What I Have Learned About Supply Chain Excellence

by Lora Cecere on August 18, 2012 · 1 comment

I go back and forth. At times, I reflect on how fast things have changed; while at other times, I struggle with why supply chain processes cannot happen quickly enough, and be transformed faster. For me, it is a conundrum. I have been studying this for the past nine years.

I have decided that I think it is much like this picture of a man on a moving sidewalk. As we push forward, the supply chain processes are slowly evolving, and propelling us forward, but we are moving at a faster pace.

After a year of studying supply chain excellence for the book Bricks Matter, I do not think that we have BEST practices. Instead, I think that we have EVOLVING practices. Here I want to share my insights.

What Is Supply Chain Excellence?

After studying supply chain excellence for a year, I do not think that companies can start with process. I think that the application of generic processes without a sound understanding of supply chain strategy has been a mistake for many companies.

I believe that the best companies propel themselves forward with a clear understanding of supply chain strategy, a well-defined multi-year roadmap, and an unobstructed view of how to make trade-offs on the supply chain effective frontier shown in Figure 1. They invest in talent and they have a sound understanding that the best supply chain is not the most efficient. Instead, they understand that the most effective supply chain balances the trade-offs of growth, revenue and costs while managing working capital, corporate social responsibility and asset strategies. These trade-offs are made based on the corporate strategy.

Companies that shine and are good at delivering value through their supply chains focus on the trade-offs at the top of Figure 1. This is in contrast with companies that are laggards and only look at the waste, or the symptoms of poor performance at the bottom of this figure.

Leaders understand there needs to be balance and that the policies for channel strategy, product portfolio management and supplier development strategies make a difference.  They also understand that supply chain excellence requires the mastery, or the knitting together, of complex processes into a complex system. As shown in Figure 1, it must be managed as a complex system.

My Frustration

In the past month, I have worked with multiple companies that believed that they had a clear understanding of supply chain excellence, but they were only looking at a limited view of manufacturing or procurement excellence.

I am frustrated because there are many companies that proclaim to help companies improve supply chain excellence.  When I visit manufacturers’ companies and see these consulting surveys; I see poor work, over and over again, on supply chain benchmarking. I believe that 90% of supply chain benchmarking efforts are fundamentally flawed in three ways:

  • Self-reported Data Is Inaccurate:  Any time that you have self-reported data on forecast accuracy, customer service (on-time delivery or perfect order) or manufacturing reliability, expect problems. Each of these measurements lacks a clear industry standard for reporting; and, as a result, are based on very different definitions. In addition, based on real-world experience of supply chain benchmarking, there is usually a positive organizational bias to overstate results in each of these areas.
  • Peer Group is Essential:  I believe strongly that supply chains must be compared by peer group. You cannot put all supply chains in a spreadsheet and shake them up.
  • Apples to Apples Comparisons are Fundamental: The data must also be from the same time period.  It must be current.

Making Trade-offs

As a result, I have started studying the financial trade-offs that companies have made in supply chain leadership by analyzing twenty-five years of financial balance sheets.  Working with Abby Mayer (Twitter: indexgirl), we have grouped financial ratios into four areas and we are studying company patterns on growth, profitability, cycles, and business complexity.  The financial ratios that we think matter are shown in the columns.

To understand supply chain excellence, we are plotting peer groups at the intersection of these metrics and attempting to tie this understanding to the maturity models that are built into our research studies. Please join us on a webinar on September 24 to hear more about our efforts. (Visit our website’s Webinar page for registration.) We believe that the companies with the best supply chains have three characteristics:

1) Positive System Momentum in Peer Group Performance: Each supply chain has its own unique potential, but the best supply chain has a positive upward momentum while balancing the trade-offs.

2) Balance: Supply chain leaders maintain balance of these metrics against a supply chain strategy.  They show positive momentum in peer group comparisons in each area.

3) Steady, Unfaltering Year-over-Year Progress:  The supply chain journey happens over many years. The best supply chains are reliable and able to drive year-over-year progress.

A Case Study

Consider the results of two competitors, PepsiCo and Coca-Cola. When comparing year-over-year revenue/employee to cash-to-cash cycles, PepsiCo (red in the figure) shows a positive trend (revenue per employee shows steady progress without swings in cash-to-cash cycles) while the Coca-Cola (blue in the figure) results are erratic. (Which is why I was amazed at the rating of Coca-Cola over PepsiCo in the Gartner Supply Chain Top 25.)

We are deep into this research. If you would like to see similar cuts for your company on these ratios just ask. Join the Supply Chain Insights Community launching on September 5th, and submit your request to Index Girl. We want to help everyone that is trying to understand supply chain excellence.

All we ask, is that you use that data to drive true improvements. Don’t get sidelined by defining supply chain excellence too narrowly, or being lulled to sleep by some consultant’s interpretation of self-reported data.

And just remember, we are all on moving sidewalks. Remember that it is a journey not a sprint, and be clear on the final destination.

 

 

 

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