Seven Characteristics of Supply Chains to Admire

Supply chain excellence matters. As growth slows, it can make or break corporate performance. Now 30-years old, the practice of supply chain management is still evolving. The average manufacturing company has spent 1.7% of revenue on technology over the course of the past decade. Most of it has been focused on improving supply chain excellence.

While companies speak of supply chain ‘best practices’, and boast about improvements in operating margin, inventory levels and asset management in speech-after-speech in conference after conference, the results of these investments in supply chain excellence is hard to pin-point in the analysis of balance sheet information for any industry. The reason? There are three:

1. Project-based Approach. A project-based approach is the implementation of multiple projects simultaneously.  For years, companies have believed that if each project had a ROI above an established threshold; that when implemented correctly, each would add value. Many companies have thousands of projects that are focused on admirable goals, but they are not aligned creating slower progress.
2. Focus on Vertical Excellence. A supply chain is composed of the functions of source, make or deliver. Deep within the back office of each company, they become strong vertical silo(s)–almost a fortress–within the larger organization. Mistakenly companies focus on vertical excellence not realizing that the best balance sheet performance happens when the functions are aligned cross-functionally. Knocking down the walls of the silos is an opportunity for all.  The strongest performance occurs when the functions are aligned together on total cost, customer service (order fill and on-time delivery) and inventory turns.
3. A Lack of Corporate Understanding.  The supply chain is a complex system with tightly inter-woven and non-linear relationships. While corporate finance is backward looking based on transactions, the supply chain is forward-looking based on business flows like order flows, channel withdrawals, translation of demand into product availability, and sourcing strategies. Many companies mistakenly try to manage the supply chain based on historic transactions which limits the potential of the supply chain.

As a result, we find that many companies like Flextronics and Dow Chemical DOW -0.19% are at the same place on operating margin and inventory turns today as they were at the start of the decade.  In contrast, we find that for top performers that it happens in a slow and steady progress versus the big-bang approach.

The selection of the Supply Chains to Admire is the result of a 24-month effort.  It is based on the analysis of both performance and improvement of publicly-held manufacturing, distribution and retail companies for the period of 2006-2013. (The methodology is outlined in this report.) The highlighted companies outperformed their peer group in operating margin, inventory turns and ROIC and made progress in supply chain improvement as measured against their peer group.

It is ironic that the strongest performance is in the industrial manufacturing value chain. Why? In these industries there has been a precipitous drop in margin, and pressure on life cycle. These companies have higher demand and supply volatility. Contrast this to the healthcare value where no company made the list. In these industries, margins are high and regulations are increasing. It is a case of when the going gets tough, the tough get going.

There are seven characteristics of the companies that outperformed their peer groups:

1. Leadership. Enlightened leadership that focuses on the management of the supply chain as a complex system.
2. Outside-in Processes. The use of channel data into advanced analytics to sense and translate demand. Today, with higher demand volatility, the demand latency of the customer order is not sufficient for most supply chains.
3. Mature Horizontal Processes. Leaders have focused on building strong horizontal processes like revenue management, Sales and Operations Planning, Supplier Development and Corporate Social Responsibility. For mature companies, there is balance in S&OP between the “s” and the “op”. For example, when companies are balanced in S&OP processes, they outpace their peer group with 10X greater performance in inventory turns.
4. The Right Stuff in the Organization. Companies with the strongest performance had more advanced supply chain human resource departments, a well-integrated supply chain finance team, and a supply chain center of excellence. Today, only 14% of companies feel that they manage the human resources of the supply chain team well and only 40% of companies have a human resources team focused on building talent. In addition, only 8% of companies can readily get to total supply chain costs and while 1/3 of companies have a supply chain center of excellence, only 50% feel that they are effective. As a result, there is much to be done.
5. Supply Chain Design. While companies would never think of building a plan without years of design and fine-tuning. Only 22% of companies actively design their supply chain. Companies that do this well, focus teams at continually designing and redesigning their supply chain flows cross-functionally. It is not just about the bricks and mortar. Instead, it is about the flows: form and function of inventory, stocking locations, inter-plant shipments, the alignment of suppliers, and the design of the channel. It matters. Active supply chain design is a common characteristic of ten of the fifteen leaders.
6. Aligned Metrics. To ensure the management of the complex system, the metrics of operating margin, inventory turns, ROIC, customer service, revenue, and forecast accuracy need to be managed together as a non-linear system dross-functionally. The functional metrics have a laser-focus on reliability with a cross-functional alignment on the higher-level balance sheet performance.
7. Strong Planning Capabilities. Companies with better planning capabilities score higher on the methodology. The supply chain today cannot be adequately managed on a spreadsheet. Yet, despite the implementation of many supply chain planning technologies, the spreadsheet is still the most commonly used technology for planning. The issues are many — difficulty with the user interface, scalability, a lack of what-if modeling, suitability of the data model–getting it right makes a major difference in driving corporate performance.

Last week, I presented these results on a webinar of 150 financial analysts. They were thankful to have a way to measure supply chain improvement. In the course of the dialogue, I was asked several questions:

• What are the barriers? Companies with extreme levels of IT outsourcing and a focus on project implementation have done more poorly when compared to peer group.  Companies that have done it well have implemented Information Technology systems once and stabilized the implementations. Take General Mills GIS +0.12% and Kellogg K -0.37% as an example. General Mills implemented SAP once and well, while Kellogg had multiple and difficult ERP implementations. 
• What insights can you give us on the management of complexity? Complexity comes in many forms—price increases, product portfolio expansion, shelf-ready packaging, packaging-specific artwork, promotions, in-store displays. The secret is to tackle all complexity and decrease the complexity that adds cost but does not drive off-setting value. The difficulty is most companies are so tied up in being marketing-driven, adding products and promotions willy-nilly, that there is no analysis of good and bad complexity. As a result, they should focus on becoming more market-driven focusing on what matters to the ultimate buyer of the product and services with greater discipline in marketing and sales programs and alignment with supply chain designs and flows.
• What should I ask the business leaders at the companies that I follow? I encouraged the financial analysts to ask:

1. Are you using channel data to sense in your supply chain operations?
2. Do you actively design networks with a focus on form and function of inventory?
3. How do you balance the trade-offs between source, make and deliver?
4. Are you actively building supply chain talent?
5. How do you make trade-offs between marketing programs and good/bad complexity?