Written by 11:07 pm Market-Driven, Supply Chain, Uncategorized • 2 Comments

Three Lies and a Truth

When new groups come together, the forming process is often awkward.  Teams want to know each other, but introductions are strained. So, how can they do it quickly and move on to solving business problems?  Ice breakers help. One of my favorite is the game, “Three Truths and a Lie.” In this team activity, people who do not know each other list four statements and ask the group to guess which statement is false. It is usually fun and revealing.

This week, I played a variant of this game with my audience. I spoke at the Kinaxis event (#kinexions12), and I asked companies to answer the question, “Which of the following statements is true?” I played three lies and a truth with the group. Most were surprised at the answer.  Here is the list:

  • Supply chain technology implementations have reduced inventory.
  • Companies should implement supply chain best practices.
  • Companies that have focused on collaboration in the supply chain have built competitive advantage.
  • Supply chain excellence matters.

Seemingly, most supply chain leaders that are reading the press, or going to industry conferences, would believe that all four statements are true. However, based on the research for the book Bricks Matter, I now sadly know that only one of these statements is true.  Here I share insights on my journey to understand the truth.

The Lies That I have Told

As a supply chain analyst for the last ten years, I have a passion for writing. I have averaged about 100 articles a year. I love the process of research. For some absurd reason, that I don’t quite understand, I have a passion for supply chain. I believe that it is the lingua franca of the business.  Unknowingly, I have told three lies. I have discovered the truth through the research for Bricks Matter. Here they are:

The Lie of Inventory Reduction

Over the course of the last decade, I have carefully recorded and reported presentation after presentation from conference after conference and interview after interview with supply chain leaders.  Repeatedly, I heard that supply chain applications have saved costs, reduced inventory and improved customer service. I wanted to believe, and in fact, I do believe that most projects did have short-term impact. However, the results were not sustained and the impact cannot be seen on the balance sheets.

How do I know?  I have been fortunate over the last year to work with Abby Mayer (@indexgirl). Abby and Mikey on my team have  built a database of financial ratios from publicly available balance sheets from 1995-2012. We have been mining the data to understand the trade-offs between growth, profitability, cycle and complexity ratios. We are trying to understand how supply chain leaders have raised the bar at the intersection of these four sets of metrics on the supply chain effective frontier. The results have been eye-opening.

The problem is that when I examine balance sheets over the last decade, as shown in figure 1, I find that only high-tech and electronics industries have reduced inventories year-over-year. Other industry groups did not. The reason?  I think that there are many.  Many would argue it’s because supply chains grew more complex. Some would say that it is because supply chains became longer due to outsourcing,  I struggle to think that this is the reason. The high-tech industry experienced the blow of both of these business impacts simultaneously. In fact, I believe that if these issues solely drove up inventory that the high-tech industry inventories should have soared higher than other industries. They did not.

I think that the answer is deeper. I believe that the more insidious reason was that most supply chain projects were implemented as discrete projects and not part of a systemic business transformation.  Leaders focused on process after process that was not designed to be part of a larger supply chain strategy. Silos in the organization do not know how they align because over 85% of companies are not clear on supply chain strategy.

I also believe that it is because the organization is not incented to manage cash-to-cash metrics. The strong functional silos focus on their own metrics which seldom include the cycle metrics of inventory turns, working capital or cash-to-cash.  When working capital has been reduced, it is usually a story of reducing payables. For many this has increased supply chain risk due to a weakening of the supplier base.

Technologies were implemented as projects. Well-intended projects and process built-in isolation were a major barrier to meeting the goal. There was no accountability. As a result, most of the results were not sustainable over time. For more on the impact of supply chain technologies on inventory, check out the blog post “Why Have We Not Reduced Inventory?”

The Lie of Best Practices

As I have studied the practices of supply chain management, I do not think that we have BEST practices. Instead, I think that they are EVOLVING.  I think that any consultant that talks to you about best practices should be nicely escorted to the lobby and shown the curb.

In the last decade, we have moved through the evolution of the efficient supply chain (lowest cost per case) to the reliable supply chain (right product, at the right time at the right cost) to the resilient supply chain.  In 2009, the definition of supply chain resiliency was driven by the impact of the Great Recession. In 2011, insurance claims and business continuity amplified the discussion. Last year, $450M of profits were lost in the Japanese auto industry and Intel lost 1$ billion in revenue due to floods in Thailand  and the associated impact on Thai suppliers.

Over and over again, I see that the evolution of supply chain processes is born largely from failure. This heightened awareness on business continuity has increased the emphasis on supplier development and is changing the processes in procurement to focus from squeezing costs and terms to building relationships. But, it does not stop there.

With the rise of corporate social responsibility, and the discussion of natural capital accounting focused on air, water, land and biodiversity, companies are learning that only a tiny fraction of non-renewable resources are under their direct control. (reference Carbon Disclosure Project 2012). This measurement of intertwined, non-renewable resources will push a new definition of supply chain management. It will force the discussion of supply chains to value networks. Companies will be forced to own their entire supply chain.  However, there is more to the story.

As growth flattens and commodity pressures escalate, market-to-market orchestration and the building of outside-in horizontal processes is the next frontier. The momentum to build market-driven value networks with bidirectional orchestration of demand and supply variability is the aspiration.  Today’s supply chains were built assuming that manufacturing is the primary constraint and that oil was a $10/barrel. West Texas crude is now selling for 3X the price in the 1990s. Materials and commodities are becoming the new supply chain constraint, and there are few technologies to guide direct procurement visualization and optimization.  This was the roots of Kinaxis, and new players like SCA, Signal Demand and Triple Point are entering the fray.

I agree that there are best practices to implement a technology. Industry templates, commonly defined interfaces, and IT standards; but we cannot confuse the implementation of a technology with the definition and implementation of holistic end-to-end value networks. I think we are a LONG way from having supply chain best practices.

Ironically, my observation is that the same thing that got us here will be a barrier for the future.  It is the definition of the “supply chain organization.” For many years, the evolution of supply chain practices was slowed by the lack of a supply chain organization.  Now, based on the work that I am doing with companies, I am seeing the inverse. The narrow definition of the supply chain organization has become a barrier. When you say building the “end-to-end value chain” and there is push back that this is not the job of the supply chain, you have problems.

Unfortunately, the supply chain organization has been defined too narrowly.  It is frequently named supply chain; but only has control over logistics or distribution. The definitions in Europe are more constraining than those in the US. The irony is that while these teams state that they want to build the global end-to-end value network, that there is no one in the group that is responsible for looking at business decisions end to end.  In fact, in most organizations where I am working today, I struggle to find anyone that has an end-to-end focus.

Unfortunately, the door is not swinging both ways. Our drive for supply chain excellence, put the sign over the door. Horizontal processes –Sales and operations planning, revenue management, supplier development and corporate social responsibility– are the pathway forward; but to do this the supply chain organization has to be willing to have the spirit to tackle what they feel that they cannot do. Simply put, it is the building of the processes from the outside-in from the customer’s customer to the supplier’s supplier. They have to be comfortable challenging sales-driven and marketing-driven mindsets to drive higher value through market-driven value networks.  Most are not ready. The windowless silos are too strong. While the group will say that these are supply chain processes, they do not feel that it is the role of the supply chain organization to drive them. I find this sad.

Where will the organization get the cross-functional leadership to build these horizontal processes? It will probably happen through failure. If we do not change, it will be driven through a bad score on a carbon footprint audit, a failed product launch, or supplier failure. The supply chain organization now has as deeply entrenched walls as the other silos in the organization. The group has forgotten the charter to connect the silos, reduce latency and improve end-to-end decision-making. For many, sadly, this not the role of the supply chain organization. This old supply chain gal is shocked, and leaves many organizations shaking her head in disbelief.

For more on this subject, reference the blog post “Reflections.”

The Lie of Collaboration

There is probably not a more overhyped and overused word in supply chain management than the term “collaboration.” It is pervasive in the spoken language of every supply chain executive and absent in the results.

I believe that collaboration is a sustainable win-win value proposition that benefits both parties. And, if this is the case, I believe that you should see the total cost of the supply chain decrease and the days of working capital improve.  As I run these analysis and study value chain after value chain, I cannot find one example where supply chain processes have improved total cost and working capital. I really want to believe.  I keep on looking.

Instead, what I find is that we have shifted costs and working capital backwards in the supply chain. The waste in the crevices of the supply chain that lies between parties has not declined. The irony is that pushing costs back in the supply chain weakens the supply chain because most suppliers have a higher cost of capital and lower gross margin than their downstream trading partners.  One of the ironies of this work has been the discovery that most of the work that we have called “collaboration” has actually put more risk into the supply chain.

My favorite slide on collaboration came from a P&G presentation at an Effective Consumer Response (ECR) conference in Europe. The speaker was sharing his experience on “collaboration.”  His belief was P&G in Europe experienced a number of failed attempts at collaboration because there was not a shared vision, the right skills, aligned incentives, available resources, a common plan and leadership to drive the program.  It was only when a company could bring all of these elements together that he believed supply chain leaders had the “right stuff” to drive successful collaboration.

For more on supply chain collaboration, check out the blog post, “Yes, I Am a Contrarian.”

 Why? Why? Why?

So, why have we perpetuated these myths?  I think that it is because we are not holding ourselves accountable to balance sheet deliverables. The data is hard to get. The peer group analysis is even tougher, and most supply chain teams struggle to speak the language of business.  My advice is to cast off the four letter acronyms and forget the “geek speak” of IT. Instead, learn to talk the language of financial supply chain ratios and hold yourself and your team accountable.

The Truth

The truth is that supply chain excellence matters. You can see it in the resiliency of companies when faced with market shifts or in the ability of companies to make progress on the supply chain effective frontier of trade-offs (reference the Supply Chain Insights report, Conquering the Supply Chain Effective Frontier ).  We will be sharing insights about these findings on Friday, October 26, 2012 @ 1:00 p.m. EST during our second Supply Chain Insights Webinar, The Supply Chain Index, 20 Years in the Making: A Focus on Discrete Industries. We hope to see you there!

Next week, I will be speaking at the Consumer Goods Technology (#CGT2012) event and the Institute of Business Forecasting Executive Event (#IBF12). We have a newsletter publishing with new reports on Wednesday. We look forward to getting your feedback.

Let me close with my quote of the week. It comes from Don Gaspari (from NCR) at the Kinaxis Conference. I had worked with NCR for many years and had helped them develop their S&OP processes. He gave a great presentation.  I was proud. He closed with “Supply chain is like marriage. It depends on good communication.” I think that this is true.  I don’t think that we can clearly communication unless we can speak the truth even when it hurts. So, I think that it is time to get honest with ourselves about the progress of supply chain management over the past decade.