Whew! It Is Finally Happening.

by Lora Cecere on March 12, 2014 · 2 comments

I am an old gal. In six months, I will raise a toast to my sixtieth birthday. It is hard for me to believe that I am that old and still working. Many of my friends are retiring. The industry is in flux. Daily, I get notices from Linkedin of job changes. Sometimes, I ask myself, “Where has time gone?” Other times I celebrate how much I have learned.

It will be a long time before I retire. I have a long memory. It is good today to celebrate something that I wished could have happened 14 years ago.

Today, I want to celebrate progress. As an analyst, I watch trends and the progress of technology adoption. Many times it is slow, and I get frustrated. However, today I am currently involved in a research process where I am seeing fast and demonstrable results. It is the adoption of new forms of B2B networks for supply chains.


Let me start with some history to provide context. As background for the new reader, I have been an analyst in the supply chain management market for 12 years. First I was employed by Gartner Group and then by AMR Research. This was  followed by a short stint at Altimeter Group which led to starting-up my new company Supply Chain Insights. My research projects have been many, and I love new technologies. I often find that new technologies are overhyped and underdeliver on promises. I pride myself on cutting through the hype and getting to the facts. No fluff from me… I am known for telling it straight.

As we emerged from the Y2K cloud, there was exuberance about e-commerce and the promise of Business-to-Business connectivity. I actively followed the emergence of marketplaces and watched e-commerce blossom and B2B stagnate. In the period of 2000-2002, when I was at Gartner, I watched the evolution of a model that I violently disagreed with. It was the premise of ERP II. I could not condone investment in ERP as the path forward to building end-to-end value chains. I did not believe that it could happen from the inside-out. Instead, I felt that it needed to happen from the outside-in (from the network or channel back.)


Figure 1.

When Gartner Group bought AMR Research, I could not go forward. I had left Gartner because I did not feel that they were as serious about supply chain research as I wanted them to be. I wanted to write about cool technologies for the line of business buyer. I wanted to be uncorked and out of the control of dominant players in the market to write the unabashed truth as I see it. This journey has taken courage. It is tough to take a hard stand. Today, I want to take another one.

Celebration of the Evolution of B2B Networks

I am currently working on a series of reports on the state of Business-t0-Business Connectivity. The first published this week, and the second will publish next week in our newsletter. 

While many companies wax eloquently on the concept of building the end-t0-end value chain, I find that they are not clear on the meaning. It is often stated as a goal in meetings, and I see it used in many strategic plans. However, what I observe is continued investment in the automation of enterprise practices. We are busy working on process iterations and continuous improvement programs that I think only inch us towards business transformation. I am excited to state that today, I think that we finally have B2B Network alternatives that work. I am also excited to state that I think that they are one of the disruptive technologies that can help us get unstuck in delivering on corporate performance.

It is important. As we have outsourced logistics and manufacturing, I firmly believe that we need to get more serious about the building of Business-to-Business (B2B) networks. These are one-to-many and many-to-many architectures that connect logistics providers, contract manufacturers and suppliers into true supply networks. There is a community layer, an application layer, and a connectivity layer. In our recent research reports, line-of-business users are using these networks for 7% of their flows. The primary methods of connecting with trading partners are spreadsheets and EDI.

It is easier said than done. We have been at it for over a decade, and I see real progress in the evolution of these technologies in the last two years. An image representing this type of connection is shown above. (I use it courtesy of GT Nexus.)  Here is the essence of what I have found out:

  • Confusion reigns. The term control tower confuses the market. It is used by Kinaxis in a one-to-one model and by E2Open in a one-to-many model and by GT Nexus in a many-to-many model. What I think that we are seeing is the evolution of different types of supply chain visibility as outlined in Figure 1. To solve the problem, we have to be clear on the type of connectivity that we are seeking. When people use terms loosely, we need to ensure clear definitions.
  • Why business networks over EDI Vans? In the words of one of my reference calls last week, “They work.” While EDI providers do point-to-point integration, the connections are fragile. Every time that there is a software upgrade at a point in the node, the connections break. This is not the case for the B2B business network provider. EDI VANS have consolidated and stagnated, but B2B Networks are maturing. It is for this reason that you should choose GHX over GXS if you are in healthcare or GT Nexus over Descartes if you are in logistics/commerce.
  • The answers are not coming from ERP players, and will not in the short-run. Yes, I know that SAP bought Ariba, and that they are hard at work on the integration of SAP APO, SNC and the Ariba business network. I just do not see that it will be a viable alternative in the short-term. (e.g., …less than five years.) Why?  It lacks the community infrastructure and the depth of application. However, it is important to note that SAP is trying. Oracle is not. As a result, I would invest my money in E2open, Elemica, Exostar, GHX, GTNexus, or iTradenetworks in the short-term. The specific choice depends on the requirements at the application layer and the desired community. But, look for more on this next week.
  • The business networks have evolved. I am impressed by the evolution of canonical models in these business networks. We have come a long way from the failed start-ups of over 300 marketplaces in 2001-2005. I am also stoked to see the use of non-relational databases and cloud-based computing to make B2B business networks for supply chain a reality. They have come a long way in the past two years. In fact they had matured faster than I had given them credit for. So the next time that you see an analyst compare an EDI VAN and a B2B Business Network on the same model, throw up a red flag. It is obvious that they just do not know what they are talking about. They are very different solutions with far-reaching implications.
  • We need to get on with connecting the value chain. The traditional roles of buyers and sellers make it difficult to get past traditional buy/sell relationships and start the work of building value networks. Less than 1% of companies have a resource aligned to drive this work. It is a gap. I think that we need to just get on with it.

So in closing, I would love to hear about your experiences with the Business-to-Business Supply Chain Networks. It will be a long weekend writing my report, so I look forward to your emails.

On a side note, if you enjoy our research, we would love to have your help on several of our open surveys. It is a good chance for you to benchmark your processes for free. And, as always, if you fill out a survey, we keep your name confidential and report in aggregate. In return, you get a copy of the summary document and a one-hour phone call to educate your team on the findings.  We also share these in monthly webinars and will showcase the findings at our Global Supply Chain Summit. The essence of open research is you raising your voice and letting it be heard. While I know that your time is valuable and you are busy, and that you might not have time for a lot of surveys, I am hoping that I can talk you into taking at least one.

When you give to us, we give back to you. That is our mission. The active surveys in the field are listed below:

Supply Chain Risk Management

Corporate Social Responsibility and Supply Chain Alignment

Digital Manufacturing

Vendor Managed Inventory

Use of Downstream Data

Planning Software Implementations and Success Rates

No Trash Talk Allowed

by Lora Cecere on February 17, 2014 · 1 comment

Definition of Asset

 A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit.

Definition of Trash

Worthless or discarded material or objects, refuse or rubbish.

In the last year of my Wharton MBA program, the professor wrote on the board that “finance is the art of money passing hands until nothing is left.” I have found this to be a sad reality. In contrast, economic value is derived  from making or growing things to be sold.

In the process of making things, companies have to account for assets. While all leaders can agree that they want more assets and less trash, there is confusion about the best metric.

There are a number of ways that companies can account for assets and align them for value.  Recently, we have been studying the trends on three different measures of asset effectiveness. These three simple definitions have very different implications with far-reaching impacts. It is the goal of this blog post to explain the differences and help link you to the most impactful measurement to drive shareholder value.

  • ROA: The return on assets is equal to net income/total assets. It can vary substantially across industries and should only be used to compare a company within an industry peer group. The assets are based on both debt and equity.
  • RONA: If you ask my friends at DuPont for the best asset measure, they will advocate Return on Net Assets (RONA). It is different from ROA in that it is equal to Net Income/(Fixed Assets + Net Working Capital). Fixed assets are tangible property and working capital is a measurement of current assets minus current liabilities. It is a longer-term perspective than ROA.
  • ROIC: Colgate and other consumer products companies swear by the Return on Invested Capital (ROIC) metric. It is a good measure of the company’s ability to generate a profitable outcome from investments. ROIC should be greater than the market value of capital. It is equal to net income-dividends/total capital. It can also be calculated as (net operating profit after taxation)/(invested capital).
When we correlate these three metrics to market capitalization, ROIC correlates in 85% of the industries, and RONA and ROA in 25% of industries.  Most supply chain leaders measure themselves by ROA. The more work that I do on metrics, the more I become a fan of ROIC.
To prove the point, let’s look closely at the numbers for the food industry. Note how different the numbers are. ROIC is not only a measurement of assets, but also the use of capital. Sadly, several of these companies don’t look bad when you look at ROA, but when you look at ROIC, it is clear that they are operating at a level below the market cost of capital.
For me this is not trash talk. Instead, it is about supply chain leaders delivering value.  If the cost of capital is 18% (a good average), then the top performance would go to Campbells, and many companies should be having the discussion of why they are under performing to market.
And, of course, the supply chain is a complex system with increasing complexity. Asset metrics should not be viewed in isolation to declare a supply chain winner. There are metric dependencies, but I like the inclusion of ROIC in the basket portfolio of metrics. What do you think? What do you think is the best measurement?