Does Supply Chain Matter?

by Lora Cecere on March 14, 2012 · 1 comment

Does supply chain matter?  I think so.

In this blog, I want to convince you that it does.

In preparation for writing the book Bricks Matter, my co-author, Charlie Chase, and I interviewed 75 supply chain leaders.  When asked, Who does supply chain best?  Procter & Gamble got the most mentions.  P&G was mentioned 38% of the time, Apple was mentioned 21% of the time, and Dell was mentioned in 17% of the interviews.

I am a firm believer that you cannot determine supply chain excellence by putting all industries into a spreadsheet and shaking them up or by only looking at one year snapshots.  I believe that it takes at least three years to make a substantial change in the supply chain and that supply chains can only be compared within peer groups.  <As a result, I strongly disagree with some of the methodologies in the market.>

Bricks Matter

To make the story in the book compelling, we wanted to tie supply chain excellence to balance sheet performance.  We worked to get financial data over the past 20 years.  We tried to look at correlations of different sets of supply chain balance sheet metrics to supply chain maturity, economic factors and market valuations.  We could not find a correlation. <While I think that there is a correlation there, I think that I need more data.  This is future work; but for right now, I have to get this book to press. >

In essence, with the data that we have, the results of supply chain leaders are masked by higher impact results from R&D and marketing.  We have not been able to find a way to isolate the impact of supply chain leadership as a primary driver on the market value of the company.

However, as I was scrubbing and analyzing the numbers, a quote by Keith Harrison, leader of Global Product Supply at P&G ran through my head.  P&G was an early leader in the design of the supply chain organization.  In 1985, the company moved source, make and deliver teams to a single reporting relationship through one common organization globally.  Keith led the Global Product Supply Group during the period of 2001-2011. The largest team at P&G was product supply.  Keith stated in the interview that, “As technology matured, the possible span of control of a manager increased.  …technology enabled the effective management of larger teams.”

Currently, 78,000 of the 127,000 employees in the P&G Company
work across the Product Supply organization.  While they are ultimately
accountable to the Product Supply Organization, they report in a matrix’d organization to the Business leaders in the region.  In his prior position, Keith presided over the strategy development, identification of breakthrough objectives and talent development/rotation. He has now retired.

I have run a number of charts on the companies in this chart over the course of the last 20 years:  revenue/employee, Earnings before Interest and Taxes/employee, IT investment, and overlaid other metrics and compared the performance of these consumer products leaders to leaders in the chemical industry, pulp and paper, and high tech and electronics.  Bottomline: I cannot find another industry where an industry leader was able to pace themselves so far ahead of their peers in year over year results on revenue/employee or EBIT/employee.

P&G’s story does not end there.  Their success was not 2-dimensional.  Their leaders were primarily engineers. In conversations, they clearly understood that the supply chain was a system and that there were innate trade-offs resulting from supply chain decisions.  They pushed the effective frontier of their supply chain on many fronts.  The many graphs that I could show of P&G versus their competitors in this industry show that in this period of time, P&G outperformed their peer group on successful new product introductions (Nielsen and Symphony IRI data), retailer ratings of supply chain satisfaction (Cannondale ratings on Supply Chain Satisfaction by Retailers (now Kantor Retail)) , days of inventory (DOI) and Days of Working Capital (DWC).  Bottomline.  I think that supply chain does matter and that P&G led the way for the development of many practices like demand-driven value networks, open innovation, top-to-top meetings and corporate social responsibility.  No, they are not perfect, but as I end my analysis for my book, I have to tip my hat to the P&G team as being the best example that I can find of why supply chain matters.

Organizational Insights

These are complex organizations, and each defined their supply chain organizations differently.  I have worked for over seven years with these four companies.  While many of the stories are sealed in NDAs and promises of confidentiality, here I share public domain insights surrounding this graph, that I think made a difference:

  • Definition of Global: In this period, companies within the Consumer Products industry defined the term GLOBAL very differently.  They were not aware of their choices.  For many it just evolved.  P&G moved quickly to build a global organization with a strong vision of global planning for local execution.  They defined a matrix’d organization where global teams set standards and teams were trained to a common set of standards.  While other companies had a global product footprint, and put strong energies into  opening global channels, the organizational design for the supply chain team was quite different.  For companies like Colgate, Johnson & Johnson (J&J) and Unilever, the organization had a strong regional bias.  In these companies, the regional teams had a strong amount of autonomy.  Kimberly-Clark was slow to create a global organization; and when they did, it was primarily regional (North America and Europe).
  • Supply Chain Organization Definition: P&G was an early mover to consolidate make, source and deliver into a common organization.  In all of the other organizations, in the chart above, there was strong functional and regional autonomy.  During the period of 1985-2008, they were the only organization on the chart to have these supply functions reporting to one common global leader.
  • Technology Selection:  Each of the companies also selected and adopted technology differently.  While Colgate consolidated on a SAP strategy, Unilever allowed the regions to select their own technologies.  Unilever had lots of small projects with each region doing their own thing.  In this period, Procter & Gamble was consistently an early adopter of technology.  They funded corporate development efforts and often worked with small vendors to drive innovation.

It is late…time to finish the book.

There are more snippets to come in the next couple of weeks as I get ready to push the manuscript to the printer.  I think supply chain matters. Have I convinced you?

Tomorrow, I will be writing about S&OP HANA product release and my upcoming trip to the SAP Insider Conference in Orlando.  Will I see you there?


It is ABOUT time!

by Lora Cecere on March 14, 2012 · 1 comment

Last week, when I attended the SAP CVN session on Supply Chain Management, SAP previewed their work on Demand Signal Management.  While the presentation was at a very high level – lacking the depth for an old analyst to sink her teeth into — I found the questions from customers to be fascinating. Here I share my insights on the release, and answer the questions.

Next week at SAP Insider, North American customers will gather to understand how SAP is redefining their supply chain management applications. For me, it is especially interesting because it is the debutante ball for the two SAP SCM HANA solutions:  Sales and Operations Planning and Demand Signal Management.  While I am excited to see SAP build new solutions following a five year drought of new products in SCM, I would caution that both of these releases are early and are only a good fit for the “early adopter”.  Here I will share insights on the Demand Signal Management product and later in the week, I will share my perspective on the HANA Sales and Operations Planning product.

What is the Release?

After seven years of pushing and prodding, SAP is finally releasing their version of a Demand Signal Repository (DSR).  Demand Signal Management is a new product from SAP that will ship in Q4 of 2012.  The good news for clients is that it is a true DSR: built with an enterprise architecture to embrace structured and unstructured data. I am very pleased that SAP is finally responding to the consumer product user group requests to build a DSR.

The product is built on an in-memory data base termed SAP HANA.  The in-memory capabilities should help consumer products companies with speed for reporting.  The Demand Signal Repository also capitalizes on the partnership with NetBase to harness sentiment of user-defined comments on blogs and ratings/reviews.  It is a huge step forward in the vision for a DSR platform.

The bad news is that the product is largely unproven and the positioning, as presented, is not clear to customers.  The pricing for the product is largely unknown.  For SAP to be successful in the launch of the product, they need to get clearer on product and solution positioning.  The answers to the questions, like those below that I heard at the session, needs to be clear and crisp.

What were the Questions?

The audience peppered the session with questions.  It was unclear to the attendees how to fit the application into their current infrastructure and how this product augmented and supported other applications.  Here are the questions that I heard.  <I answer them below.>

What is the purpose of the application? How will the demand signal be used in other SAP applications?

Does this replace Relational Solutions or Retail Solutions?  (The two RSIs in the market.)

What does this mean for my relationship with Terra Technology?  SmartOps?

How does this redefine your relationship with Vision Chain (previous partner).

What is the cost of the product?

The Shaman’s Point of View:

When customers ask questions in large audiences that I feel strongly about, I have a hard time sitting in my seat.  Especially if it is in an area of research where I have passion.  And for the readers of this blog, you know that the SHAMAN has passion about demand signal management.  It took a lot of energy for me to stay mum and place my thoughts on mute, these were the answers that I would have given if I was presenting on the topic.

What is the purpose of the application as you have built it? How will the demand signal be used in other SAP applications?

The current application is architected to be an enterprise reporting solution. While the work with customers on reporting is promising, at the current time, SAP does not know what they do not know about how the demand signal and how it can be used.  The SAP team has the opportunity to transform ther applications within the SAP suite to make them demand driven<finally>.  The introduction of the Demand Signal product, will put pressure on SAP to redefine SAP APO DP (Demand Planning) and transform the demand signal into SAP APO PPDS (production scheduling).  In the launch, they will learn five things the hard way:

  • The Hard Work is not Done.  Retail data is dirty and requires transformation and synchronization.  There are three elements that must be synchronized: product hierarchies, calendars and item definitions.  Retail data cleanliness varies day to day. It requires knowledgeable intervention.
  • They will get Bad Data.  Consumer products data is also dirty. The product that is sold at the shelf does not match the back-office item master. To avoid paying slotting allowances many companies use old item definitions at retail to introduce new products.   The signal will require translation. Each customer’s challenges will be different.
  • Reporting is not Reporting.  The data needs to be visualized in role-based definitions that are quite different for sales, category management and supply chain leaders. This will require some extensive work to define the user views.
  • It will Require Predictive Analytics.  The right mix of demand data –store level data, retail warehouse replenishment, perpetual inventory signals, manufacturing inventory signals– will change based on the level of demand shaping and market pull.
  • Change Management issues Abound.  Syndicated data is dirtier than the consumer manufacturer would like to admit.

Does this replace Relational Solutions or Retail Solutions?  (There are two RSIs in the market.) Or Market6? 

The short answer is NO.  I would not recommend replacing sales account team reporting systems with the new SAP Demand Signal Management product.  My logic is based on many reasons. 

1) The current technologies within the sales account teams are defined to translate the downstream data for a specific retailer into usable formats for the sales account team.  They are very “retailer specific.  While SAP has done work in the area of retail definition, this still needs testing.  Sales teams will not be patient for testing. 

In the short-term, I recommend layering the SAP tool on top of these sales account team specific databases and using them as inputs into demand signal reporting for the enterprise.  E.g. Synchronization of signals from multiple channels and multiple retailers into a common format augmented with user-based content.  The goal is to get a common view of what was sold when, but to augment this with user-based content to better understand the why.  And, why would companies want to do this?  The business benefit is in decreasing demand latency.  This tool, after evolution and stabilization, should be able to bring a consolidated view of what is sold when and why to the enterprise user two weeks earlier than a report based on syndicated data or the recognition of a pattern in order data.  Companies that understand why the order signal is not a good signal for demand are SAP’s best prospects.

I am also excited about the predictive analytics on shelf sensing for out of stocks that is happening with Market6 and Vision Chain.  Over time, this type of predictive analytics will drive decisions for the sales teams.  SAP has deep work to do in this area.

In time, after testing, consider replacing the sales demand reporting tools. 

What does this mean for my relationship with Terra Technology?  SmartOps?

In 2012, I believe that SmartOps and Terra Technology will become direct competitors.  SmartOps has a tighter relationship with SAP, and companies that have a preference for SAP partners will start development work with Smartops on the use of the demand signal for demand sensing.  I believe that this will  put pressure on Terra Technology to build a more complete solution.  The market for demand sensing applications will become more mainstream. 

As companies go through the holy math wars, buyers should harken back to the advice that Dick Clark, now deceased and previously Demand Planning Global Process owner at Procter & Gamble once said at a conference,  ”The wrong appproach with the right math is bad… and with the wrong math disasterious.” Companies that do not have a demand sensing application should make their decisions based on proof of concept pilots and client references.

How does this redefine your relationship with Vision Chain (previous partner).

The partnership with Vision Chain was opportunistic.  It did not do much for either company, and the freeing of Vision Chain from the chains of the SAP partnership will allow them to do deeper client work out-of-stock sensing and develop mobile applications for market execution.  Vision Chain had a good year last year.  I believe that it will have no impact on Vision Chain’s viability. 

What is the cost of the product?

This is unknown.  However, the Shaman expects that it will be expensive.  The four letters of HANA usually translates to multiple zeros at the end of the quotation. 

In summary, I believe that there is too much at stake in this release for SAP to make it a “flash in the pan”.  While Oracle attempted to bring a DSR to market three years ago, and has gotten no adoption, I believe that SAP will define the true “enterprise” DSR.  It will take time.  And, there will be a number of redefinitions of products along the way.  It has been too long coming.

What do you think?

I will do a similar posting on SAP’s S&OP release in a couple of days and then share some exciting research from my book before I go to the SAP Insider event.  Will I see you there?