Supply chain excellence

“Lora in your own way, you are helping. You tell it straight. You are pissy and opinionated in this world of supply chain blandness. I find it refreshing.”

Quote from a reporter this morning

The term supply chain excellence is easier to say than define. It permeates corporate strategy, but it lacks definition. I have been trying to define it as a supply chain analyst for over fifteen years. For some strange reason, it is a passion.

As a veteran of the go-go days of the hype cycle of Advanced Planning, I advocated that better planning improves corporate performance. As an analyst in the market for the past ten years (first with Gartner, then with AMR Research, followed by my work at Altimeter Group and now with my own firm Supply Chain Insights), I have stood in front of clients doing strategy days advocating “best practices” and I wanted to set the record straight.

When I wrote the book Bricks Matter, I wanted to write a celebratory book on why the adoption of new technologies and practices in supply chain had improved corporate performance. But the data could not support the promise. I wanted it to be data-driven. I had spent the last two decades in the technology market and I wanted to celebrate success. I could taste it. There is too much “yada yada” in the market. (I laughed at the quote this morning…)

So, I built a database of 20 years of supply chain financial ratios to try to find the correlation between the adoption of new technologies and the improvement on corporate performance, but I could not prove my hypothesis. Instead, what I observed when I looked at the data, was that most companies that I had worked with (in my role as an industry analyst, I had worked with over 300) were going backwards on margin and inventory turns. I found that nine out of ten companies were stuck. “Ugh,” I said. It was an awakening. As an industry analyst, in prior roles I had never had access to this data. We had always talked about the promise, but not looked at the reality. I believe that companies made progress in projects and drove short-term progress, but that it could not be sustained. I also believe that the rise in complexity eroded many results. (The rise in complexity happened faster than supply chain leaders could improve supply chain performance.) My question was, “What do I do now?”

I believe it in the toes of my feet and the DNA in the cells of my body, but I wanted to prove it. So, this has been my two-year mission. It is my quest.

The Supply Chain Index

Yesterday, I published a report on the first piece of my definition of the Supply Chain Index which we will launch in April. This work is based on a collaborative project with Arizona State University. In this work, we have taken supply chain financial ratio data for all publicly held companies and analyzed the data for strength, balance and resiliency. In the Supply Chain Index, each publicly held company will be given a mathematically determined number for their performance against their peer group (NAICS code) for strength, balance and resiliency. The formula is:

Supply Chain Index= Strength Ranking + Balance Ranking + Resiliency Ranking +Peer Group Assessment

Strength will be defined as year-over-year performance at the intersection of Growth, and Return on Invested Capital (ROIC).  Balance will be the ability to manage a portfolio of supply chain ratios to maximize market capitalization. Resiliency is the pattern at the intersection of operating margin and inventory turns.  Strength, Balance and Resiliency will each count 30% of the total index with the peer-valuation counting 10%. The members of the Shaman’s Circle will weigh-in on the peer rankings.

I am looking at the data for 2000-2013 for several reasons. First, it is based on the belief that supply chain excellence takes many years. In the words of Marty Kisluik of FMC, “It takes at least three years to see results and five years to make it stable.” I heard this time-after-time in my interviews for the book Bricks Matter. I am hearing it again in my interviews for the book Metrics That Matter.

It has been a two-year research effort, and we are not done. We have had a lot of twists and turns, and lessons learned. We have stubbed our toes. One of my biggest lessons is that the devil is in the detail. It requires collaboration with great math minds to remove outlier data points, eliminate bias and ensure that we are applying the most current methodologies to the problem. I have loved working with Dr. George Runger and his team and give thanks to Mani Janakiram of Intel for introducing us, and for giving me some candid feedback that we needed deeper analytics help to complete our mission.

 Defining Resiliency

Yesterday, I published the report on Improving Supply Chain Resiliency. I define the resiliency measurement as the tightness of the pattern at the intersection of operating margin and inventory turns for the period of 2000-2013. My question for the Arizona State team was, “How do I best define a technique that can represent the randomness of this pattern?” I could see that the patterns were very random for some industries and not for others; and I could also see that the pattern was better for companies that I believed were supply chain leaders. My question was “How can I apply a methodology that would allow companies to measure resilience?”

The ASU team considered many different techniques and decided on the use of “mean distance” between each of the points over the period of 2000-2013.

Why is this important? Supply chain leaders want to deliver excellence. They are searching for an objective measurement that helps them to define “what good looks like.” They are a competitive group and want to track their own performance. I believe that supply chain leaders are charged with the delivery of consistent and reliable results at the intersection of operating margin and inventory turns, and most companies are not very reliable.

A Closer Look at Resiliency

Industry performance on resiliency is quite different. As you look at the data, consider how foolish it is to put all industries in a spreadsheet and shake them up. The data sets are quite different in both the mean, the range and the standard deviation. As shown in the data below, the most resilient industries are medical device and consumer packaged goods. And, as shown in our prior reports, the variation in contract manufacturing and third-party logistics providers should be a stay-awake issue for companies worried about corporate risk.

I think that the marked resiliency between Samsung and LG Electronics is due to supply chain excellence. Samsung outperformed LG on operating margin, inventory turns and resiliency; but they are not comparable to P&G. The industry drivers are just too different. I also see it in the data between Stryker and Boston Scientific, Merck and Shire, Walmart and Target; and between Colgate and Unilever. But, I want you to see it also. For more on our analysis of resiliency, please refer to our recent report. Meanwhile, we will continue to define supply chain excellence, one column at a time.

So for readers that are holding your breath waiting for the Gartner Top 25 report in May, I would advocate that you start breathing deeply again, and reconsider the approach. The more that I work with the development of the Supply Chain Index, the more flawed that I can see that the work that I did at Gartner was…. I am embarrassed that I was ever a part of the methodology. I am also convinced that the supply chain leader needs a methodology that is:

  • -Widely Applicable. A methodology that can be applied to ALL publicly held companies. The Gartner Top 25 only looks at the Global 1000.
  • -Industry-specific. A technique that evaluates each industry. I firmly believe that you cannot put all industries in a spreadsheet and shake it up. I think that each industry needs to be evaluated separately.
  • -Longer-Term in Focus. I wanted a view that was  longer-range view than three-four years. My reasoning is that it takes many years to drive true supply chain performance.
  • -Encompassing. More encompassing of metrics beyond the growth, inventory and Return on Assets (ROA) metrics used in the Gartner Top 25. I think that the supply chain leader needs to drive strength, balance and resiliency against a business strategy.
  • -Objective. The Gartner Top 25 ranking has a high percentage of input coming from analysts and peer group rankings. While I do not know what it will be this year, in the past, the analyst ranking and the peer scoring have been 40-50% of the score. As a result, it becomes a popularity contest.

It is for this reason that I will continue my quest. I hope that you will join me to hear about the findings. We will be presenting the overview of the resiliency rankings on our webinar on April 24th and the complete rankings at our Supply Chain Insights conference at the Phoenician on September 9th-11th. If you would like to get the rankings for your company, just drop us a line. We look forward to helping you on your journey. I just think that we need an objective measuring stick.

For my prior views on the Gartner Top 25 and the work on the Index, please check out these posts:

What About the Supply Chain Index

Will Arrogance Stunt your Growth?

What I have Learned Working on the Supply Chain Index

Why I No Longer Believe in the Gartner Top 25

Writing: Working on My Book

by Lora Cecere on January 8, 2014 · 0 comments

 

“When I ask my team about customer service, I get high-five reviews. When I meet with my customers, I get thumbs-down feedback. I find the measurement of customer service to be one of the most difficult.”

Supply Chain Leader

Interview for Metrics That Matter

My kitchen table is piled high with interviews for the upcoming book, Metrics That Matter. The manuscript is due to Wiley on March 1st for an August 2014 publish date. I am behind. The heat is on. No backing out. I need it for my conference on September 10th-11th, 2014.

Writing a book is a labor of love. I wrestle with theme and content in each chapter. It starts with a blank screen and slowly starts to shape from my fingers. When I get stuck, I go for a swim. And, slowly through the repetition of the laps in the pool, I figure it out.

I love writing. It is an amazing process.

A 90,000 word deadline looms in front of me. I have working drafts of two chapters and two months to go. I can produce 3,000 words a day. I have completed sixty-five interviews. They all need to be approved by corporate communications departments. So, I have a couple of long months ahead of me. I will be in the pool a lot.

It is my second book. The research is the fun part of the process. I loved the quote that I captured today in my interview (see above), and I have enjoyed interviews with supply chain leaders like Peter Gibbons. To give readers a sneak peek for the book, here I share my interview with Peter.

As background, Peter Gibbons is the Executive Vice President, Global Supply Chain for Mattel, Inc. He is responsible for manufacturing, procurement, supply chain planning, logistics, quality, social responsibility and final product engineering.  He has more than twenty years of international experience. Prior to Mattel, Peter was the Executive Vice President of Global Supply Chain Operations for Starbucks where he was responsible for the supply of the products that contribute to the Starbucks Experience: from the supply of coffee, to the procurement of the cup, to delivering the table it rests on. Prior to joining Starbucks, he worked at the executive leadership level in Europe, Latin America and North America at ICI, a global chemical company. He joined ICI Fibers after graduating college. He holds an MBA from Strathclyde University and a B.SC in Physics from the University of Edinburgh. I recently interviewed him for my upcoming book, Metrics that Matter, that publishes in August 2014. Peter is one of sixty-five companies that I have interviewed for the book. Here is an excerpt from the interview.

Peter, thanks for joining us today. Which metrics do you think matter to supply chain excellence?

For me, fulfillment is the fundamental measure of end-to-end supply chain performance.  I believe that the challenge for the supply chain is to deliver exactly what the customer asks for the first time. Therefore I use the ‘perfect order’ metric to assess our overall performance and to “peel back the onion” and ask questions about what we need to do to satisfy customer requirements and demand. In my experience this has been a powerful metric to generate profound change.

Of course, the achievement of 100% ‘perfect order’ performance is not possible.  But, that is not the point.  It is a goal. We want to strive for ultimate performance to understand what needs to change or improve to allow our supply chain to satisfy customers – and some of those changes may have to come from the customer– to be reflected in how we manage demand.

I have come across customer service metrics and fulfillment metrics that overstate performance. Previously, we had a definition that did not truly reflect what the customer was asking for (example was case fill rates versus perfect order fill rates). Many organizations have encouraged allowances and adjustments that inflate the service numbers – all that does is create a false sense of organizational confidence and tension between Supply Chain organization and Sales and Marketing.

No matter the metric, I like to measure performance ‘in a manner that provokes improvement’ in a way that focuses on processes and not the people.  My mantra is ‘let the metrics measure the process but let the people improve it.’ As leaders, when we remove fear and instill confidence, it is easier to go fix the process.

 How do you define the metrics that matter? And, what have you learned?

There are three metrics at the core of how I lead supply chains: Safety, Customer Satisfaction and Total Delivered Cost.  Approached correctly, I have found them to be effective levers that get to the heart of how the supply chain is performing.

Safety is about ensuring your people go home after their shift as well and healthy as when they arrived.  It measures how much you care for your people, the control of your physical processes and the alignment of your leadership team.  It’s hard to be world-class at anything if you can’t be world-class at safety.

We touched on Customer Satisfaction already.  Considered broadly it becomes a lens for how you view quality, new product launches, product promotions, supply chain design changes as well as day-to-day business.  It measures if the end-to-end machine (the supply chain) is operating the way we need it to.

Total Delivered Cost means capturing the end-to-end cost of the global operation: inbound freight, material purchases, inventory losses, yield losses, internal and external manufacturing, distribution, inter-facility freight, outbound freight, overhead, duties, taxes, tooling, etc.  When it comes to the total supply chain costs, I want to measure the ‘global financial footprint’ and not be constrained by how the enterprise manages the accounting or the ownership of cost centers or legal entities. It is easy to become trapped in cost accounting and lose your way.

These three metrics can create transparency (‘how are we doing?’), the motivation to change (‘we can do better’) and the signal that we are making progress (‘results matter’).

Finally, over the years I have learned that while Supply chains are complex and dynamic it is best to keep things simple:

  1. Are our processes in control – are they reliable and predictable?
  2. Are we improving – are we delivering improved customer satisfaction, launching more new products, helping grow the company’s sales, improving our profits?
  3. Do our people think we are a good place to work – is their environment improving?

What do you measure for Corporate Social Responsibility?

The Mattel approach to Corporate Social Responsibility revolves around setting clear standards and strategic priorities to achieve our vision and engage cross-functionally to support the company’s business goals. When it comes to how our products are produced, our Global Manufacturing Principles (GMP) set these standards. Our CSR mission is: “Act with integrity in all we do to bring the world safe toys that grown-ups trust and children love. We are committed to positively impacting our people, our products and our world by playing responsibly.”

Over the past few years we have improved our tracking of key performance indicators, which has enhanced our abilities to inform business decision-making.

A good example from my previous role at Starbucks would be the Starbucks CAFE Practices (Coffee and Farmer Equity Practices), which was developed with an independent third-party. The ultimate metric of success used by Starbucks was the percent of coffee purchased from CAFE Practices verified farmers. When I left Starbucks, we were up to about 85%.  The program helped farmers improve crop yields, monitor water usage, share insights on the best way to fertilize the crop, and provided transparency on what we paid and what we purchased.

What have you learned?

It’s important to think about how best to align metrics and how you manage them with the culture of the company. Companies are different.

For example, ICI was a highly technical and analytic company.  So when we reviewed metrics, the numerical outcome (say 70%) was likely to be provocative.  We were driven more by trends and data; and less by emotion.

Starbucks was different. It is a more relationship-based company focused on creative outcomes. There, we talked less about the number and more about the impact on the success of the store employees.  Guaranteeing the right delivery every day to a store meant that when the store manager opened the store for business that they could focus on delivering a successful Starbucks experience to the customer. We wanted no distractions due to replenishment issues.

In short, every business is different. It is important to align with the key cultural and business drivers.

Finally, talent is the foundation of our success. I believe in investing in talent and developing people from the earliest stage of their careers. I also believe in providing challenging jobs and tasks early in careers. I want to make sure that entry-level supply chain professionals have “water up to their chins…” but no higher.

You build capabilities by stretching people in challenging assignments, and showing that you trust them and have faith in their potential.

Thanks Peter. I love the thoughts on the alignment of metrics based on business drivers and culture. So many times, clients call me to ask how to measure XYZ without thinking about these points. I appreciate you sharing your insights. I look forward to including your interview in the book. Right now, you are deeply nestled into Chapter 4.

I would love to hear from you on Metrics that Matter and your approaches to measurement. I have a couple more weeks to finish the interviews. Let me know if you are interested in participating.