Taking the Hill
Article by Lora Cecere from Supply Chain Shaman; published on May 14th 2013
For most companies, growth has slowed. Profits are sluggish. Complexity reigns and cycles are longer. The challenges and opportunities of business are greater. We believe that supply chain excellence helps a company to better balance demand and supply. We also believe that it helps companies to be more resilient: weathering demand and supply volatility while maximizing opportunities and mitigating risks. We believe that supply chain excellence matters and is important to improving financial market performance. After a decade of investment, many companies are asking me, “How do I take this next hill? How do I push forward? What does the future of supply chain excellence look like?” For many, despite spending 1.7% of revenue on supply chain applications, the promise of an agile, flexible supply chain that can respond as the business changes seems like an illusion.
This week, at Supply Chain Insights LLC, we published our 11th report in the series titledSupply Chain Metrics That Matter. Over the course of a year, we analyzed a decade of financial data to gain an understanding of how companies and industry sectors are balancing growth, profitability, cycles and complexity. These reports are available in our communityand on our website.
To write these reports, I work with Abby Mayer (twitter: @indexgirl), Research Associate at Supply Chain Insights. We start by analyzing industry sector progress on company growth, profitability, cycles and complexity. Using our database of financial ratios (shown here), we analyze company and industry sector progress over the last decade. Financial ratios allow us to analyze performance across the peer group (large against small companies) and across currencies. We look for year-over-year improvement. We also look for companies that have out-performed their peer groups. When we find these two characteristics, we interview industry leaders to analyze why. We do not believe that there is much value in putting all companies into a spreadsheet and shaking them up… or looking at singular metrics without analyzing the intricate trade-offs of the supply chain when viewed as a complex system.
In developing the methodology for this series of reports, we defined supply chain financial ratios and tracked the progress of each industry sector in scaling what we term the Supply Chain Effective Frontier (carefully making trade-offs on growth, profitability, cycles and complexity to improve shareholder value in financial markets). The table shows the financial ratios that we work with. In many of our reports in this series, we show clear patterns of the trade-offs made between operating margin and cash-t0-cash cycles, and operating margin and revenue/employee. Three trends are clear:
The industries are not making equal progress. Companies are competitive. They are constantly asking us “Who does this best? Which industry sector can we learn from?” Through this series of reports, we now can see that consumer electronics has pulled ahead of the pack. Consumer Packaged Goods (CPG) and chemical companies are close behind, but they are having difficulty “taking the hill.” The hospital industry has made progress, while the pharmaceutical and medical device companies are stalled. Apparel is actually moving backwards.
Companies that are good at planning—use of supply chain design and supply chain planning technologies—are outpacing other industries. Active management of value networks and scenario planning makes a difference. When companies look at singular metrics (labor costs or inventory), they have moved backwards.
There is no substitute for leadership. Industries that have formed cross-functional leadership teams combining source, make and deliver together have made the fastest progress. In parallel, when supply chain concepts are well-integrated into the design of trading partner relationships by both sales and procurement, there is an acceleration of value. The trade-offs are easier and the value network strategies more straightforward.
Aligning metrics matters. Companies making the fastest progress have designed metrics to ensure that all functions are held accountable for operating margin, cash-to-cash cycles, growth and productivity. When this happens, proxy metrics like Return on Assets (ROA), Overall Equipment Effectiveness (OEE), Days of Payables (DOP), Material Costs, Transportation Costs or Sales and General Administrative Costs (SG&A) can be discussed and trade-offs can be made easily cross-functionally. Functional metrics in isolation degrade value.
The gaps between industry sectors have widened over the decade. I have studied supply chain excellence for the last decade as an industry analyst. As I write these reports and work with Abby, I am amazed how much these gaps have widened. It is clear basics matter. Leaders manage the supply chain as a system and improve the potential of the system to make trade-offs. Laggards let the supply chain whip them around and make unconscious trade-offs through indecision. The gaps between the two have grown.
Supply Chain Excellence Matters. In our work on the Supply Chain Index, where we are correlating progress on the Supply Chain Effective Frontier to financial market performance, we can see that supply chain matters. The leaders that have managed the supply chain as a complete system are able to achieve better financial market valuations. We will be sharing more on the Supply Chain Index over the summer in our monthly webinar series with a final summary presentation at our Global Summit in September. It is exciting to see the correlations.
In closing, in our writings and our research, the term supply chain means the processes from the customer’s customer to the supplier’s supplier. Unfortunately, for many of our readers, the word supply chain is now a politically charged term. We find this unfortunate and often disheartening. The shift in definitions can be a barrier to driving progress.
How so? For software application providers, it is often reduced as a subset of applications. I find it sad, when I attend a conference where the term supply chain is only used to describesupply chain execution (SCE) or advanced planning optimization (APS). Likewise, I find it sad when I work with a company that had defined the supply chain organization very narrowly. It is often reduced to be the Supply Chain Department that has been functionally defined to ONLY focus on a part of the supply chain like transportation, customer service or distribution planning. These limiting definitions confine the potential.
The companies that are the furthest along in “taking the hill” have a process manager focused on managing the “end-to-end supply chain.” For these companies, the mission is clear. There is no debate on what supply chain means. It is about the company’s ability to manage growth, profitability, cycles and complexity to improve the potential and capabilities of the company. In the end, isn’t this what matters anyway? I have little energy to debate the term supply chain. I just want to get on with driving value.