A Stronger Chain of Command

Topics: Supply chain management, Supply chain, Logistics Pages: 5 (1374 words) Published: November 30, 2010
A stronger chain of command
By Daniel Schäfer in Frankfurt
Published: October 11 2010 23:09 | Last updated: October 11 2010 23:09 | | |Engineering change: Siemens has made supply chains a priority |

When Barbara Kux arrived at Siemens in late 2008 to head the German engineering group’s newly created supply chain management organisation, she soon discovered how badly her appointment had been needed.

On evaluating Siemens’ supplier base, she was astonished to discover that Europe’s largest engineering company listed some of its 113,000 suppliers several times in its purchasing databases.


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The discovery laid bare the lack of transparency and the inefficiencies in the group’s decentralised purchasing system.

Ms Kux’s experience will be familiar to many large and medium-sized industrial companies with gargantuan but cost-saving potential hidden in dispersed purchasing departments.

While last year’s economic crisis forced companies to concentrate on short-term working capital reductions such as bringing down inventory levels, the recovery is prompting many to implement broader improvements in the supply chain.

A recent global study by Capgemini, the consultancy, revealed that improvement of customer service and supply chain processes have replaced the economic downturn at the top of supply chain managers’ agenda.

Martin Raab, head of supply chain management at Capgemini, says: “A lot of companies are currently thinking about ways to make their supply chains more transparent and flexible by further centralising them and digitalising the relevant information ... as purchasing often adds up to 60 to 80 per cent of overall costs, this is something where you can save very much, very fast.”

Unlike the many plant closures or restructuring programmes initiated during the economic crisis, improvements in the supply chain do not take years to make a difference to profits. “Such savings have a direct effect on margins and the bottom line,” says Ms Kux. Her appointment to the board is unusual in a country where responsibility for supply chains is seldom represented at such senior level.

Siemens’ approach is seen as a good example of supply chain reform. “They are absolutely doing the right things here,” says Martin Prozesky, analyst at Bernstein Research. Mr Raab says such organisational re forms can improve operating profit margins by up to 10 percentage points. “In extreme examples, a company can see its Ebit [earnings before interest and taxes] margin quadruple from 3 per cent to 13 per cent.”

Supply chain vulnerabilities

When the economic crisis triggered a slew of insolvencies among cash-strapped suppliers over the past few years, managers became aware what damage a hiatus in the global supply chain can cause.

It has prompted a new phrase to be added to managers’ vocabulary: “disruption risk”.

“The financial crisis and a number of other large events that have happened in the past five years have definitely prompted companies to start looking at the true costs of supply chain disruption risks,“says Paul Kleindorfer, professor for sustainable development at Insead, the French business school.

A number of large companies such as General Electric, Toyota and Siemens have set up teams that map risks to the supplier base – a long list that can stretch from financial problems to regulatory risks and global warming. The teams also highlight particularly vulnerable areas of the supply chain base.

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