Today, I am proud to launch the Supply Chain Index. It is my hope that the readers of this blog will take time to either join us today to listen to the launch of the Supply Chain Index on our webinar or listen to the replay. (We will make the replay available on our website and in our community within 24 hours.)

The Supply Chain Index has been two years in the making. The genesis started with the writing of the book Bricks Matter.  As I sat at my kitchen table, I reviewed spreadsheet after spreadsheet of corporate performance data on supply chain financial ratios. The relationship between corporate financial performance and supply chain metrics was complex; and in my first attempts, I was unable to derive a correlation. However, as many of you know, I am stubborn. I wanted to know more. I hungered to know the patterns. I was driven to find out which supply chain financial ratios really mattered to corporate performance and stock market valuations.

Why did I care?  The year 2012 marked the 30th anniversary of the use of supply chain management as a cross-functional process for source, make and deliver in the commercial sector.  I wanted the book to be a critical look at what we have accomplished as supply chain professionals during that 30-year period.  I feel that there is too little primary research in the area of supply chain management. I believe that there is more hype than substance in most supply chain writing, and that we have not held ourselves accountable enough to financial balance sheet performance.

When I started writing the book, I believed that supply chain process improvements had reduced costs, improved customer service, and increased invetnory turns.  Sadly, while writing the book, I found that this was not the case.  What I found was that we have improved employee productivity through the investment in processes and technology, but that most industries were stuck in their ability to manage the trade-offs between growth, profitability, cycles and complexity. I termed this concept the Supply Chain Effective Frontier. As I wrote about this concept, and worked with Abby Mayer (@indexgirl) to write the Supply Chain Metrics that Matter series of reports, I discovered more on the depth of the complexity. It has taken us eighteen months to build the database of supply chain financial ratios and find the patterns and start building the formulas.

My goal was to help corporate financial and supply chain teams align. I believed that supply chain excellence could not be generalized from industry to industry. I strongly believed that it varied by industry sector and that it was a series of complex relationships. I wanted to build a useful tool that could help companies irrespective of size or geographic location.  As a result, I commissioned work to try to build a formulaic representation of supply chain metrics (financial ratios) to tie corporate market valuation to the definition of supply chain excellence. I wanted to better understand which metrics truly mattered. This work has been in progress for the past year, and it is far from done.

The launch today of the Supply Chain Index is a start, and should not be viewed as an end point. Today, we will start to socialize the concepts. We are on a journey. This work will continue throughout the summer and culminate in the release of the Supply Chain Index for 36 Industry Sectors at our Supply Chain Insights Global Summit at the Phoenician in Scottsdale, Arizona on September 11-12, 2013.  Over the summer, we will be sharing the insights of this work through a series of webinars and reports.

As we progress, we will ask for supply chain leaders everywhere to join the discussion in our Supply Chain Insights Community. We want to get it right. We want to hear your voice. My goal is to help supply chain leaders everywhere to better align the metrics that matter to define supply chain excellence and its relation to corporate performance.

Definitions

To understand the concepts, let’s start with the definitions:

Supply Chain Index: A formulaic representation of supply chain financial ratios correlated to stock market capitalization.
Supply Chain Effective Frontier: The balance of growth, profitability, cycle and complexity metrics to deliver a supply chain strategy.  It may or may not maximize the company’s market valuation. (This should be a conscious choice.)
Supply Chain Excellence: The behavior of companies working to maximize value through the setting of targets for supply chain financial ratios, and aligning metrics that matter, which are tied to value chain strategy.

What We Know Today

The Metrics That Matter Are Different by Industry Sector. The correlation of supply chain financial ratios to corporate stock performance varies by industry. The concepts of supply chain excellence cannot be generalized. As shown in table 1, and in figure 1 outlining the consumer value network, industry sectors within a value network are rewarded by performance on very different metrics. For each supply chain it is the management of a system, but the levers for each industry are very different. I firmly believe that you cannot put all industries in a spreadsheet and shake them up.

Public Markets Reward Alignment and Balance. What is common for each industry is the management of trade-offs on the effective frontier.  While the formulas are different and the supply chain financial ratio correlations vary, there is a strong trend for balance  and alignment (management of Days of Inventory and Payables). I am also struck by the need for cross-functional alignment to perform against these metrics. These type of performance cannot be achieved through a focus on functional metrics.

Supply Chain Performance Matters. The term supply chain should be easy to define; but sadly, I find that it is a politically charged term within organizations.  I define the term as the processes that align the processes of sell, deliver, make and source outside-in from the customer’s customer to the supplier’s supplier.  When I go to a  software conference, the term supply chain is often very narrowly defined as supply chain planning and supply chain execution software. The technology vendors talk in three-letter acronyms about pieces of the software that drive supply chain performance. Conversely, when I speak to many organizations, the term supply chain is very narrowly defined as a supply chain function often limited to logistics, distribution and customer service. It is only in enlightened organizations that I find a holistic definition that spans end-to-end processes.

There is No Substitute for Leadership.  As I go through balance sheet after balance sheet, and spreadsheet after spreadsheet, I associate the numbers with the names of the leaders and the faces of the teams that I have worked with over the last decade. I remember the discussions on the choices on the selection of technology and organizational design. In the numbers, I see that some companies that have made clear and conscious choices. The work has taken many years. I also see that companies with a focus on end-t0-end process management are outperforming peers. Supply chain excellence matters.

Next Steps

We will be tying the results of cross-functional alignment in supply chain metrics to organizational  and process design through our quantitative survey on alignment. If you would like a customized assessment based on your company’s Supply Chain Index, please have three or more functions within your company fill out this assessment. Share this link with members of your Information Technology (IT), financial, corporate social responsibility, sales and supply chain teams. The link to share within your organization to take the study is http://tinyurl.com/sci-ali-lc 

We look forward to hearing from you! Let us know what you think.

Lora Cecere

Author Lora Cecere

Lora Cecere is the Supply Chain Shaman. A shaman interprets and connects the evolving world to a group of followers. Lora does this for supply chain. As the founder of Supply Chain Insights and the author of Supply Chain Shaman, Lora travels the world to chart the course of supply chain practices and disruptive technologies. Her blog focuses on the use of enterprise applications to drive supply chain excellence.

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