Why It Matters

by Lora Cecere on October 1, 2013 · 2 comments

As I work with companies, I often contrast the strategies, approaches and outcomes within a peer group. Over the last five years, I have helped two companies, Sonoco Products and Owens Illinois (OI) with their selection of technologies to improve Sales and Operations (S&OP) planning. Both companies provide packaging materials to the food manufacturing industry. Owens Illinois provides glass products and Sonoco Products provides flexible packaging. Here I contrast their results.

Six years ago, Owens Illinois’ primary question was IT standardization versus the choice of best-of-breed vendor. The decision was a political tug of war. Warring factions undermined progress on business process. IT and the business teams were not aligned. They were unclear on their supply chain strategy and the role of supply chain planning. Complexity reigned in the business and they were unsure how to manage it.

Figure 1.

Sonoco Products, on the other hand, had a clear objective to maximize asset utilization while improving customer service for strategic customers. Their goal was to visualize excess capacity and make it available to enable their sales teams to offer upstream opportunities to their clients. It was their way of “shaping demand.”

As a supplier three to four levels back in the supply chain, life as a packaging provider is tough. Demand is volatile, price is competitive and complexity reigns. Food manufacturers, over the course of the last decade, have pushed costs and waste backwards in the supply chain. Products have proliferated by 37% over the last five years and packaging suppliers are being asked to provide more and more innovation to help the food manufacturers bring new products to the market.

Figure 2.

The companies are similar in size. Sonoco Products is a $4.5 billion company, located in the southern portion of the United States. Their journey to be more market driven with a strong focus on Sales and Operations Planning (S&OP) is now seven years old. Owens Illinois (OI), a $6.3 billion company, manufactures glass containers with headquarters in the Midwest. OI has been more focused on transactional efficiency, procurement and IT standardization.

As I write my new book, Metrics That Matter, I am studying the patterns of corporate performance based on choices in supply chain program execution. A company that is effectively working a supply chain strategy will have a nice, neat pattern at the intersection of operating margin and inventory turns. A company that is not balanced will tend to have a pattern that oscillates with no real trend towards improvement.

Figure 3.

 

Contrast the patterns of the two companies in figure 2. Owens Illinois oscillates with little predictability. While Sonoco Products is losing margin (in large part due to a tough market), they are making improvements in inventory turns. The pattern is much more reliable and they are executing a growth strategy.

So, what can we learn?

A Marathon, Not a Sprint. The story of supply chain excellence cannot be told in  one year snapshots. It cannot be accurately represented by studying two years, or even three. It requires a study of the patterns over a five to ten year period. Supply chain leaders deliver reliability and resiliency in the results.

Conscious Choice.  The journey is about conscious choice and leadership. It cannot be about singular metrics. Instead, it is about managing the trade-offs and improving supply chain potential. The supply chain needs to be managed as a complex system to drive continuous improvement against the supply chain strategy.

The Focus Needs to Be End-to-End. I am teaching a number of workshops this month with well-intended clients that have defined supply chain as a limited function of distribution, manufacturing and procurement. They will make limited progress unless they can redefine their initiatives to cross over and define their go-to-market strategies.

S&OP Matters. Sales and Operations planning done right (focus on the management of the supply chain to maximize opportunity and mitigate risk end-to-end) improves organizational alignment and agility, and improves operational resiliency.

Don’t Waste Your Time on the Wrong Battles. The discussion of which system is less important than moving forward with a system. The supply chain as a complex system cannot be effectively modeled on a spreadsheet. The political arguments of IT standardization often result in one function winning the battle while the company loses the war.

What do you think? Do you have a story to share on the implementation of supply chain strategy? I would love to hear it.

{ 2 comments… read them below or add one }

Richard Cushing October 2, 2013 at 5:12 pm

Lora:

I’d like to throw in my two-cents’ worth.

I believe what we are seeing here, between Owens-Illinois (OI) and Sonoco Products Company (SON), are two different management approaches leading to essentially the same result.

OI’s behavior pattern is characteristic of a firm in oscillation. Executives and managers have never discovered constancy of purpose. So, instead, they oscillate: pulling one lever until the outcomes prove to be disappointing–perhaps even intolerable to their shareholders. Then, they pull a different lever seeking a different outcome. Nevertheless, because they have never figured out the how their organization and their market really works (that is, they don’t yet understand the reality of cause-and-effects either internally or externally), they do not get the results they desire. Ultimately, when things go too far or too fast in the wrong direction, they push the lever back and try something else. Sometimes, they even go back to a slightly different version of what they tried with the first lever-pull.

The other firm, SON, has taken a different approach. Here the executive and management team has found a happy medium. They have, indeed, achieved a relatively successful “balance” between operating margins and inventory turns. They are what we might call, “fat and happy.”

Nevertheless, both of these firms exhibit a significant similarity: Neither of the firms is making any real “progress.” Day after day, year after year, there is no significant sign of ongoing improvement. While OI experiences violent swings in profitability, its inventory turns ratio hovers interminably at about five. Sonoco, by contrast, hangs relatively steady at seven or eight percent operating margin with an equally steady nine or so inventory turns.

Growth is entirely flat for Owens-Illinois and Sonoco’s average growth doesn’t give it bragging rights, by any means.

In my view, what is missing from both of these firms is any evidence whatsoever of any process of ongoing improvement (POOGI). If either firm were making significant strides toward supply chain agility or successfully leaning out their supply chains, then we should be seeing a trend of rising inventory turns accompanied by rising operating margins. We should be seeing their trend lines running upward and to the right on your Figure 2.

What do you think?

Reply

Lora Cecere Lora Cecere October 16, 2013 at 8:50 pm

Thanks Richard
I believe that supply chain excellence is measured by:
Strength: Improvement in year-over-year averages
Balance: The balance and the composite of metrics as it ties to an objective measurement. I am using market capitalization in my book.
Resilience: The variability at the intersection of operating margin and inventory turns.

While, the difference is strength is slight, the difference in resilience, based on my research, is significant. I hope that this helps.

All the best! And, thanks for your comment.
Lora

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