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1、Focus on Operating Outcomes,Not Reduction Targets,to Optimize Supply Chain CostPaul Lord,Senior Director Analyst24 May 2019Gartner ResearchFocus on Operating Outcomes,Not ReductionTargets,to Optimize Supply Chain CostPublished:24 May 2019 ID:G00382831Analyst(s):Paul LordSupply chain and business rol
2、es must align and collaborate aroundoperating outcomes,rather than reduction targets,to optimize total cost.Supply chain leaders can use this research to adjust how they engagestakeholders and propose initiatives that achieve breakthrough costimprovements.Key FindingsReduction targets for cost and i
3、nventory create apprehension and resistance amongstakeholders,inhibiting the collaboration and innovation required to drive and sustainimprovement.Attempts to reduce cost within individual sites and functions put quality and service at risk,orcreate constraints that limit improvement potential.Compa
4、nies often pursue too many initiatives simultaneously without investing in the talent andtechnology required to enable improved performance.Supply chain organizations focusing on improving strategically aligned outcomes havedemonstrated that trade-offs among cost,service and quality are not always n
5、ecessary.RecommendationsSupply chain leaders pursuing cost optimization should:Drive collaboration and innovation for improved performance by aligning multiple functionsaround cost-optimized operating outcomes.Enable decisions by defining metrics and developing cost analysis models that align to the
6、scope and performance objectives of specific operating outcomes.Justify investments by proposing initiatives based on their potential to impact performance anddeliver improvement to specific operating outcomes.Table of ContentsAnalysis.2Big Picture Approaches Are Useful but Not Fully Actionable.4Foc
7、us on Efficient Operating Outcomes to Sharpen Focus and Align Stakeholders.6Respond to Short-Term Pressure by Clarifying Outcomes.9Growth Strategies and Events Complicate Cost Optimization.9Gartner Recommended Reading.10List of FiguresFigure 1.Cost Management Remains Short Term and Functionally Focu
8、sed.3Figure 2.Five Levers for Supply Chain Cost Optimization.5Figure 3.Align Stakeholders on Efficient Operating Outcomes.6Figure 4.Optimize Operating Outcomes to Support Strategic Value Imperatives.7AnalysisProfessional golfers long ago learned to focus on the process rather than the result,as it g
9、ives themboth a plan and positive focus before each shot,while also letting them visualize the shotstrajectory before taking their swing.Without this approach,self-doubt,negativity and consequencesof bad shots can creep in.1Top-down cost reduction targets cause similar negativity within organization
10、s.Resulting pressureand conflict limits a supply chains ability to meet its full performance potential.Figure 1 presentsresults from a recent Gartner survey,2 elaborating on top challenges faced by supply chain leaders intheir pursuit of cost optimization.Short-term cost pressure cultivates skeptici
11、sm surrounding long-term business value being overlooked.Page 2 of 12Gartner,Inc.|G00382831Figure 1.Cost Management Remains Short Term and Functionally FocusedLogistics leaders who completed the survey3 also cited challenges with achieving ongoing costreduction targets within their function while,at
12、 the same time,struggling to acquire sufficient talent.This illustrates the paradox of taking functional approaches to cost improvement.They placeisolated pressure on operating functions,such as logistics,which are primarily responsible for thereliable,safe and compliant delivery of materials to war
13、ehouses,factories and customers.At thesame time,these functions have limited direct influence over distribution plans and commitments tocustomer orders that drive operating activity.These narrow approaches create sentiments that range from dejection to resignation.At best,thereis superficial complia
14、nce in the form of routine diligence using the most obvious tactics.Leadersknow their efforts will create skepticism within the organization.Stakeholder reactions can rangefrom passive resistance to open conflict.Even so,the assigned targets leave them no choice:theirhands and feet are active,while
15、their hearts and minds are elsewhere.Cost reduction attempts are further stifled by simplistic approaches that overlook complex impactsof constraints,variability and system interdependencies.Gartner has observed examples thatinclude:Gartner,Inc.|G00382831Page 3 of 12Figure 1.Cost Management Remains
16、Short Term and Functionally FocusedLogistics leaders who completed the survey3 also cited challenges with achieving ongoing costreduction targets within their function while,at the same time,struggling to acquire sufficient talent.This illustrates the paradox of taking functional approaches to cost
17、improvement.They placeisolated pressure on operating functions,such as logistics,which are primarily responsible for thereliable,safe and compliant delivery of materials to warehouses,factories and customers.At thesame time,these functions have limited direct influence over distribution plans and co
18、mmitments tocustomer orders that drive operating activity.These narrow approaches create sentiments that range from dejection to resignation.At best,thereis superficial compliance in the form of routine diligence using the most obvious tactics.Leadersknow their efforts will create skepticism within
19、the organization.Stakeholder reactions can rangefrom passive resistance to open conflict.Even so,the assigned targets leave them no choice:theirhands and feet are active,while their hearts and minds are elsewhere.Cost reduction attempts are further stifled by simplistic approaches that overlook comp
20、lex impactsof constraints,variability and system interdependencies.Gartner has observed examples thatinclude:Gartner,Inc.|G00382831Page 3 of 12Price over value.Supplier substitution or contract renegotiation to obtain price concessionsacrifices elements of quality,service or flexibility,which impair
21、s the nature of the networkresponse.One common example is contract manufacturing arrangements with minimumvolumes and long commitment lead times increasing the difficulty to optimize inventory andservice levels.Shifting fixed costs.Outsourcing,offshoring or contract labor are employed to reduce theo
22、verhead costs attributed to full-time employees.This creates the need to develop newcapabilities for managing service providers and may not even reduce total cost impactingboth work quality and organizational morale.Supplier financing.Many purchasing strategies target the extension of payment terms
23、or forcesuppliers into consignment arrangements.Doing so puts the reliability and security of supply atrisk particularly for suppliers with weaker financial health than their customers.Inventory reduction.Inventory is often confused for cost,and cash flow impacts are notalways distinguished between
24、fixed cost absorption or allocation.While inventory has a cost,the full range of its contribution to efficient,reliable supply is not fully appreciated.Cycle stocksupports the leverage of scale to reduce unit supply costs.Anticipation stock is often used tomaximize the use of constrained capacity th
25、at serves event-based demand peaks.Big Picture Approaches Are Useful but Not Fully ActionableAttempting to reduce cost by adjusting budgets or metrics is similar to declaring a target final scorein a golf tournament.The goal will not result in success until it is broken into actionable initiatives.P
26、ractice time is allocated to the phases of the game from driving and fairway approach shots tochipping,putting and hazard recovery shots.Gartner defines cost optimization as a business-focusedcontinuous discipline to drive spending and cost reductionwhile maximizing business value.The distinction be
27、tween costreduction and cost optimization is more than rebranding.Aspirations to improve efficiency are constrained by the primaryresponsibility of supply chain to deliver high-quality productsand timely service to customers.Figure 2 provides the visual overview of a previously published Gartner fra
28、mework for supply chainoptimization.Supply chain leaders have five levers to manage in pursuit of end-to-end costoptimization(see“Use Gartners Supply Chain Cost Framework to Analyze Categories and ManageLevers”).Page 4 of 12Gartner,Inc.|G00382831Figure 2.Five Levers for Supply Chain Cost Optimizatio
29、nThis framework represents a more complete and effective approach to performance improvement,compared to fragmented control of individual sites,functions and cost centers.It also promotes asystemic understanding about the specific supply chain levers that impact cost and must besynchronized to optim
30、ize overall performance.The main principles illustrated in Figure 2 include:Starting at the bottom of the inverted pyramid,tactical approaches,like supplier pricenegotiations(“deals”)and more efficient operating plans(“tactics”),are relevant but hold limitedimpact.They are actionable and have the po
31、tential to yield results within a short time period,and should be pursued continuously.Annual impact ranges from 2%to 5%of revenue,andmay suffer from decreasing marginal return on effort over time.A significant portion of supply chain cost is structural in nature as illustrated toward the topof the
32、pyramid which cannot be impacted by operating decisions.When competition drivesincreased complexity into product and service portfolios,supply networks must be aligned toenable reliable,efficient fulfillment of demand.This requires revisiting previous design choicesto ensure networks have the necess
33、ary capacity,speed and flexibility to support business go-to-market strategies.Gartner,Inc.|G00382831Page 5 of 12To enable timely decisions and scalable execution,changes in product supply and servicedelivery networks require upgraded planning and operating capabilities.Investing in processcapabilit
34、ies(enabled by talent and technology)is required to maximize value from the productportfolio and supporting network.Tactical strategies will not realize their full value potential if notenabled by sufficiently robust decision,transactional and operating process capabilities.While holistic frameworks
35、,such as shown in Figure 2,provide useful insights to address systemcomplexity,they are difficult to operationalize within organizations composed of traditional operatingfunctions.Modeling for decision support is complex,and it is not realistic to align all stakeholdersaround every design choice and
36、 operating decision.Focus on Efficient Operating Outcomes to Sharpen Focus and Align StakeholdersTop performing golfers remain focused on the present moment,planning and executing each shotbased on the balls location and that holes hazards.Figure 3 illustrates a cost optimization“sweetspot”for suppl
37、y chain organizations.Focusing on discrete operating outcomes breaks down costoptimization problems into measurable,repeatable events and conditions.Figure 3.Align Stakeholders on Efficient Operating OutcomesThis allows organizations that operate complex supply networks to avoid the conflicts caused
38、 bycost reduction targets for individual functions.Multiple groups can align around design choices andoperating decisions that minimize waste,while ensuring target performance for outcomessupporting business value.Cost reduction efforts are constrained by the need to both protect and maximize busine
39、ss value(see“Supply Chain Brief:Advanced Supply Chains Add Business Value to Cost Focus”).This valueis manifested within the companys products and proprietary technology,its commercialrelationships,brand image and organization capabilities.Supply chain leaders must find a methodPage 6 of 12Gartner,I
40、nc.|G00382831to define and communicate how the operating outcomes they deliver translate directly to supportingmaximization of business value.Figure 4 provides a schematic illustration for this essential alignment between business value andsupply chain operating outcomes.In this case,three strategic
41、 imperatives are defined andsupported by three discrete operating outcomes:efficient demand fulfillment,cost-optimized supplyfor established products and risk-optimized capture of new business(or launch of new products).Figure 4.Optimize Operating Outcomes to Support Strategic Value ImperativesDepen
42、ding on the industry and business strategy,the nature and relative weighting of strategicimperatives will vary.However,the framework of Figure 4 provides an opportunity to ensurestrategic alignment and minimize conflict in the pursuit of cost optimization.Profitable growth withsufficient investment
43、return will almost always be a strategic imperative for commercial enterprises.Government and nonprofit organizations will have slightly different financial imperatives perhapsexpressed within the constraints of available funding.Articulating strategic imperatives has an influence on how discrete op
44、erating outcomes are defined,enabled and prioritized.In Figure 4s example,the product-centric supply chains performance isdecoupled into three measurable outcomes:Gartner,Inc.|G00382831Page 7 of 12Cost-optimized product supply(whether purchased from suppliers,produced internally oroutsourced to exte
45、rnal manufacturers)Efficient service delivery,accompanying the fulfillment of product demandAcquisition of new business via events that include business acquisition and integration,expansion of the supply and distribution network,new contract agreements,and new productlaunchThis engagement approach
46、has the potential to change the nature of supply chain discussions withbusiness stakeholders.It reduces conflict by reaffirming a commitment to support the business.Debates and negotiations about spending cuts and budget allocations can be replaced with aligningand clarifying specific network perfor
47、mance required to support the business.This process canpotentially catalyze new thinking that identifies breakthrough improvement opportunities by definingtarget outcomes in a way that unleashes collaboration and innovation.The potential of strategically-aligned outcomes is illustrated in two Gartne
48、r case study examples,summarized below:Tech Supplier Cisco Optimizes Product Supply Cost and QualityCisco,a leading high tech supplier,described its approach to product quality as“fear based,”over-testing across every step of its value chain.This resulted in increasing costs for testing equipmentand
49、 high levels of rejected supplier parts particularly in the early stages of a new product launch.The company organized an initiative to collaborate with its suppliers,with investment in advancedanalytics for adopting quality testing protocols informed by process analysis.This enabled areduction in t
50、esting equipment costs and lower rejected supplier parts rate.Quality testing protocolswere managed and adapted during a products life,based on process and product data analysis.Product quality continued meeting performance requirements,while supply cycle times werereduced to improve responsiveness(
51、see“High-Tech Manufacturing Supply Chainnovators 2016:Connecting,Collaborating and Capitalizing on Complexity”).A Leading Supplier of Industrial Coatings Improves Delivery Service and EfficiencyA leading supplier of industrial coatings evaluated its supply capabilities in support of an aggressivegro
52、wth strategy.It discovered gaps in its demand fulfillment capabilities and performance,based onresults from benchmarking and maturity analysis.A combination of legacy mindsets and incentivesoriented around meeting functional cost goals emerged at the root of this gap.Leadership for this supply chain
53、 took timely and comprehensive action:changes included incentiverealignment across the organization to emphasize service performance.Supply lead times saw over30%reduction by working with suppliers,as well as increasing their planning agility.Processimprovements within warehouses increased the speed
54、 and accuracy of order fulfillment.Thesechanges saw results that were immediate and dramatic.In addition to raising their on-time,in-fulldelivery metric by 15%,they also experienced a 5%efficiency benefit in reduced freight costs.These results demonstrate the potential for avoiding traditional cost-
55、service trade-offs by taking aPage 8 of 12Gartner,Inc.|G00382831comprehensive focus on the entire fulfillment process(see“Case Study:Industrial MaterialsSupplier Translates Assessment Into Action for Improved Customer Service and Reduced Cost”).Respond to Short-Term Pressure by Clarifying OutcomesTh
56、e examples above illustrate the breakthrough potential of systemic approaches that exceed whatis possible with top-down control and reduction targets.During periods of short-term financialpressure,supply chain leaders must advocate for cost optimization strategies to be sharpened,notabandoned in fav
57、or of traditional practices.Rather than abdicating the responsibility to deliverefficient,sustainable outcomes,supply chain leaders should clarify specific performance targetswith their stakeholders.Do customers still demand(and do product and marketing leaders still commit to delivering)thesame lev
58、els of product quality as before?Is the business prepared to make trade-offs of qualityto reduce cost?Are sales and service leaders committed to the same customer service levels?Are theyprepared to institute new service rules(for some customer segments)related to minimum orderquantity,order placemen
59、t methods and lead times,cancellations and returns?Are manufacturing and finance leaders prepared to strike a different balance between workingcapital and manufacturing asset performance?Would higher inventory levels be acceptable toincrease asset efficiency or reduce freight cost?A focus on outcome
60、s provides a mechanism to maintain organizational focus in an environment ofpressure and uncertainty.Service and delivery organization leaders can maintain morale of theirpeople by emphasizing outcomes,reinforcing the importance of redoubling efforts to protectprecious company revenue and margin.Sou
61、rcing and operating organizations can also useoutcomes,here to reinforce the importance of quality and reliability,while expanding their thinkingto collaborate and innovate in search of changes that improve cost without putting outcomes andstrategic imperatives at risk.Growth Strategies and Events C
62、omplicate Cost OptimizationBusiness models are increasingly impacted by discrete events which must be managed asoperating outcomes that impact cost and value.Examples include successful projects for industrialconstruction businesses,promotions for consumer products and seasonal demand peaks inagricu
63、lture and many other sectors.Future Gartner research will define and elaborate on theoperating outcomes most applicable within specific industry sectors.Figure 4 acknowledges the growth of advanced operating models that consolidate product,serviceand content into integrated solutions.Mastery of the
64、operating outcomes defined here can serve asan intermediate milestone toward these more complex operating models that offer“outcomes as aservice”to their customers.This topic will be addressed in Gartners research on supply chainstrategies for supporting digital business transformation.Gartner,Inc.|
65、G00382831Page 9 of 12Focus on Operating Outcomes,Not ReductionTargets,to Optimize Supply Chain CostPublished:24 May 2019 ID:G00382831Analyst(s):Paul LordSupply chain and business roles must align and collaborate aroundoperating outcomes,rather than reduction targets,to optimize total cost.Supply cha
66、in leaders can use this research to adjust how they engagestakeholders and propose initiatives that achieve breakthrough costimprovements.Key FindingsReduction targets for cost and inventory create apprehension and resistance amongstakeholders,inhibiting the collaboration and innovation required to
67、drive and sustainimprovement.Attempts to reduce cost within individual sites and functions put quality and service at risk,orcreate constraints that limit improvement potential.Companies often pursue too many initiatives simultaneously without investing in the talent andtechnology required to enable
68、 improved performance.Supply chain organizations focusing on improving strategically aligned outcomes havedemonstrated that trade-offs among cost,service and quality are not always necessary.RecommendationsSupply chain leaders pursuing cost optimization should:Drive collaboration and innovation for
69、improved performance by aligning multiple functionsaround cost-optimized operating outcomes.Enable decisions by defining metrics and developing cost analysis models that align to thescope and performance objectives of specific operating outcomes.Justify investments by proposing initiatives based on
70、their potential to impact performance anddeliver improvement to specific operating outcomes.Winning in the Turns:A Supply Chain Action GuideGartner,Inc.|G00382831Page 11 of 12GARTNER HEADQUARTERSCorporate Headquarters56 Top Gallant RoadStamford,CT 06902-7700USA+1 203 964 0096Regional HeadquartersAUS
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