Risk management

Do No Harm…

by Lora Cecere on June 16, 2014 · 0 comments


“…I will apply dietetic measures for the benefit of the sick according to my ability and judgment; I will keep them from harm and injustice….

…If I fulfill this oath and do not violate it, may it be granted to me to enjoy life and art, being honored with fame among all men for all time to come; if I transgress it and swear falsely, may the opposite of all this be my lot.”

—Translation from the Greek by Ludwig Edelstein. From The Hippocratic Oath: Text, Translation, and Interpretation, by Ludwig Edelstein. Baltimore: Johns Hopkins Press, 1943.


Today, nine out of ten supply chains are stuck.  Despite two decades of advancement in supply chain technologies, companies are struggling to gain balance at the intersection of operating margin, inventory turns and case fulfillment. Market volatility is increasing and supply chains can respond, but they cannot sense. They are slow to adapt.

Over the course of the last year, I have written about this extensively. The research that I have conducted has enabled me to look at this holistically. For me, this has been discovery.

I am an old gal. Like an artifact, I have kicked around in the supply chain space since the 1980s. I believed that the first generation of supply chain systems would improve operations to a greater degree than actually happened. As an analyst, I had predicted great things that did not happen. Recently, I did a mea culpa. I am sorry.

As a result, I am trying to be more careful to not overhype the market. When I left AMR Research I invested over 400K in building a database of supply chain financial ratios to correlate supply chain results. My goal is to understand the impact of technologies and processes. It is easier said than done. After three years of research, I have just refined the methodology to start to pull the trends.

I have learned that supply chain systems are more complex than I originally thought, and that the relationships between supply chain metrics are nonlinear. I have also learned that you need a large data pool to derive the type of analysis that I want to publish. It takes more than one or two respondents from a company.

I need to finish the work, but in the process—like the Hippocratic Oath above—I want to do no harm.

Why It Matters

Today, we have a number of burning platforms. Recently, I spoke to a major European retailer that lost 5% of their grocery revenues to Amazon in the first quarter of 2014. It is clear to them that Amazon is going to be anything that they want to be, and that they need to defend their turf. In a similar vein, a major 3PL that I spoke to last week at Eye for Transport is considering discontinuing the traditional storage of spare parts and initiating a new service to do 3D printing of parts on demand. There are many tipping points happening together, and companies want to know what can drive the greatest value.

What I See in the Data

In my work on the Supply Chain Index, I see that companies I recognize as doing network design well are rising faster on the list of the Supply Chain Index work. The network design technologies have changed a lot in the last decade. (I sometimes wonder if I should create a new class of technologies for the network design tools because they have changed so much.) The older tools from CAPS Logistics, SNO from Oracle, and Manugistics Network Planning are giving way to new technologies like the Logictools product (purchased from IBM), the Solvoyo product for concurrent planning, the Quintiq technology for concurrent optimization, and the Llamasoft technology platform for optimization and simulation.

These technologies are applicable to solve many problems. These tools allow us to look at sell, source, make, and deliver together. They also enable the evaluation of networks for both sales and procurement relationships to optimize the flows upstream and downstream. The technologies enable the evaluation of both volumetric flows and cost.  And optimization, as well as simulation, can now be done together.

I am a big fan of the use of these types of technologies. The work on the Supply Chain Index shows me that the companies that I consider to be the most mature in the use of these technologies—General Mills, Intel, Cisco, and Seagate—are outperforming their peers. Is it coincidence? I don’t think so. I think that it matters.

Next week I will be speaking at the Llamasoft Summercon conference (follow this link to see the slides). On October 15th, I will be speaking on the Qunitiq World Tour in Philadelphia. Along the way, I will be doing more work on network design case studies. In preparation for these speeches, I have recently completed some quantitative research on network design. Here I share a cut of the data.

Figure 1.

Where Would I Start?

In figure 1, from the research, I share the current state of network design usage. As you can see from the data, while companies have increased the frequency of network design work from yearly to quarterly, most of the work is still focused on basic network design. The focus is on physical assets. I feel that the opportunities are in flows. The greatest gap is in the design of supplier and manufacturing networks. I also think that there is a great opportunity for increased focus on flow-path analysis and a shift from optimizing inventory levels to optimizing the form and function of inventory in value networks.

Anyway, in my effort to do no harm, this week, in a series of blog posts, I outline what I would do if I was a supply chain leader managing a company that was stalled at the intersection of inventory turns and operating margin. My first investment would be in network design to holistically design the network. I would not stop with the physical design. Instead, I would look at network flows, the form and function of inventory, cost-to-serve analysis, and the determination of the supplier network. I would infuse it into S&OP, risk management, and supplier development. I would build an expertise system in the Supply Chain Center of Excellence. I believe that it matters. While there are many factors that affect corporate performance, I can see that the leaders in the implementation of network design technologies are rising up the ranks on the Index and outpacing their peers.

If you are interested in some of our other studies on supply chain planning excellence, consider participating in our study on Supply Chain Planning: Is Faster Better. And, in our Digital Manufacturing Study. Both of these studies are slated to close in a week to be available for our July newsletter. Companies participating in the planning study will be able to benchmark the number of planners needed by supply chain complexity and better evaluate the rate of implementation. In contrast, the digital manufacturing study evaluates the rate of adoption of new technologies like The Internet of Things and 3D printing to change manufacturing strategies. As always, when you give to us, we give to you. We never release the names or the individual responses of the respondents, but we always share the results in aggregate and offer a one-hour call for those that want to better understand the data.

All of these studies that we are doing this summer will be showcased in a series of infographics at our upcoming Supply Chain Insights Global Summit on September 10th-11th in Scottsdale, Arizona. We hope to see you there!

Throwback Thursday

by Lora Cecere on May 1, 2014 · 2 comments

This week, as the east coast of the United States was deluged with rain, I basked in beautiful San Diego sun while attending the Logimed USA event. This was WBR’s first event in the United States targeted for the Medical Device Supply Chain Leader. I had not been to a medical device event and I wanted to listen.

When I finished my presentation on “past practices,” that I cannot call “best practices,” and outlined the methodology for the upcoming Supply Chain Index, a woman who had listened intently in the audience told me that I had thrown “cold water” on the audience.

I said, “I am sorry, but I think that the industry needs to face some cold hard facts.” The discussions at the event reminded me of dialogue that I heard in other industries a decade ago. So, the title of this post is Throwback Thursday.

Current State

Today, managing a medical device supply chain is tougher. It is much more complex than it was a decade ago. Many are enamored with the “good old days.” As shown in Table 1, operating margin has declined 16% over the course of the decade. This precipitous drop in margin hurts. As hospitals adopted consignment planning programs, inventory progress slowed. The turns are the lowest of any industry, and despite investments in technologies and processes, inventory turns have only improved 3%, and Cash-T0-Cash (C2C) cycles have declined 4%.  Companies are feeling pain.

Table 1.

Industry performance benchmarks for 2000 -1012

This is why I think that the industry needs to get serious about supply chain management. And,  I believe that it needs to happen FAST! There is no time for whining. The operating margin for the medical device industry is 4X that of the automotive manufacturer and 2x the margin of the hospital. The business operating environment has changed. The pressures of affordable care and global regulation are transforming the market, but are they redefining the supply chain fast enough? I don’t think so.

My message in the presentation was simple. There is an inverse relationship between margin and supply chain excellence. Companies with lower margins tend to get better at supply chain faster. It matters more. In these industries, the adoption of technologies and processes becomes essential to doing business. In industries with high margin, change happens slowly and the leaders tend to be insular.

In doing studies of different industry subgroups, we find that the medical device industry is resilient. The patterns at the intersection of inventory turns and operating margin are tighter than other industries, but we do  not find “strength” or year-over-year performance improvements in the numbers. Note that in this comparison of the top three medical device companies in Figure 1, that Zimmer is substantially underperforming against the other two, and that all three companies are going backwards in operating margin. However, all three of these industry leaders have margin averages that are SIGNIFICANTLY better than the industry average for the period of 16%, but are underperforming on inventory turns.

Change is under foot. Zimmer Holdings is growing larger. Last week Zimmer announced the acquisition of Biomet for a cash and stock transaction valued at approximately $13.35 billion.

Figure 1.

Figure 1: Medical Device Firms

This transaction, which is subject to customary closing conditions and regulatory approvals, is expected to close in the first quarter of 2015. The merger of Zimmer and Biomet will position the combined company as a leader in the $45 billion musculoskeletal industry.  Zimmer’s strategic framework focuses on growth, operational excellence and prudent capital allocation. Let’s hope that this will drive channel leadership that is sorely needed.

My Challenge.

So, my challenge for these three companies is: leaders need to lead. We don’t have time for Throwback Thursday. This value chain needs a supply chain leader. Hospitals are too fragmented to lead, and the GPOs are dysfunctional. We need for supply chain leadership to step up to the plate.

Why do I call this Throwback Thursday? It is because the conversations at the conference were yesterday’s discussions. The leaders from the medical device industry need to learn from both the success and failures in other industries. Here are five areas where I would start:

-Scorecards. In healthcare, there are no customer scorecards. While companies talk about being customer-centric, there is little recognition that the customer has changed from a focus on the physician to the care center and in some cases to wellness in the patient’s home. My take: The industry is 10-15 years behind in measuring itself in the “eyes of the customer.” To build more effective outside-in processes, the focus needs to be less on a sales-driven organization and more on effective channel usage. Leaders need to start a system to improve measurement and tie performance to buying incentives.

-Embrace Standards. GS1 standards adoption is sooooooooooooo slow. I heard Stryker share the story of adoption over a period of five years at the GHX conference last year. At the Logimed conference, no one in the audience was aggressively adopting the standards. My take: When the adoption of standards happened in CPG/retail, Danny Wegman of Wegmans, Sandy Douglas of Coca-Cola, and Tim Smucker of Smucker’s led the charge. This industry has no leader(s) driving the initiative. Instead, companies are letting the federal government stuff a standards mandate with UDI. The leaders in CPG drove the change while medical device leaders are fighting it. The discussion that I heard at this conference was reminiscent of the laggards in CPG discussing GS1 standards in 1999.

-Get the Labels Right. With changing legislation and country-specific regulations, having the right label on the product is a big deal. My Take: I was at a hospital last month watching the receiving of agents and pharmaceutical products. 30% of the items did not scan. Hospitals have aggressively adopted B2B automation. This has happened faster in hospitals than in retail. As a result, scanning has grown in importance. Late-stage postponement and effective in-country labeling and tracking is essential. I dusted off a 2002 presentation from P&G to share with the audience. Yet, the attendees wanted to discuss Lean warehousing.

-Aggressively Get and Use Channel Data. With the shift of inventory back in the supply chain, there is a lot of discussion on Vendor Managed Inventory (VMI). In the discussions, there was not one mention of usage data. My take: VMI should be used to sense and respond to channel demand. The shift of inventory without the sharing of data is a mistake. Let’s learn from the lessons of the last decade. For more on the state of VMI, please reference last week’s blog Stasis.

-Share Data. The clock speed, and the need for supply chain decisions, is accelerating. There is no Walmart or channel power broker in this value network. As a result, the large medical device companies need to decide on a value network and endorse it to get channel data. The goal needs to be the use of daily data daily. Right now there are many contenders. My POV. The leaders in the medical device industry need to pick—GHX, Owens and Minor, Cardinal Health, or Integrichain—and support an industry standard. The supply chain will not improve unless the processes move from Inside-out to Outside-in.

Next week I will be speaking on Retail Scorecard adoption as part of the rVCF conference, and then I fly to Turkey to speak on the Race for Supply Chain 2020. I hope to see you in my travels.

At Supply Chain Insights, we are busy preparing the Supply Chain Index methodology for a May 13th launch. Don’t miss it.  To be sure that you get our research through the summer, please sign up for our newsletter.

And finally, our survey on supply chain planning is closing. In this survey we find out some benchmark metrics on the number of demand planners per item, and the rate of adoption of demand and supply chain planning systems. If you are questioning where you are on your journey and how you compare to others, this survey is one that you do not want to miss. And, like all surveys, we share the final results and keep the individual responses confidential.