An Imperfect Solution

The basis of our Supply Chain Index work, as well our benchmarking, lies in financial metrics.The raw data is pulled from annual reports and 10-Ks for all public companies. From the raw data, we calculate ratios which we then utilize in our research efforts. Ratios enable us to compare a wide variety of companies on a level playing field. We consider companies of all different sizes (as measured by both revenue and employee). Ratios allow us to easily work across different currencies.

Over the past two and a half years, we have refined our methodology to focus on financial metrics, and more specifically ratios. While we believe objective financial measures provide a superior jumping-off point for supply chain leaders to understand performance, it is not perfect. In fact, there are several problems which deserve some attention.

Seasonality

Different companies define fiscal years differently. One company’s version of FY 2014 may be very different from another. For example, many companies operate from January 1 to December 31. Others may operate from April 1 to March 31 or October 1 to September 30. Thus, FY 2014 does not always include the same time period for all companies. A natural disaster that occurs in March may fall in two different FYs for competing companies. Comparison of the impact of those sorts of events can be difficult.

In addition, quarterly reports indicate the state of the business at four different points in time. The reality of operations between reporting dates may vary significantly from what is recorded on the page.

Revisions

Revisions are a reality. Many companies will adjust their reporting numbers and release revised results in a future quarter that more accurately portray the financial reality. It is important to go back and catch revisions as often as we can to get a more accurate picture of the company’s performance.

What other problems do you see with a methodology based on financial results? Unfortunately, it is imperfect; but for the time being, I think it’s the best we have. Let me know what you think.

How Does S&OP Impact Inventory Management?

We do several types of research at Supply Chain Insights- financial benchmarking, quantitative surveys and qualitative interviews. The vision has always been to connect the results of these different research efforts to create a 360 degree view of the supply chain industry. For example, do companies that are more advanced in their utilization of big data demonstrate better cash flow management as measured by the cash-to-cash cycle? Or, do companies that rate themselves as “outside-in” oriented prove more resilient on the Supply Chain Index scale?

The infographic below illustrates the connection between inventory turns and Sales & Operations Planning (S&OP) as measured through two separate research efforts.

Companies that were better aligned in their Sales & Operations Planning activities were more likely to improve inventory turns performance from 2006-2013. 49% of all companies demonstrated improving inventory turns performance over the time period, but 67% of companies that rated themselves with high alignment between sales & operations improved inventory performance. This data reinforces what one might expect to see- that better alignment within the organization leads to better financial performance. However, if I’ve learned one thing through the financial research, it is that often we have misconceptions about our company’s financial performance. Of course, the disclaimer needs to be included that correlation does not indicate causation. Still, it’s good to find evidence to support the idea that alignment between teams within the organization can be demonstrated in improved financial performance.

At the top of the post, I mentioned a couple of different connections we are interested in: big data and cash flow as well as “outside-in” orientation and resiliency. What other connections would you like to see explored between the worlds of supply chain and finance?

Supply Chain Trivia

During intermissions at the Supply Chain Insights Global Summit, tidbits of supply chain trivia played across the ballroom screen. Over the past two years, I have collected these tidbits from articles, interviews, client interactions and anywhere else I could scoop them up.

Here are some examples:

Check out the slides below and if you have your own trivia, please send it along. I’d love to add it to my list.

 

Supply Chain Talent in 2014

Supply chain is often described as the intersection of “people, process and technology.” I’m going to hope those words are listed not only in alphabetical order but also in order of importance. People are a critical component of a successful supply chain and unfortunately an area where many companies are falling short. Take a look at the graphic below from our recently completed Supply Chain Talent survey.

Nearly half of respondents believe they are worse at managing supply chain talent than their peers. Only 14% think they are doing a better job. There are many challenges as seen below. The challenges are not one-sided. Both employees and companies are struggling.  The top issues in 2014 are highlighted below.

One of the techniques we like to use in our surveys is tracking capabilities over time. For that reason, we repeat the talent survey on an annual basis. This year, we also asked respondents to predict their top challenges in 2019. Some challenges stay near the top of list while others lose relevance over a longer time horizon.

One challenge remains in the top three for both 2014 and 2019 – the lack of clear job progression and career path. I think this challenge is especially topical for young professionals in the workplace who are emerging from a very structured and signposted educational system. The lack of signposts on the career path can be a serious liability when it comes to retaining young talent. Young people are likely to go where there is a clear path forward. Supply chain careers are notoriously nonlinear, but companies should start thinking about ways to openly address this issue.

If there is a bright spot, it is that companies are beginning to understand where they are faltering and struggling. How would you rank your employer on their talent management? Do you have a clear career path outlined either individually or with the help of supervisors? I’d love to hear from you.

Interview with Jill Marcotte of Dealer Tire

Last week I had a chance to chat with Jill Marcotte, Partner and Chief Supply Chain Officer of Dealer Tire, LLC. We covered everything from metrics to supply chain excellence across industries to career advice for young professionals. Check it out.

Jill Marcotte was named Partner and Chief Supply Chain Officer with ownership interest for Dealer Tire, LLC in January of 2001 as the company was initially founded. Dealer Tire is exclusively focused on building and supporting the car-dealer channel by making it easy and profitable for automotive dealers and OEMs to sell tires, services, and parts to drive loyalty and retention.  Dealer Tire currently manages 25 OE tire programs across the US and Canada for customers such as BMW, MB, Lexus Toyota and Chrysler.  Jill is known as a goal-oriented team builder with an ability to create a vision and inspire outstanding results.  Jill has directed growth of Dealer Tire’s Logistics function from its original three distribution centers to its current network of 32 in the U.S. and seven in Canada.  She also built Supplier Relations, Transportation, Supply Chain Solutions, and Inventory Management teams to support the company’s dramatic sales growth.

 What financial metrics do you track at Dealer Tire?

We have many metrics that we track for a variety of purposes.  From an overall financial perspective, key metrics include, but are not limited to: revenue growth, gross margin, operating expenses as a % of sales (warehouse, SG&A), EBITDA margin, DSO, DPO, and inventory turns.

 How has this changed since you started with the company? 

We have always tracked these metrics.  However, at times, the company’s performance or strategic goal(s) may shift the focus towards certain metrics more than others.

 What different industries have you worked in and how has your experience differed across those especially in terms of what makes a “good” supply chain?  I have been fortunate to have gained experience in a variety of company types, including automotive and confections (consumer/food) with both a wholesale and retail focus.  I have worked in privately held and public companies, large and small companies and fast growing and stable companies.  A “good” supply chain supports the company vision and goals, adapting to meet the needs of the customer and key stakeholders.  What is most important in each situation, with each unique company, is to determine the best way to have the most impact on the company.  In each company, determining that one most important advantage has been key to leveraging the supply chain and it has differed in each company.  Building a supply chain that can flex with the many changes (environmental, economic, customer additions, product offerings, service offerings, geographical expansions, etc.) that companies experience today is important to having a “good” supply chain.   Being future focused, proactive and staying ahead of your competition will minimize lost opportunities.  Executing with excellence and meeting commitments and metrics is fundamental to having a successful supply chain.

Dealer Tire is expanding its B2C business. What has surprised you the most about that experience? Where are you at currently? Is the pilot program expanding?

Our first pilot of RightTurn.com was in Dallas, Texas.  We used this pilot to test our concept, the process, the web site and marketing.  Leveraging customer feedback and results, we then made improvements.  We expanded the pilot to include Cleveland, Ohio.  In both cases, we received positive feedback from consumers, validating our goal of an “easy, right, fair” experience – a fairly new concept to tire purchasing.  Our associates have really embraced our expansion from a B2B company to include a B2C presence.  What has surprised me the most is the wide variety of consumers that have purchased from the site, not just our targeted demographic group.  We will definitely be expanding into additional markets in 2015.

Finally, what would you tell young professionals in the supply chain industry?  Supply chain is a great career choice.  Companies are continuing to place increasing value on the contribution that can be made by supply chain professionals.   The variety of supply chain roles makes it a great choice for professionals with differing skill sets.  The best advice I can give to young professionals is to focus on their company’s needs; find the best way to positively impact company results.  Always be selfless about putting the company’s needs first and foremost – always looking for a way to have an impact.  Have an informed point of view – have facts and information to defend your perspective.  Continually develop your relationship skills to increase your influence to drive the right decisions at your company.  You will be recognized as a valued contributor.

Thank you so much to Jill for taking time to answer these questions. I hope my readers found this interview as interesting and insightful as I did. If you did, let me know and I will work to incorporate more interviews into the blog.

Big Data Helps You Ask The Right Questions

There’s a lot of buzz these days about big data. But big data just for the sake of being big has little to offer supply chain. A spreadsheet with a million rows is no more or less insightful than one with ten rows. It depends on what is in the data and what tools we have to analyze the data. The tools and skill set component is a critical one. In fact, I think that big data can sometimes paralyze overwhelmed and understaffed supply chain departments.

Check out the results of a recent survey we did. The top pain for all respondents was the ability to get to data. Does more data make that task any easier? I would argue no. In some instances it is probably true that data doesn’t exist. In others, data exists and it is the task of slogging through it to find meaning that is the challenge.

At Supply Chain Insights, we have spent more than two years buried in financial data trying to understand the relationship between supply chain performance and financial performance. There is a large quantity of both. The challenge is finding meaningful relationships and actionable insights from the data.

This is a journey without a clear end and a math problem without a single solution. For me, coming from school, I spent a long time looking for the single answer. I am slowly coming around to accept that there is not a single answer. Why does the Index model depend so heavily on inventory turns and operating margin? It’s a good question. Those metrics are some of the most meaningful for supply chain leaders, they are objective and they are harder to game than other metrics. Would gross margin be better? Or days of inventory? Or something else entirely? Maybe. This is wholeheartedly a journey without a clear destination. The further we go, the more we discover and the better we are at asking important questions. I think what I’m trying to say is that more data doesn’t solve your problems. In fact, if you’re using it right, it probably just forces you to ask better questions.

One Year Later: Do We Have a Greener Supply Chain?

There are several research studies that we repeat on an annual basis- risk management, supply chain talent, green supply chain and big data. If you’d like to contribute on any of those topics, click the links above and take the short survey. We share all the results openly after the survey closes. In identifying topics to track year over year, we like to pick subjects that are dynamic. Are companies’ approaches to big data different this year than they were last? Are companies making progress on sustainability issues? Has all the publicity about the talent shortage helped alleviate the issue?

We just got the results compiled for our second green supply chain survey and I thought I’d share some high level insights.

Companies are doing less public sharing of sustainability goals than they were a year ago. More companies plan to, but less are actively doing so. This disappoints me. Things get done when parties are held accountable. Public sharing of goals is a great way for companies to make a public commitment to improve their supply chain practices in a more green direction.

But here’s something interesting. At the same time that companies are being less vocal about what they doing, they are including a more extended version of the supply chain in their green plans.

Only 34% of respondents are only focused on activities within their four walls and I think that’s refreshing. Supply chains don’t exist in isolation and it’s great to see companies acknowledging and working towards that extended vision. Collaboration on green initiatives can be a great first step on a long list of ways companies could improve performance in concert.

Like I mentioned, this study is still open and we are hoping to collect significantly more responses before closing it down for final analysis. If you’d like to participate, here is the link one more time.

New and Old

I am out of my comfort zone this week. I took a break from the financial analysis to do some thinking and learning about the software vendor space in supply chain management. This is a whole new world!

On one hand, the options and technologies are incredible. Companies are tracking SKU level data, obtaining instant out-of-stock alerts and all kind of real-time events. On the other hand, we are still fighting the same problems we’ve had for 30 years. Many companies are using the same old tools. In fact, a recent survey I found from Software Advice stated that 9% of respondents are still using only spreadsheets to track supply chain, while a further 5% are using nothing!

Many supply chain problems have remained remarkably consistent over time. Maybe they’re a bit more intense or occurring at a faster pace, but we’re well versed in the problems. How do we get this box to this place for this cost in this time period? The solutions however are totally different. Smartphones are totally reshaping the landscape. 3D printing, the Internet of Things, autonomous cars. These things sound so futuristic. And they are. But they’re on their way. Are you optimistic?

Research Is Hard

Last night as I worked to compile the data needed for a table in our upcoming consumer value network report, it hit me. What we are doing is hard. There is a lot that happens behind the scenes to get that pretty data in to the report. Below is the table I was working on to consider 5 industries in the consumer value chain over the period 2006-2012. Not only are we showing averages, but also the change over the time period on the second portion of each row. It seems obvious, but the average and the percentage change illuminate different facts. Together, they provide a much more comprehensive understanding than on their own.

But what makes it into our research and how do we display it? The choices are many and for better or for worse, there is no one single right answer. What industries are considered part of the consumer value network? What is the right NAICS code designation to capture the retail segment without getting too narrow or too broad? What are the metrics we (or the reader) should care about?

Some supply chain metrics are obvious: inventory turns, cash-to-cash cycle and operating margin. Other are less so, revenue per employee encompasses the whole enterprise but helps as a proxy of complexity in operations from a supply chain perspective. Return on invested capital (ROIC) is another metric we have come to gradually, through trial and error. In our work last year, we were surprised to find that ROIC had a much higher correlation factor with market capitalization than the more traditional return on assets. It is for this reason we have included ROIC as one part of the balance metric in the Supply Chain Index.

Once the metrics are chosen, more decisions appear. What is the right time period to consider? Is a table appropriate or perhaps an orbit chart? What about a simple line graph? These decisions depend not only on what data we want to present, but also on the audience. For someone new to the methodology, jumping straight into a pile of orbit charts is hard. Tables or simpler charts might provide a better entry point.

Next time you’re faced with a chart or table, remember the layers of decisions that lie beyond that research offering. A pie chart may look simple, but research is anything but easy as pie.

Black, White and Gray

The world of supply chain is one of gray. As much as I want it to be black and white, it is not. There are few “best practices” and few “worst practices.” Mainly there are evolving or improving practices. There are countless technology vendors, consultants, analysts, journalists and practitioners. We are all in this together. Unlike a spelling bee or an offsides call in a hockey game, there is no wrong or right answer.

Immersed in financial metrics, it is easy to lose sight of this. There should be a “right” answer. But there is not. Our ongoing research on the Supply Chain Index is one of discovery. For every question we answer, we come up with three more. This moves the industry forward. It is not fast and it is not perfect, but we are doing our best and trying new ways every day to improve supply chains around the world.