Supply Chain

“Lora in your own way, you are helping. You tell it straight. You are pissy and opinionated in this world of supply chain blandness. I find it refreshing.”

Quote from a reporter this morning

The term supply chain excellence is easier to say than define. It permeates corporate strategy, but it lacks definition. I have been trying to define it as a supply chain analyst for over fifteen years. For some strange reason, it is a passion.

As a veteran of the go-go days of the hype cycle of Advanced Planning, I advocated that better planning improves corporate performance. As an analyst in the market for the past ten years (first with Gartner, then with AMR Research, followed by my work at Altimeter Group and now with my own firm Supply Chain Insights), I have stood in front of clients doing strategy days advocating “best practices” and I wanted to set the record straight.

When I wrote the book Bricks Matter, I wanted to write a celebratory book on why the adoption of new technologies and practices in supply chain had improved corporate performance. But the data could not support the promise. I wanted it to be data-driven. I had spent the last two decades in the technology market and I wanted to celebrate success. I could taste it. There is too much “yada yada” in the market. (I laughed at the quote this morning…)

So, I built a database of 20 years of supply chain financial ratios to try to find the correlation between the adoption of new technologies and the improvement on corporate performance, but I could not prove my hypothesis. Instead, what I observed when I looked at the data, was that most companies that I had worked with (in my role as an industry analyst, I had worked with over 300) were going backwards on margin and inventory turns. I found that nine out of ten companies were stuck. “Ugh,” I said. It was an awakening. As an industry analyst, in prior roles I had never had access to this data. We had always talked about the promise, but not looked at the reality. I believe that companies made progress in projects and drove short-term progress, but that it could not be sustained. I also believe that the rise in complexity eroded many results. (The rise in complexity happened faster than supply chain leaders could improve supply chain performance.) My question was, “What do I do now?”

I believe it in the toes of my feet and the DNA in the cells of my body, but I wanted to prove it. So, this has been my two-year mission. It is my quest.

The Supply Chain Index

Yesterday, I published a report on the first piece of my definition of the Supply Chain Index which we will launch in April. This work is based on a collaborative project with Arizona State University. In this work, we have taken supply chain financial ratio data for all publicly held companies and analyzed the data for strength, balance and resiliency. In the Supply Chain Index, each publicly held company will be given a mathematically determined number for their performance against their peer group (NAICS code) for strength, balance and resiliency. The formula is:

Supply Chain Index= Strength Ranking + Balance Ranking + Resiliency Ranking +Peer Group Assessment

Strength will be defined as year-over-year performance at the intersection of Growth, and Return on Invested Capital (ROIC).  Balance will be the ability to manage a portfolio of supply chain ratios to maximize market capitalization. Resiliency is the pattern at the intersection of operating margin and inventory turns.  Strength, Balance and Resiliency will each count 30% of the total index with the peer-valuation counting 10%. The members of the Shaman’s Circle will weigh-in on the peer rankings.

I am looking at the data for 2000-2013 for several reasons. First, it is based on the belief that supply chain excellence takes many years. In the words of Marty Kisluik of FMC, “It takes at least three years to see results and five years to make it stable.” I heard this time-after-time in my interviews for the book Bricks Matter. I am hearing it again in my interviews for the book Metrics That Matter.

It has been a two-year research effort, and we are not done. We have had a lot of twists and turns, and lessons learned. We have stubbed our toes. One of my biggest lessons is that the devil is in the detail. It requires collaboration with great math minds to remove outlier data points, eliminate bias and ensure that we are applying the most current methodologies to the problem. I have loved working with Dr. George Runger and his team and give thanks to Mani Janakiram of Intel for introducing us, and for giving me some candid feedback that we needed deeper analytics help to complete our mission.

 Defining Resiliency

Yesterday, I published the report on Improving Supply Chain Resiliency. I define the resiliency measurement as the tightness of the pattern at the intersection of operating margin and inventory turns for the period of 2000-2013. My question for the Arizona State team was, “How do I best define a technique that can represent the randomness of this pattern?” I could see that the patterns were very random for some industries and not for others; and I could also see that the pattern was better for companies that I believed were supply chain leaders. My question was “How can I apply a methodology that would allow companies to measure resilience?”

The ASU team considered many different techniques and decided on the use of “mean distance” between each of the points over the period of 2000-2013.

Why is this important? Supply chain leaders want to deliver excellence. They are searching for an objective measurement that helps them to define “what good looks like.” They are a competitive group and want to track their own performance. I believe that supply chain leaders are charged with the delivery of consistent and reliable results at the intersection of operating margin and inventory turns, and most companies are not very reliable.

A Closer Look at Resiliency

Industry performance on resiliency is quite different. As you look at the data, consider how foolish it is to put all industries in a spreadsheet and shake them up. The data sets are quite different in both the mean, the range and the standard deviation. As shown in the data below, the most resilient industries are medical device and consumer packaged goods. And, as shown in our prior reports, the variation in contract manufacturing and third-party logistics providers should be a stay-awake issue for companies worried about corporate risk.

I think that the marked resiliency between Samsung and LG Electronics is due to supply chain excellence. Samsung outperformed LG on operating margin, inventory turns and resiliency; but they are not comparable to P&G. The industry drivers are just too different. I also see it in the data between Stryker and Boston Scientific, Merck and Shire, Walmart and Target; and between Colgate and Unilever. But, I want you to see it also. For more on our analysis of resiliency, please refer to our recent report. Meanwhile, we will continue to define supply chain excellence, one column at a time.

So for readers that are holding your breath waiting for the Gartner Top 25 report in May, I would advocate that you start breathing deeply again, and reconsider the approach. The more that I work with the development of the Supply Chain Index, the more flawed that I can see that the work that I did at Gartner was…. I am embarrassed that I was ever a part of the methodology. I am also convinced that the supply chain leader needs a methodology that is:

  • -Widely Applicable. A methodology that can be applied to ALL publicly held companies. The Gartner Top 25 only looks at the Global 1000.
  • -Industry-specific. A technique that evaluates each industry. I firmly believe that you cannot put all industries in a spreadsheet and shake it up. I think that each industry needs to be evaluated separately.
  • -Longer-Term in Focus. I wanted a view that was  longer-range view than three-four years. My reasoning is that it takes many years to drive true supply chain performance.
  • -Encompassing. More encompassing of metrics beyond the growth, inventory and Return on Assets (ROA) metrics used in the Gartner Top 25. I think that the supply chain leader needs to drive strength, balance and resiliency against a business strategy.
  • -Objective. The Gartner Top 25 ranking has a high percentage of input coming from analysts and peer group rankings. While I do not know what it will be this year, in the past, the analyst ranking and the peer scoring have been 40-50% of the score. As a result, it becomes a popularity contest.

It is for this reason that I will continue my quest. I hope that you will join me to hear about the findings. We will be presenting the overview of the resiliency rankings on our webinar on April 24th and the complete rankings at our Supply Chain Insights conference at the Phoenician on September 9th-11th. If you would like to get the rankings for your company, just drop us a line. We look forward to helping you on your journey. I just think that we need an objective measuring stick.

For my prior views on the Gartner Top 25 and the work on the Index, please check out these posts:

What About the Supply Chain Index

Will Arrogance Stunt your Growth?

What I have Learned Working on the Supply Chain Index

Why I No Longer Believe in the Gartner Top 25

Talent Trap

by Lora Cecere on January 19, 2014 · 1 comment

The definition of a trap is something designed to catch a person or animal,
either figuratively or literally.

Nine out of ten companies are stuck. Their supply chains are not improving corporate performance. Despite multimillion dollar technology projects, and tomes of strategy documents, they are stuck in their ability to overcome market factors and rising complexity to drive continuous improvement on a portfolio of metrics.

I have spent the last month working with clients that are out of balance. They quickly acknowledge that they are stuck. What does that mean? In short, they have been able to drive improvements in one or two metrics; but, they are struggling to improve a portfolio of metrics that includes customer service, cost, inventory turns, and growth. They struggle to manage the supply chain as a complex system and power improvement on the Effective Frontier (shown below).

progress on the effective frontier

A large factor in success versus failure is the management of supply chain talent. Last week, I taught a public training class. As we were discussing the pending supply chain talent shortage, and the lack of mid-management talent, I was asked a great question. The class participant said, “Lora, I get it. I need to build talent. I cannot wait. But, help me, what are the talent traps to avoid?” Here are the five areas that we discussed. I loved the rich discussion with the group of ten.

  • Don’t Be a Know-It-All. I love doing strategy days with teams. Often, I will walk into a strategy day to face a group of managers that have not worked together before. Due to the shortage of supply chain talent, many have come from different companies. The fun starts when I expose that each thinks that they know what supply chain excellence is, but they lack a broader understanding. What they do not know before the class is that each of them carry a fixed mental model of the supply chain that they knew from their prior job. What they do not realize is that each supply chain has a unique combination of rhythms and cycles. Each is different. The value statement for each supply chain needs to be aligned to deliver on the business strategy in a way that delivers strength (year-over-year improvements), balance (a balanced portfolio of metrics to deliver against the strategy), and resiliency (consistency despite market shifts) in corporate performance. It is unique for that company. As complexity shifts happen, the supply chain has to be redesigned to absorb the changes. Most supply chain leaders are too comfortable in thinking they have the answers.  Breaking out of the pack requires new thinking. Traditional technologies and processes are not equal to today’s challenge. As a result, leaders have to understand the past, to unlearn what they think are “best practices,” to enable new thinking to drive new solutions. This requires embracing new mental models. 
  • Get Clear. One of the barriers to delivering on corporate performance is a lack of clarity of terms. Words like agility, responsiveness, efficiency, and flexibility need to be clearly defined to take strategy to action. Without clarity in definition, the supply chain teams cannot drive action. All too often, there is an assumption that the words can easily be translated to action. Without clarity of definition, the teams have difficulty aligning. Some of the frequently used terms are outlined in Figure 1. This chart is from a study of 46 leaders in the food industry. Note the range of frequently used words and the gaps. The use of any of these would require a careful definition to drive it to action.  Let me give you an example. One of the most overused terms is the word “team.” When I ask people what this means they look at me like I am crazy; but, the definition of a team is important. The games of football, baseball, swimming, track, and tennis all have different definitions of team play with different rules. You would never ask a swimming team to play by the rules of a football team. How can you ask a team to play together if the rules are not defined? 

Figure 1. Supply Chain Descriptors

  • Carefully Design Regional/Global Governance. A major trap is the lack of definition of regional/global governance. Each discussion will usually start with the statement, “You know Lora, that we are global. And, that we are different and more complex than anyone else.” However, when I ask how they have defined Regional/Global governance, I get blank stares. It is not obvious. Global is not global. Strategic and tactical planning is usually global and done with a product or category focus. Operational and executional planning processes are usually focused on geographic implementation by factories, distribution centers, and third-party manufacturers and distributors.  In 2006, I met a man by the name of Dick Clark that traveled the world working on role definition of planners for Procter & Gamble. This year P&G will be over $83 billion in revenue. There is no doubt about it. The company is a consumer products giant. The P&G system has thousands of planners operating in a very complex matrixed organization. Unfortunately, Dick is no longer with us. Sadly, he died of lung cancer several years ago. But, if he were here, I would love to continue my dialogue with him. In 2006, I asked Dick why it was taking him so long to define the roles of planning within P&G. He had been at it for a few years, and I just could not understand why it was taking him so long. As a result, I would continually ask Dick why it could not be quicker. He had been at it for three years. In Dick’s words, he would say, “Lora you don’t understand. Our work processes are very complex with many conflicting priorities and political agendas. It is not as easy as your writing says. We are global with new employees with little experience and senior employees with lots of experience. Both need guidance. We cannot assume that they know what to do. If we do not help employees understand how their inputs tie into the greater whole of the company, we cannot win in the market. It is that simple.” Unfortunately, there are too few companies that understand the need for the work that Dick did. It was a great lesson for me, and I think it was a major factor in the corporate performance of P&G in the period of 2006-2010.
  • Step Up. Focus on Mid-Management Training. While companies have training programs for entry-level employees and “high-performance” achievers, only 22% of companies have training programs for mid-management employees. With the number of open positions, and turnover of planning positions, investment in talent becomes more important. The changes in analytics, supply chain processes, and technologies require a constant focus on training. The future is going to be quite different from the world today. I am convinced that this traditional sandwich approach will leave many well-intentioned companies with a talent vacuum.
  • Focus Equally on the Important and the Urgent. Today, one of the gaps is the focus on the urgent without leaving time for the important. People think that they need to be busy. They reward the urgent. However, planners need time to plan. Getting good at strategic and tactical planning is essential to be able to manage continuous improvement in inventory turns and operating margin. As a result, leaders need to ensure that rewards systems and job progression paths equally reward the urgent and the important. Work on “what-if planning” and audibles to ensure alignment as the business changes. The best job that I have seen of a company that ties Sales and Operations Planing to operations execution is Eli Lilly. At Lilly, the teams build play books to crystallize what plays need to be called within the month to ensure that the operating teams understand how to adapt the cross-functional plans in play-based market shifts. It is much like a football team sensing what play to call based on how the other team lines up on the field. A football team would never line up without spending time to develop the audibles. Sadly too few supply chain teams take the time to develop the plays based on “what-if analysis” to help the teams know how to operate on the field and in global markets. Only 11% of companies are satisfied with their “what-if capabilities.”
  • Measure Progress in Inches not Miles. Progress in supply chain performance happens slowly over many years. It is measured in inches, not miles. Supply chain leaders have to persevere and stay focused. I loved the quote from Marty Kisliuk, Director of FMC, in the book Bricks Matter,“Progress in supply chain improvements needs to take at least three years.” However, too many companies focus on ”the program of the month,” or “the yearly plan” without ensuring year-over-year continuity.
What do you think of my answer? Interestingly, the overwhelming sentiment of the members of the class was that the biggest issue for them is item #1: The leader that thinks that they know it all. I would love to hear your thoughts.

Or, maybe you would like to join us in our next training session to share your thoughts with the group?  I would love to see you there. Our next supply chain training class is in San Diego on March 25th-26th.  For more information check out our brochure.

I love telling stories and sharing research with the class. It is very reinforcing to see participants’ understanding of supply chain excellence evolve through the use of experiential exercises. The interaction helps me pound out more blog posts. I look forward to seeing your feedback.

For more on Supply Chain talent, check out these blog posts:

What Do We Do NOW?
Out of Africa
Interview with Mike Corbo, Colgate on Building Global Talent
Supply Chain Talent: The Missing Link?