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.

The Supply Chain Index, Broadly

One of the core beliefs backing the new Supply Chain Index is that companies face wildly different operating environments and should be compared only against peers in similar situations. Safeway Inc.‘s supply chain is so structurally and strategically different from American Apparel Inc that any comparison is almost entirely meaningless. Of course, there are lessons to be learned from one industry and implemented into another, but it is rarely as simple as copy-and-paste. For that reason, we like to conduct our Supply Chain Index analysis along strict industry lines.

Every once in a while though, we branch out and compare different industries. Usually, this comparison is based upon the idea of a value chain or value network. Industries that cooperate and collaborate to bring products to consumers may not be apples-to-apples comparable, but it can be insightful to gain a longer value chain perspective stretching across different industries. The table below illustrates some preliminary work we have conducted on the consumer value network encompassing retail, consumer packaged goods, food & beverage and chemical companies.

The three metrics: balance, strength and resiliency are objective measures based upon financial performance. The best companies or industries will have high values for balance and strength, but low values for resiliency. Resiliency, the calculation of tightness of the pattern at the intersection of inventory turns and operating margin, is best when the value is low and the pattern is tight.

In the table above, based upon a rather selective number of companies you can see that the food & beverage industry has the best performance on balance and strength, while consumer packaged goods leads the way on resiliency. Fluctuating commodity costs make resiliency a different task in the food & beverage world.

The chemical industry turns in negative performance on both balance and strength, meaning the industry as a whole has lost ground since 2006. The Great Recession created significant challenges for chemical manufacturers and that is reflected in their results.

What else do you see in the results? Do the results for this value chain or value network surprise you? We’ll be profiling these four industries in greater detail in a June research report. In the meantime, you can check out our latest Index methodology report here and take a listen to a podcast over here.

 

What I Learned

Nearly two and half years of work on financial ratios in connection with supply chain excellence have led us to this point. This week we are publishing the results of the 2014 Supply Chain Index. Our report (The Supply Chain Index: Improving Strength, Balance and Resiliency) examines the methodology of the Index as well as three industry peer groups (chemical, consumer packaged goods and pharmaceutical). Here is what I have learned through the process -

* This is hard work. Connecting financial metrics with supply chain performance is not as simple as it sounds. Maybe to wiser people it doesn’t sound easy, but to me it initially sounded straight forward. It has not been. This has been a long project full of mistakes and iterations and improvements.

*Cross industry analysis and comparisons are fun but not always meaningful. Comparing well known supply chain leaders like Wal-Mart, McDonald’s and Apple is a fun exercise, but the realities of the different business environments means practices are not always transferable across industries. Comparing against a similar peer group of public companies or even down to divisional analysis provides much more actionable insight.

*Big companies may be disadvantaged in the race for supply chain excellence. Companies with a larger supply chain footprint and more complexity stretching across the globe deal with more inertia than smaller more agile companies. It is for this reason we are aiming to include public companies of all different sizes in our ranking, not only the largest by revenue.

*Change takes time. It takes several years to measure consistent and sustained change within a supply chain. Most leaders are surprised to see that, in general, inventory levels over the past decade have not come down significantly. A short-term project mentality has led us to exaggerate inventory improvements. In an effort to provide the necessary time horizon, the Supply Chain Index is based on seven years of results (2006-2012).

I hope you will catch the whole report available here and consider joining our webinar on May 19 at 11 EST. The webinar is the second on the list here.

What About Customer Service Metrics?

Our exploration of supply chain excellence divides financial metrics into four categories. Growth, profitability, cycle and complexity are the four components of the Supply Chain Effective Frontier. We believe supply chain leaders have to make conscious trade-offs of these four priorities in order to improve supply chain performance in a calculated and controlled manner. Many of you are familiar with our seesaw of the Supply Chain Effective Frontier.

One of the most common questions we get in our discussions of supply chain excellence is “where are the customer service metrics?”. Unfortunately, for the time being, they are not here. For several reasons we are not comfortable including customer service metrics. There are no objective standards for customer service metrics. Because they are not reported in annual reports (with the rest of our metrics), we do not believe companies can be expected to objectively measure and report their performance.

Inventory is a proxy for customer service. Large swings in inventory are evident in financial metrics including days of inventory or inventory turns. Excessive fluctuation in these indicates an underlying issue within the supply chain which may manifest in reduced customer service levels. It is not perfect, but it is the best we have for the time being.

Finally, when we conduct deep dives into divisional data for clients, we are able to get a more nuanced look including some measures of customer service levels. After signing an NDA, companies are more willing to share that data and we can look at performance across different divisions or categories. The figure below illustrates an example of inventory turn and case fill percentage across three different categories.

If you’re interested in complimentary benchmarking or a deeper dive into your company’s financials, send me a note at abby.mayer@supplychaininsights.com. If you’re developing a measure of customer service based on financial performance or other objective measures, definitely let me know. In the meantime, thanks for following along!

Supply Chain Resiliency Revisited

A couple weeks ago, I wrote a post entitled “What the Heck is Supply Chain Resiliency?” We had just completed preliminary work on a new metric in cooperation with Arizona State University called resiliency. Resiliency is a measure of a company’s performance at the intersection of inventory turns and operating margin. It is one piece of the Supply Chain Index that we are developing. The other pieces are still in development, but I’d like to give you a sneak peek into our work. We’re planning to develop two additional metrics – strength and balance.

Strength will be our attempt to quantify year-over-year consistency in results. This might be revenue growth on an annual basis or even Return on Invested Capital. This metric is designed to reward companies demonstrating consistency in results. Of course improvement in metrics is important, but so too is consistency.

Balance is the third metric we are creating and for long time readers will likely evoke memories of last year’s work on the Index. This is our attempt to connect supply chain financial metrics with market capitalization. Of course, there is a TON of noise in market capitalization data that cannot be controlled by supply chain, but we believe there is a relationship there. As the work continues, we are finding that some industries demonstrate a correlation and others do not. Is there a pattern between industries that do or do not correlate? The discovery is ongoing.

This is work that has never been done before and it keeps me on my toes. If you’d like to follow along with our latest developments, be sure to tune into our complimentary webinar this Thursday, April 24 at 2 p.m. ET. Lora Cecere, myself and Dr. George Runger of ASU will be presenting our latest research.

In order to keep our webinar series going, we depend on survey respondents from readers like you. We have several open surveys available here and are especially excited to finish a long running study on retail scorecards. If you can help us out, here is the link. See you Thursday!

Stuck on Inventory

Inventory trends are clear. While companies tout their accomplishments at conferences and in annual reports, a longer term perspective shows we haven’t made much improvement since 2000. Sure, we have made some improvement as shown in the table below, but for most industries the gains in inventory turns are single digit percentages.

Hospitals, mass retail (think Target & Wal-Mart), and the grocery industry have bucked the trend, but most other industries are making very slow gains.

There are several underlying reasons for this stagnancy. Complexity is rising for most supply chains. Stock keeping units (SKU) are rapidly increasing. Supply chains are lengthening as companies move manufacturing abroad and consumer demand pops up in new parts of the world. With these lengthening supply chains comes an increased chance of a risk event impacting operations. The technology market is crowded and complex. Software is not living up to its promises. Talent is in short supply. Plus many more. What else have I missed?

One alternative companies have turned to in order to tackle some of these challenges is increased use of vendor managed inventory or VMI. Our latest survey takes a look at the adoption of VMI and how consumer packaged goods and food and beverage manufacturers are leveraging the technology. If you’re in one of those industries, we’d love your input. The link is here. In addition, if you’re interested in offering your perspective on planning software within your organization, check out this other open survey.

All respondents will get a complimentary copy of the results as well as the offer for a 1-hour telephone review of the results with Lora Cecere. We’d love your help to bring these two surveys home!

Metrics That Tell A Story

A single company can be sliced and diced in a multitude of ways. Different metrics are meaningful to different groups of people – both internally and externally of the company. That seems simple, but it is important to understand. P/E ratio is important to investors. Operating margin is a good yard stick of supply chain performance and is important to a Chief Supply Chain Officer (CSCO). Other metrics, like customer acquisition cost are important to a marketing department and Chief Marketing Officer (CMO). Additionally, departments like Transportation or Corporate Social Responsibility will measure their performance using different yardsticks. This is natural, but can cause conflict between different functions within the organization.

When it comes to supply chain, we have a short list of metrics we like to consider.

We are experimenting with other metrics including Return on Assets and Return on Invested Capital. Long time readers will remember our attempts last year to connect some of the above metrics with market capitalization. That work is still ongoing. In the meantime, the metrics listed above are the ones I return to over and over again to understand supply chain performance.

In addition, the metrics in the table are based upon publicly available data in corporate annual reports. In an ideal world, we might like to know about on-time deliveries or other internal metrics, but companies are not required to report that.

Are there any other metrics you would suggest including to dial down on supply chain performance?