Market-Driven

No Trash Talk Allowed

by Lora Cecere on February 17, 2014 · 0 comments

Definition of Asset

 A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

Definition of Trash

Worthless or discarded material or objects, refuse or rubbish.

In the last year of my Wharton MBA program, the professor wrote on the board that “finance is the art of money passing hands until nothing is left.” I have found this to be a sad reality. In contrast, economic value is derived  from making or growing things to be sold.

In the process of making things, companies have to account for assets. While all leaders can agree that they want more assets and less trash, there is confusion about the best metric.

There are a number of ways that companies can account for assets and align them for value.  Recently, we have been studying the trends on three different measures of asset effectiveness. These three simple definitions have very different implications with far-reaching impacts. It is the goal of this blog post to explain the differences and help link you to the most impactful measurement to drive shareholder value.

  • ROA: The return on assets is equal to net income/total assets. It can vary substantially across industries and should only be used to compare a company within an industry peer group. The assets are based on both debt and equity.
  • RONA: If you ask my friends at DuPont for the best asset measure, they will advocate Return on Net Assets (RONA). It is different from ROA in that it is equal to Net Income/(Fixed Assets + Net Working Capital). Fixed assets are tangible property and working capital is a measurement of current assets minus current liabilities. It is a longer-term perspective than ROA.
  • ROIC: Colgate and other consumer products companies swear by the Return on Invested Capital (ROIC) metric. It is a good measure of the company’s ability to generate a profitable outcome from investments. ROIC should be greater than the market value of capital. It is equal to net income-dividends/total capital. It can also be calculated as (net operating profit after taxation)/(invested capital).
When we correlate these three metrics to market capitalization, ROIC correlates in 85% of the industries, and RONA and ROA in 25% of industries.  Most supply chain leaders measure themselves by ROA. The more work that I do on metrics, the more I become a fan of ROIC.
To prove the point, let’s look closely at the numbers for the food industry. Note how different the numbers are. ROIC is not only a measurement of assets, but also the use of capital. Sadly, several of these companies don’t look bad when you look at ROA, but when you look at ROIC, it is clear that they are operating at a level below the market cost of capital.
For me this is not trash talk. Instead, it is about supply chain leaders delivering value.  If the cost of capital is 18% (a good average), then the top performance would go to Campbells, and many companies should be having the discussion of why they are under performing to market.
And, of course, the supply chain is a complex system with increasing complexity. Asset metrics should not be viewed in isolation to declare a supply chain winner. There are metric dependencies, but I like the inclusion of ROIC in the basket portfolio of metrics. What do you think? What do you think is the best measurement?

Digital Path to Purchase: An Outside-in Opportunity

by Lora Cecere on February 12, 2014 · 0 comments

dig·it·al   ˈdijitl/adjective

digital  (of signals or data) expressed as series of the digits 0 and 1, typically represented by values of a physical quantity such as voltage or magnetic polarization. Relating to, using, or storing data or information in the form of digital signals.

Growth has slowed. Complexity has increased. At least this is the story for consumer packaged goods (CPG) companies  in North America. The complexity of changing product portfolios and the increase in demand-shaping programs (price and promotion) have distorted demand signals and made supply chain planning more complex.

As outlined in my recent Forbes article, the cost to bring a new product to market has increased four-fold in the last five years. The supply chain capabilities to sense market requirements and support new product launch successfully is a gap. There is just too much latency in the traditional order signal to effectively respond at the market cadence. What to do?

Today, 63% of consumer manufacturing organizations have a digital path to purchase initiative. This is a wonderful opportunity to design outside-in processes. Here are three steps to take:

1) Read Promotion and Price Effectiveness with Minimal Latency. Today, it takes 30 days for the consumer products organization to read the impact of a promotion. This might be sufficient for sales and marketing processes, but for the activities of replenishment, 30 days is too long.  Use downstream data (retailer Point of Sale and warehouse withdrawal data) to build outside-in processes to sense short-term demand requirements and translate them to the supply chain. This is the combination of demand sensing technologies in combination with channel data. Build these processes outside-in. Focus on data synchronization and harmonization.

2) Use New Forms of Analytics to Uncover Unlikely Inferences. Answer the questions that you do not know to ask. Text mining and sentiment analysis can be used to build listening posts to help companies listen to the voice of supply chain. Likewise, cognitive learning engines that use unstructured and structured data can listen and learn from multiple data types to better understand the right assortment in each market, and the reasons driving customer acceptance. (Many of which can be changed with the product launch.) Information from ratings-and-review data can help align the organization to better serve the shopper. Actively work on these initiatives to use the power of analytics to serve the shopper.

3) Test and Learn. Today, consumer products companies can sell in e-commerce channels directly to the shopper. Use these emerging channels to test and learn about the relationship of product attributes to customer attributes. Use test-and-learn strategies (either cross-channel or in vitro market testing) to better serve the shopper. The days of spray and pray are gone. The secret is to carefully design the test-and-learn strategies and to be careful in the execution to accurately read the market.

To do this, companies cannot operate in functions and the processes need to be designed outside-in. Supply chain leaders need to partner with commercial teams to drive a market-driven, not a marketing-driven, response. The key is listening, sensing and adapting to market signals with little latency. This cannot happen with the old inside-out processes. Use these new initiatives to build innovation at the edge and test new forms of analytics and use new forms of data.

For me, this is exciting. It is a wonderful opportunity to build outside-in processes to serve the shopper. What do you think? What do you see as the barriers?

All the best in your journey! Let me know your thoughts.

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