Supply chain excellence

Taking the Hill

by Lora Cecere on May 14, 2013 · 0 comments

For most companies, growth has slowed. Profits are sluggish. Complexity reigns and cycles are longer. The challenges and opportunities of business are greater.  We believe that supply chain excellence helps a company to better balance demand and supply. We also believe that it helps companies to be more resilient:  weathering demand and supply volatility while maximizing opportunities and mitigating risks. We believe that supply chain excellence matters and is important to improving financial market performance. After a decade of investment, many companies are asking me, “How do I take this next hill? How do I push forward? What does the future of supply chain excellence look like?”  For many, despite spending 1.7% of revenue on supply chain applications, the promise of an agile, flexible supply chain that can respond as the business changes seems like an illusion.

This week, at Supply Chain Insights LLC, we published our 11th report in the series titled Supply Chain Metrics That Matter.  Over the course of a year, we analyzed a decade of financial data to gain an understanding of how companies and industry sectors are balancing growth, profitability, cycles and complexity. These reports are available in our community and on our website.

To write these reports, I work with Abby Mayer (twitter: @indexgirl), Research Associate at Supply Chain Insights. We start by analyzing industry sector progress on company growth, profitability, cycles and complexity. Using our database of financial ratios (shown here), we analyze company and industry sector progress over the last decade. Financial ratios allow us to analyze performance across the peer group (large against small companies) and across currencies. We look for year-over-year improvement. We also look for companies that have out-performed their peer groups. When we find these two characteristics, we interview industry leaders to analyze why.  We do not believe that there is much value in putting all companies into a spreadsheet and shaking them up… or looking at singular metrics without analyzing the intricate trade-offs of the supply chain when viewed as a complex system.

In developing the methodology for this series of reports, we defined supply chain financial ratios and tracked the progress of each industry sector in scaling what we term the Supply Chain Effective Frontier (carefully making trade-offs on growth, profitability, cycles and complexity to improve shareholder value in financial markets). The table shows the financial ratios that we work with. In many of our reports in this series, we show clear patterns of the trade-offs made between operating margin and cash-t0-cash cycles, and operating margin and revenue/employee. Three trends are clear:

The industries are not making equal progress.  Companies are competitive. They are constantly asking us “Who does this best? Which industry sector can we learn from?”  Through this series of reports, we now can see that consumer electronics has pulled ahead of the pack.  Consumer Packaged Goods (CPG) and chemical companies are close behind, but they are having difficulty “taking the hill.”  The hospital industry has made progress, while the pharmaceutical and medical device companies are stalled.  Apparel is actually moving backwards.

Companies that are good at planning—use of supply chain design and supply chain planning technologies—are outpacing other industries. Active management of value networks and scenario planning makes a difference. When companies look at singular metrics (labor costs or inventory), they have moved backwards.

There is no substitute for leadership. Industries that have formed cross-functional leadership teams combining source, make and deliver together have made the fastest progress. In parallel, when supply chain concepts are well-integrated into the design of trading partner relationships by both sales and procurement, there is an acceleration of value.  The trade-offs are easier and the value network strategies more straightforward.

Aligning metrics matters. Companies making the fastest progress have designed metrics to ensure that all functions are held accountable for operating margin, cash-to-cash cycles, growth and productivity.  When this happens, proxy metrics like Return on Assets (ROA), Overall Equipment Effectiveness (OEE), Days of Payables (DOP), Material Costs, Transportation Costs or Sales and General Administrative Costs (SG&A) can be discussed and trade-offs can be made easily cross-functionally. Functional metrics in isolation degrade value.

The gaps between industry sectors have widened over the decade. I have studied supply chain excellence for the last decade as an industry analyst.  As I write these reports and work with Abby, I am amazed how much these gaps have widened. It is clear basics matter.  Leaders manage the supply chain as a system and improve the potential of the system to make trade-offs. Laggards let the supply chain whip them around and make unconscious trade-offs through indecision. The gaps between the two have grown.

Supply Chain Excellence Matters.  In our work on the Supply Chain Index, where we are correlating progress on the Supply Chain Effective Frontier to financial market performance, we can see that supply chain matters. The leaders that have managed the supply chain as a complete system are able to achieve better financial market valuations.  We will be sharing more on the Supply Chain Index over the summer in our monthly webinar series with a final summary presentation at our Global Summit in September. It is exciting to see the correlations.

In closing, in our writings and our research, the term supply chain means the processes from the customer’s customer to the supplier’s supplier. Unfortunately, for many of our readers, the word supply chain is now a politically charged term. We find this unfortunate and often disheartening. The shift in definitions can be a barrier to driving progress.

How so? For software application providers, it is often reduced as a subset of applications. I find it sad, when I attend a conference where the term supply chain is only used to describe supply chain execution (SCE) or  advanced planning optimization (APS).   Likewise, I find it sad when I work with a company that had defined the supply chain organization very narrowly. It is often reduced to be the Supply Chain Department that has been functionally defined to ONLY focus on a part of the supply chain like transportation, customer service or distribution planning.  These limiting definitions confine the potential.

The companies that are the furthest along in “taking the hill” have a process manager focused on managing the “end-to-end supply chain.”  For these companies, the mission is clear.  There is no debate on what supply chain means. It is about the company’s ability to manage growth, profitability, cycles and complexity to improve the potential and capabilities of the company.  In the end, isn’t this what matters anyway? I have little energy to debate the term supply chain. I just want to get on with driving value.

We hope to see you on our upcoming webinar series as we share more on the Supply Chain Index.

I also hope that you enjoy the  Supply Chain Metrics That Matter series.  We enjoy writing them! We have learned a lot through this activity.

These reports will be the foundation of the new book that we are writing for 2014. We will release preview copies as ebooks over the course of the summer.

I will be writing the first draft of the manuscript on my way to South Africa on May 30th.  Talk to you soon! We will share the insights on the Index and the Metrics that Matter over the summer. And, we look forward to your feedback!

Public Markets Reward Supply Chain Alignment

by Lora Cecere on April 25, 2013 · 0 comments

Today, I am proud to launch the Supply Chain Index. It is my hope that the readers of this blog will take time to either join us today to listen to the launch of the Supply Chain Index on our webinar or listen to the replay. (We will make the replay available on our website and in our community within 24 hours.)

The Supply Chain Index has been two years in the making. The genesis started with the writing of the book Bricks Matter.  As I sat at my kitchen table, I reviewed spreadsheet after spreadsheet of corporate performance data on supply chain financial ratios. The relationship between corporate financial performance and supply chain metrics was complex; and in my first attempts, I was unable to derive a correlation. However, as many of you know, I am stubborn. I wanted to know more. I hungered to know the patterns. I was driven to find out which supply chain financial ratios really mattered to corporate performance and stock market valuations.

Why did I care?  The year 2012 marked the 30th anniversary of the use of supply chain management as a cross-functional process for source, make and deliver in the commercial sector.  I wanted the book to be a critical look at what we have accomplished as supply chain professionals during that 30-year period.  I feel that there is too little primary research in the area of supply chain management. I believe that there is more hype than substance in most supply chain writing, and that we have not held ourselves accountable enough to financial balance sheet performance.

When I started writing the book, I believed that supply chain process improvements had reduced costs, improved customer service, and increased invetnory turns.  Sadly, while writing the book, I found that this was not the case.  What I found was that we have improved employee productivity through the investment in processes and technology, but that most industries were stuck in their ability to manage the trade-offs between growth, profitability, cycles and complexity. I termed this concept the Supply Chain Effective Frontier. As I wrote about this concept, and worked with Abby Mayer (@indexgirl) to write the Supply Chain Metrics that Matter series of reports, I discovered more on the depth of the complexity. It has taken us eighteen months to build the database of supply chain financial ratios and find the patterns and start building the formulas.

My goal was to help corporate financial and supply chain teams align. I believed that supply chain excellence could not be generalized from industry to industry. I strongly believed that it varied by industry sector and that it was a series of complex relationships. I wanted to build a useful tool that could help companies irrespective of size or geographic location.  As a result, I commissioned work to try to build a formulaic representation of supply chain metrics (financial ratios) to tie corporate market valuation to the definition of supply chain excellence. I wanted to better understand which metrics truly mattered. This work has been in progress for the past year, and it is far from done.

The launch today of the Supply Chain Index is a start, and should not be viewed as an end point. Today, we will start to socialize the concepts. We are on a journey. This work will continue throughout the summer and culminate in the release of the Supply Chain Index for 36 Industry Sectors at our Supply Chain Insights Global Summit at the Phoenician in Scottsdale, Arizona on September 11-12, 2013.  Over the summer, we will be sharing the insights of this work through a series of webinars and reports.

As we progress, we will ask for supply chain leaders everywhere to join the discussion in our Supply Chain Insights Community. We want to get it right. We want to hear your voice. My goal is to help supply chain leaders everywhere to better align the metrics that matter to define supply chain excellence and its relation to corporate performance.

Definitions

To understand the concepts, let’s start with the definitions:

•Supply Chain Index: A formulaic representation of supply chain financial ratios correlated to stock market capitalization.
•Supply Chain Effective Frontier: The balance of growth, profitability, cycle and complexity metrics to deliver a supply chain strategy.  It may or may not maximize the company’s market valuation. (This should be a conscious choice.)
•Supply Chain Excellence: The behavior of companies working to maximize value through the setting of targets for supply chain financial ratios, and aligning metrics that matter, which are tied to value chain strategy.

What We Know Today

The Metrics That Matter Are Different by Industry Sector. The correlation of supply chain financial ratios to corporate stock performance varies by industry. The concepts of supply chain excellence cannot be generalized. As shown in table 1, and in figure 1 outlining the consumer value network, industry sectors within a value network are rewarded by performance on very different metrics. For each supply chain it is the management of a system, but the levers for each industry are very different. I firmly believe that you cannot put all industries in a spreadsheet and shake them up.

Public Markets Reward Alignment and Balance. What is common for each industry is the management of trade-offs on the effective frontier.  While the formulas are different and the supply chain financial ratio correlations vary, there is a strong trend for balance  and alignment (management of Days of Inventory and Payables). I am also struck by the need for cross-functional alignment to perform against these metrics. These type of performance cannot be achieved through a focus on functional metrics.

Supply Chain Performance Matters. The term supply chain should be easy to define; but sadly, I find that it is a politically charged term within organizations.  I define the term as the processes that align the processes of sell, deliver, make and source outside-in from the customer’s customer to the supplier’s supplier.  When I go to a  software conference, the term supply chain is often very narrowly defined as supply chain planning and supply chain execution software. The technology vendors talk in three-letter acronyms about pieces of the software that drive supply chain performance. Conversely, when I speak to many organizations, the term supply chain is very narrowly defined as a supply chain function often limited to logistics, distribution and customer service. It is only in enlightened organizations that I find a holistic definition that spans end-to-end processes.

There is No Substitute for Leadership.  As I go through balance sheet after balance sheet, and spreadsheet after spreadsheet, I associate the numbers with the names of the leaders and the faces of the teams that I have worked with over the last decade. I remember the discussions on the choices on the selection of technology and organizational design. In the numbers, I see that some companies that have made clear and conscious choices. The work has taken many years. I also see that companies with a focus on end-t0-end process management are outperforming peers. Supply chain excellence matters.

Next Steps

We will be tying the results of cross-functional alignment in supply chain metrics to organizational  and process design through our quantitative survey on alignment. If you would like a customized assessment based on your company’s Supply Chain Index, please have three or more functions within your company fill out this assessment. Share this link with members of your Information Technology (IT), financial, corporate social responsibility, sales and supply chain teams. The link to share within your organization to take the study is http://tinyurl.com/sci-ali-lc 

We look forward to hearing from you! Let us know what you think.