It happened on Thursday morning last week. It will probably happen again on Tuesday. And, again on Wednesday. I am driving on a campaign to change thinking.
It is hard to change a mindset. The brain is wired to believe what it has been told for many years.
Every time that it happens, I smile. I understand. I was once there also.
Let me start with a story. Last week in the middle of a presentation, a supply chain leader made the statement, “We have solved the issues in supply through better optimization and use of data. There is not much more that we can do. The issue is demand. I think that we need to focus there.” The statement was delivered with arrogance and conviction. Many supply chain leaders are so convinced they know the answers that they have stopped listening and learning.
It never occurred to this supply chain leader that there is no place to put “new forms” of demand data into today’s supply-centric enterprise architectures. As I mature in my work as an analyst, I am more and more convinced that the redesign of the supply chain outside-in to use new forms of demand data requires us to “blow up” our traditional, and supply-centric architectures. Why? The data models are wrong. These architectures were defined based on simple, deterministic optimization using the principles of a “push-based” supply chain. The systems are based on 1990s thinking. Remember back then? It was when gasoline was 1/3 the cost of today and there was a lot of excitement about 32-bit architectures and the move to client-server systems. A lot has changed in both business requirements and technology capabilities; yet, the fundamental technologies and the definition of the supply chain footprint remains unchanged.
We have been taught, as supply chain leaders, that over the last decade supply chain processes have improved costs, shortened cycle times, improved customer service and decreased inventory. Just ask any consultant and they will quickly tout “best practices.” Or run the statement by any software provider, and they will share that their solutions delivered these “best practices.”
When I first started working on the book Bricks Matter, I believed it too. I sadly found that this was not the case. After two years of studying corporate balance sheets and talking to supply chain leaders, I now see things quite differently. Numbers don’t lie. Companies are stuck. Based on our recent research, we find that only 1% of process-based companies are making progress on both operating margins and inventory. As a result, I don’t believe that we have best practices. It is my belief that we have emerging practices.
Facing the Issue
Most organizations are stuck on their ability to drive improvements in operating margin and inventory cycles. Too few supply chain leaders have held themselves accountable to their balance sheet results.
Currently, we at Supply Chain Insights are working on presentations for our upcoming Supply Chain Insights Global Summit. At this conference, we are excited to share three detailed analyses of corporate performance over the last decade:
- Performance on the Supply Chain Effective Frontier. An analysis of how companies have made trade-offs between operating margin, inventory cycles, complexity and growth. Which companies have made year-over-year improvements? And, why?
- Results of the Supply Chain Index. Which supply chain metrics correlate to market capitalization by Morningstar sector? Which sectors have made the most progress? Who are the leaders in each sector?
- Supply Chain Resiliency. Which companies have been the most resilient delivering year-over-year results with small incremental improvements over the last decade? What are their secrets?
To understand the current state, I built a database of twenty years of supply chain financial ratios for all public companies. (Note that the ratios are better than absolute numbers because it helps in the comparison of large and small companies and performance across currencies.) In 2012, supply chain process evolution was thirty years old, and I wanted to use the book, Bricks Matter, as a litmus test to tell the story of success. However, I could not find it. Progress was good at the beginning of the decade, but as supply chain complexity has increased, progress on operating profit and complexity has tapered off.
We find that to cope, companies have pushed costs and waste backwards in the supply chain. For example, they have made improvements in cash-to-cash cycles by increasing payables and lengthening terms to suppliers. This increase in payables has increased risk by decreasing resiliency. As we rethink supply chains, we will need to reverse this thinking and take ownership of the entire value network.
Those of you who know me well, know that I no longer believe in the Gartner Top 25 methodology. The six years of work at AMR Research on this methodology was actually the stimulus for me to tackle a new approach. You can read some of my thoughts in my past blog posts at:
Where have we made the most progress? The greatest progress has been made through the introduction of new business models. E-commerce is a more profitable form of retailing. Amazon can now deliver almost every category of item to your home with no shipping cost for Amazon Prime customers. Club store formats improved retail turns and operating margins. Performance-based logistics in aerospace and defense changed the A&D industry forever. Modcloth, a fashion retailer that lets the buyer be the designer, just turned ten-years old with revenue of $100M.
Supply chain is an engine for growth and enabling new capabilities. We are at an inflection point of new technologies and processes. The technologies installed in the last decade are quickly becoming legacy applications. To move forward, in my opinion, we need to do five things well:
- Build Outside-in. Build supply chains from the outside-in, minimizing demand latency and redefining supply processes to sense and respond to channel demand. Recognize that today, the response is inside-out based on orders and shipments. The order is a poor representation of demand. We have never had a better opportunity to build a customer-centric supply chain; but, to do this we have to recognize the difference between a marketing-driven and market-driven response. The first step is social listening and text mining of customer sentiment.
- Focus End-to-end. Only 1% of companies have a role focused on managing the end-to-end supply chain. The greatest synergies happen when the supply chain is managed end-to-end as opposed to management as a limited supply chain function focused on logistics and operations.
- Move at a New Cadence. Embrace new technologies: Internet of Things, new forms of analytics, mobility, etc. It is no longer weekly data weekly… or reporting with a day latency. Instead, it is real-time data. Define and drive new processes like digital manufacturing and digital path to purchase so that our supply chains can operate at the new cadence of data flows.
- Orchestrate Demand and Supply Market-to-Market. The traditional supply chain drives a volumetric response based on a SKU (item at a location). The future processes, based on new forms of analytics, will be based on matching product attributes to customer attributes while orchestrating price, mix and volume. Experiment with these new forms of analytics.
- Be Accountable to the Balance Sheet. Today, only 23% of supply chain leaders can easily see the impact of their decisions on profitability. Companies that are outpacing peers have strong supply chain finance functions.
We hope to continue this discussion with you at our Global Summit. It is sold out for technology providers, but there are still seats available for manufacturers, retailers and distributors. Hurry! The room block is lifted next week, so the best cost on hotel rooms is this week. The event is being held at the Phoenician in Scottsdale, AZ on September 11th and 12th.