Quantifying the benefits of SCM

By Francis J. Quinn -- Logistics Management, 1/1/2000

The value inherent in the supply chain management proposition seems to be self-evident. Manage the flow of materials from source to final consumption in an integrated manner--keeping inventory to a minimum and adding value along the way--and you'll be successful.

Though most companies (and most of the managers in them) endorse the concept of supply chain management, they often have difficulty quantifying the related benefits. And that difficulty becomes particularly troublesome when proposing specific supply chain programs or initiatives. Invariably, someone is going to say "Show me the money!"

Fortunately, the bottom-line case for supply chain efficiency is being made with increasing frequency and conviction--both in industry wide studies and within individual organizations.

The most recent research documenting the supply chain-profitability connection comes from the Performance Measurement Group, a subsidiary of PRTM Consulting. The group's Supply Chain Benchmarking Survey examined best practices across a range of high-tech and consumer packaged-goods companies in North America, Europe, and Asia.

The survey established a clear relationship between supply chain performance and profitability. It found that the market leaders among those companies surveyed had reduced their supply chain costs to 4 to 5 percent of sales. Overall, they spent 5 to 6 percent less on supply chain management as a percentage of sales than the average performers. Is this cost advantage a big deal? As the study authors point out, for a company with $500 million in sales, it translates to a $25 million to $30 million cost advantage every year.

Studies like the one conducted by the Performance Measurement Group paint a broad picture of SCM's quantitative benefits. More specific examples can be found in the supply chain initiatives launched by individual organizations.

We've spotlighted a number of these leading companies in the pages of Supply Chain Management Review. One recent article on Proctor & Gamble described a series of supply chain merger initiatives. These programs were designed to integrate and simplify the interfaces along P&G's extensive supply chain. The results of this ongoing effort have been nothing short of remarkable. Consider this: Finished-product inventory has been cut by 10 percent over the last three years; average return on equity has risen dramatically; and net profit has increased from 6.4 percent to close to 10 percent.

Another article chronicled the experiences of IBM. The company's North American Distribution operation conducted an aggressive logistics benchmarking program. The process required IBM to document how it was doing across key cost and operating metrics. The existing performance levels then were compared against the industry leaders--both inside and outside of the high-tech arena. Now, IBM already had reduced its logistics costs considerably before embarking on this program. Yet the benchmarking exercise pointed to an additional $30 million in quantifiable savings.

The broad industry research and company case studies underscore a message that can't be emphasized enough: The benefits of effective supply chain management are quantifiable. SCM does exert a powerful, positive impact on key performance metrics like profitability. The challenge for logistics and supply chain professionals is to make their colleagues and top management see the light. This is the first step toward reaping the benefits of successful SCM that the industry leaders already enjoy.

Francis J. Quinn is editor of Supply Chain Management Review, published by Cahners Business Information. For subscription information, call (888) 343-5567.