Seeking a Summer Intern

Supply Chain Insights LLC, a small supply chain research and analyst firm, is seeking a summer intern.

Skill Set

  • Undergraduate student
  • Minimum 3.5 GPA
  • Experience in supply chain, finance, economics or statistical modeling through work, class or volunteer experiences
  • Attention to detail
  • Independent and self-disciplined
  • Proficient with Microsoft Excel and PowerPoint

Job Description

You will be helping with a variety of tasks which will include data collection, financial benchmarking, statistical modeling and assisting with our monthly Supply Chain Metrics That Matter reports.

The work environment will be remote, from a location of your choice, with a reliable internet connection. It is a full time Monday through Friday (40 hr) position and requires maturity and a high level of responsibility to produce results on-time and in-full from a remote location. The pay rate (USD) is dependent on experience and skill set.

If you are interested, please submit a resume to abby.mayer@supplychaininsights.com by May 31, 2013.

Healthcare Value Chain: Index Perspective

This week, we are finishing up work on the 6 healthcare industries we will include in the Supply Chain Index. We have selected these six as we believe they offer a comprehensive perspective on the different industries present within the larger healthcare field. The six industries are:

* Drug Manufacturers- Major

* Drug Manufacturers- Specialty & Generic

* Medical Care

* Medical Devices

* Medical Distribution

* Medical Instruments & Supplies

The figure below illustrates the separate peer groups and also includes logos and company names for representative companies in each group.

There are a variety of value chains within the healthcare industry and I would argue, a value network is probably a better way of conceptualizing the complex relationships between the different peer groups. Nevertheless, value chains are a meaningful way to begin to understand the inherent complexity of the modern business world and offer an improvement from a company-centric supply chain approach  The graphic below demonstrates the Supply Chain Index equations for three of the six healthcare peer groups including medical care, medical distribution, and drug manufacturers- major.

Each equation is a correlation between market capitalization (y) and the significant supply chain ratios which provide a proxy measure of overall supply chain excellence within a specific company and/or peer group. Medical care (hospitals) represents the portion of the value chain which consumers usually interact with most directly. Medical distribution and drug manufacturers are important members of the chain, but operate further removed from the general consumer. They also seem to demonstrate less complex relationships between market capitalization (our dependent variable ) and the supply chain ratios with fewer independent variables.

Finally, I’d like to go into a little more detail regarding the drug manufacturer-major equation which is shown below.

The five significant supply chain ratios with strong correlation to market capitalization for this peer group were:

* Free Cash Flow Ratio

* Return on Invested Capital

* Altman Z

* Current Ratio

* Days of Payables Outstanding

With only five supply chain ratios, this is the least complex of the healthcare eqations completed so far. Altman Z (a calculation of the likelihood of impending bankruptcy based on a formula invented in the 1960s- read more here) is one metric that has shown up rarely in our work so far. It has had significant correlation for only food manufacturers and drug manufacturers. I see a pattern developing, but I’m not quite sure what it is yet.

It’s also interesting to note that Days of Inventory does not seem to have a strong correlation with market capitalization for these drug manufacturers. Inventory management remains a problematic area for many pharmaceutical companies. Simply because of the large margins within the business, many pharmaceutical manufacturers have not needed to optimize the business and focus more attention on inventory management. The Index equation shown above demonstrates that lack of a relationship between inventory management and market capitalization (at least for the period of 2006Q1 to 2012Q4) for this peer group.

This week, we continue the work on the healthcare peer groups and should finish the six equations in time for our next Supply Chain Index webinar next Thursday, May 23. You can register here and join the conversation in the Supply Chain Insights Community in advance of the webinar. I look forward to seeing you there and continuing the conversation.

 

 

How Does the Apparel Industry Measure Up?

My latest Supply Chain Metrics That Matter report published this morning and focuses on the apparel industry and this peer group’s performance on several supply chain-related metrics over the past decade. You can check out the full report here, but I’d like to focus on a few key points I found intriguing in the process of researching and writing this report.

The apparel industry is quite diverse in terms of the products offered and the structure of the business. Some firms operate in fast-fashion which hinges upon getting seasonal or trendy products from design to storefront as quickly as possible. Other firms operate supply chains with much less need for speed. For example, consider this quote from Hanesbrands, Inc.‘s 2011 annual report: “We believe that our status as a high-volume seller of core basic apparel products creates a more stable and predictable revenue base and reduces our exposure to dramatic fashion shifts often observed in the general apparel industry.” -pg 11. Because Hanes’ supply chain is built around basic apparel staples such as socks, undershirts or underwear, there is more stability and less of a need to create an exceedingly fast supply chain responsive to the latest fashion trends. For companies like PVH Corp or VF Corporation, it is much more important to have flexibility and the ability to move new products quickly to waiting consumers.

Not only does the speed and flexibility of supply chains in apparel vary greatly, there are also different operating structures adapted by companies. American Apparel, Inc., for example, has taken the non-traditional approach of keeping most manufacturing activities within the company and within the country. This creates a different supply chain with different challenges and opportunities than one built using outsourced manufacturing and first, second and third-tier suppliers in remote locations. It also ensures that responsibility remains within the organization. This is a problem that has tripped up many globally-structured apparel companies recently as tragedies in India, Bangladesh and elsewhere have demonstrated the poor and often deadly working conditions of upstream suppliers for some of the world’s largest apparel manufacturers and retailers. While companies may be able to outsource the physical work involved in making the clothes, they are unable to outsource the responsibility when things go wrong. This is true across industries and highly visible in both apparel and consumer electronics over the past couple of years.

Finally, inventory management remains a problematic area for many apparel companies as shown in the figure below.

American Apparel, Inc. with in-house production has the highest days of inventory value which is, on its own, not incredibly surprising. What is more worrisome is the fact that three of the six companies demonstrate increasing inventory averages since 2000. These companies are American Apparel, Inc., Columbia Sportswear Co., and Hanesbrands, Inc.

Companies requiring more flexibility and responsiveness in their supply chains as mentioned above, including PVH Corp, Ralph Lauren Corporation and VF Corporation have slightly reduced their inventory over the past decade. However, given all of the time, energy and resources spent on improving technology and processes for increased inventory management, the gains have been disappointingly small. Large inventory stores represent money sitting unused in the back room and performance on inventory management remains an area of concern (and opportunity) across the apparel industry.

I hope you’ll take the time to read the full report and let me know what you think. Are there patterns I missed or more industries you would like to see profiled? Please let me know. My next report, publishing in June, will focus on the supply chains of outsourced manufacturing and the role these companies have had in revolutionizing the manufacturing space including the close partnership with some of the apparel companies profiled above.

Thanks for reading and have a great weekend!

What Can I Do With the Index?

Last week, we introduced the Supply Chain Index in the first webinar of our summer series. You can catch the replay here and peruse the slides in the Community here. I started blogging here last May and now, a year later, I can say that my understanding of what the Supply Chain Index is and can be is still changing every day. In this post today, I’d like to look at one of the industries we have completed an equation for and also investigate how those findings can be taken out and applied beyond the confines of the specific industry.

The first equation we created to include in the Supply Chain Index was based on the Morningstar sector of chemical companies and is shown in the figure below.

The four metrics that proved meaningful for understanding the correlation between the chemical companies’ market capitalization (stock price * number of shares) and the supply chain ratios were

1. operating margin

2. return on assets

3. days of payables outstanding

4. days of inventory

The remainder of the supply chain ratios we selected (highlighted in the below graphic) did not have a significant linear and/or nonlinear relationship with market capitalization for the chemical peer group.

In short, we went from 54 general financial metrics to 14 supply chain ratios to 4 meaningful ratios for understanding the chemical industry. We will repeat this process for over 30 industries over the course of the summer and add to supply chain understanding in building the Supply Chain Index.

While it’s interesting to look at the industry equations alone, it’s perhaps even more insightful to consider them in coordination with each other across common partnerships composing value chains. The figure below illustrates the meaningful metrics across three industries: mass retail, consumer packaged goods, and chemical. These industries are often considered to be part or whole of the consumer value chain.

Each industry equation will be unique, but each will also add to our understanding of what makes a great supply chain.The metrics in bold indicate they are meaningful across multiple industries with both operating margin and days of inventory popping up in all three industries. Return on invested capital is meaningful in both mass retail and cpg, while days of payables outstanding has common meaning between cpg and chemical. What this tells me is that some metrics matter across industry lines and create an opportunity for companies to strengthen partnerships internally and externally to drive improvement on the metrics that really matter. For example, this value chain might focus on process re-engineering projects or technology investments expected to have a positive impact on days of inventory for multiple partners within the value chain. Improved inventory management would raise the supply chain performance of all three industries within the value chain and improve performance on the Supply Chain Index in their individual industry rankings.

Keeping that in mind, I’d like to invite you to participate in our latest Supply Chain Insights research study focused on supply chain alignment. Here’s the link. In it, we’re trying to understand how different functions relate to each other and plan spending budgets internally within the organization. We’re also trying to understand the differences across different business functions in their perception of the value of supply chain alignment. Taking this one step further, we hope to connect this data to the Supply Chain Index work and understand how companies can better align externally with their extended value chain partners.

The work is ongoing and I look forward to continuing the conversation.

Supply Chain Index: Journey vs. Destination

In a previous post (Starting from Scratch), I outlined significant differences between our Supply Chain Index and existing systems for measuring and ranking supply chains. In this post, I’d like to continue that discussion and outline some of the decisions and interesting insights we have discovered in our ongoing work in building the Index.

Choosing the Metrics

Over the past year plus, we have built a financial database of over 50 metrics for most publicly traded companies around the world reporting annual results. This database is big, to say the least, and includes many metrics which are not necessarily closely tied to supply chain. Thus, the first step in our research became clear: we needed to identify the short list of meaningful supply chain metrics. We did this in three cleaning sweeps.

Initial analysis showed that when a large company dominated a peer group, the result was that that company would “take over” the peer group and the result would be a high ranking for them due to their size, irrespective of their actual supply chain performance. In short, their size manipulated the rankings. So, in order to compare fairly across company size, we removed all raw number metrics (revenue, cost of goods sold, employee count, etc).

We also removed duplicate metrics. The most powerful example is the variety of inventory metrics available. Our database included more than five inventory metrics including

* days of inventory

* inventory turns

* days of finished goods

* days of work in progress

* days of raw materials

* and others

In order to only count inventory performance once, we cut all duplicates and only allowed days of inventory in our short list.

Finally, we omitted metrics which were not dependably available in the database. Employee growth—which measures the change in number of employees on an annual basis—is interesting, but rarely available and thus not reliable enough to use in building our equation.

In total, we cut 40 metrics from the starting point. We ended with 14 supply chain metrics on the short list as shown in the table below.

Linear & Nonlinear

Our first trials focused on defining linear relationships between market capitalization (y) and the list of independent variable metrics shown above. We quickly realized that although linear modeling may be fine in contrived problem sets, it loses some of its power in the chaos of the real world.

We readjusted our approach, and allowed for the possibility that the variables might be related in nonlinear ways, and ended up with a much stronger equation (higher r squared) and more comfortable with the results.

Searching for Relationships 

Finally, the journey has illuminated several interesting results (already!) and the discoveries continue. The members of the team overwhelmingly expected a strong relationship (linear or nonlinear) between year-over-year revenue growth and market capitalization performance. The chart of this relationship is shown here for our chemical peer group.

In short, there seems to be no relationship, and definitely no strong relationship, between the two metrics. Over and over again, this work challenges our assumptions about what makes a good or great supply chain and brings data and objectivity back to the table.

Tune in for our upcoming webinar on April 25 for more information on the Index, the steps we took in building it, and a discussion about equations and rankings for several key industries. Here is the link to register. I hope to see you there.

The Rise of Outsourced Manufacturing

My latest report from Supply Chain Insights is the next installment in our ongoing Supply Chain Metrics That Matter series and focuses on the consumer electronics industry. You can check out the full report here. One of the most interesting results of the report, for me, was a brief section highlighting the relationship between consumer electronics manufacturers and their outsourced manufacturing partners. I’d like to dig into that relationship in more detail here.

The success of consumer electronics companies’ supply chains is well known and well deserved. These companies have had an extraordinary decade, successfully managing the Supply Chain Effective Frontier and balancing the dueling priorities of growth, profitability, cycle and complexity. More specifically, they have seen increased growth and margins, decreased cycle times and shown an ability to successfully manage the increasing complexity. The table below illustrates the performance of consumer electronics companies over the previous decade on several key supply chain metrics.

Many of the companies have driven significant year-over-year sales numbers as well as very high revenue per employee performance. Over the course of the decade, operating margin has undergone significant shifts. The average operating margins shown above don’t tell the whole story and more detail is presented in the table below.

While operating margin for the most part was very low at the beginning of the decade, most companies in the peer group have seen an increasing operating margin more recently. This trend (increasing margin) is nearly unheard of outside the industry. However, what is clear is that this has been made possible in some part by their ability to move manufacturing outside of the company and often, outside of the country.

By outsourcing manufacturing, these companies have been able to focus on more critical functions and add value through advanced R&D processes, logistics management and other techniques. The success has not been shared equally throughout the value chain. For the most part, outsource manufacturers still struggle with small margin even with explosive year-over-year growth.

While three of the four outsourced manufacturing companies shown in the table above have experienced year-over-year growth in the double digits, the operating margin for all is still relatively low, and even negative for two of the outsource manufacturers. While the operating environment is very different between consumer electronics and their outsourced manufacturing partners, it is troublesome to see this large divide. The gains have not been equally shared with value chain partners and those manufacturers lower on the supply chain still struggle with low margin.

What trends do you see in the numbers? Do you see this pattern happening in other industries that have adopted outsourced manufacturing to a certain degree? Is this something we should be worried about or am I crying wolf? What can we do as an industry to raise the playing field for everyone instead of creating a world of low margin upstream companies pitted against high margin downstream companies? I would love to hear from you. I’m always tuned in on Twitter (@indexgirl) or directly: abby.mayer@supplychaininsights.com

Starting From Scratch

Over a year ago, I started blogging here as I began to explore the intersection of finance and supply chain, connecting supply chain performance with corporate financial performance. The goal has always been to create a quantitative ranking system (the Supply Chain Index) which objectively measures supply chain performance of companies, separated by peer group, as demonstrated through their financial performance in the stock market. It’s taken a long while, but we’re making progress.

The past year has been full of stop-and-go, trial-and-error, successes and failures as we worked to create a brand new ranking system. It’s been an adventure in innovation; as not only the answer is new, the problem is new as well. It is our attempt to remove subjectivity, short-term thinking and uneven playing fields from a supply chain ranking system. Here I go through three advantages inherent within the Supply Chain Index format.

Subjectivity

I like numbers. The Index is based on numbers. We make a good team.

Many ranking systems, whether they are based off personal experience with companies or subjective self-reported data, are not grounded in an objective perspective. By connecting financial performance on supply chain metrics (such as days of inventory, cash-to-cash cycle, operating margin, revenue per employee, etc.) with market performance as measured by market capitalization data, we are removing subjective wishy-washiness from the equation.

Over the past year plus, my experience with financial data and supply chain performance has been illuminating and convinced me that our progress and success over the past three decades of SCM have been oversold and exaggerated. We have spent a lot of money on new systems, technologies and processes, but overwhelmingly  inventory performance has been relatively stagnant. Yes, specific industries and companies have demonstrated improvement, but not to the level most believe. The Index will ground us and make us accountable for what we have accomplished and also where we have fallen short.

Our use of objective financial data in creating the Index is intended to create a consistent and comparable ranking system unable to be “gamed” by any one member of a company within the supply chain or value chain network.

Short-Term Faults

Many existing ranking systems take a relatively short-term approach to understanding the “best” supply chains. Although the speed of the supply chain is constantly increasing with customer demands, global events and changing operating environments, the time it takes to make changes to a supply chain is not speeding up. Change is hard; and altering a supply chain can be especially difficult because of the challenges of working horizontally across one’s own company, as well as with upstream and downstream partners. By looking at supply chains with such a short-term perspective, we believe ranking systems can fail to see the big picture. What may seem like minimal improvement over a 3-year time period may actually be consistent, but small improvement over a decade or longer. The Index currently dates back to 2006 and uses data, on a quarterly basis, to enable a more long-term perspective on supply chain performance. Moving forward, we will continue to anchor our research beginning in 2006 and build our database to enable an even longer period of study.

Uneven Playing Fields

Each supply chain is unique. Comparing Schlumberger to Apple to McDonald’s does not do any of them justice. Each operates in a significantly different industry, selling to different customers, and dealing with varying constraints. To better represent that, and provide a fair playing field for companies, the Supply Chain Index does not compare apples to oranges. The Index is organized into industry peer groups through YCharts per Morningstar‘s sectors. Each industry, from auto manufacturers to consumer electronics, is treated separately to enable a justified comparison and an opportunity for companies to benchmark not against everyone, but only against everyone that matters.

Work continues on the Index as we speak. The ultimate vision is to create a unique equation, by peer group, which connects supply chain performance to stock market performance. Companies closer to that magic equation will place higher in the rankings. Additional questions including the holy grail “Can supply chain performance at one year or one quarter lag predict market capitalization performance?” remain unanswered as of yet. Check back often as we begin to release the equations and encourage conversation on the methodology and the rankings!

 

How Aligned Is Your Supply Chain?

Supply chains can be described with, what seems like, 1000 different adjectives. They can be flexible, stiff, agile, pull, push, outdated, highly evolved, etc. One of the most important qualities of a successful supply chain is its alignment within the company. Although alignment may not be as sexy as big data or other hot button issues, it is a critical foundation level issue necessary from which to build greater successes.

While the current structure of most companies means that supply chain is simply a function, in the same way that marketing, sales and finance are, supply chain excellence is impossible, or at least very difficult, in such a siloed environment. Supply chain as a function is not really a function, but rather a process from supplier to customer that spans the enterprise and requires orchestration and input from other functional departments.

Alignment within the supply chain function itself is the first step. This requires all employees getting onboard with a big picture supply chain strategy and smaller more operational-minded goals. These smaller goals could be something as simple as increasing performance on C2C or DOI or integrating ratings and reviews sentiments into the S&OP process. Alignment within the department is a difficult task and a constant challenge. Even if the supply chain team is aligned internally against common goals and metrics, often the alignment is not shared with other functions of the same company.

Unfortunately, an aligned supply chain doesn’t just exist within the supply chain department. It requires greater alignment with finance, sales, marketing, HR and other functions as well as, most importantly, the executive team. Our research surveys illustrate that there is often a large gap in understanding between the supply chain team and the executive team as seen in the figure below. A lack of executive knowledge, understanding and one could assume, support, was rated the top business pain in one of our recent surveys.

Supply chain finance also pops up high on the list with 30% of respondents identifying that as a problem area. I would guess that for most, there remains a strong disconnect between the financial team and the supply chain team. A more recent research study we conducted focused on the role of Corporate Social Responsibility (CSR) and how supply chains are interweaving supply chain goals with sustainability goals. There is still a large disconnect here as evidenced in the image below.

Members of the sustainability team believe they understand the supply chain team very well, or well, for 65% of respondents. As for supply chain understanding sustainability, only 45% of supply chain team members rank their understanding very well, or well. Although the sustainability team seems to understand supply chain better than vice versa, there is still room for improvement.

Due to the relatively recent growth of CSR and sustainability initiatives, supply chain often works closely with these functions. A lot of the goals of a highly evolved supply chain rest upon more sustainable practices whether it be reducing waste, lowering cost or creating healthier products for consumers. In an attempt to protect and improve corporate image, and ensure best practices are occurring within the enterprise, CSR teams and supply chain teams work closely on many issues. Additionally, CSR and supply chain are two of the only functions within an enterprise that have a strong outreach to upstream suppliers and partners.

I have a feeling that the level of understanding between supply chain and other functions varies greatly. I would suspect that CSR probably ranks pretty high in terms of mutual understanding with the supply chain department. What do you think? In our latest, Supply Chain Insights survey, we’re trying to uncover more data about the functional structure and performance of different companies. If you’d like to participate (and we’d love it if you did) here is the link you’ll need. As always, the results are shared openly through our Community and website and we appreciate your  help.

Supply Chain Effective Frontier

The supply chain effective frontier is a term you may have heard used in posts here or within Supply Chain Insights research reports. I’d like to spend a little more time dissecting the concept in this blog post. We begin with the financial side and then move to a more complete understanding of the model.

The concept of the supply chain effective frontier was born early last year as Lora Cecere worked on her now published book, Bricks Matter. Every supply chain manager understands, either consciously or subconsciously, that decisions must be made and priorities ordered when running a supply chain. The supply chain effective frontier model ties these decisions and priorities to four categories of financial metrics. The financial metrics we use at Supply Chain Insights have been sorted into the categories of growth, profitability, complexity and cycle. Each category is important, but most understand that it is impossible to pursue four, sometimes conflicting goals at one time. However, most also understand that a company focused on only one, two, or three of the categories will not prosper for long.

A company without growth is static and losing market share to competitors. A company without profitability is operating at a loss and losing financial strength on an annual basis. A company without complexity excellence is lost within their own supply chain and not aligning for success. A company lacking cycle excellence will be unable to deliver on their promises to customers and falter in customer service. Some might argue that growth or profitability are more important than complexity or cycle excellence, but I would be inclined to say that they all matter. Are there other categories of metrics you think we have not considered? Do you think we could combine any of the four categories?

The current version of the supply chain effective frontier is shown above. This graphic doesn’t focus so much on the four categories of metrics, but rather on the trade-offs and decisions leaders face in steering the supply chain.

Profitable growth is always a priority and is placed at the top of the pyramid. Below we see four different tiers of decisions, representing Corporate Trade-offs, Investment Trade-offs, Supply Chain Trade-offs and Supply Chain Waste. Each of these potential results requires consideration and each supply chain decision, whether it is the mode of transportation or the location of a manufacturing facility, can have a domino effect on the supply chain.

In order to make the right decisions and strike the right balance between the financial metrics, companies should start any discussion of supply chain by defining their own strategy. Many leaders believe that a strategy is created through a series of decisions, mistakes, re-dos, and successes. At Supply Chain Insights, we believe the opposite. That is, a supply chain requires a strategy from day one so the team can align on goals and make decisions focused on furthering that supply chain strategy. Do you start with strategy or execution? Is a strategy just a collection of past history or something more powerful? I’d love to hear from you. Comment below, Twitter me (@indexgirl) or e-mail me directly (abby.mayer@supplychaininsights.com).

 

Consumer Electronics- False Icon?

Supply chain management professionals both within and outside of the consumer electronics industry often identify consumer electronics as the model industry for the most advanced supply chains. While this is often a foregone conclusion, I feel it warrants a second look. The table below illustrates the performance of the consumer electronics peer group against four other industries.

The consumer electronics industry has seen higher growth, lower inventory stores and higher revenue per employee performance than any other industry. They have capitalized on the rare opportunity in which technology invaded (or enabled) our home and work lives to a level never before seen. But is this rapid trajectory sustainable in the long term? If we look closer at operating margin, you may get a better sense of what I am talking about.

Four of the six companies have seen rising operating margin, while two have weathered decreasing operating margin. In fact, two companies Apple Inc. and Research in Motion Ltd. both ended the decade with a four-year-average operating margin of 0.25. Is it reasonable to expect that these high-tech companies will continue to operate with operating margins rivaling some pharmaceutical companies? I think probably not.

More clues are available in year-over-year sales growth figures shown below.

Four of the six companies above illustrate 12-year-average sales growth in the double digits. RIM, for example, leads the pack with an average of 70% annual sales growth. By now, the temporary (permanent?) fall of RIM has been well documented and one has to believe that this pattern of short-lived dominance will continue both within the industry and within the supply chain environment as a whole.

Clearly, the consumer electronics supply chain has done a lot right with high growth, improving margins and measurable and sustainable improvement in inventory management. However, the consumer electronics industry has also benefited from the explosion of technology devices into our lives over the past decade. Furthermore, to some extent, the industry moves quickly not because it chooses to, but because it must. This fast pace means that consumer electronics companies make mistakes, discover them, and resolve before other industries have time to even call a meeting. As a direct result, it is not surprising that consumer electronics companies have moved to the top of the heap. But will they stay there forever?

Just as smart people are now projecting the fall of Apple Inc. from absolute market dominance, I believe it is incredibly hard for a single company or industry to remain the non-stop constant and consistent leader. Consumer electronics is doing something right at the moment. Even better, they have created an environment in which they can now prepare for the future which will quite possibly see slower growth, lower margins and a more generally difficult ride.  One hopes they are preparing for that as double-digit sales growth ad infinitum seems optimistic to me.

Do you agree or do you find me an unbearable pessimist criticizing the industry that has done supply chain the best for all of recent history? I’d love to hear from you. Let me know in the comments or at abby.mayer@supplychaininsights.com.