Contact: Lynn Cook
Deloitte
Manager, Public Relations
(416) 874-3654

Toronto, February 7, 2005 – While many companies have grown from small local enterprises to become global leaders in their industries, more than 80 percent of them fail to capture the full returns of their global investments, according to a new study conducted by Deloitte Research. The report shows that rather than taking a holistic, global view of their businesses, most manufacturers focus on addressing the individual pieces of their far-flung global network — the complex web of suppliers, production and R&D facilities, distribution centres, sales subsidiaries, channel partners and customers, and the flow of goods, services, information and finance that link them — that comprise their supply chain.

The result for a company can be devastating: suboptimal improvements, wasted resources and lackluster performance. Many of the global organizations that were studied realize a value loss from suboptimization of 50 percent or more of bottom-line profits.

The Deloitte Research study, Unlocking the Value of Globalization, analyzed data from the nearly 800 companies in Deloitte’s global supply chain benchmarking survey. These companies represent multiple industries, including aerospace and defense, automotive, industrial and consumer products, life sciences, process, paper, chemicals, high technology, and telecommunications equipment. The companies range in size from less than US$50 million to over US$1 billion in revenues. Together they represent about US$1 trillion in revenues.

“Most of these companies, through their rampant globalization efforts, have left large footprints around the globe,” says Luc Martin, Deloitte’s Canadian Manufacturing industry leader. “They still manage these assets on a ‘local’ basis, however, rather than optimizing their global supply chain capabilities. We call this the “Optimization Paradox.”

Only about one in 10 companies has taken significant efforts to optimize their global networks over the last three years. “So it is not surprising that supply chain cost structure is in last place among competitive capabilities in all of the industries we have studied," says Martin.

Optimizing the global supply chain can lead to dramatic profit improvement
According to the study, manufacturers that have continuously invested resources to improve their global supply chain network as a whole have been rewarded with improved bottom-line results and profit levels that are 50 percent higher than those of other companies. In one case covered extensively in the study, a leading industrial products manufacturer gained a staggering 75 percent annual profit improvement by pursuing continuous optimization, through improved customer service and lower overall cost base.

“Optimizing a global operation is not an easy task,” says Kurt Ritcey, Deloitte’s Canadian supply chain leader. “Leading manufacturers have mastered this capability by building an optimization infrastructure to align people and organizational structures, business processes and technology platforms. They factor competitive drivers such as revenue growth, cost management targets, infrastructure, and product innovation into their global network design.”

Other critical factors include global and local compliance drivers, such as local regulations and tax issues, and organizational issues.

“People issues are critical,” Ritcey adds. “Often the biggest obstacle to optimizing networks is the role of the existing organization and incentive structures in the global organization. We observed a large company that had to forgo about 50 of the improvement opportunities they could have realized from global optimization because of people and organizational issues. This clearly affects future profitability — the linchpin of shareholder valuation.”

Unlocking the value of globalization
According to the study, as companies expand around the world, creating the capabilities to ensure that existing and new investments are holistically and continuously optimized is crucial for unlocking the true value of globalization. Both competitive and compliance drivers must be considered. Competitive drivers include revenue growth, cost management targets and innovation. Compliance drivers include regulation, tax issues and intellectual property protection. Failure to consider these drivers during global expansion can carry a high price tag.

For example, one company outsourced its global manufacturing operations to reduce costs but ended up with a higher cost structure because of the impact of regulations and duties. Taking tax into consideration when optimizing a global supply chain, the bottom-line profit improvement is nearly 100 percent higher than if tax considerations are excluded, the study estimates.

It is crucial that the CEO and the top executive team take the lead — successful optimization involves not only operational units, such as manufacturing, sales and product development, but also tax, human resources and legal departments across multiple countries. Not surprisingly, the vast majority of those manufacturers that are successfully optimizing their networks in a holistic fashion have one executive in charge of the overall supply chain.

About Deloitte's Global Benchmarking Program
More than 800 companies from Asia-Pacific (10 percent), Central and Eastern Europe (10 percent), North America (34 percent), and Western Europe (44 percent) have participated in DTT’s global supply chain benchmark program to date. Industries represented include aerospace and defense, automotive, industrial and consumer products, life sciences, process, paper, chemicals, and high technology and telecommunications equipment. A new global benchmark survey, covering service parts, was launched in January 2005.

About Deloitte
Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 6,100 people in 47 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. The firm is dedicated to helping its clients and its people excel. Deloitte is the Canadian member firm of Deloitte Touche Tohmatsu. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms, and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu," or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.