General Supply Chain

Article by Lora Cecere from Supply Chain Shaman; published on January 31st 2013

This week, I am grounded due to weather. So, I am spending my time writing. Music is blaring, my toe is tapping, and I am hard at work on what I love. I enjoy writing research.

I am currently writing an article on supply chain excellence.  The time off the road is allowing me to think more critically about the path that got us here, and about what drives supply chain excellence (or more importantly, what does not drive improvement).

For years, I have listened to consultants espouse buzzword bingo.  You know the drill.  Getting“all the way to bright” by “harvesting the low-hanging fruit.” Or twisting the arm of the COO to use an Enterprise Resource Planning system to build the “right house of best practice” to drive supply chain excellence. I am tired of buzzword bingo.

To better understand this journey that we have been on together,  I have been analyzing a decade’s worth of supply chain financial ratio data for nine industry subsegments. (You would be very proud of the spreadsheet that I am analyzing.) I am poring over the results.

I am trying to find good news; but over and over again, I see the same trend. Progress is stalled. Consider the above table on healthcare.  While companies have increased Revenue per Employee across the healthcare value chain, the Days of Inventory have increased for suppliers, and there is a shift in power to the healthcare provider. Operating Margin is shifting, but total costs are going up.

When I look at a value chain (a cluster of industries chained together to deliver products and services), I see that we are pushing costs backwards in the supply chain, but not decreasing the total costs of the system. I also see that we are not decreasing the total inventory levels in the network or accelerating time to value.

When I evaluate companies at an enterprise level, I see the that growth has flattened, inventories are growing and we are losing operating margin. As a result, I believe that companies are at a Supply Chain Plateau. Performance is stalled.

Consider the case of food manufacturing. Companies in this industry have increased SG&A Margin/Revenue by 1%, lost 1% in operating margin and have increased average inventories by 22% over the last decade.  The only metric that we have improved through ten years of IT investments is the revenue/employee number.  I believe that the only way to get past this plateau of results is through holistic systems thinking, enlightened leadership and holding ourselves accountable to balance sheet results. The company that has done this the best in this food peer group is General Mills.

Sage Advice? Rethinking Conventional Wisdom.

As I share the work that we are doing at Supply Chain Insights LLC on financial ratios and peer group performance with company leadership teams, I am shocked that their supply chain teams are not aware of their year-over-year performance against their peer group.

We have mapped over fifty of these evaluations in our Supply Chain Insights Communityand each time, teams are surprised. (I encourage teams to ask us for a custom analysis. We will run this analysis for each company free of charge.)  So, as I sit here and finalize my reports for next week on supply chain excellence, I am thinking hard about all of the sage advice that companies have gotten from consultants.  I am questioning how we got it all so wrong. Here I want to question some of it, because as a cook, I believe that sage is a best fit for turkeys, and I don’t believe I am surrounded by turkeys. I want my friends in supply chain management to accelerate performance. I want them to  push themselves off of this supply chain plateau. Here are my thoughts:

•  Don’t Harvest the Low-hanging Fruit. Shake the Whole Tree.  I cannot count the number of times that a consultant has told me that we need to “harvest the low-hanging fruit.”  I think that we have spent the last decade putting the fruit in the basket, but not delivering results. As we have taken the fruit from the tree, we have not rethought the orchard.  The practices that got us here in supply chain management need to be rethought. We need to think more about supply chain management as a system. The focus needs to be on the end-to-end value chain, and the processes need to be mapped outside-in. Today, less than 1%  of companies have a person responsible for the end-to-end value chain, and focus on the enterprise outside-in.  The outside-in transformation shakes the tree. Don’t stop with the low-hanging fruit. Rethink the entire system.
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• Saving Pennies Can Cost You Dollars. Over the course of the last decade, I have worked with many companies that moved manufacturing to countries with lower labor costs. This elongated their supply chain and increased the replenishment cycle. It also increased working capital and obsolescence.  As I now look at these companies’ results, they were penny-wise and pound-foolish. As I look at the corporate performance of these companies, I can see the increase in operating margins, but an even greater increase in cash-to-cash cycles.  This happened because they got greedy and sought to take advantage of lower costs of labor without understanding the impact on the supply chain as a system.  Companies that redesigned the supply chain, understanding the impact on rhythms and cycles, did far better.
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• Don’t Save Money in the Back Office to Finance the Front Office.  Use the Back Office to Drive Growth.  The folks in the back office are good at process and continuous improvement.  As I look at the increase in SG&A without the increase in growth, I think that we need more process discipline in the front office. I also think that the best supply chain teams are using supply chain initiatives as a pathway forward to drive growth through new channels, new business models and better response.  Don’t cut your supply chain to the bone to fuel sales and marketing initiatives without a seat at the table to discuss how to make it more effective.
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• The Supply Chain IS Business, Not a Department Within a Business.  For me, this is sad. For the last twenty years, supply chain professionals have fought to get a seat at the table. Suddenly, the term supply chain is being used to describe a department within the enterprise–often composed of distribution and logistics–and the concepts of supply chain management as a better way to run businesses are largely forgotten. I strongly believe that the principles of great supply chain management are key to business. Progress can never be made when the term supply chain is narrowed to only the auspices of a limited set of responsibilities within a supply chain department.
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• Project-based Initiatives Do Not Get Us There.  I know that many readers have worked on continuous improvement programs and multi-year IT programs. We have cut our teeth on these. However, I do not see that these project-based initiatives have had the desired impact on the bottom line. I believe that functionally-based projects, in isolation of a multi-year road map, have done us more harm than good. Instead, the most effective results have happened when supply chain enablement was a company initiative, not a functional initiative, and the projects were tied together in a multi-year road map.  For most companies, this is the exception, not the rule.

Gotta run. Two reports to finish before Tuesday’s newsletter.  Next week is the first anniversary of Supply Chain Insights. We are planning a big celebration. You will not want to miss it!

For those of you that have helped us in our first year journey, many thanks! We have had over 300 companies fill out our surveys, and more than 60 companies have welcomed us into their organizations to help them solve real-world supply chain problems.  We are proud to have finished 15 research surveys, launched the Supply Chain Index, built the Supply Chain Insights Community, published a book and completed 24 reports. As you will see next week, we are just getting started. Much, much more in store for the upcoming year…  But, more on that later.