 
Do good supply chains create shareholder value?
Supply Chain Council executive retreat ponders Wall Street's view of excellence
By George J. Schultz, contributing editor -- Manufacturing Business Technology, 5/1/2003 6:00:00 AM
When it comes to supply chain management practices, investors likely are not concerned with the details of integrated processes, but they certainly take notice of companies whose strategies create value during shaky times. That was a recurring message from principal speakers at a February Supply Chain Council (SCC) senior executive retreat in Phoenix.
Pittsburgh-based SCC is a not-for-profit organization that publishes the Supply Chain Operations Reference (SCOR) Model, a cross-industry framework for supply chain management (SCM) processes. Numerous applications vendors use the model as the basis for tools that analyze supply chain performance. During the retreat, however, the model's metrics lay in the background as corporate leaders discussed how outsourcing strategies, integrated processes, and partner relationships trace directly to the bottom line.
"How far from 'nowhere' six or seven years ago supply chain management has come," J. Stuart Francis, managing director for the global technology group at Lehman Brothers, a New York-based investment banking firm, said at the retreat. "Now Wall Street assigns premium valuations to companies with superior SCM execution."
To investors, such companies exhibit increased or stable profitability despite challenging industry pricing, according to Francis. This, in turn, connotes efficiency and superior execution.
Francis told retreat attendees that evidence suggests a direct relationship between companies' SCM practices and stock-price performance. For example, he says, Armonk, N.Y.-based IBM Corp., and Palo Alto, Calif.-based Hewlett-Packard have seen their stock prices get a boost in certain instances when they announced manufacturing outsourcing agreements. In these cases, the large contract manufacturers that won the business also saw stock-price boosts.
While the SCC concerns itself more broadly with best practices rather than just software, SCM applications typically are seen as factors in operational excellence. Claus E. Heinrich, a member of Walldorf, Germany-based SAP's executive board, told attendees that astute companies keep an eye on the value of adaptive supply chains. Heinrich, whose responsibilities at SAP include development of the vendor's SCM applications, cited the present challenge of mass customization, where "partners put a premium on shared information to support critical decisions for the chain."
Another driver for adaptive supply chains, says Heinrich, is accelerated new product introduction. "Not only is time-to-market critical, but so is time-to-volume, when the window of opportunity for products often is only up to a half a year," he says. "For example, the modules and features of mobile telephones change every three months. You need to plan and replan across an extended network that is responsive to events."
Heinrich says the value of SCM solutions stems from three main elements: SCM applications, the adaptive business processes themselves, and supporting technology. At SAP, he says, the NetWeaver composite application framework is an example of supporting technology. Heinrich, who says NetWeaver and composite apps support the SCOR model, called the technologies an application and integration framework for tying together systems and unifying business processes and information across disparate systems and organizations.
While earlier deployments of SCM applications focused on areas like feasible production schedules and control over order-promising functions, Lehman Brothers' Francis sees companies more fully integrating customer-facing processes into SCM strategies. SCM software, he says, becomes "the paradigm linking a company to [both] its supplier and customer bases. It means enhanced customer reach and incremental revenue generation."
Most retreat presentations, however, focused on SCM practices and top management buy-in for SCM initiatives, rather than just software. Shakeel Mozaffar, group vice president for the global supply chain of ICI plc, the U.K.-based chemicals giant, says ICI now sees supply chain operations as "a major contributor to capital value within a contracting [economic] environment."
Mozaffar was responsible for launching ICI's "digital transformation program," which emphasized standardizing procurement policies, dissemination of information in real time, and "cross-division transparency." He says ICI has come to see such SCM initiatives as delivering a "value extraction proposition," or VEP.
Mozaffar grants that top management buy-in for VEP took some doing. But, he says, it was "an attention grabber at ICI when it was proven that every decision has connectivity with the supply chain. Supply chain management in the ICI experience became effective through total integration with every segment of the corporation—vertically and geographically."
Steve Church, senior vice president and director of services and strategy business development with Avnet, a Phoenix-based distributor of electronic and microelectronic components and equipment, concurs that the bottom-line aspects of SCM initiatives are growing in importance. "Business has changed," he says. "It's not just revenue, and not just revenue growth. The need now is return on capital employed, or you're destroying shareholder value."
