On Thursday morning, I began an engagement with a food manufacturer attempting to drive “Supply Chain 2.0.” When I asked for a definition, the phone was silent. The answer was not clear to them. (They wished that I had not answered the question… ) So, I want to give you a helping hand.
My observation? Most companies have a hairy, audacious goal, but have failed to give it definition. The names vary–Industry 4.0, a digital supply chain strategy or Supply Chain of the Future—but the pattern is the same. Teams are moseying down the path of doing what they have done for years, but with a renewed focus on efficiency, and doing it faster. My answer? We need to be honest with ourselves. Conventional supply chain strategies did not serve us well for the past decade, and making them faster and more efficient is fools’ play.
We then viewed the team’s strategy. The goal was to save money in the back office to fuel growth in sales and marketing. I hate pushing back on a well-intended team and share bad news, but their strategy is flawed. (Along with most companies in consumer products…)
Let me explain. Most companies that I work, over the last decade, pursued a low-hanging fruit strategy over the last decade:
- Save money in the supply chain: squeeze suppliers, increase asset utilization, and reduce costs.
- Shift the savings to drive marketing and sales programs.
- Marketing invests in new product launch and traditional demand shaping programs.
- New products and demand shaping programs increase complexity and demand variability. As variability increases, there is a need for proportionately more assets (as a buffer), and a need to pursue agility programs like platform rationalization and postponement. Yet, less than 10% of companies actively pursue these agility strategies.
- Over the years, the supply chain capabilities increase for high volume and very predictable products, but not for the shift in product mix for higher demand variability.
- Only 9% of companies actively design their supply chains. Less than 15% of Companies use technologies to set targets for the form and function of inventory, and less than 29% of companies quickly access and manage total cost information.
For the last decade, companies have attempted this strategy and failed. Let’s start the discussion by reviewing aggregate results from consumer manufacturers. I am sharing an example of three industries moving backward on margin and inventory turns. This is despite all of the attempts to improve these results. My conclusion? Our strategies are flawed.
Figure 1. Personal Products Manufacturers Industry Averages for the Period of 2010-2019
Figure 2. Industry Averages for Food Manufacturers for the Period of 2010-2019
Figure 3. Industry Averages for Apparel Manufacturers for the Period of 2010-2019
Why? Why? Why? Why? Why?
I like the five why technique. So, I asked myself why as I did this work. Here are my six that come to mind, I welcome yours as we REALLY need to reverse these trends:
- Supply Chain as a Function Not a Capability. The only companies bucking this trend are managing the supply chain as a capability. When supply chain is a function competing with other functions, deleterious results occur. Most companies are marketing-driven not market-driven. As a result, complexity increases without a focus on value for the end consumer. The organization is not aligned on value-based growth strategies.
- Focus on Inputs. Not Outputs. The determination of plans is completed mainly on spreadsheets even though over 80% of companies own an Advanced Planning System. As demand variability increased, Companies did not design and account for the impact. (Modeling variability on a spreadsheet is virtually impossible.) Also, as companies chased the lower cost of labor, they were blind to total cost impacts of inefficiencies of longer-lead times and shifts in supplier reliability. Only 50% of companies actively model and connect S&OP execution to planning, and few understand that since they have not accounted for variability, that they are pursuing an infeasible plan.
- Design. I am bewildered why so few companies actively design their supply chains and account for variability. The impact of variability and complexity is only evident through what-if discrete simulation and optimization.
- Blind Implementation of Efficiency Strategies. Most consultants push strategies for the efficient supply chain (lowest cost per unit). However, as variability increases, the efficient supply chain is not effective. As a result, all of the tightly integrated transactional systems become problematic. Harmonization, synchronization, and bi-directional orchestration trumps integration as complexity increases.
- Management of Complexity. This week, E2open published its annual report on forecast accuracy. (Kudos to Rob Byrne, this remains one of the best pieces published in the industry on demand management practices.) In the findings, they share, “Since 2010, portfolio complexity has increased at more than twice the rate of sales, rising by 44% compared to an 18% growth in revenue. The result is a 22% erosion of the average sales productivity per item over this period. 44% are active items. Since 2010, the number of cumulative items rose by a staggering 296%. With one-third of items added each year, the aggregate figure quickly adds up. While most are discontinued, each introduction and discontinuation has inherent costs.
- Focus on New Product Introduction Versus Business Model Innovation. Traditional marketing programs chase product innovation. Most business leaders see new business model innovation as too risky; yet, most of the growth in the sectors comes from business process innovation, not a new product launch process.
Take a Deep Breath
I know of no company that managed complexity and successfully buffered variability. Supply chains need to be fit for function. In the last decade, we have aggressively increased complexity while reducing capabilities to manage complexity. Is it any wonder that we are driving industry results in the wrong direction? You can start now to be a part of the solution versus part of the problem. Take the following steps:
- Manage demand as a river. Type your supply chains based on the Coefficient of Variation and design each flow. Hold yourself accountable for Forecast Value Added on each stream.
- Clearly define your strategies. Don’t fall for industry mumbo jumbo.
- Design your supply chains based on emerging business models from the customer back. Recognize that there are many logical supply chain models, not just one. Design each for success. Challenge the team to embrace the art of the possible. Continually test and learn.
- Focus on outputs and hold yourself accountable for a balanced scorecard of growth, cost, inventory turns, and Return on Invested Capital (ROIC). Shift functional metrics to focus on reliability. Actively assess the effectiveness of the S&OP process to the balanced scorecard.
- Show those low-hanging fruit consultants touting traditional programs the door. You know the one. It has the large letters EXIT above it.
I hope this helps. Look for the Supply Chains to Admire analysis in July. I am actively pounding my keyboard to complete the report for 2010-2019. Here is a teaser: only 4% of companies drove improvement faster than peer group and outperformed in their sector. The Supply Chains to Admire analysis and the Gartner Top 25 only have one company in common. What does this say? My belief? What we think drives balance sheet performance is not aligned with actual performance. There is a need for supply chain leaders to hold themselves accountable to drive value, not just cost; and align with the organization to design the supply chain that can deliver results as business models change.
 E2open study on Forecasting, June 2020