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Misnomer

by Lora Cecere on November 9, 2014 · 1 comment

Misnomer (n): A wrong name. The misuse of a term or name.

Merriam-Webster Dictionary

I am a supply chain gal. I work with many organizations on their supply chain strategies.

One of the important lessons I have learned in my lifetime of doing this work is to never be afraid to ask what a term means … especially when everyone in the room is comfortable. The more content people are, the more important it is to ask the tough questions to drive alignment. I find that many times companies have the wrong name, or a misnomer, for what they are trying to achieve. Let me give you an example:

Last week, I gave a presentation at a global supply chain team meeting of 175 professionals. It was a large multinational company. It was my first time working with this group. They had seen my videos on the website and needed a speaker for their global kick-off meeting. They really did not know me, and I did not know them. While we had spoken by phone, this was our first opportunity to work together.

As I sat in the back of the room, shifting in my chair, waiting for my time to speak, I watched speaker after speaker endorse the concept of one team. For a couple of hours I looked around the room and saw glazed eyes. “Lucky me,” I thought, and smiled. This team is not buying the message. They were as uncomfortable with the message as I am with the scratchy fabric of my boiled-wool jacket rubbing my neck.

The team was organized around the functional silos of source, make and deliver. Their career paths, their identities, and their comfort zones were steeped in the traditional definitions.  It had been this way for over two decades.

I was asked to be an agent of change. This is why I was selected to speak. As I cleared my throat, and pushed my toes deep into my shoes, I bounded up the stairs to start the presentation. I shook hands with the moderator and patted him on the back as he apologized publicly for mispronouncing my name.  (As I laughed it off, I stopped and thought, “What is in a name?” I grimaced and reflected. ”Today, everything. This is why I am here…”  )

I opened, “Hi, my name is Lora Cecere. My name is often mispronounced. The first name is Irish. My second name is Italian. No one gets it right on the first try.”  I looked into the audience and caught a couple of eyes and winked. The group laughed. I let the laughter subside and continued, “When someone mispronounces my name, it opens up an opportunity for me to explain to others what I do.”

I walked to the center of the stage, looked stage left and continued. “I study supply chains. I am passionate about it. So much so, that three years ago, I founded a research company to focus on understanding supply chain excellence.

In our work, we tie research from quantitative and qualitative studies to financial results to drive new insights.   This morning, I heard you use the term ‘one team’ and I am worried. We find these words used frequently, but with very different meanings. Most companies think that they know what this means; but, to be actionable they need definition. Let me explain.”

I looked stage right and continued, “Let’s start with the phrase ‘one team’. What is a team? If you played sports, you know that the rules for soccer, football and baseball are quite different, and that a team-based sport looks quite different than an individual sport like swimming or track. The teams can come together because the rules are defined. The problem is that in today’s supply chain organization the rules are not well-defined. In my interviews with your organization, I find that you, like most companies, are struggling with conflicting objectives between functions.” I then showed them the slide shown here as Conflicting Objectives.

“Let’s take a minute and look at this slide. It’s a lot to digest…. It is the essence of both the problem and the opportunity in the definition of what ‘one team’ means for you.” The group was quiet as we discussed the fact in the traditional organization that functional silos are not designed to work together. “Working together requires more than a name change. You cannot move from a functional orientation to a end-to-end value chain focus with just a name change,” I stated.

“Let me tell you a story… Seven years ago, I worked with a woman named Deborah. I was a new analyst and felt quite cocky in my knowledge of supply chain. I, like you, spent many years learning from hard work the process industry. I had managed factories and distribution centers, and strongly believed that the best supply chain results stemmed from strong, well-run functions. Proudly, I had led my division to have the lowest manufacturing costs with the highest Return on Assets. I was proud of my record, and shared it with Deborah. She asked me, ‘What was the impact on total costs?’ I answered that I did not know. It was not measured.

When we started benchmarking companies, Deborah and I had a friendly wager. I believed that we would find a company with the lowest distribution costs (warehousing and transportation), and the lowest manufacturing costs, and this would result in the best overall cost structure. I also believed that this company would have the best inventory and customer service. I was wrong. We never found this company. I now know that this is not reality.

Deborah and I benchmarked 97 supply chains; and, we found the inverse to be true. Instead, we found that the companies with the lowest total supply chain cost (a total of source, make and deliver) had average costs in manufacturing and distribution. We found that it was the sum of the parts that mattered. Surprisingly, to me then, I found that a function run as a function drove up total supply chain costs. The reason? Functions within the supply chain are not naturally aligned. When an organization optimizes one function, by definition they company will suboptimize the others, unless there is a clear end-to-end vision of how the functions should work together to deliver on the operating plan. Hence the need to define the word team.

This is important. Why? In our research, we find that only 8% of companies can access total supply chain costs to anchor decisions, and that less than 1% have a clear end-to-end vision. Most say the word ‘team’, but they do not define it.

In building one team, alignment is critical. This can either be through direct reporting or a matrixed organization. We find the fastest results when the organizations have a direct reporting relationship.

 I rubbed my hands together, and looked at the audience and stated, ”So, see… you are in good company. Most companies are stuck in this functional quagmire. It is one of the primary reasons why nine out of ten manufacturing companies are stuck at the intersection of operating margins and inventory turns.”  

In contrast, we find in our research that companies with procurement and manufacturing reporting to the supply chain organization have stronger, and more reliable results on inventory, operating margin and Return on Invested Capital (ROIC). Today, 60% of sourcing organizations and 45% of manufacturing organizations report through the supply chain organization.”

As I travel from organization to organization, I find that each company defines supply chain slightly differently. They say they want to achieve one team, but they fail to define it. There is a desire to minimize the friction between silos and operate as one entity. This starts by clearly defining the roles of  each function, and then focusing the cross-functional teams on the same metrics. My favorites are customer service, operating margin, inventory turns, and ROIC. The goal is to manage the supply chain as a system, together.

When all functions are jointly focused on improving these metrics, then we can have one team. If not, I am afraid we have a misnomer. What do you think?

We are a month away from the publication of Supply Chain Metrics that Matter. I am excited! I cannot wait to smell the ink. The publication of a book takes a couple of years. I have spent a year of weekends hunched over my kitchen table writing, rewriting and writing. It will be great to hold it in my hands!

This week, I travel to Bentonville, Arkansas to facilitate a customer meeting on the use of channel data. We are the middle of closing the study on the use of downstream data and would love to have you in the survey. If you give to us, we hold all responses confidential. In response to filling out the survey, we will share the results with respondents on a one-hour conference call.

On Thursday at 11:00 EST, we are hosting our webinar on the Race for Supply Chain 2020. We have invited two visionary speakers—Marty Kisliuk, Global Operations Director at FMC,  and Chris Clowes, Supply Chain Manager at Costa Enterprises—to share their thoughts. Very different, but insightful presentations. I look forward to gaining their insights, and hope to see you there.

I hope to talk to you soon either on the road or in one of our webcasts.

 

Q&A on the Supply Chains to Admire

by Lora Cecere on September 9, 2014 · 0 comments

 

Today we published a new report, Supply Chains to Admire. It is the end of a two-year research project, and identifies which publicly held companies outperformed their peer group on balance sheet results. Here we share the answers to the questions that we get the most often about this research:

What is the source of data? The data analyzed to compile the Supply Chains to Admire report came from publicly-available information from balance sheets and income statements.

Which companies were considered in the study?  We built peer groups based on like industries. Companies were selected based on three criteria. They had to be publicly traded, we had to have a nearly complete data set for the years studied, and they had to have a peer group of at least six companies to be able to draw the comparisons. We eliminated several large conglomerates. As a result, you will not find 3M or GE in the data. This left us with a list of nearly 200 companies.

How did you define peer groups? We tried to use NAICS code designations. The NAICS designation was developed by the US Federal Government to characterize groups of companies within an industry.

If the company had multiple divisions crossing over many industries, where did you place them? We placed them in the industry that they were the most like, e.g., the primary source of revenue. For example, Johnson & Johnson has many supply chains in many industries, but the majority of the revenue comes from pharmaceuticals. As a result, we report their results along with their pharmaceutical peer group. We know that this is not perfect; but it is the best that we could do, and we think that it is a fairer comparison than putting all companies in a spreadsheet and shaking them up without any consideration for peer group analysis.

How did you select the final list of fifteen companies?  The companies were selected based on performance better than peer group for 2006-2013 and delivering better than average improvement within the peer group as determined by the Supply Chain Index. We think that supply chain excellence is a combination of performance and improvement.

Was the list of the Supply Chains to Admire hard to select? We thought that it would be; but surprisingly, it was not. After applying the rules for data collection, we ended up with 200 companies. Nineteen of the 200 companies met the performance criteria of improving operating margin, inventory turns, and ROIC together in concert for the years of 2006-2013 or 2009-2013. Four more companies fell out of the list when we applied the supply chain improvement criteria as defined by the Supply Chain Index. The companies that fell out at this point were Diageo, PepsiCo,  Reckitt Benckiser, and The Gap.

How does this compare to the Gartner Top 25? One of the reasons that we built the Supply Chains to Admire is that we don’t think that the Gartner Top 25 serves the market well. While you need to make your own decision, here is an overview of the two methodologies:

Will you do this analysis again? Yes, we will do this study yearly in the preparation for our annual conference. This conference is designed to challenge supply chain leaders to think differently.

What is the Supply Chain Index? The Supply Chain Index is a methodology to judge supply chain improvement. It is detailed in our recent reports.

I have some input into the methodology. How do I give you feedback? We would love to hear from you either formally or informally. We get stronger through your feedback.

What did you learn in the analysis?

  • Despite a rise in demand and supply volatility, companies are becoming more resilient in 11 out of 15 companies studied.  However, due to a variety of factors, companies are losing ground on driving progress on both inventory turns and operating margin.  We believe that this is largely due to rising complexity.
  • We are not doing as well as I thought we were doing on driving balance sheet improvement. We have a lot of projects, but many companies are struggling to see these results on the balance sheet. Nine out of ten companies are stuck at this intersection.
  • I am surprised at how many companies are raising improvement in one of the three metrics, but not driving performance improvements in the total portfolio. This is often due to the lack of understanding of the supply chain as a complex system. We find that companies will establish metric targets in isolation and throw the supply chain out of balance.
  • There are a lot of misconceptions about inventory. It is a hot spot of misunderstanding. Inventory is one of two primary buffers in the supply chain. A buffer absorbs volatility. With the rise of demand and supply volatility, buffers are more important that ever. However, most companies are still looking at inventory levels, and we have a host of crazy consultants running from company to company advocating cutting inventory to free-up cash. Cutting inventory without right-sizing the form and function of inventory throws the supply chain out of balance. Each industry has a very different potential, and it is important to not generalize the answer.
  • Excellence is easier to say than to do. Good luck in your journey! And, let us know if you have any questions.

We are excited to kick-off our Supply Chain Insights Global Summit this week. We will have an audience of 110 supply chain leaders, but if you are not able to make it, please join us through our ustream broadcast. We look forward to hearing from you!