Lessons from Metrics That Matter, Part 1

In the United States, the rhythm and cycle of business slows in the face of the Thanksgiving holiday. When the holidays roll into my life, I feel that I can take a breath. A deep, long breath like the one of the swimmer in the picture. 

Holidays bring cancellations, and holes quickly appear in the calendar. I find this to be a good time to write, and  look forward to crossing- off those nagging items at the bottom of the to-do list that seem to never get done. One of the things on that list is to write a series of blogs on my lessons learned from presenting on the Supply Chain Metrics That Matter research from my recent book. This blog is the first in this series. 

The Preface 

On December 26th, 2010, I started writing the first chapter of my first book, Bricks Matter. I was excited. 2012 was the thirtieth anniversary of supply chain management, and I wanted to write a celebratory book.

In my role as an industry analyst, over the last ten years, I had worked with over six-hundred companies, and I wanted to tell their story. At the time, I believed that the first generation supply chain pioneers precipitously reduced costs, improved inventory and overcame complexity. Based on all of the projects that I had reviewed over the course of the last decade, I assumed that I would see it in balance sheet results.

As I cleaned the holiday dishes and scraped apple pie crust from my counter, I started thinking about the task at hand. It was daunting. I had never written a book before. To start the process, I started printing balance sheet information. All afternoon, as the information rolled off the printer, I placed the printed information into two stacks: companies that had improved inventory turns and operating margin and those that had not (for the period of 2006-2011). I was shocked to find that nine out of ten companies were stuck and had not made progress. I shook my head when I saw how many of these companies were clients.  The orbit chart of Kimberly-Clark is a typical pattern. The company's results in both inventory turns and operating margins has gone backwards. 

Figure 1: Orbit Chart for Kimberly-Clark at the Intersection of Inventory Turns and Operating Margins

I was under contract to write Bricks Matter; and faced a serious dilemma. The story was vastly different than what I scoped in my book abstract to the publisher. What should I do since the premise of the book that I submitted was flawed? I tossed and turned and called my publisher. I chose to write the book Bricks Matter as a nonfiction, historical view of supply chain planning, and when completed to launch a research project to find out why nine out of ten companies were stuck. This four year research project resulted in the writing of a second book, Supply Chain Metrics That Matter. 

Writing a book is not for the faint of heart. For each book, I wrote two days a week for eight months to produce nine chapters averaging 12,000 words. While I know that neither will make the New York Times Best Sellers List, as the words moved from my fingers onto the pages, I gained clarity.

In a series of interviews, quantitative studies and statistical data mining, I figured out that nine out of ten companies were stuck for five reasons:

1. Incremental Versus System Thinking.   The supply chain is a complex system that must supply chain leaders have faced incrementally. The system is a non-linear, adaptive system where we have tried to force-fit linear optimization tools. As a result, companies have made progress on projects in pockets; but have struggled to bring the savings and results to the balance sheet. 
2. Functionally-Based Goals. Only 1/3 of companies have a holistic leader where source, make and deliver report through a common organization. Because the functions are not aligned, projects are focused on driving functional outcomes. As a result, the organization sub-optimizes the results. (Look for more on this in a subsequent blog.) The best results happen when the requirements of source, make and deliver are orchestrated together. 
3. Project-Based Focus. Companies have hundreds and thousands of projects. There is a belief that if each project has a well-defined ROI that goodness will happen; however, unless the projects are aligned to the strategy, they lack cohesion, and project results can counteract each other.
4. Belief in Historic Best Practices. Because of the functional orientation of teams, and the historic focus of functional improvement, many leaders do not see the need to embrace the supply chain as a complex system and design outside-in processes. There is a general belief in the industry that there are supply chain best practices; and that these historic practices (which are often functional in nature) can be used to drive superlative financial results. Instead, the historic practices need to be vetted against the supply chain strategy and rationalized using systems theory. 
5. Lack of Holistic Metrics Frameworks. Most companies measure too many things (their metrics frameworks have too many metrics and they are not structured).  As a result, it is difficult to get balance in the complex system. To help clients, I developed an image that I term the Effective Frontier. The model, shown in Figure 2, is based on the belief that companies need to balance growth objectives against cost, inventory and Return on Invested Capital objectives. The best results--increase in market capitalization-- happens when there is a balance between cost, cycle and complexity measurements. The focus on a singular metric will throw the supply chain out of balance and sub-optimize the system.

Figure 2: The Effective Frontier

The Story:

It was a rainy Tuesday afternoon. (One of those days when the rain falls in heavy sheets and no umbrella or raincoat can keep you dry.) My clothes got wet running through the parking lot to the visitors lobby. Soaked through and through, I was quickly whisked from the lobby, up the elevator to the meeting of the top floor, to present the key insights from the recent book. It was a cross-functional team of a global conglomerate. The inquiry started with a discussion on the Supply Chains to Admire methodology. Rescheduled three times and with changing agenda, I was apprehensive that I would hit the mark. 

I started the meeting by sharing the balance sheet results of peer group competitors. All of the company were stuck in a similar way.... The group peered at the charts like pigs watching TV. (The orbit charts are a different view and take some time to internalize.) At the end, the leader of the group stated, "I don't get it. We need a framework that can help us measure more than two metrics."

At that time, I smiled, and asked the group to turn to chapter 8 in the Supply Chain Metrics That Matter book. As the group turned the pages, I swallowed hard. This group, like many I speak to, had struggled so hard to understand the charts representing system theory that they were losing the main point of the discussion.

I then continued, "What I found in writing the book is that the companies driving the greatest results, hold the organization cross-functionally to the metrics that matter on the Effective Frontier (Growth, Operating Margin, Inventory Turns and Return on Invested Capital) while holding the functions accountable for reliability. One company that I worked with recently, used the metrics bonus matrix shown in Figure 3."

Figure 3: Bonus Matrix based on the Supply Chain Metrics That Matter Framework

The group struggled that such a simple approach could work. Their metrics framework was quite complicated with many metrics. With a strong functional finance group, they believed that every function should be held accountable for the lowest functional costs (lowest transportation, manufacturing and procurement costs). The belief was deeply rooted in the culture. The concept of aligning all functions to a balanced portfolio of corporate metrics--with a focus on total costs-- while redefining functional metrics to be focused on reliability was too big of a cultural shift.  

Figure 4: Orbit Chart of the Company 

As a result, I don't expect the company's performance shown in Figure 4 to improve anytime soon. The company is making performance on costs, but not on a balanced portfolio of metrics. 

My Lesson:

As I walked out of the building, I smiled and thought, "You can take a horse to water, but you cannot make him drink." Shifting from conventionally-held beliefs of legacy practices to drive more holistic systems thinking is hard for most organizations.  It usually does not happen with one or two discussions. Instead, the concepts grow over time. I expect to hear back from this company sometime during the year to renew the conversation. As a result, it is time for me to take a deep breath and be patient. When they call, I will be here...

About Lora:

Lora Cecere is the Founder of Supply Chain Insights. She is
trying to redefine the industry analyst model to make it friendlier and more useful for supply chain leaders. Lora has written the books Supply Chain Metrics That Matter and Bricks Matter, and is currently working on her third book, Leadership Matters. She also actively blogs on her Supply Chain Insights website, at the Supply Chain Shaman blog, and for Forbes. When not writing or running her company, Lora is training for a triathlon, taking classes for her DBA degree in research, knitting and quilting for her new granddaughter, and doing tendu (s) and Dégagé (s) to dome her feet for pointe work at the ballet barre. Lora thinks that we are never too old to learn or to push for excellence.trying to redefine the industry analyst model to make it friendlier and more useful for supply chain leaders.