Lack of integration hobbles four-fifths of manufacturers
producers and distributors can result in significant loss of
potential profit, claims a new report.
And while many companies have grown from small local enterprises to become global leaders in their industries, more than 80 per cent of them fail to capture the full returns of their global investments.
These findings, which are contained in a report carried out by Deloitte Research for Deloitte Touche Tohmatsu (DTT), suggest that rather than taking a holistic, global view of their businesses, most global manufacturers focus on addressing the individual pieces of their far-flung global network - the complex web of suppliers, production facilities, distribution centres and customers - that comprise their supply chain.
"The negative impact of failing to take a holistic, global view of the business can be devastating," said Gary Coleman, DTT global manufacturing industry leader.
"The result for a company is often suboptimal improvements, wasted resources, and frequently lacklustre performance. Many of the global organizations that were studied realise a value loss from sub optimisation of 50 per cent or more of bottom-line profits."
The Deloitte report is supported by a study conducted last year that concentrated on IT budget and spending trends. The survey, from market analyst Aberdeen, suggested that many firms separate, to their detriment, IT investment from investments in production capabilities.
Aberdeen found that by isolating and managing IT infrastructure as a cost centre, many organisations are not operating as efficiently and streamlined as possible. As with other aspects of their global businesses, enterprises are therefore sub-optimising their IT investment, defeating the purpose of installing IT solutions to correct gaps in efficiency in the first place.
All this should make food manufacturers and suppliers, who are continually being squeezed by the conflicting objectives of meeting high customer service levels and keeping inventories down, sit up and take notice. Since 1 January 2005 all EU companies operating along the food chain are obliged to identify all food, food products and feed suppliers, and this information needs to be systematically stored, to be made available to inspection authorities, upon request.
This means that achieving an holistic global view is now both a financial and legal necessity. But as the Deloitte report suggests, many firms are struggling to catch up with the new realities.
Out of the 800 companies analysed, only about one in ten was found to have undertaken significant efforts to optimise its global networks over the last three years. "So it is not surprising that supply chain cost structure is in last place among competitive capabilities in all of the industries we have studied," said Coleman.
According to the study, the few manufacturers that have continuously invested resources to improve their global supply chain network as a whole - less than 15 per cent of the most global companies studied -- have been rewarded with significantly improved operational performance and profit levels that are 50 per cent higher than those of their global peers.
Creating the capabilities to ensure that existing and new investments are holistically and continuously optimised is therefore crucial for unlocking the true value of globalisation, according to Deloitte. But both competitive and compliance drivers must be considered.
For example, one company analysed by Deloitte outsourced its global manufacturing operations to reduce costs but ended up with a higher cost structure because of the impact of regulations and duties. Taking tax into consideration when optimising a global supply chain, the bottom-line profit improvement is nearly 100 per cent higher than if tax considerations are excluded, the study estimates.
The Deloitte study also suggests that it is crucial that the CEO and the top executive team take the lead. Successful optimisation involves not only operational units, such as manufacturing, sales, and product development, but also tax, human resources, and legal departments across multiple countries.
The study found that the vast majority of those manufacturers that are successfully optimising their networks in a holistic fashion have one top executive in charge of the overall supply chain.
