06 SCS:VIEWPOINT
STRATEGY
Risk: A complex
problem
Europe’s supply chain leaders have
made big strides in the war on cost,
but now struggle with increasing
complexity. DENISE PAULONIS AND
DEEPAK MISHRA
Managing a global supply chain is getting more
difficult and more risky, but the focus of Europe’s
multinational companies is starkly different from that
of their North American counterparts. These
differences call for contrasting management
strategies, but there is much that companies in the
two regions could learn from each other’s
approaches to supply chain risk.
In June of this year, we surveyed operations
leaders and other senior executives from around the
world about the risks their supply chains faced and
their organisations’ strategies for dealing with those
risks. 273 executives participated in the survey. More
than three quarters of the respondents said that
supply chain risk had increased over the past five
years. A third said that this increase had been
“significant”– a sharp increase over 2006, when we
asked a similar group the same question. Then only a
quarter saw a significant increase.
Asked about the primary influences on their
supply chain strategy, however, and regional
differences become immediately apparent. In
Europe 60 per cent of respondents said that coping
with increased complexity of products and services
COSTS
Hone those
knife skills
Managing the costs of the supply chain
is a must for the downturn.
CALLUM MOY
Smart bosses know the impact of costs on their
operations. And they may even have a good sense
of where more improvement is needed. But their
main aim, when markets are growing, is to promote
and sustain that growth. So they shape the supply
side of the business to enhance service to the
customer and to achieve economies of scale
through higher volumes.
But now times are turbulent, and the agenda is
very different. Volumes are in decline. Financial
markets are unstable. And international competition
is fierce. There is real pressure on margins and
profits. So it is vital to put cost reduction at the top
of the agenda. Lots of firms will have to control and
was having the biggest influence on their supply
chain strategy. Rising energy prices were the second
most important concern for European companies,
cited by 33 per cent of respondents, followed by the
impact of increasingly global labour markets and
rising wage rates, mentioned by 25 per cent.
Complexity was important for Americans too, but
overshadowed by the challenges of rising fuel costs
(39 per cent of respondents) and increasing financial
volatility (38 per cent).
These findings might not surprise you. Europe’s
already heterogeneous markets are becoming even
more complex as the rapidly growing economies of
the East become more important, while North
cut costs simply to survive.
And when there is a need to cut cost quickly, the
entire infrastructure and cost base in the supply
side is the obvious place to look. If the supply chain
is under-used, profitability is threatened. Skilled
executives recognise that, to survive, they need to
act fast. And they make the most impact when
they draw up a plan to cut the costs of assets,
processes and the organisation, and then take
steps to realise the savings. This is their chance to
set new goals and demand new abilities
throughout the company. But all this can go sadly
awry in the research, planning or execution. That is
why the main risks need to be assessed – and
managed out. The priorities need to be understood
– and shared. And for that, a framework based on
experience is required.
The companies that do best in the drive to cut
costs stand conventional business thinking on its
head. Out goes the old emphasis on products and
revenues. In comes a new focus on customers and
profit. The result is processes that reap the full
potential profit from every customer. How do they
do it? By applying systems that keep track of
transactions throughout the business.
NOVEMBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
America is suffering a rude awakening after decades
of cheap fuel and years of easy credit. What we
found most telling, however, were the different
strategies being employed by the survey
respondents to cope with these strategic influences.
In Europe, the focus was very much on cost
savings and increasing efficiency, with 86 per cent of
respondents citing a drive for increased efficiency as
a key element of their supply chain strategy,
compared to only 70 per cent of the North American
executives we surveyed. Americans, by contrast,
were more than twice as likely as Europeans to be
pursuing active risk management strategies, with 60
per cent using approaches such as identifying
Our work with clients to drive down costs and set
up efficient processes has turned up a number of
home truths. And the successful businesses are the
ones that manage to embed these straightforward
disciplines in managers’ day-to-day tasks. We offer
these as touchstones for executives who are, or who
soon will be, trying to cut costs.
● Profit should always be the first charge against
sales. This sets the costs that the firm can afford.
● Any business that does not keep its eye trained
on profit will end up making a loss.
● Any business, system, procedure or person left
undisturbed for three years will have become
inefficient.
● Managers should treat all overheads as variable. If
volumes fall, overheads should be cut even faster. If
volumes rise, overheads should be held.
● Costs should be regarded as core – adding value
to products and customers, support – needed to
maintain the organisation, and improvement –
required to change and improve the business. This
change of mindset helps managers in their
approach to restructuring.
● It is structure that mainly determines the
overhead cost of a company. Its design should
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