S&OP

Talk Doesn’t Cook the Rice

by Lora Cecere on April 14, 2013 · 1 comment

As they say in Mississippi, “Talk doesn’t cook the rice.”  The essence of this colloquialism is that words have to be converted to action.

It seems like yesterday that I transitioned to become an industry analyst. I have worked for Gartner Group, AMR Research, Altimeter Group and now my own company, Supply Chain Insights. I have now been an industry analyst in the supply chain management space for ten years. In this time, I have worked with over 500 companies. I have heard presentation after presentation on supply chain excellence, and I have heard industry leaders wax eloquently on how their supply chain objectives have improved value. I was surprised as I have evaluated balance sheet progress of these leaders over the course of the last year.  For many, I am afraid that these words never get converted to action. I am afraid for many it has been just talk.

This month, I am proud that the Supply Chain Insights team will announce the Supply Chain Index. The Supply Chain Index is a formulaic representation of supply chain excellence based on market valuations. It will be launched during a webinar on April 25, 2013 and through a series of reports that will run in our May newsletter and throughout the summer. Here, I would like to share some background information on the Index and how I intend to use it in developing a higher level of research.

How was it developed? Over the course of the last year, Abby Mayer (@indexgirl) worked with the Supply Chain Insights team to build a database of 20 years of information with over 50 supply chain financial ratios. To understand supply chain excellence, Abby and I have been studying pattern recognition for industry peer groups at the intersection of the metrics in the Supply Chain Effective Frontier of growth, profitability, cycles and complexity. (Based on inquiry, we do this analysis free of charge for members of our Supply Chain Insights Community.)

We have performed over 50 analyses for companies. Each time that we run a new evaluation, we learn more. As a result, we have built a database of how companies have made trade-offs on financial ratios over the last decade. This analysis has been fun and insightful. However, we have found that only a few companies are improving the potential of their supply chain to balance supply chain metrics.

How is the Supply Chain Index different from the Supply Chain Effective Frontier?  Last month, we decided that it was time to take this analysis to the next level. We feel that it is not sufficient to just plot the patterns at the intersection of the Supply Chain Effective Frontier (the balance between growth, profitability, cycles and complexity). But instead, a additional need existed to build a formulaic representation of market valuation. We are using data from ycharts.com based on Morningstar sectors to build a formulaic representation of market valuation for over 35 industry peer groups. We find that each peer group has a unique equation based upon what drives value in their specific value chain. While we have known this empirically, it is fascinating to see the differences between industries and across value networks. (A value network is a group of companies that trade together to satisfy a market need. An example is retail/consumer products/chemical/transportation or hospital/pharmaceutical companies/medical device companies/medical distributors.)

How does the methodology compare to the Gartner Top 25. Why do we need a new Index? This methodology differs in a number of critical ways.  We hope that it provides new and critical insights for the supply chain leader. We believe that the Gartner Top 25 is flawed in three primary ways:

  1. Value chains are not created equally: You cannot put all companies in a spreadsheet and shake them up. Each company and value chain has a different value proposition. The Gartner Top 25 methodology, by definition,  is biased to reward the high-tech and electronics industry. As a result, asset intensive companies or service providers will never do well via this methodology. We believe that companies need to be compared within their peer groups.
  2. A long-term view of leadership is needed: We believe that the data needs to be based on a longer time horizon than three years.  Supply chain excellence happens over the course of many years, and the relative positions of companies, and the movement over the past decade, is just as interesting as the index itself.
  3. Objectivity: We are correlating the formula based on quarterly stock market valuation data. We want to understand the differences between industries, and across value chains, to help teams better align and to improve collaboration between trading partners.
  4. A fit for all companies: The Gartner 25 is limited to analysis of only large companies (Fortune 1000). This new analysis allows us to compare all companies.

How will we use it?  It is our goal to use the Supply Chain Index in four different ways. It will become one of  the cornerstones of our research.

  • Discovery: It is our goal to tie financial balance sheet data together to quantitative surveys and do a deep analysis on supply chain excellence. We are busy trying to figure out what practices and technologies drive supply chain excellence.  So after we announce the Index, all publicly held companies will be given an index factor, based on annual performance, and grouped into segments based upon maturity.  We will then use this as a comparison table to understand the processes and technologies used by more mature companies.
  • Selection of our Global Summit speakers: On September 11-12, 2013, we will be holding our first Global Summit.  The companies that have performed the best on the Supply Chain Index will be selected to be our speakers.
  • Supply Chain Strategy Sessions.  The sharing of performance on the Supply Chain Effective Frontier helps companies to understand their performance against their peer group and the overall trends of the market. Similarly, the Supply Chain Index allows companies to better prioritize strategies.
  • Publication of our next book. We plan to release two epublications this year; one on Supply Chain Metrics that Matter, and the other covering the Supply Chain Effective Frontier and the Supply Chain Index. They will be digitally shared through Amazon, iTunes and other sources.

How can you and your teams gain benefit from this research? We hope that it can help you better define supply chain excellence, and articulate why supply chain matters.

We would love to hear your feedback and we hope to see you on our webinar to discuss the Index on Thursday, April 25, 2013. If you are interested please register for the webinar.

This month we are also completing three studies. We are continuing our practice of “If you give us 10 minutes, we will give you an hour.”  In short, if you fill out our surveys, we will share the results with you and your team on a one-hour call. These new studies will be the first where we will be able to complete the financial analysis and tie the Supply Chain Index to the quantitative analysis in each study.  We would love to have you participate.  The links are listed below:

S&OP:  A State of the Union.  Does S&OP improve agility?  Improve the ability of the company to better compete. Understand where you are on maturity and how S&OP improvements can help your company.

Alignment: Where are we on supply chain functional alignment?  For leaders in corporate finance, Information Technology, corporate sustainability and Supply Chain.  Understand where you are against peer groups on supply chain alignment.

Healthcare: How Do We Heal the Healthcare Value Chain.  For manufacturers and distributors of pharmaceuticals, medical device components, healthcare providers and consultants in healthcare. A look across the value chain on how companies can align to improve patient outcomes.

In closing, I want to thank you for your support of our Open Content research model.  We look forward to sharing more with you on the Index and why supply chain excellence matters to balance sheet results.  After all, we all know that it take more than words “to cook the rice.”

 

Epitaph

by Lora Cecere on March 3, 2013 · 0 comments

epitaph n.  An inscription on a tombstone in memory of the one buried there.
 A brief literary piece commemorating the deceased.
A final judgment on a person or thing.

  Here lies EIEIO, EIO, MEIO, DIO, Powerchain and all of their descendants.

At the beginning of the third decade of supply chain management, a new class of applications was born. They were born from well-intentioned, bright professors from great schools –Boston College, Carnegie Mellon, and Massachusetts Institute of Technology (MIT)– in operations research. Each had cool math and wanted to make a name for themselves… as well as a couple of bucks along the way.  They knew little about the software market.

Today, I write the epitaph for this market. It was called multi-enterprise inventory optimization. It is no more. The players have now been absorbed into the larger ecosystem.

In the beginning, the inventory management solutions of LogicTools, Optiant and SmartOps pushed to take operations research to a new level through supply chain optimization.  As the leaders in the Advanced Planning Solutions (APS) market consolidated, and innovation slowed, the new inventory management startups brought energy into a market that was losing its luster.

Last week, one of the last survivors from the software inventory optimization software market ceased to exist as a stand-alone software company. SmartOps was purchased by SAP. Like its predecessors, LogicTools and Optiant, the company stopped functioning as a stand-alone software provider due to acquisition. If you do a google search, you will find lots of accolades and positive press on the acquisition of SmartOps by SAP, but the Shaman is a skeptic.

SmartOps entered the supply chain optimization market in 2000 and became an SAP partner in 2006. The press release last week cited the reason for the acquisition, “…as part of the strategy to build a real-time optimization solution for S&OP on SAP HANA.  SAP released an S&OP solution using HANA in 2011. (For more on this announcement reference the Supply Chain Shaman blog post, Third Time the Charm?) However, the picture is not that rosy. For more, read on….

Background

When I became an industry analyst at AMR Research, I was told that I needed to write about this “hot market”  of inventory optimization. I shrugged my shoulders and asked myself, “Why?” The market seemed ancillary to the larger supply chain planning market, and I expected it to be short-lived. I should have followed my intuition. Against my better judgement, I wrote two reports and many alerts over the course of five years on the multi-enterprise inventory optimization market. This market shone brightly for only five years before it was extinguished by its own flame.

The sales cycles were heavily contested. They were brutal and bloody. The solutions were expensive. Over the last decade, I helped many clients navigate what I termed the “holy math wars” that were brought to market by these well-intending professors.

Results stagnated. Over the course of the decade, the inventory optimization market stalled. Levels of inventory did not go down, and many companies began to question the value of the software.  Only one out of every ten customers, that I helped in sales cycles, were able to optimize and reduce inventory through the solution. They were the exceptions, not the rule.  Only companies like Stanley Black and Decker, Hewlett-Packard, and Procter & Gamble were able to realize the value proposition. The problem was seldom the math. The problem was larger and rooted in organizational issues. There were three common characteristics for failure:

  • Fit. The capabilities of the technologies were often more advanced than the processes of the manufacturers and retailer. As a result, the technologies were implemented, but they were not sustained. In fact, 25% of the companies actually installed multiple inventory optimization technologies with all projects suffering the same fate.
  • Focus. To use the software there needed to be a shift in understanding.  The processes were more mature. The focus needed to shift from looking at inventory levels versus the form and function of inventories.
  • Ownership.  In the organization, no one individual owned inventory in the organization. Instead, it became the outcome of multiple functional decisions and processes. It was a piece of a larger puzzle.

What Can We Learn?

At the end of the day, I wanted to use this as an opportunity for reflection. I think there are four things that we can learn:

1. Inventory Optimization Should Not Be a Stand-alone Market. Inventory decisions are more important, but they are not stand-alone.  Inventory is now the primary supply chain buffer. Why?  In the beginning, when manufacturing was insourced, there were two supply chain buffers: manufacturing and inventory. With the outsourcing of manufacturing, inventory became the buffer for both demand and supply volatility. As a result, inventory decisions became more important, and more intertwined with other supply chain processes. This advanced math needed to be a part of the next generation of supply chain decision support applications. It was not a stand-alone solution.

While it was sold by SAP to overcome the deficiencies of SAP APO, it could not overcome the inherent limitations of APO.  Instead, the first generation of supply chain applications needed to be rewritten to encompass this higher level of planning. Perhaps, this will be the outcome of the acquisition, but the question is “have manufacturers lost so much faith in SAP to give it a chance?” Or will the story be written by new players?

2. Overhyped Markets Eventually Fail. To Be Sustainable There Must Be a Sustaining Value Proposition.  As analysts, we tend to fall in love with the newest thing and write about it. There needs to be more discipline to validate and write about actual results. It was only after the building of the database to understand financial ratios at Supply Chain Insights that I could actually track the progress of companies using the software.  It took me a year to analyze companies with and without the use of advanced inventory optimization software solutions.

However, there is a problem. In the traditional analyst model, I would not be able to write about these results. In these more traditional models, it is easy to publish good news (posts that support the positioning of the technology vendor), and more difficult to publish the “bad news” (writing that does not support the positioning of the technology vendor). As I look at this history, it makes me believe more in the model of open, objective research. It is much easier to write this blog than the prior research studies that I wrote in previous analyst roles.

3. Software Acquisition Only Benefits the Founding Company. While press releases and articles tout that the purchase of software will yield great results, history shows that the only people who win in the acquisition of a software company are the founders of the company being acquired. The users of the software often find that the acquisition slows innovation and product delivery and causes employee turnover of key resources in the company being acquired. The software users of the SmartOps solutions need to be very diligent in protecting their solution investments through the acquisition.

4. Failure of the SAP Partnering Ecosystem. Originally, the gems of the SAP Ecosystem were the players in the inventory optimization market. On the original announcements, there were to be four partners, and SAP was committed to making them equally successful.  At the end of the day, SAP supported SmartOps and the rest of the partners floundered.  If the measurement of a successful partnership is the success of the partner,  it is hard for me to find any successful SAP partnerships in the supply chain management space.

Summary

So, as we gather together for the WAKE for the Inventory Optimization market, we can share lots of stories. The founders of this market were colorful and full of vision. The stories are rich. There are many tales to tell.

Tonight, I propose a toast. May this vision take shape in the next generation of solutions.  I just have my doubts that we should place our bets on SAP to deliver it.