Nothing provides a concrete, objective view of your supply chain’s
strengths and weaknesses like benchmarking your performance against the
competition. But this is more than just an exercise in determining how
your supply chain stacks up — it can also translate into significant,
tangible savings. For example, did you realize that by taking your supply
chain pulse and engineering your supply chain to top performance, you
could reduce your inventory carrying costs by as much as 63%,
adding a 1.7% revenue improvement to the bottom line?
A recent benchmarking study commissioned by SAP has already shown that
SAP customers enjoy a net profit 75% better than the market average.1
But it also suggests that most companies can achieve even greater efficiencies.
For instance, companies that have used mySAP Supply Chain Management (mySAP
SCM) solutions to move to more advanced, mature supply chain practices
— embracing processes that go beyond individual departments for
integration inside and outside the enterprise — achieve higher levels
of supply chain performance and measurable cost savings.
Before we explore the full implications of the benchmarking study, let’s
take a look at the business value of performance measures.
Make the Connection Between Performance Measures and Cost Savings
Benchmarking against the market overall, as well as against best-in-class
performers in your industry, requires key performance indicators (KPIs)
that measure your business as a whole. Level 1 KPIs (like the Level 1
KPIs defined in the SCOR model2) define the basis of industry-wide
comparison and help a company set business-wide performance targets that
can be linked to the income statement, either directly or indirectly.
Level 1 KPIs that Directly Influence
the Income Statement
- Operating Margin
- Return on Assets
- SCM Costs (e.g., Inventory Carrying
- Equity Ratio
- Procurement Spend to Sales
- Delivery Performance (e.g., Delivery
to Request Date, or Delivery to Commit/Promised
- Order Fulfillment Lead Time (OFLT)
- Cash-to-Cash Cycle Time
- Inventory Days of Supply
- Asset Turns
- Strategic Supplier Count
- Capacity Utilization
Internal (cost-relevant) Level 1 KPIs, like
those listed in the sidebar at the right, typically
reflect a dollar value (e.g., SCM Costs) or
a ratio of values (e.g., Asset Turns). Customer-facing
(revenue-relevant) KPIs are closely associated
with a measure from which a dollar value can
be derived. In the examples in the sidebar
below, you’ll find
indicators that, although at first glance
do not elicit dollar value measures, still
directly relate to a business’s
Examples of Customer-Facing KPIs that
Significantly Impact Business Revenue
An improvement in Delivery
Performance generally results in an
increase of revenue. Experience and
benchmarking studies tell us that a
company will gain market share if it
improves its service. Even if the market
is shrinking, improving service is
a sure strategy to gain market share.
Fulfillment Lead Time (OFLT)
Reducing OFLT may immediately
reduce inventory. In general, there
will be less holdup as WIP3 if
you reduce your Order Fulfillment Lead
Time; Little’s Law4 states
this fact as a mathematical relationship
based on some simple assumptions.
However, even if these
assumptions don’t apply and reducing
OFLT does not change the inventory
level, faster order fulfillment still
increases supply chain responsiveness
and, as a result, revenue. For instance,
reducing order backlog in a factory
will lead to shorter OFLT and greater
flexibility for changing the production
schedule; production changes will,
on average, be realized faster since
there are fewer orders waiting in the
pipeline. In a situation where a company
must quickly bring a new product to
market, gaining even a few extra days
of response time can mean a lot of
What This Study Can Tell You About Your Supply Chain
The benchmarking study commissioned by SAP, conducted in 2002 and 2003
by the management consulting firm PRTM, shows that companies using mySAP
SCM advanced planning functionality achieved superior overall business
performance results, both in internal and customer-facing metrics. The
study also looks further into the relationship between processes, systems,
and business performance. According to this study, even with best practices
in place, if you forego the advanced technology and solutions to automate,
integrate, and enable those practices, you’re leaving something
on the table.
The study evaluates the supply chain performance of more than 100 global
SAP customers compared against the performance of the market.5
Then, for a more in-depth glimpse at supply chain performance of SAP customers,
the study analyzes the performance of more than 60 SAP customer companies6
worldwide representing 75 supply chains.
For some customer-facing Level 1 KPIs, the state of a company and
industry will determine whether a change in KPI translates into
real value. After all, in a market where demand is shrinking, increasing
Capacity Utilization (i.e., increasing Asset Turns) won’t
bring bottom-line value. Time gained in production can be used for
training of personnel or maintenance of plants, but it elicits no
“hard” value in this scenario.
In other words, while improving most Level 1 KPIs will lead to
clear-cut, bottom-line benefits, don’t lose sight of market
forces and your company’s performance requirements when determining
your SCM strategy.
The study uses a balanced supply chain performance scorecard based on
the SCOR model. The study also examines how the maturity of supply chain
planning practices and enabling systems correlates with supply chain performance.
“Mature” supply chain practices and systems were defined as
those enabling integration within the extended enterprise and with external
business partners — for example, sharing forecasts via the Internet
or creating exchanges with customers and partners (see Figure
1). In addition to showing that mature SAP customers’ net
profit averages 14% compared to the 8% market average (75% higher),7
the study also found that:
|Stages of Maturity as Defined by the Benchmarking Study
all planning functions, companies that have reached a high level of maturity
enabled by SAP’s advanced planning solutions see an average 17%
better On-Time Delivery Performance to Request Date and an average 7%
better On-Time Delivery to Commit Date than companies using immature (e.g.,
Excel) or no supply chain planning practices and systems.8
According to a previous PRTM benchmarking study, a 17% increase in On-Time
Delivery Performance to Request Date would lead to a 3.4% increase of
companies also show a more than 45% shorter Order Fulfillment Lead Time,
enabling them to deliver products in a little over 4 days, compared to
an average of 6 days for companies overall. According to Little’s
Law (see the sidebar on the previous page), a 45% decrease in OFLT can
lead to inventory reduction by as much as 45%.
the results clearly show the benefits of mature practices, the
biggest gains to be made are when ensuring that mature systems
support those practices (see Figure 2). When it comes to the Inventory
Carrying Costs shown in Figure 2, the study also shows
that the biggest factor in lowering these costs is reducing obsolescence.9
|Example of How Mature Practices and Systems
Together Boost Supply Chain Performance
When studying inventory costs, we can gather that rather than blindly
reducing inventory levels across the board, mature companies are able
to reduce their Inventory Carrying Costs by having the right
inventory available at the right points along the supply chain.
For example, interchangeability10 is one approach
to preventing obsolescent inventory and improving fill rates. Because
a product can be substituted with a similar one (e.g., an 80GB hard disk
can be chosen from a number of manufacturers), inventory across the various
demand chains is used more efficiently and reduces the likelihood of “dead”
items. Having all the information for product interchangeability on hand
in real time during product allocation — finding the right inventory
to fulfill an order in the various demand chains and allocating it according
to customer priority — can only be realized with strong systems
support, typically from an advanced optimizer.
Apply a Maturity Model to Optimize Supply Chain Practices and Systems
the Right Way
This study took the innovative step of applying a maturity model in
conjunction with benchmarking data. By analyzing both the performance
and the level of advancement of your supply chain, you can improve your
supply chain in two key ways:
the Right Next Step in Aligning Business Processes with Enabling Systems
Consider a global company where demand planning data is only
integrated within the systems at company headquarters (Stage 2 in the
maturity model). However, demand/supply balancing is integrated
and synchronized across all the company’s production sites worldwide
and even, in some cases, performed in collaboration with main suppliers
(Stage 3). Missing regional and market data and the lack of comprehensive
forecasts will inevitably lead to error-ridden supply plans and incorrect
demand data provided to suppliers, causing stock-outs and other serious
problems across the entire supply chain. By first identifying and then
aligning the maturity of practices and systems across the supply chain,
a company can sidestep such problems.
Areas for Improvement in Supply Chain Architecture
Maturity models also facilitate strategic decisions about supply chain
solutions and design. A supply chain may be very cost-efficient, but if
its architecture is wrong, it can lack the flexibility and speed to succeed
in today’s market. Supply chain design — a strategic make
or buy decision, determining the number and location of warehouses, or
choosing which IT systems best support supply chain operations —
is the precursor to successful supply chain management.
We all know of the bullwhip effect: the further upstream a company is,
the higher the demand volatility the company will face. On the other hand,
industry clockspeed11 increases the further downstream a company
is: a PC producer has a shorter product life cycle than the semiconductor
manufacturer further up the supply chain. Inevitably, downstream companies
are under greater pressure to shorten their product development times.
In response, companies can take one of two approaches: concurrent engineering
(i.e., to design a product for optimal manufacturability) or modularization.
Modularization reduces complexity and enables faster development.
It also supports outsourcing, which can be a strategy for increased speed-to-market
and faster technology innovation. But to realize the profits from this
competitive advantage, you must establish collaboration with the outsourced
suppliers and partners.
As in-house production of core components shifts to suppliers and partners,
an internal, perhaps even informal, exchange of information and data must
be transformed into a more formal one between customer and supplier. Extending
enterprise collaboration like this relies on practices and systems that
support exchange and coordination of information with suppliers and partners
— moving your supply chain from maturity Stage 2 to Stage 3.
Manufacturers of complex medical imaging systems like magnetic resonance
imaging (MRI) and computerized tomography (CT) have taken this step. With
modularization, these companies have taken the highly complex computer
system required to handle signal and image processing in their products
and outsourced it to a supplier of those systems for the aerospace and
defense (A&D) arena (spy planes and submarines). Now both the medical
manufacturers and the A&D customers benefit from faster, profitable
upgrades of the imaging technology developed by the supplier.
This is just one example of how, by integrating supply chain design
with the product and manufacturing design processes, a manufacturer can
benefit from innovation in other industries, achieve a faster time-to-market,
and thus cope with fast industry clockspeed. Analysis using benchmarking
and a maturity model helps you gain insight into your supply chain process
to meet challenges like these.
The faster the supply chain changes, the more important supply chain
design becomes. By combining benchmarking with a maturity model, you can
devise intelligent reactions to supply chain changes and challenges and
create an adaptive supply chain.12 If SAP solutions
are already in place in your organization, you’re well on your way.
As a next step, benchmark your supply chain processes and follow a maturity
model to progress to the next maturity level and phase of performance.
Then look for the results in greater supply chain efficiencies and, ultimately,
in the bottom line.
For more results of the benchmarking study, visit
For details on participating in the SAP
Supply Chain Planning Benchmarking Study,
a service available to qualified SAP and
non-SAP customers in the automotive, high-tech,
consumer products, chemicals, pharmaceuticals,
and mill products industries, please visit www.sap.com/solutions/scm/businessbenefits/benchmarking.asp.
to the study “PRTM/SAP Benchmarking Study 2002-2003: Supply Chain
Planning.” See further discussion later
in the article.
is used as a cross-industry supply chain
process reference model and was adopted by
the Supply-Chain Council Inc. The SCOR model
delineates three levels of KPIs: Level 1
KPIs measure overall business performance
used for benchmarking studies, such as the
one described here, and are the focus of
this article. Level 2 KPIs measure performance
of an individual division’s supply
chain processes (e.g., plan, make, source,
or deliver processes). Level 3 metrics are
diagnostic KPIs taken at the process element
level (e.g., Order Entry Cycle Time, Direct
Labor Utilization). For more information
on the SCOR model, see www.supply-chain.org.
3 Work in process.
4 Inventory = Output
(product units/day) x Lead Time.
5 Market average information
was gathered from a PRTM database of 400 companies.
6 Although information
gathered from more than 100 SAP customer companies was used in the study,
comprehensive data was available from 60 SAP customers.
refers to SAP customers within Level 2 maturity
and higher. See “PRTM/SAP Benchmarking
Study 2002-2003: Supply Chain Planning” at www.sap.com/solutions/scm/newsevents/index.asp?pressID=2425.
the excerpt of the study, you’ll see
the most important findings for demand and
supply planning practices. See www.sap.com/company/press/pdf/
instance, the costs of holding on to phased-out
or expired inventory (in other words, products
that can’t be sold).
example, product supersession/discontinuation
and form/fit/function requirements — grouping
interchangeable parts that are identical
with respect to their technically relevant
2000 article “Clockspeed-based Strategies for Supply Chain Design” in Production and Operations Management (Vol. 9, No. 3), pp.
12 See the book Adapt
or Die (John Wiley & Sons, Hoboken, New
Jersey: 2003) by SAP Executive Board Member
Claus Heinrich and industry expert Bob Betts
for more on the adaptive supply chain.
Hofmann studied Chemistry and
Physics at the University of Vienna,
and received his Ph.D. in Physics at
the Technical University at Darmstadt.
He was a faculty member at the Technical
University in Munich and at Northwestern
University in Chicago, Illinois, USA.
In the IT division of BASF in Ludwigshafen,
Germany, he headed the development of
object-oriented production planning and
scheduling software for BASF’s
plants. Before joining SAP in 2001 as
Director, Global Strategic SCM Initiative,
he was Plant Manager at BASF’s
Catalysts Global Business Unit. He is
the author of numerous publications,
including a book on SCM and environmental
information systems, and is also a presenter
and speaker at SCM conferences.