Thursday 24th Aug 2017 - Logistics & Supply Chain

Being world class

(From Supply Chain Standard, June 2012)

Continuous improvement is the way Philip Morris does business, constantly looking for new ways to do things better and quicker. And it’s proved to be an award-winning approach.

The business expression “world class” is bandied about a lot these days. Everyone, it seems, reckons they are world class – which suggests that some people’s definition of what the phrase means must be about as elastic as a bungee jump.

So it’s great when you come across someone who has done something that is widely recognised as world class – and acknowledged as being so. Earlier this year, Philip Morris International, the cigarette and tobacco company, won the coveted United States’ Supply Chain Council “global operational excellence award”.

The award was for the changes which Philip Morris had made to the supply chain in its Australian subsidiary – which also serves New Zealand and some Pacific islands. The man behind many of the changes – although he’d be too modest to claim all the credit – is Parker Kapp, head of the supply chain in Philip Morris Limited, the down-under operation.

I’ve been exchanging e-mails with Parker and he’s been telling me about some of the changes which helped to win the award. Apparently, the work started three years ago when the company decided to set up an end-to-end supply chain function. Getting key stakeholders to work in cross-functional teams focusing on business priorities was critical, Parker told me.

Knowledge base

The reason for that was because the knowledge base in the supply chain was low. Such knowledge as there was tended to be concentrated in “silo expertise”. But, as Parker noted, if Philip Morris was to build a truly cross-functional supply chain “it was imperative that we created a common vision and goal”.

That vision has been summed up in the phrase: “We were the first; we’ll be the best.” And that, in turn, implied that the supply chain team were going to focus on continuous improvement. Key objectives: improving the company’s market share and profitability as defined by earnings before interest, tax, depreciation and amortisation (EBITDA).

Parker told me: “It was key for everyone across the business to understand that whatever we do needs to lead to a net benefit in market share and profitability, serving our shareholders and consumers with superior benefit. We established an employee engagement programme called Open, which also formed the foundation for a lean implementation.”

But it was also important that customer service didn’t suffer while Parker and his team were making the changes. And it didn’t. Perfect order fulfilment remained above 99.75 per cent and the order fulfilment cycle time stayed at one day in urban and two days for rural areas. Remember we’re talking about Australia and New Zealand – so this is not like delivering to the UK’s Home Counties.

There were other impressive statistics. Upside supply chain flexibility remained above 20 per cent which meant the company could ramp up production to meet demand at short notice, Parker told me. And sales forecast accuracy was consistently above 90 per cent.

The work has created a situation where the all-important cash-to-cash cycle time is less than 20 days, there is improved return on supply chain fixed assets of above 25 per cent and return on working capital has reached 20 per cent. And, Parker told me, although keeping the precise figures close to his chest, that profitability has been increased through a “double digit” reduction in the cost of goods sold and also growth in EBITDA into double digits.

The new cross-functional approach has led to much closer working relationships between operations in the factory and the sales and marketing teams. As a result, all of the new product and line extension deadlines have been met without exception. The design cycle time for launches has already been cut by a third and is heading towards a cut of a half.

Market share

As Parker pointed out to me, bringing new products to market quickly has been central to the ability to grow market share and boost EBITDA. “The last line extension was launched within three to four months from request with sales exceeding forecasts substantially for the third quarter in a row since launch,” he added.

Parker summed up the thinking behind the changes like this: “Breaking functional silos and focusing on how we drive performance for the business in its entirety has brought all stakeholders together. Today, we talk about how we improve the business model as a team, understanding that certain decisions may have negative impacts either on an individual, department or functional performance, but understanding that ultimately these trade-offs lead to improved EBITDA without compromising the high service standards and quality our customers and consumers expect of us. It is changing our business to be customer and business-focused rather than functional-focused.

“Continuous improvement is the way we do business, constantly challenging ourselves to find new ways to do things better and quicker.”

As a manifesto for world-class supply chain management, I couldn’t have put it better myself.

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