As we speed towards delivery of Lora Cecere’s second book, Metrics That Matter, it seemed natural to take a moment to look back at all we have accomplished over the past two years. I spent some time last week writing up a brief retrospective of the work we have completed since coming on board in February 2012. Enjoy!
The plan was simple-connect corporate performance with supply chain performance via financial metrics. The execution has been more difficult than we could have imagined. Our work began in February 2012 as I mined online annual reports industry by industry to construct spreadsheets of common financial metrics. We experimented with a multitude of ways to turn a spreadsheet into a story finally fine-tuning and setting upon orbit charts which you see scattered throughout this book. We worked our way through countless iterations as we created the best way to visualize the data and use financial metrics to tell stories about supply chain performance.
We shared our findings and educated supply chain leaders about finance and financial leaders about supply chain. Leaders helped us to understand the story as well. What caused this downswing in inventory in 2007, we would ask. They mentioned a 6 month laser focus brought on by a new manager. What caused these cash-to-cash cycle gyrations in the period of 2002-2004, they told us of the hard merger the community went through. In most organizations, there is a disconnect between the departments and no common language. We worked to bridge the gap.
We also created a new language. We imagined new concepts as a result of our financial work coming up with new terms to make sense of this new area of study. We sorted financial metrics into the categories of growth, profitability, cycle and complexity. Supply chain leaders are tasked with balancing these competing priorities which we termed the Supply Chain Effective Frontier.
In August of 2012, we began work on the first of many Supply Chain Metrics That Matter reports. The reports usually focus on a single industry ranging from automotive to consumer packaged goods and everything in between. This gave us a chance to better understand the differences between the industries and cemented Lora’s belief that industries have to be evaluated separately. The supply chain of a hard disk drive manufacturer is inherently different from a supply chain focused on food products and an apples to oranges comparison benefits no one.
In January of 2013, we felt comfortable with the data, orbit charts, and reports and took the next step - building the Supply Chain Index. We recruited assistance from mathematical and industrial engineering students at the University of Waterloo in Ontario and North Carolina State University to assist in the research effort. Our work moved from subjective pattern analysis to mathematical modeling. We chose market capitalization as our dependent, y variable and included several supply chain oriented metrics (think days of inventory, working capital, return on net assets, etc) as potential independent variables. We worked through countless hiccups and came away with equations connecting market capitalization and supply chain performance. We came away with an equal number of changes to make in the research process to strengthen both the inputs and the analysis.
In January of 2014, we resumed work on the Supply Chain Index. A year wiser, we brought in assistance from Arizona State University’s School of Computing, Informatics and Decision Systems Engineering. Currently, we are specifically focused on corporate performance at the intersection of operating margin and inventory turns. After 2 years of work, we believe this trade-off is one of the best indicators of supply chain excellence. Consecutive improvement on both metrics on an ongoing basis is rare, but indicative of top supply chains.
Connecting supply chain performance with financial performance has been much harder than any of us could have imagined. Follow along with ongoing research at www.supplychainindex.com and www.supplychaininsights.com and look for Lora’s new book, Metrics That Matter, coming this fall.