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?

What the Heck is Supply Chain Resiliency?

Resiliency, agility, excellence, visibility, responsiveness. These are all words thrown about to describe the ideal supply chain. But does anybody really have a clear definition of what supply chain resiliency is? At Supply Chain Insights, we finally do! To check out our full research report click here, but from the short and sweet version, keep reading. (As for those other adjectives, we’re working on them.)

Our definition of supply chain resiliency or “Resilience Ranking” is a mathematical measure of corporate performance at the intersection of inventory turns and operating margin. Originally, we started with subjective analysis of orbit chart performance. Take the chart below for example. When we look at the patterns of Boston Scientific versus Stryker, it is obvious how much tighter Stryker has managed inventory turns and operating margin compared to Boston Scientific.

Through a partnership with Dr. George Runger and Bahar Azarnoush at Arizona State University, we have quantified that tightness into a measure of “mean distance” of the pattern. This is our measure of resiliency. Similar to the cash-to-cash cycle, a lower number is better as it represent more stability, more resiliency and less oscillation in the pattern. The table below quantifies the patterns of several medical device companies with Stryker and Boston Scientific as bookends. Notice that the rating of Stryker (0.22) is significantly lower than Boston Scientific’s 0.68.

I hope this gives you a sense of the new Resilience Ranking we have developed at Supply Chain Insights. For the full report and a more in-depth look at several industries, check out the report here. Defining a great supply chain is hard enough without the nebulous nature of undefined adjectives thrown into the mix. Cross resiliency off the list of vague adjectives.

Another component of the work we are doing besides the financial analysis is quantitative research surveys. One of our current surveys looks at the state of risk management now, 5 years ago and 5 years from now. I hope you’ll consider completing the survey here. Our ultimate goal is to connect results from our financial work with our research surveys to be able to answer questions like this – How do risk management strategies vary between companies of low and high resiliency rankings? We need your help to get there!

Automation in the Supply Chain

Yesterday, Bill Gates spoke at The American Enterprise Institute and was quoted as saying “Software substitution, whether it’s for drivers or waiters or nurses … it’s progressing. …  Technology over time will reduce demand for jobs, particularly at the lower end of skill set. …  20 years from now, labor demand for lots of skill sets will be substantially lower. I don’t think people have that in their mental model.”

When I think about automation and the rise of “software substitution” in the supply chain, a couple key industries and functions come to mind. Complex and intricate manufacturing functions seem like an obvious place to start. Industries I see this affecting in particular are contract manufacturing, semiconductor & hard disk drive manufacturing and aerospace & defense manufacturing. Logistics functions (think truck drivers or train engineers) also come to mind. Warehouse workers at large distribution centers are another role I could see being replaced. We’re already starting to see some of this in our day to day life. Many banking functions are now conducted online or at an ATM. When was the last time you needed a real teller? Furthermore, we check ourselves out with our grocery purchases and we check ourselves in for our flights.

What other industries or roles do you think will be affected by this shift? How does the rise of 3D printing play into this? Is your supply chain ready to take advantage of these developments? More critically, is your mental model ready?

Two Years Later

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!

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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.

Supply Chain Risk Management (Past, Present & Future)

Supply chain risk is a big deal. A couple weeks ago, I asked for help from blog readers for a survey we were developing to better understand how companies are addressing risks in their supply chain. Well, the survey is now launched and we need your response! Click here to take the short survey.

In the survey, we take a pretty broad approach to risk but we’re specifically interested in how risk management is evolving within your company. What was risk and risk management like 5 years ago? What is it like now? Where are you headed in the next 5 years? I assume that risk is rising, maybe I will be proved wrong. Is your practice of risk management rising in sync or are you falling behind?

I haven’t been in the industry too long, but it is my perception that risk management is steadily rising up the list of top concerns. Supply chains are more global than ever and thus, more susceptible to a natural disaster, geopolitical event or anything else that might go wrong half a world away.

I’m excited to see the results, but to get there we need responses. Here is the link again. And if you’re really in the survey mood, check out our full list of open surveys. Thanks so much!

Interview with Dr. George Runger

If it seems like the Supply Chain Index work has been going on forever, that’s because it has been. This is a brand new realm of research and we have had many stops and starts over the past two years as we aim to connect the worlds of supply chain and finance. Long time readers will remember the Supply Chain Index work that spanned last summer as we began to study the relationship between supply chain excellence and market capitalization. The goal was to create a simple equation connecting supply chain ratios as independent variables helping to explain stock market performance.
After a brief respite, we are back at it and have enlisted the assistance of Dr. George Runger of Arizona State University along with PhD student Bahar Azarnoush. I spent a bit of time speaking with Dr. Runger last week as he explained his background and summarized the newest work on the Supply Chain Index.
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Abby: Hi Dr. Runger, let’s start with the basics. Tell us a bit about yourself.
Dr. Runger: Sure, I am a Professor in the School of Computing, Informatics and Decision Systems Engineering at Arizona State University. My research is on real-time monitoring and machine learning methods with a focus on large, complex data sets with applications. I hold degrees in industrial engineering and statistics. In addition to academic work, I was a senior engineer at IBM.

Abby: Great. Can you briefly summarize the work we are doing so that it is accessible to the general supply chain audience?

Dr. Runger: The first task is to understand how consistently a supply chain operates over time. A scatter plot of operating margins and inventory turns quarterly (or yearly) for some companies is quite compact, while for others it is not. Compactness indicates that the supply chain is more consistent or stable over time. In order to compare companies and industries, a measure of compactness is useful. Several measures were considered and evaluated.  The total of the distances between all pairs of points in the scatterplot of a company was selected as a simple, but effective measure. The following work is to compare this measure between companies, between industries, and over time to detect trends in the stability of the corresponding supply chains.

Abby: That’s right. We’re trying to understand the compactness of the pattern of inventory turns and operating margin. Many folks will be familiar with what we call orbit charts that look like the one below.

In this chart, we’re looking at two companies, CVS & Walgreen, and their performance on inventory turns and operating margin over the past decade. As you’ll see, the Walgreen pattern (orange) is much tighter than CVS which has jumped around a lot over the past decade. We have done a lot of manual pattern recognition, but are now moving to the next level and looking for a numerical way to measure and rank those patterns based upon tightness.

Abby: So, Dr. Runger, we’ve been looking at this together for just about a month now. What has surprised you the most in our work together?

Dr. Runger: After Supply Chain Insights described their thoughts on supply chain stability, and the related measures of compactness, there was a lot of interest on everyone’s part to calculate the measures, summarize the measures, and generate ideas for additional analyses.

Abby: Yes, this is definitely exploratory work. For every question we answer, we come up with what seems like five new avenues of discovery. Finally, what do you find most important to remember when doing new research projects?

Dr. Runger: Communications are always important. Questions and particularly results need to be communicated clearly. As groups work together, they learn the most important elements and results from an analysis, and that is already occurring, but this always involves good communications.

Abby: Awesome. I agree that communication is key and it can be especially challenging (and thus critical) when combining people with different backgrounds and skills sets. We’re glad to be partnered with you and be able to use your expertise to continue our work on the Supply Chain Index.

Readers, what other questions do you have for Dr. Runger? I’ll be sure to pass them along and keep you updated as our work continues on the Supply Chain Index.

The Power of a Question

Two years ago, I submitted a question to Lora Cecere’s Supply Chain Shaman blog as I was in the middle of my graduate studies. That question turned into a blog post and then a correspondence, a part time internship and finally a full time job and career path. It’s still incredible to look back at that journey that started as a question from me (a grad student in England) to Lora (an analyst in the U.S.). Throughout the past two years, I have repeatedly found great value in asking questions.

I currently work in an interesting space at the intersection of supply chain and finance. In most organizations, there is a wide disconnect between these two functions exacerbated by the fact that they speak different languages. This gives me an opportunity to do a lot of education. Sometimes I am speaking to financial professionals about what metrics matter for supply chain. Other times, I am educating supply chain leaders on the basics of financial metrics. As a result, I get a lot of questions. I love them!

Because I spend all day in this world, I have sometimes made the mistake of assuming others are equally fluent in the world of supply chain metrics. Questions from clients help me to adjust my message for their understanding level. If my job description is to help clients formulate supply chain strategy based in part on results of financial benchmarking, we have to nail the basics. If there’s uncertainty around the components of the cash-to-cash cycle or why we want high inventory turns and low days of inventory, we need to address that before we can get to upper level strategy discussions.

I’m reminded of a Toastmaster’s rule that you have to adjust your message based on your audience. This is not only true in a formal speech setting, but true in all of life. It’s not about patronizing people or dumbing down your speech. It’s simply about being a good communicator and having accessible language. Questions are a valuable guiding post along the way. If I’m not getting questions, I’m worried. Either people aren’t engaged or aren’t understanding the content well enough to have questions.

So today I would encourage you to ask a question. Sometimes it’s asking for clarification on a project, sometimes it’s asking for a better definition of an overused acronym, sometimes it’s questioning an assumption that needs to be questioned. Keep the questions coming!

Refining Our Ecosystem

The Supply Chain Insights team spent last week huddled around a kitchen table in Baltimore, Maryland outlining the goals large and small for the year. The company is now 2 years old and one of the advantages of working for a young, small company is getting to participate in conversations that might take place solely within a marketing or strategy discussion within a larger organization. Seeing how all the pieces fit together into a single company has been a highly educational and exciting part of my time at the company.

A lot of our work this year is focused on refining who we are and what we offer to our clients. I thought I’d start that discussion with a brief outline of what Supply Chain Insights is and the key pieces, events and offerings.

* Supply Chain Insights is the name of the company founded in February of 2012 by Lora Cecere. The company website hosts current research reports and open surveys as well as information about training events and the Global Summit in September 2014. (www.supplychaininsights.com)

*Supply Chain Shaman is the personal website of Lora Cecere where she has written for over 4 years about the supply chain technology, insights from ongoing advisory work and more recently qualitative and financial research completed through Supply Chain Insights. (www.supplychainshaman.com)

*This blog, Supply Chain Index, is written by me, Abby Mayer. It is focused primarily on exploring the connection between supply chain excellence and corporate financial performance. Of course, there is a lot of other stuff sprinkled in, everything from my experience as a young supply chain professional to interesting research we are conducting on talent, research scorecards, S&OP or anything else that strikes my fancy. (www.supplychainindex.com)

*Supply Chain Insights Global Summit is the event we put on each September to allow global supply chain leaders to meet and network in person. The theme of this year’s event is Imagine and registration is now open for the 2 day event (September 10 & 11, 2014). (www.supplychaininsightsglobalsummit.com)

This is not an exhaustive list. We do training events, host a supply chain related Wiki and online Community, provide advisory services and custom research. I hope this gives you a better sense of what this blog does and how it fits into the larger Supply Chain Insights ecosystem.

In Supply Chain Index related news, we have paired up with a professor and student at Arizona State University (ASU) to help us with the mathematical analysis on the Index and I am excited to get preliminary results back later this week. I will keep you posted.

How Far Are We From the Ideal Supply Chain?

If it’s news, it’s generally bad news. Even when it comes to supply chain matters, the reasons we make the headlines are rarely positive. But we are doing lots of thinks right in the supply chain space as we’ll see here. Our recent survey focuses on the current state of the food industry supply chain. Although we’ve got some preliminary results which I’ll discuss here- the survey is still open and if you’re a participant in that space, you can take it through this link.

One of the most interesting questions in the survey to me focused on how people would describe their current supply chain versus their “ideal” in 2015. And I’m happy to say, while there is (and always will be) room for improvement, we’re not that far away. See below for a neat way to summarize the responses.

Current descriptors are charted on the y axis and the ideal on the x axis. This creates a neat quadrant orientation with higher importance and lower performance variables in the bottom right. That is what we should be highly focused on improving to move our current closer to our ideal. The upper right corner on the other hand shows variables with high levels of current and ideal performance. Most respondents believe we are doing relatively well on being “aligned,” “agile,” “controlled” and “proactive.”

Perhaps most importantly, this sort of graphic representation enables us to see what doesn’t really matter- those quadrants on the left side represent the lower importance variables. Most respondents classified adjectives such as “risk-taking,” “strategic” and “outside-in” as the lowest performing and least important qualities of their supply chain today and in 2015. This is surprising as these are some of the most popular adjectives I hear when discussing the future of supply chains. However, my guess is that we are not there yet in practice even if the research and advisory firms are ready.

Of course, the ideal supply chain should be both strategic and outside-in but most respondents are still worried about creating a modern and fast supply chain first. The loftier goals are still important, but not to the same degree as more basic requirements such as “modern” and “well working.”

Do these results surprise you? What would you choose as high importance and low performance on your ideal scale? It seems to me that should be our focus in order to keep supply chain out of those negative news headlines. What do you think?