I have traveled 12,000 miles this week. When I get off the plane, I am accosted by the signs at airports around the world. SAP touts “best-run companies” while the Accenture ads claim “high-performance supply chains.”
As I shuffle along, I am not sure. I shake my head. I am a nomad, searching for a good definition of supply chain excellence. It is a quest and the subject of my next book, Metrics That Matter, that will publish in September, 2014.
Why Does It Matter?
Supply chain leaders are naturally competitive, and they want to know how well they are doing. Similarly, organizations want to see how they measure up. They want to understand which practices and technologies make a difference. I think that this is unanswered. It is for this reason that we started the work on the Supply Chain Index.
Most readers of this blog know how I feel about the Gartner Top 25. It was a good starting point, but it has not matured. I just do not think that you can put companies in a spreadsheet and shake them up. A chemical company just should not be compared to a high-tech company using this methodology. It is biased towards companies that DO NOT have assets. I am searching for something that can be meaningful across industries and across company sizes. It is for this reason, that I started the work on the Supply Chain Index.
What is The Supply Chain Index? It is a formulaic representation of supply chain excellence based on market capitalization. Over the course of the last eighteen months we have attempted to build a linear regression model to build a formula using supply chain ratios that can predict market capitalization. We used the period of 2006 to 2012 to build the model and we used the formula to attempt to predict 2013. The result is outlined in figure 1.
We came close, as the reader can see in figure 1, to building a predictive model for household and personal care (CPG), medical care (hospitals) and discount stores (mass merchants). But, we have failed to build a predictive model for the rest of the industries. However, we are not done. This week, I am finalizing an agreement with Arizona State University to fund a PHD student in statistics under the guidance of George Runger to try to finish the work.
When you are doing research, you have starts and stops and turns. We have spent the last eighteen months charting the intersections of companies on the Supply Chain Effective Frontier to understand growth, profitability, cycles and complexity. We have found that nine out of ten organizations are stuck on their ability to make improvements on both operating margin and inventory turns in the same year. However, the research has taught us a lot. Here we share some insights.
What did we learn? Overall, supply chain leaders deliver results that have strength (year-over-year performance improvements), balance (a set of balanced metrics within a portfolio) and resilience (predictable and reliable results with few swings). You can see it in the patterns. Let’s look at this more closely:
1) Strength: Continuous year-over-year improvements on the Effective Frontier based on well-defined Supply Chain Strategy. Not every company wants to make the same trade-offs of growth, profitability, working capital cycles and complexity. However, leaders make these choices consciously showing year-over-year improvements. While laggards, lose ground. Let’s take the example of Colgate, Procter & Gamble, and Unilever in figure 2. Colgate is making a conscious choice to drive profitability. (There is no company that I have studied that has been as successful in driving year-over-year profitability as Colgate.) And, recently, Procter & Gamble is more focused on improving inventory turns. Both P&G and Colgate are more resilient than Unilever. In the past four years, Unilever made progress in inventory turns, but then lost ground on both the management of inventory and improvement in margin.
2) Balance: The right balance of supply chain financial ratios to improve market capitalization. If we take the formula that we developed for the Supply Chain Index that is a linear regression of supply chain financial ratios that is correlated to market capitalization, as shown in table 1, we find that P&G has the best balance of the financial ratios.
3) Resiliency: A tight, positive pattern at the intersection of inventory turns and operating margin. In the BASF and DuPont case study below, BASF is more resilient than DuPont. Notice the wild swings in the DuPont trajectory. BASF has a more consistent, and focused supply chain strategy. DuPont has implemented many Information Technology systems, but few well.
We believe that strength, balance and resiliency are important components of a high performing supply chain organization. We hope that you agree. So, what are our next steps on this methodology?
1) Strength. We will give each public company a measurement on ability to drive year-over year performance of the factors on the effective frontier.
2) Balance. We will finish the work on the Supply Chain Index with Arizona State and rank the companies within industry peer groups based on balance of the metrics against market capitalization. Our date to finish this work is March.
3) Resiliency. We will also work with ASU to measure the trajectory of resilience of results at the intersection of inventory turns and operating margin for the last 12 years. We will translate this into a measurement of resiliency.
In the writing of the book, Metrics That Matter, we will rank companies by SIC code based on these three factors, and share the insights of supply chain leaders on the management of supply chain metrics over the last decade. The chapters will be rich with case studies.
We will then place the rankings on these three factors into our community and allow supply chain leaders (one per company) to vote. The final stack ranking of supply chain excellence will be rated equally on the four factors of strength, balance, resiliency, and peer feedback. We will share this data at our Supply Chain Insights Global Summit to be held in Scottsdale, AZ on September 10-11, 2014.
I would love your thoughts. Check out the prior blog posts on the development of the Supply Chain Index to read for perspective: