On a cold Boston winter day, I slipped into my seat on a back row in a packed conference room at AMR Research. Heavily booked and running from meeting to meeting, I was late. As I squeezed into the middle seat of a crowded conference room, I got the stare. (You know, the look of peers communicating the signal, you are late.) I struggled to manage myself as I settled in elbow-to-elbow with the group to listen to the presentation.
The topic of the meeting was the logistics to launch of the AMR Research Top 25. (When Gartner purchased AMR Research in December 2009, the methodology became the Gartner Supply Chain Top 25.) During the presentation, I squirmed uncomfortably in my seat. The methodology did not include a peer group analysis, and I strongly felt that chemical, retail, and telecommunications companies should not be compared in the same analysis. Putting all companies in a spreadsheet and shaking them up made no sense to me.
As a research leader at AMR Research when I voiced the concern for a more rigorous peer group analysis in prior meetings, I hoped for a better outcome. I dropped my head in the meeting as I realized that my request for the change to the methodology did not happen.
On this day, being late for the meeting and sitting on the back row in the company meeting, was a barrier to question the methodology for the rollout. So, I sucked it up and consented. During my tenure at AMR Research, I wrestled with this decision. My disbelief in the AMR Research Top 25 left me struggling in client meetings when teams asked me questions. It is hard to stand in front of the room and share insights on something that you don’t believe in.
However, when Gartner bought AMR Research, and I left in the transition(because I don’t believe in the Gartner methodology), I launched a new methodology named the Supply Chains to Admire. Now in its seventh year, in the analysis, I learned a lot about the impact of supply chain choices on balance sheet performance:
-Not Straightforward. Each company defines supply chain organizations slightly differently and balance sheet progress requires the management of a balanced scorecard in a complex, non-linear system. Most companies push the improvement of functional measurements that throw the supply chain out of balance. The focus on functional costs without a focus on total cost trade-offs is deadly to margin management. Only 29% of manufacturers easily manage total cost trade-offs. The reason? Total cost analysis is more difficult than it sounds and most technology implementations automated functional measurement systems (manufacturing or procurement), but leave the organization blind on the management of total costs.
One of the first goals was to develop a balanced scorecard. The first step was to charter a research project with the Arizona State University statistics department to analyze which combination of metrics drives the highest market capitalization. The research project analyzed 1200 combinations of 180 metrics for four hundred companies for the period of 2010-2012. After six months of analysis, we decided the best fit was the combination of growth, inventory turns, operating margin, and Return on Invested Capital. In Figure 1, I show the depiction of a model from this work.
Figure 1. The Effective Frontier: Balanced Scorecard Developed Through the Work with Arizona State
My interest peaked when I started plotting the progress of these companies at the intersection of these metrics year-over-year in orbit charts. The result? As shown in Figure 2 with the orbit chart of Lenovo, the progress of supply chains is gnarly. In this orbit chart, Lenovo lags the competitor group at the intersection of inventory turns and operating margin and struggles to drive improvement. Over 95% of companies are not good at driving trade-offs.
Figure 2. Orbit Chart of Lenovo Performance Against Peer Group
-Superficial Analysis in Technology Assessments.
The technology and consulting companies paint a picture of an easy path to value. When I see most of the methodologies, I hang my head. There is no correlation between technology or consulting partner selection and market capitalization or Price to Tangible Book. The pictures painted to drive technology implementation are superficial at best.
-Popular Beliefs on Supply Chain Excellence Do Not Align With Results.
The market is inundated with strong male egos seeking center stage to share their stories. The curtain is provided by a number of event companies that hold the supply chain market hostage by marketing bad events. (The event company invites supply chain leaders to speak on supply chain excellence (without vetting) and charges technology vendors large fees for sponsorship.)
As a result, there are too many conferences (most of them bad) with the same leaders sharing their stories. Consequently, there is a strong belief that companies like HP, Mondelez, PepsiCo, and Unilever are strong supply chain performers. The dirty little secret is each company is underperforming their peer group. There is no litmus test to tie the stories of Supply Chain Senior Leadership to business results. The larger supply chain market struggles with groupthink. The belief is that the companies the most frequently on center stage are supply chain leaders.
Figure 3. Mondelez Performance Against the Food Group for 2010-2019
In Figure 3, we share the Mondelez results over the last decade. Note that while the company drove improvement in margin, there is underperformance in inventory turns. The Company focused on cash-to-cash (elongating payables to suppliers) and did not improve inventory turns despite many investments in technology. (Cash-to-cash correlations on the Effective Frontier were less effective than the management of inventory turns. )The reason? From interviews, I believe that it was a combination of leadership and metrics alignment. The executive team drove personal bonus incentives by increasing the cost of capital to their suppliers without taking ownership of their own inventory targets. Is this leadership? I don’t think so; yet, there is an IBM sponsored whitepaper from the University of Tennessee sharing insights from Mondelez leadership in supply chain management.
Overall, the industry is not aligned with the definition of supply chain excellence. There is a lot of talk, but little good work to sink your teeth into.
Launching The Supply Chains to Admire Methodology
Based on the work with Arizona State, we launched the Supply Chains to Admire methodology in 2013. Each year, in March, when companies complete their final reporting, we analyze the balance sheet patterns for improvement, peer group comparison of performance and value. The analysis is now in its seventh year. In Table 1, we share an overview view of the Supply Chains to Admire methodology and the comparison to the Gartner Top 25
Table 1. Methodology Comparison
Developing The Supply Chain Index
One of my key insights from the work is the relationship between supply chain improvement and top performance in a peer group. It is almost impossible to hold the position once attained. In the research, only L’Oreal achieved this goal. Most companies regressed. The Supply Chain Index development helped us measure improvement by evaluating the patterns of the orbit charts at the intersection of Operating Margin and Inventory Turns and Growth and Return on Invested Capital(ROIC).
Figure 4. Orbit Chart of L’Oreal Compared to Peer Group
Comparison of the Gartner Supply Chain Top 25 and the Supply Chains to Admire
For the 2020 analysis, twenty-two companies qualified for the Supply Chains to Admire award. The list of winners includes AbbVie Inc., Assa Abloy AB, BorgWarner Inc., Broadcom, Dollar Tree Stores, Ecolab Inc., iRobot Corporation, Lockheed Martin Corporation, Koninklijke Ahold N.V. (Ahold), L’Oréal S.A, Monster Beverage Company, PACCAR Inc, Reckitt Benckiser Group plc, ResMed, Rockwell Automation, Samsung, Sleep Number, Taiwan Semiconductor Manufacturing (TSMC) Company, The Toro Company, TJX Companies, United Tractors, and VF Corporation.
While the companies of Becton, Dickinson, and Company (B.D.), Schneider Electric, and Urban Outfitters did not qualify as sector winners, in the analysis, each company shows marked improvement and notable achievement; and as a result, is worth a mention.
The list of Supply Chain to Admire Award Winners is a stark difference from the perception of industry leaders. While the performance of some like L’Oreal and Samsung are commonly accepted as supply chain leaders, the performance and recognition of other companies on the list are not as well known. Since the Supply Chains to Admire is a data-driven analysis, it is less subject to industry bias. As a result, the Supply Chains to Admire methodology is a useful assessment tool for companies of all sizes globally.
So, I thought, how would the Gartner Top 25 winners fare using the same methodology? The result is shown in Figure 5.
Figure 5. Comparison of Methodologies
Only three companies-AbbVie, L’Oreal, and Reckitt Benckiser- make the cut to qualify for the two methodologies. What concerns me is the overwhelming belief that the eleven companies in the bottom of the chart are supply chain leaders. If we keep perpetuating the myth that companies like HP and Kimberly Clark are supply chain leaders, we are missing the mark. The full analysis is available on slideshare.
In summary, there is no perfect method. I can quickly give you the issues for both of these methodologies. As a supply chain leader, I would like for you to use the data for benchmarking to set your own goals. In addition, I don’t want you to be bamboozled by ego-centered conference speeches, self-serving consultant “research”, or superficial technology pitches. My goal is for each company to carve its own path, but to do it on the basis of data.
In the following weeks, I will be posting the stories of the winners of the Supply Chains to Admire. The over-riding characteristic of customer-centered leadership. Summarize in Table 3 are the differences between Leaders and Laggards.
Table 3. The Right Stuff
I believe that facts matter. The supply chain is just too important… Check out the complete analysis on slideshare.
So, in summary, should I have voiced my issues in the meeting? The answer is no. I would not have made a difference. The AMR Research Top 25 was a rocket ship taking off the launch pad. However, as an independent analyst, I can make sure that companies today get all of the facts.