McKinsey on IT
Number 7, Spring 2006
1 Introduction: Software
inside
The increase of embedded
software in products is
creating a host of strategic and
operational challenges.
16 Recapturing your supply
chain data
Outsourcing parts of the supply
chain has disrupted the flow
of critical data. Targeted IT
investments can restore what’s
missing.
3 Getting better software
into manufactured products
The problems of embedded
software are rooted in
the legacies of hardware
development.
22 CIO spending in 2006
Chief information officers plan
to keep operating costs low to
spend more on ERP upgrades,
servers, and security.
Innovations in IT management
8 The next generation of in-
house software development
How leading-edge companies
are streamlining applications
development.
25 Using IT to boost call-
center performance
Call centers, making targeted
improvements involving more
cost-effective technologies,
are fi nally saving money and
improving revenues with IT.
16 McKinsey on IT Spring 2006

Recapturing your supply chain data
Outsourcing parts of the supply chain has disrupted the flow of
critical data. Targeted IT investments can restore what’s missing.
Aditya Pande, Ramesh Raman, It has never been simple to manage the
and Vats Srivatsan information that flows through a product
supply chain. Companies must work
closely with suppliers, logistics providers,
distributors, and retailers to collect and
manage information about customer
demand, sales orders, distribution schedules, several components suppliers and several
production planning, manufacturing,
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But this task has become even more
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complex because outsourcing has
stretched supply chains around the globe
(Exhibit 1). Companies not only buy
more of their raw materials, components,
design services, and manufacturing from
far-flung third parties but also rely on
contractors to coordinate the manufacture
and movement of their goods.
Both trends reduce costs, but in exchange,
executives have given up something
valuable: easy access to critical data—
such as details about quality, supplies on
hand, and manufacturing capacity—
that could help raise productivity. For
example, a computer hardware company’s
supply planner, trying to meet a spike
in demand for certain products, needs
capacity and inventory information from
contract manufacturers, but the data
may be locked up in the IT systems or
spreadsheets of a dozen or more companies.
Likewise, a manufacturer seeking to reduce
warranty costs may want to connect data

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Recapturing your supply chain data
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at the far ends of its supply chain, from
field service technicians making repairs to
components suppliers trying to keep their
costs low.
Reconnecting the dots isn’t easy, given
the widening range of players in the
supply chain and their divergent interests
and incentives. But without access to
accurate and timely data, companies
will struggle to adapt their supply chain
networks to support newer products,
geographies, and changes in the supplier
base. They also will find it burdensome
to comply with regulatory requirements,
such as Sarbanes-Oxley, as well as with
international tax laws when they have
fiscal responsibility for materials and
transactions occurring beyond their
organizational walls. Finally, if the supply
chain is poorly integrated, the partners will
duplicate their IT investments and business
processes—reducing the efficiency of the
whole chain.
17
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Managing information flows
For insights into how to regain control
over supply chain information, we looked
at leading technology companies that have
globalized significantly and outsourced their
manufacturing and logistics over the past
four or five years. Their experience suggests
three important themes: tailor information
flows according to demand and the type of
product; reconsolidate supply chain data;
and determine how closely to monitor
critical information with each partner.
Fit information flows to supply chain types
Some data from the supply chain are more
important than others, depending on the
type of product. Companies must recognize
the significance of this differentiation and
focus their investments on IT systems that
track and monitor information critical
to each product’s success. In high tech,
we see four basic types of supply chains,
which characterize other sectors as well
(Exhibit 2).
18
1 For information on getting the most
from supply chain software, see Kishore
Kanakamedala, Glenn Ramsdell, and Vats
Srivatsan, “Getting supply chain software right,”
The McKinsey Quarterly, 2003 Number 1,
pp. 78–85 (www.mckinseyquarterly.com/
links/20490).
McKinsey on IT
First are the supply chains for fashion
products, such as Motorola’s RAZR phone
and Apple’s iPod, which have short life
cycles punctuated by quick, iterative design
changes. For such products, effective
supply chains help companies chase
demand rapidly by providing information
flows that promote rapid coordination
between the designer and the suppliers, as
well as a good view of the availability of
components and manufacturing capabilities.
What’s more, good information feedback
mechanisms from retailers and end
customers make it possible to respond
more quickly in the next iteration.
Highly engineered products, such as
high-end routers and storage equipment,
have longer life cycles (sometimes four or
five years), but over this cycle there are
more significant product design changes
involving the assembly of complex
configurations of materials. For these
products, key information flows include
order configuration management, visibility
into supply and capacity across product
lines, and the effective coordination of
change-management information and
decisions among designers, assemblers,
and components suppliers (roles often
undertaken by different players in the
technology supply chain).
By contrast, a company selling commodities,
such as PCs and low-end servers, needs
to focus on information that helps it to
reduce its costs and inventory continually.
Information flows in the supply chain must
offer transparency into key costs (and cost
drivers) across the company and its partners,
as well as high visibility into inventories
along the supply chain.
Stable products, including electronic
components for automobiles, are also
cost sensitive, but they are locked in over
Spring 2006
longer contract periods and sometimes
remain unchanged for a few years. Supply
chain information should focus on details
of costs and distribution. Of course, that
information is less urgent than it is in other
types of supply chains, especially those for
fashion products.
Many companies manage several types
of supply chains. A large consumer
electronics company with a mix of
fashion and commodity products, for
example, should segment its supply
chain system, since each kind of product
involves a distinctive approach to planning
supply chains. Inventory strategies and
information flows must be managed
differently across each of them, so the
supply chain software must be sufficiently
flexible to handle more than one type.
Consolidate critical information
Once managers have identified which
types of information are critical, they can
determine how to consolidate the relevant
data for easy access. Each supply chain
partner typically collects and monitors data
at its stage of the process and then passes
on information about volumes, prices,
and dates for components and products.
This approach still leaves behind a lot of
critical cross-company information. A call
center’s data about which components
fail most often, for example, can offer
critical intelligence for product design and
for supply chain teams negotiating the
quality of components—both of which are
in the early stages of the supply chain.
To gather vital information, companies
must selectively invest in IT connections
between their own systems—supply-chain-
management software and enterprise-
resource-planning (ERP) systems—and the
systems of their suppliers.1 Companies
should focus their spending on areas where
Recapturing your supply chain data
it will have the maximum business impact.
Two types of strategies tend to work well
here: limited investments aimed at specific
business problems (for example, information
from customers and retailers about product
failures) or efforts to work from the top
down to understand how better supply
chain information can help companies meet
business goals such as reduced inventory or
lower transportation costs.
Third parties (such as logistics providers)
are also beginning to invest in these cross-
company information connections for
customers. A large computer maker, for
example, relies on a logistics company to
monitor information from 80 partners and
to present a consolidated view of shipment
and inventory information.
Bridging these gaps pays off. In one case,
a leading enterprise-computing company
started gathering better data from field
services, which gave it information on
the incidence of failures and their costs.
By feeding that data to design teams, the
company developed products that could be
serviced and repaired more easily. The result:
total costs over the product life cycle fell by
10 to 20 percent.
Develop capabilities to monitor information
Once these systems are in place,
companies need to establish an effective
way of monitoring information flows
along the supply chain. Some policing
issues are solely about capabilities: for
example, do a company’s partners have
IT systems that can deliver critical data?
If not, it may want to invest with its
partners in the necessary systems.
Other issues relate to competing agendas.
A high-margin OEM may view certain
kinds of data as critical, for example,
but price pressures may prevent its
19
low-margin suppliers from making the
necessary investments. Contracts can give
such suppliers incentives to invest in the
collection of the data or to satisfy the OEM’s
requirements in some other way.
Depending on the capabilities and
competing agendas of the players, some
relationships may be relatively autonomous
while others require closer monitoring.
Autonomy means that the lead company
relies on the partner to manage the
complexities of the intermediate information
flow. The partner in such a relationship
provides only end-performance metrics
such as cost, delivery, and quality. Consider,
for example, the relationship between Dell
and Quanta Computer, an original-design
manufacturer (ODM) that designs and
manufactures laptops. Dell sets targets for
cost, quality, and order fulfillment and
then measures Quanta’s performance against
these goals; Quanta manages its own
relationships with components suppliers.
Near the other end of the spectrum, one
high-tech company has invested heavily
in cost and quality systems that allow it
to monitor transaction-level details at its
contract manufacturers and components
suppliers. Setting up such systems is
expensive, but they help the company
manage its performance more effectively.
That is especially true when significant value
is at stake (for example, if products have
many quality issues that need to be tracked
or traced to their roots), partner incentives
are not aligned, or intermediate targets (such
as the partners’ daily inventory levels) are
easy to set and monitor.
Implementing these changes
No doubt, as other industries rely more
on outsourcing, thereby fragmenting
their supply chain information, they will
face the same pressures that high tech
20 McKinsey on IT
faces now. Companies will have to gain
the support of their partners by creating
either incentives for cooperation (through
coinvestment, for example) or, in some cases,
disincentives for partners that can’t provide
needed information. Internally, companies
can do three things to help reconsolidate
information flows.
Consider the entire supply chain
Although there are several companies in
a typical supply chain, each company’s
IT system still functions as if it were
independent. Rather than passing customer
sales information straight through to
suppliers, for instance, most players still
have their IT systems and analysts carry
out their own forecasting and materials-
planning functions.
A solution may require a radical change
of mind-sets about collaboration with
partners. Companies at the center of such
a supply chain, together with their logistics
and manufacturing partners, should look
at the whole picture to determine where
information flows should be reconnected
to improve quality, supply, and sales: could
customer-demand signals pass directly to
components suppliers, for example, and
how would that help the manufacturer
meet demand? This kind of model would
require a better information exchange
between inventory levels and orders but
would dramatically reduce the need for
sophisticated forecasting at every stage in
the chain.
Develop a cross-functional perspective
Performance metrics that are aligned with a
functional or business unit reward managers
for meeting the group’s goals, even if doing
so fails to improve performance across the
whole business. A purchasing manager in
a procurement group, for example, gets
rewarded for selecting suppliers that can
Spring 2006
deliver lower unit costs and regular cost
reductions, while in the manufacturing
group an inventory planner is rewarded for
keeping inventory low and order fill rates
high. Both require suppliers that can provide
a good information flow.
However, decisions to select a supplier
are seldom coordinated to ensure that
they optimize total end-to-end costs and
delivery performance. In fact, these decisions
are commonly driven by procurement
organizations, without attention to
delivery performance requirements. Instead,
companies should consider their overall cost
and delivery performance strategy when
they determine their supply chain priorities.
Partners should be selected because they can
meet these broader goals. This approach
calls for guidance from a senior executive—
the CFO or chief operations officer—who
can align incentives across functions and set
up a governance process to ensure that they
remain aligned on an ongoing basis.
Create a detailed scorecard
To help choose partners, companies can set
up a cross-functional scorecard, including
a broad range of metrics that not only
reflect the needs that can help them achieve
their larger goals but are also detailed
enough to indicate areas ripe for improved
performance. A company may, for example,
be basing its choice of vendors on cost,
quality, and delivery details. Within the cost
category, the scorecard could shed more
light by including the cost of after-sales
service and the opportunity costs associated
with stock shortages, not just the cost of
an item. Similarly, delivery costs could be
supplemented with information about safety
stocks for inventory and manufacturing
flexibility. Metrics for quality should include
details on the root causes of defects and
warranty costs, as well as the total costs of
goods through their life cycle. One large
Recapturing your supply chain data
technology company, for example, tracks
detailed information about its installation
service partners. This information includes
variations in productivity across regions,
customers, service requests, and even
technicians so that the company can
encourage and reward the partners offering
the best performance.
Reassembling the information flow
throughout supply chains won’t be easy,
given the players’ different capabilities
and misaligned incentives. But significant
value is at stake, so it’s worthwhile for
21
manufacturers to invest in cooperation.
Leading-edge companies that did so have
reduced their inventories while enhancing
their performance. MoIT
Aditya Pande (aditya_pande@mckinsey.com)
is a consultant in McKinsey’s global IT practice
and specializes in operations. Ramesh Raman
(ramesh_raman@mckinsey.com) is a consultant
in the supply chain practice. Vats Srivatsan
(vats_srivatsan@mckinsey.com), a principal in the
global IT practice, advises high-tech companies
on operations and technology issues. All three
are based in Silicon Valley. Copyright © 2006
McKinsey & Company. All rights reserved.
Copyright © 2006 McKinsey & Company