Definition: Brass tacks are a type of pin or nail. The phrase to come (or get) down to brass tacks is sometimes used idiomatically to consider the basic facts of a situation. Source Wikipedia

In the 1990s suppliers had channel power. The formula for success seemed foolproof. A new product was launched, the ads ran on national TVs, and “poof” a new brand was created. This all changed with the disintermediation of national media.

During the next decade, the power shifted to the retailer. Consumers became more loyal to retail brands, and retailers increased the number of products manufactured and marketed as house brands. This trend spawned chains like Trader Joes, Walmart, Whole Foods, etc.

Today, with the acceptance of the mobile phone and digital media, the power has shifted to the shopper. Consumers want to shop anywhere, and buy in the way that they want to buy. The digital consumer often wants to shop online, pick up at the store, and conveniently manage returns. The ecommerce customer wants convenient delivery to the home.

With the shifts in power, the relationships in the value chain are morphing. Each year I go to the Consumer Goods and Technology (CGT) conference where speaker-after-speaker talks about retail/supplier collaboration. I usually sit in the back of the room, and watch the event with a wry smile on my face. Why? I am a disbeliever. Collaboration is evasive. Today, it is more talk than action. In this post, I want to share what I think really needs to happen to spawn true collaboration.

What Is Collaboration?

I define collaboration as a lasting win/win value proposition for both parties. Today, we have collaborative data sharing, and collaborate processes, but we seldom have what I term true collaboration.  Instead, we have had situations where one party wins at the expense of the other. In the 1990s the supplier won at the expense of the retailer. In the last decade the retailer won at the expense of the supplier. It is for this reason that I sit on the back row at most conferences watching, listening, and smiling.

Why Is It More Important Now?

As the bricks and mortar retailer is attacked by eCommerce pure plays—Amazon in North America, Alibaba in China, and Flipcart in India—assortment and excitement in the store become paramount to lure customers. They need the supplier more to drive excitement in the store. While many retailers are changing the role of the store to include services: pet grooming in Petsmart, clinics in CVS, cooking classes in William Sonoma, etc– this is not enough. The retailer need the help of the supplier more than ever. It is for this reason, that I have written a letter to the retail Chief Operating Officer below.

My Letter to the Retailer

Dear Retail Chief Operating Officer,

I have watched the evolution of consumer value chains for many years. I have studied the building of collaborative processes and written about the shifts and highlighted where we are gaining value. I know we have talked about collaboration for many years, but all I see is pilots: good intentions defined by fits and starts. In my research, I do not see that any retailer has really redefined value chains through collaboration. Based on what is happening in the industry and the need to drive excitement in assortment in the store, I would like to share three things I would do if I were you to build a collaborative framework to enable true collaboration between you and your suppliers.

Figure 1. Data Sharing Mechanisms

1. Share Data Freely and Openly through a Private Network. Today, as shown in Figure 1, most retail data is shared through a portal. The most effective way to share data is through a  private network. Portals do not enable effective data sharing and support of collaborative practices. When data is shared through a portal it lacks a persistence layer. As things change there is no system of record. Today only 3% of retailers are using private networks for data sharing. I know that this takes investment,  but it is worth it in the long run. Consider the impact of Walmart’s Retail Link on Walmart.

Figure 2. Current State of Perpetual Inventory

2. Get Good at Data Sharing. Replenishment is fueled by an effective perpetual inventory signal. It anchors optimization engines for replenishment. The supply chain needs it. Without a perpetual inventory signal, you will never be able to manage out-of-stocks and promotions. Today, as shown in Figure 2, 57% of retailers have a perpetual inventory signal in the warehouse, and 47% have a perpetual inventory signal in the store. Collaborative relationships need a good signal for inventory. It needs to be an accurate signal reflecting real-time changes as orders are shipped throughout the day. So, to be a collaborative trading partner, build a good perpetual inventory signal … there is no substitute for an accurate PI signal in supply chain excellence.

Additionally, get good at forecasting. Measure the Mean Absolute Percentage Error (MAPE) of your forecast and focus on driving improvement. Today there are only two retailers that have forecast accuracy that is good enough to drive value downstream for trading partners. Drive a difference. Own your data.

3. Take Your Hand Out of the Supplier’s Pocket. For many, deductions and penalties for performance have become a budget line-item (often a profit center). And 84% of retailers charge for deductions with 1/3 of retailers having a budget for deductions with many taking them into income. As a result, it has become a systemic way of making money for the retailer which is a lose/lose. In this relationship no one wins. Suppliers cannot get to the root cause to solve problems, and revenue recognition is delayed. Instead, it becomes waste, or Muda, in the supply chain to track and manually audit. Instead, focus on clean transactions. Carrots drive better performance than sticks.

My advice. Own your own network. Focus on creating value and winning together. Isn’t that is what collaboration was supposed to be all about? If you get serious, I want to write your story in the new book that I am writing. 

What do you think? I would love to hear from you. This month, in our newsletter on October 21st, we’ll be sharing the results of a study that we’ve been working on focused on Downstream Data Sharing. We would love your input as we close the survey.

 

 

Let the Qs Begin

by Lora Cecere on September 17, 2014 · 0 comments

Last week was the Supply Chain Insights Global Summit. It was great to see familiar faces at the kick-off. 110 supply chain leaders attended.  I smiled on the week following the conference as the accolades piled up in my inbox.

In preparation for the summit, we readied the final report of the work on translating balance sheet results into a methodology to judge Supply Chain Excellence. This report, Supply Chains to Admire, compares the progress of 200 companies within their respective peer groups on both performance and improvement. Supply Chain Improvement is based on the work that we completed with an Arizona State University Operations Research team to determine the Supply Chain Index. While the performance rankings were based on comparisons of inventory turns, operating margin and Return on Invested Capital (ROIC) for the periods of 2006-2013 and 2009-2013, the concept is that to be a supply chain leader you must outperform and drive improvement. We find that this is true of too few companies.

Attending the conference was Alexia Howard, Senior Research Analyst – US Foods for Sanford C. Bernstein & Co., LLC.  Following the conference, Alexia asked for me to share the methodology with over 150 financial analysts. The script will be distributed to CFOs of apparel, consumer packaged goods, and food/beverage companies next week. So, I wanted to give you a heads-up on their questions, and my answers. My goal in this post is not to surprise you…

The opening statement was:

“Growth is slowed, and supply chain is more important to success. However, we are horrible at figuring out what adds value. Can you help us with what you see in the data?”

Yes, I said. We see that nine out of ten companies are stuck. There are three reasons why:

  1. Vertical excellence—having the best manufacturing, procurement or transportation function—has not worked.
  2. A project focus where each project has to meet a threshold ROI has not worked. (Most companies just have too many disconnected projects.)
  3. A big bang technology focus has not worked. In fact, many companies move backwards—like Campbell’s Soup or Kellogg—when they try to implement a large project with too few resources too fast.
There are seven characteristics of the companies that did it best. This is what I think works:
  1. Leadership. Enlightened leadership that focuses on the management of the supply chain as a complex system.
  2. Outside-in Processes. The use of channel data into advanced analytics to sense demand.
  3. Mature Horizontal Processes. Building strong horizontal processes like revenue management, Sales and Operations Planning, Supplier Development and Corporate Social Responsibility.
  4. The right stuff in the organization. Companies with the strongest performance had more advanced supply chain human resource departments, a well-integrated supply chain finance team, and a supply chain center of excellence.
  5. Supply Chain Design. Active, and intentional, design of the supply chain.
  6. Aligned Metrics. To ensure the management of the complex system, the metrics of operating margin, inventory turns, ROIC, customer service, revenue, and forecast accuracy need to be managed together as a non-linear system.
  7. Strong Planning Capabilities. Companies with better planning capabilities score higher on the methodology.
I then finished a forty-minute presentation, and prepared for questions. I was not sure of what would be asked so I share them so that you are prepared for when your CFO reads the script.

What percentage of retail out-of-stocks could be prevented by the manufacturer in these industries? This is an unknown, but in my opinion, 65% of the solution is in the hands of the manufacturer. However, it requires the use of retail data and the redesign of analytics to sense, shape and translate demand. Since most companies struggle with competency in the demand organization—and are working with disconnects in sales, marketing and supply chain processes—very few companies do this well. 

Who does this well? I like the work at Kimberly-Clark and PepsiCo. It is stronger than the work you will see at most companies. 

What does an investment in SAP mean for a company? What should we watch for? SAP means many different things for different people. An investment in SAP ERP improves transactional effectiveness in order-to-cash and procure-t0-pay. A successful implementation greatly improves a company’s abilities to manage the firm. However, the investment in SAP planning, a product termed APO, can often take a company backwards. While it is the best system of record in the industry, the optimizer and the planning software overall is not equal to best-of-breed solutions. Nine out of ten companies regret their decision to implement SAP APO, and Oracle planning is not much better. 

What investments in technology do you believe add value? I am a firm believer in new forms of analytics:  this includes test and learn, cognitive computing, demand sensing, visualization, advanced optimization, and simulation. I believe the world is too complex to run your supply chain on an Excel spreadsheet. 

Do I believe that the board of Heinz will be able to drive new levels of value? Yes, by breaking down the walls between the silos and focusing on building strong horizontal processes. This is an opportunity for most companies; but unfortunately, they are pushing the wrong levers.

What are the barriers? Companies with extreme levels of IT outsourcing and a focus on project implementation after project implementation have done more poorly.  Companies that have done it well have implemented systems once and stabilized implementations. Take General Mills and Kellogg an example. General Mills implemented SAP once and well, while Kellogg had multiple and difficult ERP implementations. 

What insights can you give us on the management of complexity? Complexity comes in many forms—price increases, product portfolio expansion, shelf-ready packaging, packaging-specific artwork, promotions, in-store displays. The secret is to tackle all complexity and decrease the complexity that adds cost but does not drive off-setting value. The difficulty is most companies are so tied up in being marketing-driven, adding products and promotions willy-nilly, that there is no analysis of good and bad complexity.

What should I ask the business leaders at the companies that I follow? I encouraged the financial analysts to ask:

  1. Are you using channel data to sense in your supply chain operations?
  2. Do you actively design networks with a focus on form and function of inventory?
  3. How do you balance the trade-offs between source, make and deliver?
  4. Are you actively building supply chain talent?
  5. How do you make trade-offs between marketing programs and good/bad complexity?

Did I miss anything? I welcome your answers.