Excellent firms don’t believe in excellence – only in constant improvement and constant change.
The idiom, rearranging the deck chairs on the Titanic, symbolizes working on something pointless or insignificant because it will soon be overtaken by events. After finishing the Supply Chains to Admire report and the Youtube series (to be released this week), this is my feeling. Here, in this blog, I explain.
What Is Supply Chain Excellence?
In the review of my first book, Bricks Matter, Keith Harrison, former Global Director of Product Supply at P&G asked me, “You mention the need for supply chains to shift from a focus on cost to value. I agree. How do you define value?” When Keith said this, I hung my head. I did not have a good answer. The seven years of work on the Supply Chains to Admire is part of my quest to answer Keith’s question. Frankly, it is still a work in progress, but as I pour over orbit charts and performance patterns, I learn a ton.
My first observation is that the best supply chains are fit for function. Leaders design a response based on the business model. The organization constantly redesigns with market shifts. They side-step platitudes and programs of the month. This is the overwhelming characteristic of the Supply Chains to Admire winners.
My second observation is that for 96% of public companies supply chain excellence is slip-sliding away. Increasingly organizations are stuck. The supply chain is complex non-linear system that is easily thrown out of balance through a focus on functional metrics. Like a car stuck in a snowbank on a wet snowy day, most organizations are stuck in the throws of functional excellence. They rock back and forth in improving singular metrics but struggle to improve a portfolio of growth, margin, inventory performance, and asset utilization. Improving the portfolio increases the price-to-tangible book or market capitalization. Conversely, the value of a firm will never be created by improving the functional metrics of Purchase Price Variance, Overall Equipment Efficiency (OEE), lowest cost of transportation, or cash-to-cash efficiency.
My third thought as I write is the Supply Chains to Admire report is the injustice and waste of the last decade. The focus on financial reengineering–elongation of payables, manufacturing outsourcing, tax-efficient supply chains, lean programs, IT standardization, tight integration to ERP, and business process outsourcing– only moved the deck chairs on the Titanic. The inevitable is business disruption. In each industry sector, there is an amazon-like effect in progress, and it is the newer, and smaller, organizations that adapt to capture market share.
Will the digital supply chain be the answer? I don’t think so. Let me explain. While companies speak of the digital supply chain, the focus is on speeding up today’s supply chain or making it paperless, but not the redesign of the supply chain market-to-market to drive value. The supply chain today efficiently pollutes the planet but does not create value for 96% of public companies. There are many supply chain technologists and consultants that made six-figure incomes and purchased multiple vacation homes on the back of false promises.
Reflections on Excellence
It would be wrong to speak of excellence, and not mention Tom Peters. This week, his book, In Search of Excellence, was on my bedside table. When I sent the report for review to a cadre of supply chain leaders, one of my friends reminded me of some great Tom Peters quotes. As an appetizer to this article, please indulge me by letting me share some favorites:
- Management is about arranging and telling. Leadership is about nurturing and enhancing.
- The simple act of paying positive attention to people has a great deal to do with productivity.
- Almost all quality improvement comes via simplification of design, manufacturing… layout, processes, and procedures.
- Relentless experimentation was probably important in the 1970s—now it’s do or die.
- You don’t bring about change in real big meetings or virtual meetings. You bring it about one person at a time, face to face—when we discover we have some common interests and we’re both pissed off, say, at too many CEOs who talk about charts and boxes. And so we create a conspiracy. It’s a subversive act, and being coconspirators in a subversive act requires trust and intimacy.
My goal is to build a guiding coalition of business leaders to drive value and improve corporate social responsibility. I am trying to do it, one person, at a time. I hope by the end of this article, that I have you fired up. I know that success requires a village.
When we look at public companies at the intersection of operating margin and inventory turns or growth and Return on Invested Capital. Shown in Figure 1 are the aggregate sector results for apparel retail. The industry progressively slid loosing performance in the margin and inventory turns, but did not redesign. This pattern holds for 80% of the 28 industry sectors studied. Yet, we tout that we know “supply chain best practices”…
Figure 1. Aggregate Results for Apparel Manufacturers for the Period of 2010-2019
Aggregate industry sector results were better in 2000, and 2010 than in 2019. Most companies followed the crowd implementing “supply chain best practices from ERP and APS technology providers.” Look at Table 1 results, should we feel good about this?
Table 1. Comparison of 2010 and 2019 Industry Sector Results for Operating Margin and Inventory Turns
Supply chain leaders have many opportunities to reverse this trend.
- Redesign and Continually Redesign for Value. Only 9% of supply chain leaders actively design their networks. Start by defining value. The best supply chains are fit for function as the value chain shifts, the design should change as well. Some looking at the table might say, “Of course our supply chain became more costly or inventory turns declined due to complexity or variability.” My response? “Could these impacts be mitigated through supply chain redesign?”
- Embrace Variability. One of the largest drivers of results degradation is the increase in demand and supply variation. While over 80% of companies implemented supply chain planning, the planners’ primary usage is Excel. As a result, when using a spreadsheet, they miss the opportunity to understand the impact of volatility on potential results through “what-if” analysis. The issue? Companies are missing the impacts of volatility and variability in their modeling.
- Say Collaboration and Mean It. The term collaboration, while bandied about incessantly, is seldom implemented. I define collaboration as multiple parties working together on a win/win value proposition. Today’s reality is a win/lose pilot. As I interview companies working through COVID-19 challenges, a key insight is companies are more willing to collaborate together in the pandemic. These unprecedented times offer the time to build value networks and share data to build meaningful process capabilities.
- Say No to Financial Reengineering. Most of the financial reengineering projects are opportunistic–a short term win for the brand owner, but a loss for the overall supply chain. Constantly educate the financial team to understand how a focus on short-term opportunistic programs degrades long-term value. Chasing knee-jerk programs for tax efficiency, lower cost of labor, shifting payables, and functional efficiency may have short-term cost benefits, but in the long-term makes the supply chain less agile and adaptable to change.
- Stop the Focus on Functional Metrics. Change metrics systems. Align the functional metrics to reliability and drive cross-functional collaboration on a few and meaningful metrics (growth, market share, margin, inventory turns, ROIC, and on time and in full shipments). (An example is moving from OEE in manufacturing to schedule adherence and first-pass yield.) Align the balanced scorecard to value.
Finally, and importantly, show the slick technology consultant with the quick, but superficial ROI calculations the door. Avoid programs of the month, and progress with new technologies only after testing and learning before implementing.
Look for the final reports this week. Personally, I am not satisfied with arranging chairs on the deck of the Titanic. My goal is to build a guiding coalition for change. I hope that you are ready to join.