Risk management

What About the Supply Chain Index?

by Lora Cecere on October 25, 2013 · 0 comments

I have traveled 12,000 miles this week. When I get off the plane, I am accosted by the signs at airports around the world. SAP touts “best-run companies” while the Accenture ads claim “high-performance supply chains.”

As I shuffle along, I am not sure. I shake my head. I am a nomad, searching for a good definition of supply chain excellence. It is a quest and the subject of my next book, Metrics That Matter, that will publish in September, 2014.

Why Does It Matter?

Supply chain leaders are naturally competitive, and they want to know how well they are doing.  Similarly, organizations want to see how they measure up. They want to understand which practices and technologies make a difference. I think that this is unanswered. It is for this reason that we started the work on the Supply Chain Index.

Most readers of this blog know how I feel about the Gartner Top 25. It was a good starting point, but it has not matured. I just do not think that you can put companies in a spreadsheet and shake them up.  A chemical company just should not be compared to a high-tech company using this methodology. It is biased towards companies that DO NOT have assets. I am searching for something that can be meaningful across industries and across company sizes. It is for this reason, that I started the work on the Supply Chain Index.

Current State:

What is The Supply Chain Index?  It  is a formulaic representation of supply chain excellence based on market capitalization. Over the course of the last eighteen months we have attempted to build a linear regression model to build a formula using supply chain ratios that can predict market capitalization. We used the period of 2006 to 2012 to build the model and we used the formula to attempt to predict 2013. The result is outlined in figure 1.

 

Figure 1.

We came close, as the reader can see in figure 1, to building a predictive model for household and personal care (CPG), medical care (hospitals) and discount stores (mass merchants).  But, we have failed to build a predictive model for the rest of the industries. However, we are not done. This week, I am finalizing an agreement with Arizona State University to fund a PHD student in statistics under the guidance of George Runger to try to finish the work.

What Now?

When you are doing research, you have starts and stops and turns. We have spent the last eighteen months charting the intersections of companies on the Supply Chain Effective Frontier to understand growth, profitability, cycles and complexity.  We have found that nine out of ten organizations are stuck on their ability to make improvements on both operating margin and inventory turns in the same year. However, the research has taught us a lot.  Here we share some insights.

What did we learn? Overall, supply chain leaders deliver results that have strength (year-over-year performance improvements), balance (a set of balanced metrics within a portfolio) and resilience (predictable and reliable results with few swings). You can see it in the patterns. Let’s look at this more closely:

1) Strength: Continuous year-over-year improvements on the Effective Frontier based on well-defined Supply Chain Strategy.  Not every company wants to make the same trade-offs of growth, profitability, working capital cycles and complexity. However, leaders make these choices consciously showing year-over-year improvements. While laggards, lose ground.  Let’s take the example of Colgate, Procter & Gamble, and Unilever in figure 2. Colgate is making a conscious choice to drive profitability. (There is no company that I have studied that has been as successful in driving year-over-year profitability as Colgate.) And, recently, Procter & Gamble is more focused on improving inventory turns. Both P&G and Colgate are more resilient than Unilever. In the past four years, Unilever made progress in inventory turns, but then lost ground on both the management of inventory and improvement in margin.

2) Balance: The right balance of supply chain financial ratios to improve market capitalization.  If we take the formula that we developed for the Supply Chain Index that is a linear regression of supply chain financial ratios that is correlated to market capitalization, as shown in table 1, we find that P&G has the best balance of the financial ratios.

3) Resiliency: A tight, positive pattern at the intersection of inventory turns and operating margin. In the BASF and DuPont case study below, BASF is more resilient than DuPont. Notice the wild swings in the DuPont trajectory. BASF has a more consistent, and focused supply chain strategy. DuPont has implemented many Information Technology systems, but few well.

 

We believe that strength, balance and resiliency are important components of a high performing supply chain organization. We hope that you agree.  So, what are our next steps on this methodology?

1) Strength. We will give each public company a measurement on ability to drive year-over year performance of the factors on the effective frontier.

2) Balance. We will finish the work on the Supply Chain Index with Arizona State and rank the companies within industry peer groups based on balance of the metrics against market capitalization. Our date to finish this work is March.

3) Resiliency. We will also work with ASU to measure the trajectory of resilience of results at the intersection of inventory turns and operating margin for the last 12 years. We will translate this into a measurement of resiliency.

In the writing of the book, Metrics That Matter, we will rank companies by SIC code based on these three factors, and share the insights of supply chain leaders on the management of supply chain metrics over the last decade. The chapters will be rich with case studies.

We will then place the rankings on these three factors into our community and allow supply chain leaders  (one per company) to vote. The final stack ranking of supply chain excellence will be rated equally on the four factors of strength, balance, resiliency, and peer feedback. We will share this data at our Supply Chain Insights Global Summit to be held in Scottsdale, AZ on September 10-11,  2014.

I would love your thoughts. Check out the prior blog posts on the development of the Supply Chain Index to read for perspective:

Will Arrogance Stunt Your Growth?

Why I No Longer Believe in the Gartner Top 25

What I have Learned Working on the Supply Chain Index

Talk does not Cook the Rice

Will Arrogance Stunt your Growth?

by Lora Cecere on July 29, 2013 · 0 comments

It happened on Thursday morning last week. It will probably happen again on Tuesday. And, again on Wednesday. I am driving on a campaign to change thinking.

It is hard to change a mindset. The brain is wired to believe what it has been told for many years.

Every time that it happens, I smile. I understand. I was once there also.

Let me start with a story. Last week in the middle of a presentation, a supply chain leader made the statement, “We have solved the issues in supply through better optimization and use of data. There is not much more that we can do. The issue is demand. I think that we need to focus there.” The statement was delivered with arrogance and conviction.  Many supply chain leaders are so convinced they know the answers that they have stopped listening and learning.

It never occurred to this supply chain leader that there is no place to put “new forms” of demand data into today’s supply-centric enterprise architectures. As I mature in my work as an analyst, I am more and more convinced that the redesign of the supply chain outside-in to use new forms of demand data requires us to “blow up” our traditional, and supply-centric architectures. Why? The data models are wrong. These architectures were defined based on simple, deterministic optimization using the  principles of a ”push-based” supply chain. The systems are based on 1990s thinking.  Remember back then? It was when gasoline was 1/3 the cost of today and there was a lot of excitement about 32-bit architectures and the move to client-server systems. A lot has changed in both business requirements and technology capabilities; yet, the fundamental technologies and the definition of the supply chain footprint remains unchanged.

The Issue

We have been taught, as supply chain leaders, that over the last decade supply chain processes have improved costs, shortened cycle times, improved customer service and decreased inventory. Just ask any consultant and they will quickly tout “best practices.”  Or run the statement by any software provider, and they will share that their solutions delivered these “best practices.”

When I first started working on the book Bricks Matter, I believed it too. I sadly found that this was not the case. After two years of studying corporate balance sheets and talking to supply chain leaders, I now see things quite differently. Numbers don’t lie. Companies are stuck. Based on our recent research, we find that only 1% of process-based companies are making progress on both operating margins and inventory. As a result, I don’t believe that we have best practices. It is my belief that we have emerging practices.

Facing the Issue

Most organizations are stuck on their ability to drive improvements in operating margin and inventory cycles. Too few supply chain leaders have held themselves accountable to their balance sheet results.

Currently, we at Supply Chain Insights are working on presentations for our upcoming Supply Chain Insights Global Summit. At this conference, we are excited to share three detailed analyses of corporate performance over the last decade:

  • Performance on the Supply Chain Effective Frontier. An analysis of how companies have made trade-offs between operating margin, inventory cycles, complexity and growth. Which companies have made year-over-year improvements? And, why?
  • Results of the Supply Chain Index. Which supply chain metrics correlate to market capitalization by Morningstar sector? Which sectors have made the most progress? Who are the leaders in each sector?
  • Supply Chain Resiliency. Which companies have been the most resilient delivering year-over-year results with small incremental improvements over the last decade? What are their secrets?

To understand the current state, I built a database of twenty years of supply chain financial ratios for all public companies. (Note that the ratios are better than absolute numbers because it helps in the comparison of large and small companies and performance across currencies.) In 2012, supply chain process evolution was thirty years old, and I wanted to use the book, Bricks Matter, as a litmus test to tell the story of success. However, I could not find it. Progress was good at the beginning of the decade, but as supply chain complexity has increased, progress on operating profit and complexity has tapered off.

We find that to cope, companies have pushed costs and waste backwards in the supply chain. For example, they have made improvements in cash-to-cash cycles by increasing payables and lengthening terms to suppliers. This increase in payables has increased risk by decreasing resiliency. As we rethink supply chains, we will need to reverse this thinking and take ownership of the entire value network.

Those of you who know me well, know that I no longer believe in the Gartner Top 25 methodology. The six years of work at AMR Research on this methodology was actually the stimulus for me to tackle a new approach.  You can read some of my thoughts in my past blog posts at:

Work on the Supply Chain Index

My Thoughts on the Gartner Top 25 

Moving Forward

Where have we made the most progress? The greatest progress has been made through the introduction of new business models. E-commerce is a more profitable form of retailing. Amazon can now deliver almost every category of item to your home with no shipping cost for Amazon Prime customers. Club store formats improved retail turns and operating margins. Performance-based logistics in aerospace and defense changed the A&D industry forever. Modcloth, a fashion retailer that lets the buyer be the designer, just turned ten-years old with revenue of $100M.

Supply chain is an engine for growth and enabling new capabilities. We are at an inflection point of new technologies and processes. The technologies installed in the last decade are quickly becoming legacy applications. To move forward, in my opinion, we need to do five things well:

  • Build Outside-in. Build supply chains from the outside-in, minimizing demand latency and redefining supply processes to sense and respond to channel demand. Recognize that today, the response is inside-out based on orders and shipments. The order is a poor representation of demand. We have never had a better opportunity to build a customer-centric supply chain; but, to do this we have to recognize the difference between a marketing-driven and market-driven response. The first step is social listening and text mining of customer sentiment.
  • Focus End-to-end. Only 1% of companies have a role focused on managing the end-to-end supply chain.  The greatest synergies happen when the supply chain is managed end-to-end as opposed to management as a limited supply chain function focused on logistics and operations.
  • Move at a New Cadence. Embrace new technologies: Internet of Things, new forms of analytics, mobility, etc. It is no longer weekly data weekly… or reporting with a day latency. Instead, it is real-time data. Define and drive new processes like digital manufacturing and digital path to purchase so that our supply chains can operate at the new cadence of data flows.
  • Orchestrate Demand and Supply Market-to-Market. The traditional supply chain drives a volumetric response based on a SKU (item at a location). The future processes, based on new forms of analytics, will be based on matching product attributes to customer attributes while orchestrating price, mix and volume. Experiment with these new forms of analytics.
  • Be Accountable to the Balance Sheet. Today, only 23% of supply chain leaders can easily see the impact of their decisions on profitability. Companies that are outpacing peers have strong supply chain finance functions.

We hope to continue this discussion with you at our Global Summit. It is sold out for technology providers, but there are still seats available for manufacturers, retailers and distributors.  Hurry! The room block is lifted next week, so the best cost on hotel rooms is this week. The event is being held at the Phoenician in Scottsdale, AZ on September 11th and 12th.