Bookend: be positioned at the end or on either side of (something)
Today, I published a new report on supply chain excellence. To prepare the report, I worked with Abby Mayer ( @indexgirl ) to analyze ten years of supply chain financial ratios. We waded through spreadsheet after spreadsheet of data for the last three weeks and contrasted the progress of the high-tech, consumer products, food, pharmaceutical and industrial industries. The storyline of the report is that ONLY the high-tech industry is making progress on the Supply Chain Effective Frontier (effectively balancing progress on growth, profitability, cycles and complexity simultaneously). The rest of the industries are either stuck or moving backwards. Consumer packaged goods (CPG), food and chemical manufacturers are stuck and pharmaceutical and industrial companies are losing ground and moving backwards.
As I worked with the data, several stories emerged in parallel to the main theme of the report on supply chain resiliency and the progress (or lack thereof) of companies on the path to supply chain excellence. One story that stands out for me is the race for supply chain excellence within the CPG peer group. It is a very competitive set of companies.
Overall, as shown in table 1, the CPG group composed of Church & Dwight, Clorox, Colgate, Kimberly Clark, Procter & Gamble, Reckitt Benckiser and Unilever, is facing slower growth. With rising commodity prices, increasing complexity of the product portfolio, and escalating costs for transportation, the companies in the peer group are fighting to reduce costs and protect market share.
As an industry analyst, over the course of the last ten years, I have worked with all of these companies. In the process, because I had not done an in-depth analysis of their progress on what I now call the Supply Chain Effective Frontier (performance on driving growth, reducing costs, improving cycles and managing complexity), I saw each of them as equals. They are not.
The analysis is tough. This data is hard to get. I am only able to do it now because we invested in systems to analyze financial supply chain ratios at Supply Chain Insights. And, behind the curtain, cranking the numbers is a researcher to help me. I give thanks for Abby Mayer’s patience in working with me to run study after study to compare the data.
Who Did It Best?
As I write this, I hang my head. Over and over again, over the course of many years, I have heralded the progress of Procter & Gamble (P&G) on revenue/employee as a characteristic of supply chain excellence. As I wrote and pushed forward these ideas, I was challenged by Mark Vollrath, of the Colgate team, on the analysis that I was doing. He pushed back and asked me to look beyond productivity. After an in-depth analysis of the data over the course of the last three weeks, on ten years of financial ratios, I see his point. (I know, I know. I can be hard-headed at times.) I now believe that the choice of Colgate versus P&G as the winner on supply chain excellence is based on what is valued. If productivity is valued, the choice is P&G. If the definition is the balancing of costs and inventory, the winner is Colgate.
However, what is now clear to me is that whatever the evaluative metric, Unilever is at the bottom of the CPG peer group and should never be seen as a supply chain leader. Unilever is at the bottom of the list in driving performance improvements in productivity, cost, margin, inventory performance, and growth. The only improvement was an extreme increase in Days of Payables that improved cash-t0-cash, but weakened their suppliers.
In table 2, I share insights on progress that the two companies made in the last two years. Unilever is roughly 4X the size of Colgate. In 2011, Colgate had revenues of $16.7 billion and had 38,000 employees. In contrast, in 2011, Unilever had revenues of $64.6 billion and had 169,000 employees. They have some commonalities: both of the companies operate global teams and each defined their supply chain organizations at about the same time. However, as anyone that has worked with both companies knows, they are VERY different cultures.
When I first started working with Unilever in Europe, the teams would laugh that you could not work at Unilever without the ability to have a spirited debate. They are right. The Unilever teams in the United States used to laugh that it was hard for them to sort through all of their “science projects,” while the Colgate teams were focused on one or two major objectives. The teams are composed of very smart people; however, they have always struggled to gain the same recognition of supply chain excellence at the board level that Colgate and P&G were able to enjoy much earlier. Unilever also relied heavily on strategic consultants and they started many waves of independent projects. Colgate, on the other hand, was largely driven by internal leadership with a conservative focus on supply chain basics.
The definition of global was also quite different for the two companies. For Unilever, the regional teams operated with a strong independent spirit. Each region had a high level of autonomy. As I worked with them, I watched the Indian Unilever team gain a strong market presence as the market stature of the United States declined. Colgate, on the other hand, operated with a stronger global hand. The goal of Colgate was to get regional input, but manage a global brand presence. The focus was far more multinational.
When the Great Recession of 2007 hit, Unilever went through a massive restructuring with a series of multiple layoffs. Suddenly, inventory management became very important, and the teams got serious cross-functionally at the management of working capital. Colgate, on the other hand, withstood the market shocks better than Unilever, and continued to build talent systems. The Colgate team focused on a common IT architecture while the Unilever team allowed more freedom for project-based and functionally-driven IT decisions.
When I compare these two companies to their peer group, I see two bookends. Over the course of the decade, Colgate maintained margin of .21 against an industry average of .16 and drove a high return on assets (ROA) of 18% against an industry norm of 11%. The team continued to reduce costs through the recession. The Colgate team achieved better growth and better margins with less inventory than Unilever (the average days of inventory for the peer group is 59). They performed better than their peer group on growth. In contrast P&G, often touted as the CPG leader, had an average operating margin average of .18, a ROA average of 9.5%, an average number of days of inventory of 65 with a growth rate of 7%.
This is sharp contrast to the rankings when you study the three companies’ performance on improvements on productivity over the last decade as measured by revenue/employee. The CPG average was $443,000/employee. P&G was the industry leader with an average of $532,000/employee. Colgate was under the average at $352,000/employee, and Unilever was the laggard at $259,000/employee.
So, in conclusion, when I use a more holistic measurement of supply chain excellence as managing the trade-offs of growth, profitability, cycles and complexity, I believe that Colgate and Unilever form the bookends of the CPG peer group. Colgate should be given the award for excellence and Unilever ranks at the bottom of the pack. Sorry, Mark. I think that you are right. This is a much better view of supply chain excellence than the easier metric that I used previously of revenue/employee.
My take? It is easier to say “supply chain excellence” than to define it. The definition varies by organization and too few supply chain teams stop to analyze the potential of their supply chains and their progress on the Effective Frontier of managing growth, costs, complexity and cycles. It is for this reason, that I wrote this new report, What Drives Supply Chain Excellence: A Look Back and a Look Forward. Let me know your thoughts when you read it. As an old gal that has been studying this subject for the past ten years, the more that I study the subject, the more I learn. I share my insights to help you learn with me.
What do you think of my analysis? I look forward to your feedback.