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McKinsey on IT Innovations in IT management

Number 7, Spring 2006

1 Introduction: Software 3 Getting better software 8 The next generation of in-


inside into manufactured products house software development
The increase of embedded The problems of embedded How leading-edge companies
software in products is software are rooted in are streamlining applications
creating a host of strategic and the legacies of hardware development.
operational challenges. development.

16 Recapturing your supply 22 CIO spending in 2006 25 Using IT to boost call-


chain data Chief information officers plan center performance
Outsourcing parts of the supply to keep operating costs low to Call centers, making targeted
chain has disrupted the flow spend more on ERP upgrades, improvements involving more
of critical data. Targeted IT servers, and security. cost-effective technologies,
investments can restore what’s are fi nally saving money and
missing. improving revenues with IT.
16 McKinsey on IT Spring 2006

Recapturing your supply chain data 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.
Outsourcing parts of the supply chain has disrupted the flow of
Both trends reduce costs, but in exchange,
critical data. Targeted IT investments can restore what’s missing.
executives have given up something
valuable: easy access to critical data—
such as details about quality, supplies on
Aditya Pande, Ramesh Raman, It has never been simple to manage the hand, and manufacturing capacity—
and Vats Srivatsan information that flows through a product that could help raise productivity. For
supply chain. Companies must work example, a computer hardware company’s
closely with suppliers, logistics providers, supply planner, trying to meet a spike
distributors, and retailers to collect and in demand for certain products, needs
manage information about customer capacity and inventory information from
demand, sales orders, distribution schedules, several components suppliers and several
production planning, manufacturing, contract manufacturers, but the data
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sourcing, may be locked up in the IT systems or
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at the far ends of its supply chain, from Managing information flows
field service technicians making repairs to For insights into how to regain control
components suppliers trying to keep their over supply chain information, we looked
costs low. at leading technology companies that have
globalized significantly and outsourced their
Reconnecting the dots isn’t easy, given manufacturing and logistics over the past
the widening range of players in the four or five years. Their experience suggests
supply chain and their divergent interests three important themes: tailor information
and incentives. But without access to flows according to demand and the type of
accurate and timely data, companies product; reconsolidate supply chain data;
will struggle to adapt their supply chain and determine how closely to monitor
networks to support newer products, critical information with each partner.
geographies, and changes in the supplier
base. They also will find it burdensome Fit information flows to supply chain types
to comply with regulatory requirements, Some data from the supply chain are more
such as Sarbanes-Oxley, as well as with important than others, depending on the
international tax laws when they have type of product. Companies must recognize
fiscal responsibility for materials and the significance of this differentiation and
transactions occurring beyond their focus their investments on IT systems that
organizational walls. Finally, if the supply track and monitor information critical
chain is poorly integrated, the partners will to each product’s success. In high tech,
duplicate their IT investments and business we see four basic types of supply chains,
processes—reducing the efficiency of the which characterize other sectors as well
whole chain. (Exhibit 2).
18 McKinsey on IT Spring 2006

First are the supply chains for fashion longer contract periods and sometimes
products, such as Motorola’s RAZR phone remain unchanged for a few years. Supply
and Apple’s iPod, which have short life chain information should focus on details
cycles punctuated by quick, iterative design of costs and distribution. Of course, that
changes. For such products, effective information is less urgent than it is in other
supply chains help companies chase types of supply chains, especially those for
demand rapidly by providing information fashion products.
flows that promote rapid coordination
between the designer and the suppliers, as Many companies manage several types
well as a good view of the availability of of supply chains. A large consumer
components and manufacturing capabilities. electronics company with a mix of
What’s more, good information feedback fashion and commodity products, for
mechanisms from retailers and end example, should segment its supply
customers make it possible to respond chain system, since each kind of product
more quickly in the next iteration. involves a distinctive approach to planning
supply chains. Inventory strategies and
Highly engineered products, such as information flows must be managed
high-end routers and storage equipment, differently across each of them, so the
have longer life cycles (sometimes four or supply chain software must be sufficiently
five years), but over this cycle there are flexible to handle more than one type.
more significant product design changes
involving the assembly of complex Consolidate critical information
configurations of materials. For these Once managers have identified which
products, key information flows include types of information are critical, they can
order configuration management, visibility determine how to consolidate the relevant
into supply and capacity across product data for easy access. Each supply chain
lines, and the effective coordination of partner typically collects and monitors data
change-management information and at its stage of the process and then passes
decisions among designers, assemblers, on information about volumes, prices,
and components suppliers (roles often and dates for components and products.
undertaken by different players in the This approach still leaves behind a lot of
technology supply chain). critical cross-company information. A call
center’s data about which components
By contrast, a company selling commodities, fail most often, for example, can offer
such as PCs and low-end servers, needs critical intelligence for product design and
to focus on information that helps it to for supply chain teams negotiating the
reduce its costs and inventory continually. quality of components—both of which are
Information flows in the supply chain must in the early stages of the supply chain.
offer transparency into key costs (and cost
drivers) across the company and its partners, To gather vital information, companies
as well as high visibility into inventories must selectively invest in IT connections
1 For information on getting the most along the supply chain. between their own systems—supply-chain-
from supply chain software, see Kishore management software and enterprise-
Kanakamedala, Glenn Ramsdell, and Vats
Srivatsan, “Getting supply chain software right,” Stable products, including electronic resource-planning (ERP) systems—and the
The McKinsey Quarterly, 2003 Number 1,
components for automobiles, are also systems of their suppliers.1 Companies
pp. 78–85 (www.mckinseyquarterly.com/
links/20490). cost sensitive, but they are locked in over should focus their spending on areas where
Recapturing your supply chain data 19

it will have the maximum business impact. low-margin suppliers from making the
Two types of strategies tend to work well necessary investments. Contracts can give
here: limited investments aimed at specific such suppliers incentives to invest in the
business problems (for example, information collection of the data or to satisfy the OEM’s
from customers and retailers about product requirements in some other way.
failures) or efforts to work from the top
down to understand how better supply Depending on the capabilities and
chain information can help companies meet competing agendas of the players, some
business goals such as reduced inventory or relationships may be relatively autonomous
lower transportation costs. while others require closer monitoring.
Autonomy means that the lead company
Third parties (such as logistics providers) relies on the partner to manage the
are also beginning to invest in these cross- complexities of the intermediate information
company information connections for flow. The partner in such a relationship
customers. A large computer maker, for provides only end-performance metrics
example, relies on a logistics company to such as cost, delivery, and quality. Consider,
monitor information from 80 partners and for example, the relationship between Dell
to present a consolidated view of shipment and Quanta Computer, an original-design
and inventory information. manufacturer (ODM) that designs and
manufactures laptops. Dell sets targets for
Bridging these gaps pays off. In one case, cost, quality, and order fulfillment and
a leading enterprise-computing company then measures Quanta’s performance against
started gathering better data from field these goals; Quanta manages its own
services, which gave it information on relationships with components suppliers.
the incidence of failures and their costs.
By feeding that data to design teams, the Near the other end of the spectrum, one
company developed products that could be high-tech company has invested heavily
serviced and repaired more easily. The result: in cost and quality systems that allow it
total costs over the product life cycle fell by to monitor transaction-level details at its
10 to 20 percent. contract manufacturers and components
suppliers. Setting up such systems is
Develop capabilities to monitor information expensive, but they help the company
Once these systems are in place, manage its performance more effectively.
companies need to establish an effective That is especially true when significant value
way of monitoring information flows is at stake (for example, if products have
along the supply chain. Some policing many quality issues that need to be tracked
issues are solely about capabilities: for or traced to their roots), partner incentives
example, do a company’s partners have are not aligned, or intermediate targets (such
IT systems that can deliver critical data? as the partners’ daily inventory levels) are
If not, it may want to invest with its easy to set and monitor.
partners in the necessary systems.
Implementing these changes
Other issues relate to competing agendas. No doubt, as other industries rely more
A high-margin OEM may view certain on outsourcing, thereby fragmenting
kinds of data as critical, for example, their supply chain information, they will
but price pressures may prevent its face the same pressures that high tech
20 McKinsey on IT Spring 2006

faces now. Companies will have to gain deliver lower unit costs and regular cost
the support of their partners by creating reductions, while in the manufacturing
either incentives for cooperation (through group an inventory planner is rewarded for
coinvestment, for example) or, in some cases, keeping inventory low and order fill rates
disincentives for partners that can’t provide high. Both require suppliers that can provide
needed information. Internally, companies a good information flow.
can do three things to help reconsolidate
information flows. However, decisions to select a supplier
are seldom coordinated to ensure that
Consider the entire supply chain they optimize total end-to-end costs and
Although there are several companies in delivery performance. In fact, these decisions
a typical supply chain, each company’s are commonly driven by procurement
IT system still functions as if it were organizations, without attention to
independent. Rather than passing customer delivery performance requirements. Instead,
sales information straight through to companies should consider their overall cost
suppliers, for instance, most players still and delivery performance strategy when
have their IT systems and analysts carry they determine their supply chain priorities.
out their own forecasting and materials- Partners should be selected because they can
planning functions. meet these broader goals. This approach
calls for guidance from a senior executive—
A solution may require a radical change the CFO or chief operations officer—who
of mind-sets about collaboration with can align incentives across functions and set
partners. Companies at the center of such up a governance process to ensure that they
a supply chain, together with their logistics remain aligned on an ongoing basis.
and manufacturing partners, should look
at the whole picture to determine where Create a detailed scorecard
information flows should be reconnected To help choose partners, companies can set
to improve quality, supply, and sales: could up a cross-functional scorecard, including
customer-demand signals pass directly to a broad range of metrics that not only
components suppliers, for example, and reflect the needs that can help them achieve
how would that help the manufacturer their larger goals but are also detailed
meet demand? This kind of model would enough to indicate areas ripe for improved
require a better information exchange performance. A company may, for example,
between inventory levels and orders but be basing its choice of vendors on cost,
would dramatically reduce the need for quality, and delivery details. Within the cost
sophisticated forecasting at every stage in category, the scorecard could shed more
the chain. light by including the cost of after-sales
service and the opportunity costs associated
Develop a cross-functional perspective with stock shortages, not just the cost of
Performance metrics that are aligned with a an item. Similarly, delivery costs could be
functional or business unit reward managers supplemented with information about safety
for meeting the group’s goals, even if doing stocks for inventory and manufacturing
so fails to improve performance across the flexibility. Metrics for quality should include
whole business. A purchasing manager in details on the root causes of defects and
a procurement group, for example, gets warranty costs, as well as the total costs of
rewarded for selecting suppliers that can goods through their life cycle. One large
Recapturing your supply chain data 21

technology company, for example, tracks manufacturers to invest in cooperation.


detailed information about its installation Leading-edge companies that did so have
service partners. This information includes reduced their inventories while enhancing
variations in productivity across regions, their performance. MoIT
customers, service requests, and even
technicians so that the company can
encourage and reward the partners offering Aditya Pande (aditya_pande@mckinsey.com)
the best performance. 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
Reassembling the information flow
(vats_srivatsan@mckinsey.com), a principal in the
throughout supply chains won’t be easy,
global IT practice, advises high-tech companies
given the players’ different capabilities on operations and technology issues. All three
and misaligned incentives. But significant are based in Silicon Valley. Copyright © 2006
value is at stake, so it’s worthwhile for McKinsey & Company. All rights reserved.
Copyright © 2006 McKinsey & Company