European Supply Chain Trends 2006:

Using the Supply Chain to Drive Operational Innovation

Authors: Joseph Roussel at jroussel@prtm.com David Skov at dskov@prtm.com Study Team: Erec Glogowski at eglogowski@prtm.com David Young at dyoung@prtm.com Michael Dheur mdheur@prtm.com

Note: Do not reproduce information from this report without written permission from its authors.

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European Supply Chain Trends 2006

Table of Contents

I. II. III.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3 Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Survey Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 1. Key Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2. The Management Agenda of Leaders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 3. Forecast: Key Trends for 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Industry Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

IV.

V.

Geographical Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

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European Supply Chain Trends 2006

I.

Introduction
PRTMs fifth annual survey on supply chain trends in Europe provides a unique insight into how leading companies are using supply chain operations to achieve competitive advantage. Over 150 companies participated in our survey conducted during the latter half of 2006. The majority are headquartered in Europe, with more than 56% recording revenues in excess of $1 billion. Our analysis highlights the practices and characteristics of leaders vs. followers and the differences between their management agendas. To determine the leaders, we used the Supply Chain Maturity Model developed by The Performance Measurement Group, LLC (PMG), a PRTM company. This model measures how companies apply strategic, organisational, collaborative, and performance management practices to the management of their supply chains. Companies at Stage 4 are classified as leaders and those at Stages 1 and 2 as followers. Those at Stage 3 are defined by PRTM as challengers. The four stages of maturity are: Stage 1 = Functional Focus: Operating discrete supply chain processes with functional management of resources. Supply chain processes and data flows are well documented and understood Stage 2 = Internal Integration: Company-wide aligned and integrated supply chain processes continuously measured and steered to achieve common objectives Stage 3 = External Integration: Collaboration with strategic partners (customers, suppliers, and service providers) including joint objectives, shared plans, common processes, and performance metrics Stage 4 = Cross-Enterprise Collaboration: Information Technology and e-business solutions resulting in real-time planning, decision making, and execution of customer requirements For more information on PMG and supply chain benchmarking contact Laura Conachy at lconachy@pmgbenchmarking.com

For more information on PMG and supply chain benchmarking contact Laura Conachy at lconachy@pmgbenchmarking.com

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European Supply Chain Trends 2006

II. Executive Summary

The 2006 survey reveals a number of new trends, in particular the increasing perception by survey participants of the supply chain as a source of innovation and therefore long-term profitability: 1. On average, spending on innovation represents 22% of spend on supply chain improvements, increasing to an anticipated 28% in 2007. Leading companies are investing twice as much on introducing innovations in their supply chains as followers 2. Although the majority of participants consider customer satisfaction improvement the number one priority, a strong focus on cost management continues with 61% of participants placing supply chain cost control in their top three priorities 3. Most companies now consider supply chain management to be a strategic issue and leading companies are focusing less on process improvement and more on using the supply chain to enable international expansion and to leverage alliances and partners in the global economy 4. As in 2005, computer and peripherals remains the industry sector with the highest level of supply chain maturity across all surveyed industries 5. The Northern region (U.K., Ireland, and Scandinavia) has the greatest number of companies with the most mature supply chain practices

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III. Survey Analysis

1. Key Findings
European companies are continuing to implement supply chain practices on a wide scale
In 2006, a large number of companies moved from Stage 1supply chains with a functional focus, to Stage 2internally integrated supply chains. As in previous years, the majority of companies are focussing on achieving internal integration. The percentage of companies at the highest level of maturity remains stable. Figure 1Supply Chain Maturity Levels Amongst Participants from 2004 to 2006

70%

Followers

63% 49% 40%

Challengers

Leaders

Percentage of Participants by Stage of Maturity

60% 50% 40% 30% 20% 10% 0% 1. Functional Focus 2. Internal Integration
2004 2005

23% 13% 14% 12%

27% 25% 12% 12% 8%

3. External Integration
2006

4. Cross-Enterprise Collaboration

Stages of Maturity

Customer satisfaction cited as top operational performance priority

76% of the leaders cited increased customer satisfaction as a top priority. This reflects an overall push for greater top-line growth through increased sales across the different surveyed industries. Revenue generating activities are now driving the management agenda and customer satisfaction is key to both keeping customers and developing new business.

In 2006, despite the healthy economic climate in the euro zone, companies continued a strong focus on cost improvement
Up to early 2005, companies in the core euro zone were focused on improving the balance sheet in the wake of the 2001 downturn. Strict cost control and rationalisation programmes dominated the management agenda. In 2006, companies truly reaped the benefits of their efforts. Cost control, coupled with euro zone expansion at its fastest rate in six years, led to strong corporate profits. Despite strong balance sheets and healthy profits, supply chain cost discipline and efficiency continued to remain near the top of the agenda in 2006 due to a number of factors. These
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European Supply Chain Trends 2006 included rising commodity and component prices, the impact of a falling dollar on exports and continuing price pressure from Asian imports. 71% of the leaders cited cost improvement as very important. Interestingly, the survey reveals that outsourcing is no longer seen as a key focus for performance improvement. In most cases, the easy wins in outsourcing have been realised. Companies are now using new levers such as complexity reduction to achieve further efficiencies. Figure 2Top Three Supply Chain Management Priorities Amongst Leaders and Followers

Increase customer satisfaction Reduce supply chain costs Reduce working capital Increase sales Extract more value from existing investments Reduce direct labour and material Transform fixed costs to variable costs through outsourcing 12% 18% 18% 7% Leaders 24% 55% 29% 25% 47% 55%

76% 62% 71% 58%

List of Selected Priorities

Followers

Supply chain management high on the CEO agenda

83% of all respondents stated that the supply chain was perceived as strategic by management; compared with only 57% last year. The change was particularly noticeable for the less-mature firms. Last year only 48% of less-mature firms judged their supply chains as strategic versus 78% this year. These results indicate that the supply chain is now widely seen as a critical enabler of the business agenda.

2. The Management Agenda of Leaders

In 2006, leading companies spent the largest part of their supply chain improvement budgets on operational innovation*
In 2006, leading companies spent 37% of their total supply chain improvement budget on operational innovation versus 19% for followers. *As defined by PRTM, operational innovation efforts create operational breakthroughs that significantly affect the way the company competes. They are company-wide projects sponsored by the CEO and involve multiple functions such as marketing, sales, product development, and supply chain. The priority given to operational innovation by leaders indicates that process improvements are no longer sufficient to gain competitive advantage.

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Figure 3Average Supply Chain Investment Allocation for Leaders and Followers

50%

45% 37% 32% 31%

Investment Allocation in Percentage

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Followers (Stage 1 & 2) Operational Improvement Leaders (Stage 4) Operational Innovation 19% 36%

Operational Excellence

Leaders continue to spend on operational improvement and operational excellence

While making supply chain innovation the priority, leaders continue to invest in operational improvement and operational excellence, which represent 32% and 31% of their supply chain improvement spend respectively. As defined by PRTM, operational improvement projects increase efficiency and decrease waste and operational excellence efforts target achieving best-in-class performance using existing processes.

47% of leaders saw the lack of partner competencies as one of the key barriers to better performance
Leaders see key suppliers and customers as a major source of innovation and are faced with an increasing need to integrate externally. In contrast, followers are still struggling with internal integration and the lack of integration between the supply chain and other internal processes is cited as their biggest barrier to success.

Leaders are better able to collaborate and partner as they have a higher use of collaborative standards
The adoption of a common language and set of processes enables companies to collaborate between companies, their partners, and suppliers. Our survey reveals that companies using SCOR (Supply-Chain Operations Reference-model) have much less difficulty working with their partners and suppliers compared to companies not using SCOR. For more information on SCOR, contact Enrico Camerinelli, Supply-Chain Council Europe Chapter (ecamerinelli@supply-chain.org)

Supply-Chain Operations Reference-model (SCOR) is a registered trademark of the Supply-Chain Council, Inc. 2007 PRTM Page 7

European Supply Chain Trends 2006

3. Forecast: Key Trends for 2007

By mid-year, a combined slow down in the U.S. and European economies, as well as a falling dollar, will put the breaks on profit growth. Previous years productivity improvements and healthy balance sheets will help companies weather the worst but a strong focus on cost improvement will continue. High growth in Asia will raise the importance of a global supply chain that goes beyond an export-centric model (e.g., with a focus on low-cost country manufacturing) to a marketcentric model (focused predominantly on sales to that emerging market). Growth both in infrastructure and consumer demand, particularly in China, will be a key driver here. A wave of liquidity led to a peak level of merger and acquisition activity in 2006, spurred on by the rise in private equity and events such as European energy market liberalisation. Europe will experience a slow down in M&A activity due to tightening credit and fewer quality assets to purchase. Integrating acquisitions without deteriorating operational performance will be a key challenge. Watch out for challengers taking market share based on superior customer service, as companies struggle to integrate acquisitions. In 2007, leaders will maintain a focus on investing in supply chain innovation. Innovation will focus on boosting sales through new products and services in core euro-markets. Expect also to see supply chain leaders establishing new business models that leverage their partner s supply chain assets to accelerate growth in new market segments or geographies.

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IV. Industry Analysis

Supply Chain Maturity by Industry
This section examines a selected number of industry segments represented in the survey in greater depth. The segments profiled in this section present a spectrum of maturity levels. For each industry there is a brief discussion of major challenges and supply chain priorities.

Figure 4Percentage of Companies at Stage 3 & 4 (in 2006)

100% 80% 60% 40% 20% 0% 80% 64% 60% 60% 50% 46% 40% 29% 29% 25% 20% Overall Percentage of Participants at Stage 3 & 4

14% 0% 0% Financial Services 0% Software Page 9

Computers & Peripherals

Other Services

Electronic Equipment

Medical Equipment

Telecom & Communication Equipment Other Industrial Products

Industry Segments Involved in the Survey

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Bio & Pharmaceuticals

Aerospace & Defence

Semiconductors

Chemicals & Applied Materials

Consumer Goods

Automotive

Communication Services

European Supply Chain Trends 2006

Computer & Peripherals Innovative service models in an increasingly commoditized market

As in previous surveys the computer segment has maintained high levels of supply chain maturity. Almost 90% of the survey population for the computer segment are companies with Stage 3 or 4 supply chain maturity. High maturity is a given in this sector due to tremendous ongoing competitive pressures. A dearth of new product innovations and increasing competition has led to eroding margins for many players. For most, the supply chain is already cost optimised with global, highly outsourced supply chains. The focus now is on innovative service models and growth while maintaining strong cost discipline.

Automotive Redefining the industrial and supplier footprint

Many years of global competition have left automotive companies with mature, lean supply chains. This is reflected in the survey, with 64% of companies citing Stage 3 or Stage 4 maturity. Faced with a long-term trend of declining sales in the core markets, companies are going beyond process improvements and are redefining their industrial and supplier footprint. In the never-ending quest for efficiency and cost savings, automotive companies are now looking for further economies through low-cost country sourcing. OEMs are increasingly looking to source parts from Eastern Europe and Asia Pacific, taking their tier one suppliers with them. One of the key challenges for companies in this industry is managing this transition towards a complex global model in an environment of extreme downward cost pressure. In line with these observations, PRTMs Supply Chain Trends Survey 2006 shows the reduction of supply chain costs and working capital as the key focus for this sector.

Aerospace & Defence Increased challenges in managing extended supply chains

Aerospace and defence is becoming more global as barriers to trans-national mergers and cooperation are lifted. As a result, companies are evolving towards the delivery of fewer but larger and more integrated programmes. This is leading to cross-border consolidation in the industry and raising the importance of partnerships and collaboration. The 2006 survey confirms this trend, finding aerospace and defence companies to be very active in supply chain collaboration. This is reflected in the survey, with 60% of companies citing Stage 3 or Stage 4 maturity. There is also an emerging trend in this sector towards availability-based agreements. In response to this trend, defence and commercial businesses are extending supply chains further downstream into after market support to build top-line growth. The aerospace and defence industry is facing a big challenge in 2007 and beyond to become more adept at managing these extended and increasingly complex supply chains, and integrating more effectively with partners. The Supply Chain Trends Survey 2006 indicates that the industry has identified increasing partner capability as a key area of performance improvement.

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Electronic Equipment Priorities have shifted towards growth and customer satisfaction while maintaining tight cost control
The electronics equipment sector includes companies ranging from automation equipment to white goods providers. The sector has clearly moved away from short-term cost reductions to investment in increased customer satisfaction and growth. However, to stay ahead in an ever-increasing competitive and dynamic market, a focus must be maintained on controlling the cost of global and complex electronic supply chains. Survey respondents indicate that continued cost discipline is very important (70%) but that outsourcing is viewed as less of an opportunity to increase performance than in previous years, declining from 26% in 2005 to 18% in 2006. The electronics equipment sector continues to be in the top league of supply chain maturity. The survey found that 46% of companies in this sector are at Stage 3 or 4, up from 36% last year.

Chemicals & Applied Materials An underperforming sector facing commoditization, focusing on new markets and customer service
After decades of leadership, the European chemical industry lost its first place position to Asia as competition intensified. In particular, Germany (25% of the EU sector) is now particularly vulnerable to increased competition from Asia. One of the main difficulties this sector is facing is commoditization. Though the sector had the highest level of R&D expenditures of all manufacturing industries in the past 30 years, there have not been many significant discoveries in recent years. Patents are becoming public, the manufacturing know-how propagated and price transparency increased. As a consequence of increased competition and price pressure, reduced supply chain costs and working capital are cited as two of the top three levers for increasing business performance. In addition to cost improvement, the management agenda will focus on improving customer service to face off competition and to increase pricing power, where possible. The survey found that 29% of companies in this sector are at Stage 3 or 4, up from 20% last year.

Medical Equipment Growing the service business while integrating internal operations
The medical equipment segment continues to focus on solution-oriented service models to generate incremental revenues. In line with this strategy, participants indicated that they rarely outsource after market support and returns operations. As pressure on patient care costs increases, many medical equipment companies are restructuring their operations to meet the changing requirements in the end market, particularly targeting closer integration with end customers such as hospitals. From a supply chain maturity perspective, the majority of the survey population are at Stage 2 and only 29% are at Stage 3 or 4 maturity. As with earlier years, this level of supply chain maturity indicates that companies in this segment are still struggling with internal integration issues. The trend towards greater integration with customers will put even greater pressure on medical equipment companies to integrate internally.

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Telecoms & Communications Equipment Riding the wave of consolidation and increased competition
Changes to the industry structure and the impact of regulations and government policies on the industry continue to impose new challenges to telecom and communications equipment companies. The level of mergers and acquisitions raises the challenge of how to drive efficiency out of the merged supply chains and operations while staying competitive. The results of recent large-scale mergers are still to be seen with details of organisation, distribution channels, and partnerships still to be sorted out. The 2006 survey shows that companies will increasingly turn their investment focus to operational innovation, realising that innovative approaches are required to stay competitive. However, the communication equipment sector has only 25% of companies at supply chain maturity Stage 3 or 4, indicating that business performance can gain significantly from improvements in the supply chain. The Asia-Pacific region will be increasingly important for the future of European telecoms and communication equipment providers. Major adjustments to existing supply chain structures will be required to serve these markets.

Other Industrial Products Managing global supply chains to deliver new services and higher customer satisfaction
The other industrial products sector includes companies ranging from machine tools to lighting equipment. Industrial companies in past years have had a high focus on reduction of cost through reducing the cost of direct labour and material, outsourcing, and extracting value from investments. The continuing strong economic climate has diverted attention away from these tactical actions towards revenue building, with increasing customer satisfaction and increasing sales being the most cited opportunities. Supply chains are also being extended into after sales services, and being made more global through cross-border internal integration. As a result, reducing supply chain cost and working capital continues to be a focus as complexity increases. This is a key opportunity as this sector has one of the lowest maturity ratings with only 20% reporting a Stage 3 or 4 maturity.

Bio & Pharmaceuticals Generic product competition, increased level of regulation, focus on new product introduction and cost reduction
The last decade saw a release of effective new treatments sustaining double-digit growth and profitability. However, with a wide range of patents falling in the public domain and only a few new blockbusters in development phase III, the 2006 growth for the European bio and pharmaceuticals sector was 6.5% with expected growth in 2007 of 5%. The sector, experiencing a high level of M&A activity, is undertaking wide measures in a number of important areas to sustain growth and margins. PRTMs Supply Chain Trends Survey 2006 shows that the key point on the management agenda is continued focus on customer satisfaction as the top priority. The increased level of business integration and use of partners pose a key competency challenge. Over the last year, the industry saw a continued high level of outsourcing in manufacturing but with supply chain planning and new product introduction remaining internal.
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Life science manufacturers remain plagued by poor operational performance and low supply chain maturity, a legacy from the high-margin days. Product supply excellence is emerging as a cornerstone for the future. Customer satisfaction is considered a top priority in order to maintain customer loyalty increasingly eroded by the introduction of lower-price generic products.

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V. Geographical Analysis
Supply Chain Maturity by Geography
While adoption of supply chain best practices has progressed across Europe overall during the last four years, Central, Western, and Northern Europe differ in the rate and extent of improvement. The differences are largely driven by the industries of survey participants and therefore should not be seen as a function of geography-specific factors. In this years survey, the Northern area (the U.K., Ireland, and Scandinavia) takes first place, with 42% of companies at Stage 3 or 4 maturity, and a low number of companies at Stage 1 (13%). This years population has a larger share of automotive and aerospace & defence companies, pulling up the overall segment performance. There is no doubt that the Northern area has increased overall maturity from earlier years, but the population mix is likely influencing the overall position to look somewhat more positive than the actual industry average. The Central area (Germany, Switzerland, Austria, and the Netherlands) has the second highest level of maturity with 36% of companies at Stage 3 or 4 due to a large number of industrial and medical equipment companies. The Western area (France, Italy, Spain, and Belgium) ranks third with 29% of companies at Stage 3 or 4 maturity. The Western area has in earlier surveys shown a higher level of maturity, but a larger number of less-mature industrial companies pulled down the average.

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About PRTM
If you would like to discuss the survey in more detail, please contact PRTM at: United Kingdom 25 The Quadrant Abingdon Science Park Abingdon Oxford OX14 3YS Tel: +44 (0) 1235.555500 Fax: +44 (0) 1235.554835 France 55 avenue Hoche 75008 Paris Tel: +33 (0) 1.56.68.30.30 Fax: +33 (0) 1.56.68.30.31 Germany Schillerstrae 42-44 60313 Frankfurt Tel: +49 (0) 69.219.940 Fax: +49 (0) 69.219.94.335 Seidlstrae 23 80335 Munich Tel: +49 (0) 89.516.175.5 Fax: +49 (0) 89.516.175.7501

Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies operate. PRTM management consultants work with senior executives to develop and implement innovative operational strategies that deliver breakthrough results. The firm is a leader in operational strategy, supply chain, product development, and customer management. PRTM has 16 offices worldwide and serves major industry and government sectors.

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