To get where you are going, you have to see where you are…
Daily, my inbox is flooded by email. As a guest writer for Forbes, public relations firms constantly pepper me with requests to speak to technologists boasting of having answers to improve supply chain resilience. Sometimes, I take the call. The discussion is seldom equal to the promise. I am amazed that smart people can be so SURE they have the answer.
I find the industry complicit. I see many experts peddling “answers” without doing due diligence. No one holds technologists or consultants accountable, and as a result, the discussions go round and round.
I find many beliefs divorced from fact. I strongly believe that historical supply chain practices are not the answer. They need to evolve to help today’s supply chain business leader.
To make the point, let me share an orbit chart for four industries (reference Figure 1). While some might claim that the industry made progress, the facts show that the industry margin decreased precipitously in three of the four industries shown. The potential for supply chain performance declined in each of these industries. In fact, in our Supply Chains to Admire analysis, we find that this is true in twenty-five of twenty-eight industry sectors studied. Only four percent of companies outperformed their peer groups.
Figure 1. Orbit Chart of Four Industry Sectors at the Intersection of Operating Margin and Inventory Turns (Year-over-Year Averages for the Sector)
While market potential declined, individual company performance declined faster. A smart student of supply chain management might ask, “Why? How could the industry spend 1.7% of revenue on IT solutions and expensive solutions to improve performance, yet degrade balance sheet results against peer group sectors in tough markets? ” The simple answer is that experts are not holding themselves accountable.
Another misconception is that enterprise resiliency only started to decline in 2020 with the pandemic. The reality is very different. Enterprise resilience–the ability to have consistent balance sheet returns despite market volatility– decreased starting in 2014.
There are many reasons. Unfortunately, in this industry, greed and ego drive much of the behavior. Many technologists in the industry got very rich during the past decade. Few measured projects against improved results.
Reversing The Trend
How do we reverse the trend? Let’s start with honesty and a focus on process innovation.
I strongly believe that we adopted practices in the last two decades that degraded performance and threw companies out of balance. Here I share my observations:
- A Focus on Cost Versus Margin. Over the decade, based on the research, the gap between operations and commercial teams grew. In addition, the gap between finance and operations widened. One reason was the focus on saving money in the back office to fund “growth” initiatives without accountability to track margin and growth based on market potential. Many of the growth initiatives–trade promotions and price in consumer industries–shifted demand without lifting baseline demand. The impact? As demand shifts from period-to-period, the costs increase with no impact on growth.
- Implementation of Sales Forecasting. The focus on sales forecasting started shortly after Y2k. Few companies measured the impact on error and bias through the rigor of Forecast Value Added (FVA) analysis. While the input from sales on market trends is invaluable, sales should never be asked to forecast. The reason? The first reason is that it is a bad use of a resource. A sales person should be selling. The second is the introduction of political bias based on sales bonus structures.
- Integrated Business Planning. Integrated Business Planning (IBP) sounds like a good idea, but the tight integration of the budget to drive the supply chain plan in a volatile market degrades the forecast and supply chain performance. This action is particularly deadly if the integration is at a regional P&L level. The reason? Each P&L leader will game the system to improve bonus structure payouts. The focus should be on market potential with the budget as an input but not as a constraint.
- ERP Integration and Tight Integration of ERP to Decision Support. The focus on Enterprise Resource Planning (ERP) sucked up company resources. In general the ERP technology providers underperformed, and the investment was an opportunity cost to the adoption of new forms of analytics and building effective business networks. In addition, the promise was overstated. Less than 50% of the required data for supply chain planning comes from ERP. Companies would have been better served to focus more on market sensing and shaping and less on enterprise technology standardization.
- Lack of Focus on Form & Function of Inventory and Designing Network Flows. As supply chains moved from regional to global, intransit and cycle inventories increased. Yet, most supply chain leaders only focused on safety stock. Only 9% of companies actively designed and managed network flows. As a result, inventory grew, but was not an effective buffer against industry turbulence.
- The Focus Inside-out Supported by Functional Metrics. Functional excellence drove regional supply chain performance in the 1990s, but a focus on functional metrics in large, global and complex supply chains over the last two decades threw the supply chain out of balance. Few companies adopted balance scorecard approaches and only 29% of companies tracked total supply chain costs. Today, less than 1% of companies feel that they can successfully measure margin at the speed of business. To move forward, companies must side-step traditional functional metrics like Purchase Price Variance, OEE, and functional costs to focus on margin, inventory effectiveness, and functional reliability metrics like first-pass yield, inbound ontime and schedule adherence.
- Functional Intitiatives Without Clarity on Supply Chain Strategy. Supply chain leaders love fads. Lean, Blockchain, Industry 4.0, and DDMRP are current shiny objects. Each has promise, but not in isolation. The average multinational has over a thousand continuous improvement programs. The problem? Without alignment progress on one program will counteract progress on another.
The answer lies in the use of market signals and the redefinition of processes to drive market-to-market orchestration. (Trade-offs of commercial programs with source, make, and deliver to maximize value to the customer and improve margin.)
The problem is that the movement to outside-in processes requires a step-change in traditional supply chain paradigms. The movement from an inside-out, functional orientation to outside-in is not linear. Instead, the path requires a redefinition of process, metrics, and capabilities.
Figure 2. Supply Chain Maturity Progression
Let me close by congratulating the Supply Chains To Admire Award Winners. In the 2021 analysis, twenty companies met the Supply Chains to Admire Award criteria. The winners include Apple, AbbVie Inc., Air Products & Chemicals, Assa Abloy AB, Broadcom, Celestica, Dollar General, Ecolab Inc., Intuitive Surgical, Inditex, Lockheed Martin Corporation, Nike Inc., Nvidia, PACCAR Inc, Ross Stores, Sleep Number, Taiwan Semiconductor Manufacturing (TSMC) Company, Tempur Sealy, TJX Companies, and Western Digital. No company met the criteria in seventeen of the twenty-six sectors studied.
The study, now in its eighth year, varies slightly year by year, as industry leaders jockey for position. To understand the trends, check out the orbit charts and the comparison to the Gartner Top 25.
Table 1. Winners Over Time.
If you want to drive change, start by defining supply chain excellence. Use the report to better define outcomes.
Few companies are clear on the definition of supply chain excellence. Most are entangled with weasel words like “an integrated end-to-end supply chain that is efficient, agile, and responsive” or the goal to “drive supply chain resiliency.” The issue with these concepts? They lack definition and organizational stickiness. For example, an organization shall never be efficient, agile, and responsive. The outcome requires a choice and is based on design. In parallel, the goal should be interoperability versus integration. Interoperability allows the organization to use disparate data and move data fluidly across organizational and corporate boundaries. (Traditional integration techniques are a sinkhole of declining value.) In addition, in the definition of “end-to-end” what is an end and what is an end? And why does it matter? I could go on and on, but you probably get my drift. For more clarity, join us at the Supply Chain Insights Global Summit.
Preparing for the Supply Chain Insights Global Summit
The Supply Chain Insights Global Summit is happening on September 7th-9th in Franklin, TN.
All in-person attendees must be vaccinated. Doing a conference in the pandemic is a risk. To help ensure global coverage, we will also have a virtual feed hosted by Supply Chain Now for those unable to travel.
The goal of the conference is to Imagine the Supply Chain of 2030. We expect 100 attendees to attend in person and 1000 to join us virtually around the world. We design each experience for extreme networking.
In preparation, I am handpicking the speakers, finishing up the results of the recent analytics study, and testing the results of outside-in processes in Project Zebra through testing with BSH and Western Digital.
If you have a story you would like to share at the conference; please drop me an email at email@example.com. Mark your calendars to join us to think differently and Imagine the Supply Chain of the Future.