
value-added labor expensesfor
example in a $10M payroll, just 5
percent in non-productive time
wastes $500,000 annually.
Finding just 2 percent
or 5 percent of additional
productivity per employee
per day can generate huge
value to the organization.
Q:
What are the most
important criteria for
evaluating and selecting
a provider of solutions or
software?
A:
A provider should
understand your
unique challenges and offer a
solution that is easy to use so
it integrates with your existing
technologies and processes
seamlessly with minimal change
management or disruption.
A solution also needs to be
flexible and scale/adapt with
changing business conditions.
This will provide lower long-term
total cost of ownership without
requiring costly customizations.
Services need to be compre-
hensive and support your IT
resources, budget, and payment
preferences.
Budgets and resources are
often tight so look for solutions
that can help you maximize your
budgets and resources with pay-
ment and deployment options to
meet every need.
Intuitive, Easy-to-Use
Solutions Needed
Q&A with Jim Kizielewicz, senior vice president, corporate
strategy and chief marketing officer, Kronos
Jim Kizielewicz
ADVERTISEMENT
66
Q:
What are the biggest chal-
lenges facing supply chain
professionals today?
A:
There are a number of reg-
ulatory and legislative mea-
sures in development that will
influence both supply chain man-
agers and providers. We feel it is
important for carriers and ship-
pers to monitor potential chang-
es and work to inform agencies
and legislators about issues that
affect our industry, including the
need for efficient supply chains
to support commerce.
Q:
What are users looking for
most in providers of logis-
tics and supply chain services?
A:
Shippers are
looking for
choice, reliability,
and simplicity. FedEx
Freight believes com-
panies must focus on
adding value for cus-
tomers. Before launch-
ing our FedEx Freight
Priority and FedEx
Freight Economy
services, we conducted
extensive customer
research and designed
our business model based on
how customers plan their supply
chains.
As part of one of the broadest
transportation portfolios in the
industry, we focus on helping cus-
tomers find the right FedEx solu-
tion for their needs. In addition
to unique service choices, we are
also leveraging FedEx technol-
ogy to simplify LTL transactions,
helping customers save time and
increase productivity.
We recently added FedEx
Freight to FedEx Ship Manager
Software, which helps customers
manage multiple LTL shipments
through the same platform used
for FedEx Express and FedEx
Ground services. We are exploring
options to further automate, mak-
ing it easier for customers to ship
with FedEx Freight and access the
FedEx portfolio of reliable services.
Q:
What are the keys to a
successful relationship
between user and
services provider?
A:
Collaboration,
communica-
tion, and consis-
tency are all essen-
tial. FedEx Freight
continuously takes
focused steps to
understand our
customers business
objectives and ship-
ping challenges in
order to ensure that
we provide the service choices
and solutions that will meet
customer needs. Mutual com-
munication is facilitated through
both face-to-face and automated
channels.
Our drivers work hard to estab-
lish positive relationships with
our customers, and our technol-
ogy enables our customers to be
informed about the status of their
shipments, through services like
FedEx Freight Advance Notice
that can send notification on the
rare occasion when a shipment
might be delayed. Our custom-
ers demand consistency in both
pickups and deliveries, which is
why we work so hard to main-
tain the reliability in our Priority
and Economy services for which
FedEx Freight is known.
Q:
What are the keys ways in
which logistics/supply chain
services providers can improve
their clients productivity?
A:
Providing reliable services
cannot be overstated. If
customers can depend upon
their carrier every day, their ship-
ping processes become more
efficient and they can focus on
their other responsibilities for
their businesses.
In addition, the way a car-
rier provides those services can
improve customers productiv-
ity. For example, having added
FedEx Freight to FedEx Ship
Manager electronic tools, cus-
tomers can save time processing
each bill of lading because they
can set preferences to automati-
cally enter shipping information,
rather than manually entering
recipient addresses. At FedEx
Freight, we will continue to col-
laborate with our customers and
use technology to gain improve-
ments in efficiency that will ben-
efit our customers.
Collaboration, Communication,
and Consistency
Q&A with Pat Reed, Executive Vice President and COO,
FedEx Freight
Pat Reed
ADVERTISEMENT
67
Q:
they look for most in sup-
ply chain software and solutions
today?
A:
While user expectations
vary from company to com-
pany, most users of transporta-
tion management solutions, who
are probably not all that different
from users of other supply
chain solutions, are more
often looking for holistic
solutions where they can
work with a single vendor
to meet their end-to-
end requirements from
buy to sell. They look for
solutions that allow for
collaboration across all
trading partners and that
give them complete vis-
ibility of their supply chain.
They are looking for sys-
tems that not only capture large
amounts of data but that also
offer strong capabilities to utilize
that data to optimize and model
their networks and to provide
the analytics that enable them to
make sound business decisions
that will give them a competitive
edge in their market.
Users are looking for software
solutions that allow them to
react quickly to their custom-
ers and their markets, solutions
that are cost effective and that
can rapidly scale to meet the
ever changing requirements
of their customersfrom the
smallest to the largest.
Todays users are looking for
functionally rich solutions that are
easy to use and easy to deploy
whether they choose to deploy in
the Software as a Service environ-
ment or in an onsite license envi-
ronment. Users want solutions
where training requirements are
minimal and customer support is
strong, solutions that have a com-
mon look and feel throughout,
those that offer a quick delivery
process that enables a rapid time
to market, and where total cost
of ownership allows for a rapid
return on investment.
And users are looking to work
with vendors that understand
what they do, that can show them
how their solutions will improve
their business. They want vendors
they can trust and that have a
long-term commitment to the
continuing success of their user
community.
Q:
case for investing in supply chain
technology?
A:
We all understand the
importance of offering
best-of-breed technology, provid-
ing a competitive edge, low cost
of entry, rapid implementation
and time to value, a rapid return
on investment, and improving
shareholder equity for our client
partners. We are anxious to talk
to these points. What we always
need to remember is that when
a company enters into a software
selection process, they usually
have specific concerns and busi-
ness issues unique to them they
are looking to resolve.
To build an effective busi-
ness case for investing in supply
chain technology you first need
to understand your prospects
business, their markets and cus-
tomers, their business processes,
their workflow. And you need to
identify with them the key critical
business issues they are facing.
Do they have a need to be
more competitive in their market,
to improve operational efficiency,
reduce costs? Are they being
driven by new customer require-
ments or market expansion?
There can be a number of fac-
tors driving an engagement.
Until you can identify, what
keeps your client awake at night
and how you can help them
sleep, they have no reason to
invest with you and what you
bring to the table.
Users Have a Broad Range
of Expectations
Q&A with Daniel Vertachnik, EVP and CCO, MercuryGate
Daniel Vertachnik
ADVERTISEMENT
8 The Supply Chain Top 25:
Leadership in Action
The 2011 rankings of the Top 25 supply
chains from Gartner Inc. are in. They include
repeat winners and some new entrants.
Perhaps even more important than the actual
rankings, says Gartner Research Director
Debra Hofman, are the lessons that can be
learned from analyzing the leaders. This year,
six specific qualities stand out.
16 The Greening of Walmarts
Supply ChainRevisited
In 2007, SCMR ran an article on Walmarts
sustainability program, focusing on eight
specific initiatives being pursued. Four years
later, the author of that original article, Erica
Plambeck of Stanford, and colleague Lyn
Denend revisit those initiatives to assess just
how Walmart is doing on the sustainability
front.
24 Achieving Flexibility in a
Volatile World
A new global survey from PRTM confirms the
importance of operational flexibility in supply
chain success and identifies five levers that
leaders employ to make it happen. The con-
sultants report that the financial and perfor-
mance advantages of improved flexibility can
be profound. They outline five basic steps that
companies can take to start realizing those
benefits.

32 Whats Your Mobility Index?
Mobile devices are everywhere these days. But
whats the real potential of mobility in the key
supply chain processes. And whats the best
way to identify and tap into that potential?
Sumantra Sengupta of EVM Partners says
the first step in answering these questions is
to carefully determine your Mobility Index.
This article tells how its done.
40 The Case for Infrastructure
Investment: Lessons from
Medco and Staples
Smart investment in supply chain infrastruc-
tureand in particular automated materials
handling and distribution systemscan pay
big dividends. Medco and Staples have proven
that convincingly, as these case studies dem-
onstrate. Their stories point to seven key take-
aways that supply chains professionals in any
business sector can learn from.
SPECIAL SUPPLEMENT
S50 EU Logistics:
Meeting the New Challenges
Editorial
Advisory Board
n
Jack T. ampuJa
Niagara University

n
Joseph c. andraski
VICS Association

n
James r. Bryon
IBM Consulting
n
John a. calTagirone
The Revere Group
n
Brian cargille
Hewlett Packard

n
roBerT B. handfield
North Carolina State
University

n
nicholas J. lahowchic
Tompkins Associates

n
hau l. lee
Stanford University

n
roBerT c. lieB
Northeastern University

n
clifford f. lynch
C.F. Lynch & Associates

n
eric pelTz
RAND Supply Chain Policy
Center

n
James B. rice, Jr.
Massachusetts Institute of
Technology

n
larry smiTh
West Marine
Sep t ember/ Oct ober 2 0 1 1 Vol ume 15, Number 5
FEATURES
COMMENTARY
4 Insights
Bowersox and Goldratt Leave Two
Great Legacies
By Larry Lapide
6 Talent Strategies
Asia: The New Talent Management
Model?
By Mahender Singh
48 Spotlight on Supply Management
The Evolution of Supply Management
By Carrie Ericson and Simon Rycraft
62 Benchmarks
Global Sourcing Calls for Due Diligence
By Becky Partida
The missing link in
your supply chain.
Keep your supply chain strong with a subscription to Supply Chain Management Review.
Get the full story behind each of these headlines and all the other issues in our digital archives
included FREE with your new subscription.
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69
A speci Al supplement to:
New show, new city,
new solutions
Held for the frst time ever, Modex 2012the nations
newest expo for materials handling, supply chain, and logistics
solutionsthrew open its doors in Atlanta on February 6 at
The Georgia World Congress Center. (continued)
By Supply Chain Group Staff
SCMR1203_SupModexWrapUp.indd 69 3/1/12 10:49 AM
70
Te event hosted more than 20,000
visitors to the trade show and educa-
tional conference, and was sponsored
by the Material Handling Industry of
America (MHIA).
Spread over four days, attendees
found more than 586 exhibitors cover-
ing 180,000 square feet; three keynote
speakers discussing all aspects of supply
chain management; 70 show-foor
educational seminars; and no less than
30 diferent educational sessions and
networking events presented by 17 dif-
ferent co-located partners.
Te Modex 2012 conference featured
leading-edge topics in manufacturing,
distribution, and supply chain manage-
ment, exploring subjects such as the
impact of the Panama Canal expansion
to sustainability, security, and visibility.
In addition to learning more about
the big picture in supply chain, Modex
2012 attendees discovered new equip-
ment solutions to streamline operations
and improve visibility, maximize ef-
ciency and fexibility, cut costs, and speed
time to market.
Participants came with very spe-
cific objectives and with buying plans
in hand, says George Prest, CEO of
MHIA. They know that investing
in the latest supply chain equipment
and technology is the key to building
and maintaining their competitive
edge.
According to Prest, the inaugu-
ral Modex met, and in many cases
exceeded, exhibitors and attend-
ees expectations. Attendees were
impressed with the wide range of
equipment and systems solutions
and education offered at Modex, and
exhibitors expressed satisfaction with
the quantity and quality of attend-
ees, he added.
I
n his show-opening keynote address, Rick Blasgen, CEO
of the Council of Supply Chain Management Profession-
als (CSCMP), expressed optimism for the future of domes-
tic logistics, empha-
sized the urgent steps
that must be taken
to secure that future,
and hailed the materi-
als handling industry
as a key driver of the
ongoing economic
recovery.
Te supply chain
is the shock ab-
sorber managing the
diference between
what is planned and
what actually hap-
pens, said Blasgen.
We facilitate a lot
of what happens in
our economy and
we dont get a lot of
credit for it. We need
to get out and tell our story.
In his 25-year career in supply chain management, Blasgen
said he has seen the discipline become not just a corporate
necessity, but evolve into a essential growth vehicle for nearly
every organization. According to Blasgen, logistics spending in
the U.S. totaled $1.2 trillion in 2011, constituting 8.3 percent
of GDP. In 1980, logistics accounted for 17.9 percent of GDP.
Blasgen credited vastly improved supply chain efciency for
the decline.
Of last years $1.2 trillion, transportation costs accounted
for $768 billion, he said. Its a highly physical business, said
Blasgen, and one that is dependent on increasingly inadequate
infrastructure. Te U.S. needs a national transportation
policy, he said. Tat much is glaringly obvious.
Blasgen said that the management of transportation will
be a focus in 2012, followed closely by access to capacity,
continuing eforts by shippers to outsource, and a gradual shift
to a truckers market.
But most importantly, said Blasgen, is that current sup-
ply chain leaders challenge and educate the industrys young
generation. Te supply chain will be run by technically savvy
people with a penchant for innovation, said Blasgen. If
youre new to this industry, go work on the third shift in some
distribution center. It will help you immensely.
Day 1 Keynote:
To secure future, CSCMP head says logistics industry must make its voice heard
Rick Blasgen, CEO of the Council
of Supply Chain Management
Professionals (CSCMP)
Special Report
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72
D
onald Ratlife, executive director of the Georgia Tech
Supply Chain and Logistics Institute, illustrated the
global relationships between logistics and trade at his Modex
keynote address on the morning of Day 3.
Ratlife outlined the change over the past 40 years in
materials handling,
from a focus within the
four walls to its current
impact on logistics on a
larger scale. Te ongoing
paradigm shift, he said,
is driven by the individ-
ual organizations need
to understand global
trade dynamics.
He presented global
trade data indicating a
marked trend toward
regionalization over the
past decade that has
been driven by the rela-
tionship between capital,
inventory, and time in
transit. In some cases
weve been too smart, said Ratlife. Te focus on lean has
become near-zero inventory, which is alright until you have
any kind of hiccup, at which point youve actually increased
you risk.
And because each government throughout the world is
both an essential trade partner and potential paperwork night-
mare, Ratlife emphasized the need for the public sector to
become more educated about and more invested in improving
the realities of logistics.
You listen to any politician talk about logistics and it
doesnt take long to realize they dont have any idea what
theyre talking about, said Ratlife. Te U.S. doesnt have the
government infrastructure to support export in the way that
most other big exporting countries do. Weve relied on the
private sector to handle it.
Ratlife also echoed Alberto Alemn Zubieta, CEO of the
Panama Canal Authority and Day 2 keynote presenter, in
highlighting the shortcomings of U.S. port capacity. Tat said,
he added, port capacity improvements will require additional
focus upstream and downstream to avoid a confict between
bigger ships and better service.
Weve got a big built-in disadvantage that is based mostly
in logistics, said Ratlife. We have the capability to export
more stuf, but were just not focused on doing it.
Day 3 Keynote:
Global trade awareness important to businesses of all sizes
I
n 2014, the Panama Canal will celebrate its centennial. It
will also celebrate the opening of the expanded Panama
Canal, according to Alberto Aleman Zubieta, CEO of the
Panama Canal Authority and Day 2 keynote speaker
Te new locks, which are currently under construction,
will expand the canals ability to handle ships nearly three
times the size of current shipsan estimated 14,000 contain-
ers versus 5,000-container capacity todayand double the
throughput capacity of the canal.
More importantly, said Aleman, the expanded canal and the
logistics capabilities of Panama can serve as the logistics hub of the
Americas. Panama is the only port with terminals in two oceans,
he said. It is just 80 kilometers from ocean to ocean and we have
more port cranes in Panama than Chile, Mexico, and Brazil.
In that sense, he added, the new canal is not so much
about capacity, but connectivity. You can use Panama as a
platform to connect the Americas and the Caribbean, he said.
Tat is important if you want to conquer those markets and
expand your supply chain and your procurement capabilities.
To take advantage of
the new canal, Aleman
added, the U.S. must
think about investing
in its transportation
infrastructure, including
expanded ports, new rail
capacity, and improve-
ments in our highways.
For instance, only the
ports in Virginia and
New York can presently
handle the larger ships
that will come through the canal.
What concerns me is how long it takes to do these types
of projects and that they are not now being done in the U.S.,
Aleman said. You must realize that you are in a globalized
economy. If you do not do it, someone else will. If you dont
capture those markets, someone else will.
Day 2 Keynote:
New Panama Canal enhances global connectivity
Alberto Aleman Zubieta, CEO of
the Panama Canal Authority
Donald Ratliffe, executive director
of the Georgia Tech Supply Chain
and Logistics Institute
Special Report
What if no one focused on career development?
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74
Warehouse control platform
offered as complete system
or by component
For control of material flow, orders,
wave picking execution, and automated
machine control, Intelligrated offers
InControlWare warehouse control
system is offered. Engineered to
efficiently manage machine and
operational resources, the software
increases facility
capacity and
lowers distribution
costs through
optimized workflow,
equipment
usage, and order
fulfillment. It is
scalable and may
be integrated as a
complete system or
by individual area
component manager, including order,
route, pick, carousel and crane. The
user interface provides visibility into
operations, orders, inventory, fulfillment
and machine performance, along with
extensive reporting. Intelligrated,
www.intelligrated.com.
Mini-load cranes move 660-
pound loads up to 78 feet
Providing an automated shelf solution
for containers, boxes and trays, SSI
Schaefer Systems SMC 2 and SMC 2 XL
twin-mast mini-load cranes use a closed
lifting trolley to hold two standard, or
one large, piece of load-carrying equip-
ment. The machines access heights up
to 39 feet or 78 feet respectively for
high payloads and greater throughput.
Load-carrying equipment includes com-
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space and feature extremely stable
masts with very high torque resistance.
New drive technology enables the
transport loads up to 660 pounds due
to a mast reinforcement strutguided
through a recessed groovethat pre-
vents vibration. SSI Schaefer Systems,
www.ssi-schaefer.us.
Mobile, on-demand label
printing/computing station
ready to roll
For efficient inventory management and
related tasks in warehouses, distribution
centers, and manufacturing facilities,
the Mobile Powered Workstation from
Newcastle Systems offers on-board
power to run a computer, a high-volume
label printer, and other devices simul-
taneously, creating a fully mobile label
printing/computing station. Generous
shelf space provides room for prod-
ucts and other items. With 6-inch rub-
ber swivel casters and no cord trailing
behind, the workstation can be easily
rolled and positioned for optimal pro-
ductivity. The casters can be locked for
stability once the workstation is in place.
All models have a load capacity of 500
pounds. The units rechargeable battery
offers integrated, seamless power for up
to 12+ hours of normal use. Newcastle
Systems, www.newcastlesys.com.
Extended piece picking
functionality featured
Dematic introduced extended picking
functionality of its goods-to-person
order fulfillment solution for piece
picking, or RapidPick, on the show floor.
Last year at ProMat we introduced
a one-to-one solution that allows an
order selector to pick from one SKU
position into one order position, said
John Baysore, president and CEO of
Dematic North America. Our extended
functionality allows an order selector
to pick to multiple order positions. A
typical configuration, he added, might
be one SKU position to 6, 12, or 24
order positions. However, the modular
design of the solution allows the end
user to configure the pick station with
the quantity of order positions that is
most productive for their application. In
addition, the system now includes the
ability to handle cartons of varying sizes
in addition to totes. Dematic,
www.dematic.com/na.
Next generation of
agile, ultra reliable
electric lift trucks
The next generation of agile, produc-
tive, and ultra reliable electric lift trucks
where showcased on the floor. Leading
the way in ergonomics and performance,
Yale Materials Handling Corp.s ERC-VA
series is among the most productive
and highly durable electric lift trucks on
the market. New features and updates
include: newly designed, industry-
leading operator compartments and
comfort; 16 percent more floor space;
relocated multifunction displays that
ensure enhanced visibility and precise
pallet control; improved brake pedal
layout; auto Deceleration Systems which
reduce operator fatigue; and steel
hoods that provide for maximum battery
service access. Yale Materials Handling
Corporation, www.yale.com.
Ergonomic advances
on new cost-effective
trucks touted
Noting an increase in customers who
prefer short-term leases, Hyster has
released a line of more cost-effective
IC trucks. The product lineup of versa-
tile lift trucks reinforces the companys
range of application-specific flexibil-
ity and industry-leading ship-to-shelf
Modex 2012
Product Highlights
Special Report
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capabilities. Were trying to get the
right truck to the right customer, said
Jonathan Dawley, president of Hyster
Distribution. Hyster showcased new
four-wheeled trucks with the exact same
performance and turning profiles of a
three-wheeled truck. The addition of
the fourth wheel disperses bumps on
the travel surface for improved operator
comfort. Hyster, www.hyster.com
Use vertical space for
storage, goods-to-person
picking
For goods-to-person picking that
increases efficiency and productivity,
Kardex Remstar offers its line of dynamic
storage solutions includes vertical lift
modules, horizontal carousels, vertical
carousels, mobile shelving, and inte-
grated software. From receiving and
order processing to replenishment and
cycle counting, the technologies save
floor space and increase accuracy. The
equipment eliminates wasted walk and
search time to increase productivity
up to 66 percent, while reducing floor
space requirements by up to 85 percent
by using vertical storage space. Kardex
Remstar, www.kardexremstar.com.
Full line of integrated,
automated material
handling systems offered
A full line of integrated automated
storage/retrieval systems, automatic
identification products, conveyors, order
picking systems, RFID, sortation equip-
ment, software and systems integra-
tion services are offered to assembly
and production facilities, warehousing
and distribution center operations.
Knapp Logistics Automation special-
izes in semi- and fully-automated order
fulfillment and assembly systems that
focus on high speed/high volume each
picking. Benefits include a reduction in
order cycle times, a decrease error rates,
optimized inventory and lower operating
costs. Knapp Logistics Automation Inc,
www.knapp.com.
Eliminate the Footsteps!
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BENChMARKS
No Easy Answers
on RFID Strategy
Determining which RFID tagging strategy is right for your
organization demands a clear understanding of customer
requirements and careful analysis of related costs. Theres
no one-size-fits-all solution.
By Becky Partida,
Knowledge
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Chain Management,
APQC
Interest in supply chain visibil-
ity and mandates from custom-
ers such as Walmart and the
U.S. Department of Defense
have fueled interest in the use
of radio frequency identification
(RFID) systems in the supply
chain. In addition, groups such
as the Voluntary Interindustry
Commerce Solutions Association
(VICS) advocate the use of RFID
tagging at the product-item level
in the retail industry as a way of
ensuring traceability and increasing the safety of
consumer, pharmaceutical, and food products. The
potential benefits for organizations using RFID tags
have been widely touted: greater accuracy in track-
ing inventory, more efficient inventory counting,
better on-shelf availability of products at retail loca-
tions, improved trend forecasting, and reductions in
counterfeit products.
However, APQCs Open Standards Benchmarking
in Logistics indicates that 59 percent of responding
organizations have no RFID tagging strategy at all (see
Exhibit 1). The remaining 41 percent use the following
RFID tagging strategies most often:
Tag all products in manufacturing.
Slap tags on products before shipping to com-
ply with customer mandates (slap-and-ship).
Maintain separate inventory of tagged and
untagged items.
Choosing a Strategy
When making a decision about which RFID
strategy to choose (or whether to use one at
all), organizations must look beyond the initial
cost of adopting the technology to other fac-
tors such as the potential benefits of adoption
and the effects of the strategy on performance
metrics. Participants in APQCs Open Standards
Benchmarking with RFID tagging strategies
were asked to select up to three of five possible
benefits that they believed would result from
implementing an RFID tagging strategy. These
benefits were:
Improved distribution processes.
Completed compliance requirements.
Reduced distribution center/warehouse cost.
Improved trading relationships.
Reduced inventory.
Of the possible benefits, the three select-
ed most were improved distribution processes
(selected by 32 percent), completed compli-
ance requirements (29 percent), and reduced
distribution center/warehouse cost (21 percent).
The desire of organizations to meet compliance
requirements aligns closely with the trend of com-
panies such as Walmart requiring their suppliers
to place RFID tags on products prior to shipping.
To gain greater insight into how an RFID tag-
ging program can affect an organizations sup-
ply chain function, APQC sought to analyze
the effects of RFID strategies on three logistics
metrics:
1. Percentage of sales orders delivered on time.
2. Total cost to operate warehousing.
3. Total systems cost to operate warehousing.
APQC compared the performance of orga-
nizations that adopted the three most popu-
lar RFID tagging strategies (tag all products in
manufacturing, slap-and-ship, maintain sepa-
rate inventory of tagged and untagged items) to
the performance of those organizations without
RFID strategies.
78
SCMR1203_Benchmarks.indd 78 2/29/12 1:16 PM
BENChMARKS (c o nt i nu e d)
The results of the analysis indicate
that organizations without RFID tagging
strategies perform neither the best nor the
worst on each of the three logistics met-
rics. Moreover, organizations following the
other RFID strategies posted mixed per-
formance results, as shown in Exhibit 2.
An RFID tagging strategy should reflect
the priorities of an organization. One key
question in this regard: is it more impor-
tant for the organization to meet customer
delivery dates or to get the lowest cost?
RFID Impact on Distribution
Processes
APQC sought to evaluate the effect of
an RFID tagging strategy on an organiza-
tions distribution process by analyzing
the percentage of sales orders delivered
on time. We found that for this metric,
performance is not significantly affected
by the RFID tagging strategy adopted.
Organizations maintaining separate inven-
tories of tagged and untagged items have
the lowest performance, with 93 percent
of sales orders delivered on time at the
median, or midpoint. Those that place
RFID tags on all products during the man-
ufacturing stage have the highest percent-
age of sales orders delivered on time (95
percent at the median).
Although APQC cannot confirm the direct cause of
these results, the higher performance obtained by organi-
zations tagging all products could be linked to the RFID
tagging being done as part of the manufacturing process,
rather than at the warehouse. Placing tags on pallets may
add to the delivery time for organizations with a slap-and-
ship RFID strategy.
Organizations maintaining separate inventories may
have the lowest percentage of sales orders delivered on
time because of the extra time required to retrieve prod-
uct information from separate inventories. In addition to
the initial cost of implementing an RFID system, compa-
nies need to consider how implementing a specific type of
RFID program could affect performance indicators such as
the percentage of orders delivered to customers on time.
Warehousing Operating Costs
One key cost metric that may be affected by an organiza-
tions RFID tagging strategy is the total cost of operating
warehousing. For its benchmarking, APQC defines operat-
ing warehousing as all activities related to receiving prod-
ucts, storing products, shipping products for outbound
delivery, and tracking shipments. The total cost for ware-
housing includes the annual costs associated with person-
nel, systems, overhead, and outsourcing, as well any mis-
cellaneous costs associated with operating a warehouse.
The difference in median total cost among the groups is
significant (see Exhibit 3).
Organizations maintaining separate inventories of
tagged and untagged products have the lowest total cost
associated with operating warehousing (at the median,
$2.67 per $1,000 in revenue). Organizations using a slap-
and-ship strategy have the highest total cost (at the median,
$11.41 per $1,000 in revenue). For an organization with $5
billion in revenue annually, the difference in median cost
between the two strategies would be $43,700,000.
79
EXHIBIT 2
Ranking of Performance Regarding Key Logistics Metrics
(Note: A ranking of 1 indicates best performance among the groups; a ranking of 4 indicates
worst performance.)
Sales Orders
On Time RFID Strategy
Total Cost
to Operate
Warehousing
Total Systems
Cost to Operate
Warehousing
Maintain separate inventory
of tagged and untagged items
4 1 1
Slap-and-ship for compliance 2 4 2
Tag all products and manufacturing 1 3 4
No RFID tagging strategy 3 2 3
EXHIBIT 1
RFID Tagging Strategies
No RFID tagging strategy 59%
Tag all products and manufacturing 14%
Slap-and-ship for compliance 11%
Other 9%
of tagged and untagged items 6%
BENChMARKS (c o nt i nu e d)
The higher operating cost for organiza-
tions using a slap-and-ship strategy could
result from the extra labor needed to place
and monitor tags on pallets destined for
specific customers. It may not be possible
to opt out of tagging products intended for
certain customers, but organizations should
consider the potential for higher warehous-
ing costs associated with using this tagging
strategy.
A related cost metric is the systems
cost associated with operating warehous-
ing. APQC defines systems cost as the total
of all normal expenses related to providing
and servicing computer hardware and soft-
ware. At the median, the difference in sys-
tems cost among the groups is staggering, as
Exhibit 4 shows.
Organizations maintaining separate
inventories for products with and without
RFID tags have the lowest median systems
cost associated with operating warehousing:
$13.33 per $100,000 in revenue. Those that
tag all products during manufacturing have
the highest cost at $40.09 per $100,000 in
revenue. For an organization with $5 bil-
lion in revenue, the difference in the median
systems cost of the two strategies would be
$1,338,000a substantial difference in the normal tech-
nology cost associated with having an RFID tagging strat-
egy. Again, organizations must weigh the benefits with the
potential for additional costs when deciding if an investment
in an RFID tagging system is worthwhile.
It is also important to consider systems costs in the
context of the larger picture. Employing a technology like
RFID is not free (as Exhibit 4 shows), but the benefits of
the investment may show in lower total costs (Exhibit 3).
For example, organizations tagging all products have a high-
er systems cost; however, these same organizations do not
have the highest total cost for operating warehousing. This
may mean that more of the process as a whole is automated,
which would reduce the personnel time needed to operate
warehousing and ultimately lead to a lower total cost.
No One-Size-Fits-All Solution
There are different RFID tagging strategies that organiza-
tions can adopt depending on enterprise needs and cus-
tomer requirements. To determine its particular needs, an
organization should conduct several internal evaluations.
Current logistics processes should be analyzed to determine
which are the most important to the success of the organiza-
tion. Then the organization needs to identify how an RFID
tagging system could fit in or improve those processes. It
also should conduct a site survey of a potential installation
location to determine how a tagging system would function
within the organization on a day-to-day basis.
In determining its circumstances, an organization must
also consider the cost of not investing in RFID technology.
Would the company struggle to catch up if competitors
adopted the technology? More importantly, would it mean
the loss of customers to a competitor? And how much
would profitability suffer?
There is no one-size-fits-all solution for RFID tagging.
An organization should evaluate its unique circumstances
and consider the potential for additional costs and longer
delivery times when determining which RFID tagging
strategy (if any) is the right choice.
About APQC: A member-based nonprofit founded in 1977,
APQC is the leading resource for performance analytics, best
practices, process improvement, and knowledge management.
For more information, visit apqc.org or call 713-681-4020.
80
EXHIBIT 4
Median Systems Cost of the Process Operating Warehouse
(per $100,000 in Revenue)
No RFID tagging strategy $23.29
Tag all products and manufacturing $40.09
Slap-and-ship for compliance $15.21
$13.33
EXHIBIT 3
Median Total Cost of the Process Operating Warehousing
(per $1,000 in Revenue)
No RFID tagging strategy $9.29
Tag all products and manufacturing $9.61
Slap-and-ship for compliance $11.41
$2.67
Survive or Thrive in an Age of Uncertainty
May 21 23, 2012
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gartner.com/us/supplychain
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Distribution and
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Sunday, May 20
2:00 p.m. Registration
Monday, May 21
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7:00 a.m. Networking Breakfast by Industry and Hot Topics
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Demand Management Talent Management Sustainability Sales & Operations Planning Inventory Optimization Risk & Resiliency Demand Management Talent Management Sustainability
Gartner Supply Chain Executive Conference Agenda at a Glance
View conference agenda
2012 Gartner, Inc. and/or its affliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. or its affliates.
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