The End of a Fairy Tale. Part 2.

by Lora Cecere on January 14, 2013 · 5 comments

Usually in a fairy tale there is a big, bad wolf… or a hairy monster.  One that is going to eat you up!

In part one of this blog series, I started the saga of the supply chain fairy tale.  It was a story where people believed that functional excellence leads to supply chain superiority. Year after year, well intentioned people toiled against improving metrics that reduced, not improved, the effectiveness of the supply chain. The example that I give in the first post is the focus of manufacturing strategies to drive strong results to improve Return on Assets (ROA) that have actually caused a deterioration in operating margin. For the supply chain traditionalist this may seem counterintuitive, but I make the argument that three primary factors have changed– go-to-market strategies,  cost inputs and the basic rhythms and cycles of the supply chain –and, that there is a need to manage the supply chain cross-functionally to drive end-to-end progress. I strongly feel that a blind focus on functional excellence will cause the supply chain to become out of balance.

Here I want to make the argument that the big bad wolf that is swallowing up the supply chain is investment in traditional technologies that were primarily designed to improve manufacturing decision making processes by reducing only manufacturing constraints. I feel that there is an opportunity cost to the organization to work on their third or fourth ERP upgrade and look blindly, and only, at analytics from the ERP vendor. Instead, I would like to see companies invest in new forms of analytics to better use existing data. The argument that I want to make here is that the supply chain problem has changed, but we are implementing the same old technologies without stopping to realign against new goals. Here is my argument.

Based on recent research, today, over 90% of companies have an Enterprise Resource Planning (ERP) system and an Advanced Planning System. These technologies are mature. We are in the evolution phase of user-based enhancements. The consolidation of this industry has served the technology providers well, but has largely stymied innovation. Yet companies are still investing millions of dollars in these upgrades. I feel that many of these technologies are now legacy.

I feel that continued investment in multi-year ERP systems is the big, bad wolf. The opportunity cost to an organization is huge. Based on the analysis of financial ratios, I can clearly see that companies with the best results on revenue-per-employee have strong ERP systems, but they have implemented once and have avoided multi-year evolution projects.  ERP is valuable to improve transactional accuracy, but I can find no evidence that  investments in ERP  have reduced inventory or improved cash-to-cash cycles. I believe that the ERP and APS systems that were developed in the 1990s are now largely legacy applications.  I also believe that companies should stabilize their investments in these technology areas and begin to push the acquisition of technologies that can better align with the organization’s need to reduce operating margins, absorb volatility and drive agility.

While some would point to companies like Amazon and Apple as examples of how to solve this dilemma, I think not. Don’t get me wrong. I like Amazon and Apple, and I admire the leadership within each of these companies that had the courage to redefine business models. For most companies, the use of supply chains to redefine business models is not a current reality. They see supply chain as a function within the organization not supply chain as a way of doing business. They do not have the power to redefine business systems to be an Apple or an Amazon. So, to hold up Apple and Amazon as points of light to help companies go forward is a bit like saying that Lora Cecere will be the February Cover Girl model on Vogue magazine. You got it! It is a low probability that this will ever happen.

Table 1.  Ten-year averages – food manufacturing companies

Figure 1.  Metrics comparison of Kellogg Co. vs. General Mills, Inc.

A Case Study

As a researcher, due to merger and acquisition activity, it is getting harder and harder to compare companies.  The peer groups are growing more and more complex. It is tough to compare conglomerates, and I do not believe that you can put companies from all industries in a spreadsheet and shake them up. Instead, I think that the best insights come from comparing peer groups. In table 1, I compare ten-year averages (2001-2011) for food manufacturing companies. In this industry, operating margin has decreased by 1%, Return on Assets has decreased by 2%, SG&A margin has increased by 1%, and days of inventory has increased by 3%. The only good news is that revenue/employee has improved by 29%.

The answer is not to be like Amazon or Apple. I think that the answer is to be more like General Mills. Note in the figure above how General Mills has improved operating margin for the past three years.  I compare General Mills to Kellogg to give some contrast. Over this period, the cereal business has been hard hit by commodity price increases and private label.  Corn and oil have tripled in cost. Both are more volatile.

So why has General Mills been able to increase operating margin, and the peer group has not? The reasons are many; but, I think one of the core reasons is General Mills is good at supply chain planning. They are not only near the top of their peer group in forecasting, but they use their forecasting analytics to drive better plans. They have become best-in-class at network design and they are very active in the use of advanced technologies for inventory optimization. Unlike many companies that buy technologies for a project and then do not use them, General Mills has built the teams to actively model demand and supply and drive better results.  They have had the courage to give up ROA to drive better operating margin.

Where to Invest?

So, if you are a supply chain leader, what do you do? Where do you invest? I feel strongly that the answer lies in the use of new forms of analytics for network design, demand and supply sensing, supply chain visualization, demand orchestration (horizontal orchestration of demand and supply variability for price, material substitution, and alternate sourcing), and the use of listening posts to better understand unstructured data from the channel.

It cannot be a fad, it needs to be part of the DNA. Multi-tier inventory optimization was a fad in the last decade. It was overhyped and largely underdelivered. Unfortunately, I see that many companies have invested in inventory optimization and have not reduced inventories. The answer is a lot like why people do not lose weight on diets. It takes commitment, hard work, and discipline. These are three characteristics that elude many organizations.

In closing, I want to leave you with a couple of thoughts. There are many technology vendors that will knock at your door, and your day will be packed with meetings, but stay focused on what matters. Our goal in the supply chain was to reduce costs, improve customer service, reduce inventories and drive growth. Over the course of the last decade, we have gone backwards not forwards. I think that we need to hold ourselves accountable to financial results. I think that it takes new forms of analytics to push us off of this supply chain plateau. However, it has to be part of the DNA: it cannot be a fad diet.  Let me know what you think.

I Believe We Have Reached The Supply Chain Plateau

by Lora Cecere on January 13, 2013 · 2 comments

A plateau: a period of stability with no change

Last weekend, I wrote two reports. They published this past week. In the first report, I rolled up my sleeves and analyzed balance sheets of process companies over the past decade with Abby Mayer (@indexgirl). In the process, I discovered that the average process manufacturing company has reached a plateau in supply chain performance. Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%.  While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.

As I wrote the report, I started thinking about all of the supply chain conferences that I have attended where supply chain leader after supply chain leader has stood before an audience and declared that they had reduced costs, improved inventory and improved customer service levels.

While I believe that individual projects may have had these results, it did not make its way to the balance sheet. I believe that we have reached a plateau and that supply chain performance is declining. One of the primary issues, shown in figure 1, is the executive team’s understanding of the supply chain. Over the past ten years complexity has increased, and many well-intentioned executives lack the understanding of the supply chain’s potential or how to manage the supply chain as a system.

A Need to Rethink Technologies?

In the second report, I wrote about the current state of supply chain technologies. The greatest gaps are in the areas of the greatest importance. Companies are the happiest with supply chain execution systems, but the gaps in supply chain planning are high, and the ability to use the data from ERP and order management remains a gap.

The good news is that companies are increasing their spend on supply chain solutions. The bad news is that there are major gaps in the solutions where they want to invest. It reminds of the old Turkish proverb, “No matter how far you have gone on a wrong road, turn  back.” I think that this is true.  In my last post, The End of the Fairy Tale, I shared insights on the changing drivers within the supply chain and the need to rethink metrics and business goals. The fundamental design of supply chain systems has not changed since the mid-1990s despite the evolution of greater computing capabilities and the change in the business problem within the supply chain. The process requirements have changed in five fundamental ways that are not reflected in the software:

  • The move from vertical to horizontal processes. There is a need for automation and new forms of predictive analytics to power horizontal processes. The need to automate revenue management, social responsibility, supplier development and Sales and Operations Planning (S&OP).
  • A need for new forms of analytics to sense using structured and unstructured data. Today’s supply chains respond. They do not sense.  As a result, the response is usually late. There is a need to use unstructured text data  mining technologies to listen and learn.
  • Inter-enterprise solutions using cloud-based computing. The supply chain is slowly adopting new forms of cloud-based computing to align and synchronize.
  • Movement from Inside-out to Outside-in. The traditional supply chain planning systems primarily use orders and shipment data for planning. There is a need to redesign the technologies to use channel data market-to-market to sense, shape and drive a more flexible response.
  • Visualization and better use of data. The traditional definition of supply chain planning was data intensive and insight poor. There is an opportunity to build a new generation of applications using new forms of mapping and visualization to drive new insights.

Today, we have the evolution, not the reinvention, of current systems. Vendors are consolidating and innovation is largely absent. The other day, I was reading about IBM in 1964, and the introduction of the IBM 360.  The IBM 360 was a tough decision for Thomas Watson because it made the prior computers obsolete.  The APS market needs this type of leadership. I think that there is a discontinuity and we need to declare the APS and ERP systems of the 1990s obsolete and start again. I think that they are legacy. What do you think?