Supply Chain Metrics That Matter: A Q From the Audience

This month I presented research on the Supply Chain Metrics That Matter to an audience of 500 at a logistics conference in Mexico. At the end of the

presentation, the Qs in Spanish were fast and furious. One from the center of the audience stuck with me. A man in his early thirties asked, "How long does it take to make real improvement on the Supply Chain Metrics That Matter?"

I smiled. The answer is analogous to "How long is a man's legs?" Everyone wants a definite question, but the answer is, "It depends."

My response, "The average time to see improvement is three years. However, it can take five and many do not see improvement at all." What makes the difference? Here is my complete answer.

Background and Perspective

As I formulated the answer to the audience in my head, the flashbacks were fast and furious. In the 1990's when I worked for a software vendor and built presentations for the sales groups, I firmly believed that it was twelve-to-sixteen months. As an analyst at AMR Research and Gartner Group in the last decade, I believed that supply chain metrics improvement was possible in two-to-three years. However, in this period, I was not looking at balance sheet information. Now I am.... In my work as the Founder of Supply Chain Insights on the Supply Chain Metrics That Matter, I can see that it is much slower, and with more issues, than I thought before. In my first decade as an analyst, I was naive.

In the past four years, at Supply Chain Insights, the team focuses on understanding the patterns and drivers of the Supply Chain Metrics That Matter. As an organization, we sit on ten years of supply chain income statement and balance sheet data for global public companies and we are constantly triangulating the data and correlating the balance sheet data to quantitative research projects to understand the trends. The research is not easy. In the course of four years, we have learned a lot, but are still refining the research methodologies.

As I talk to supply chain leaders, I find many misconceptions. Surprisingly, I also find that while the majority of companies want to improve cost and inventory, only 10% of public companies are making progress on inventory and cost metrics at the same time. Few supply chain organizations recognize this fact.

The results fly in the face of conventional wisdom. Most companies feel that the supply chain is making great progress on cost, customer service and inventory. They may be making progress within a function, or project-by-project, or tracked objectives in continuous improvement programs, but it is not translating to the balance sheet and income statements.

Why is this? The supply chain is a complex system requiring holistic thinking in the management of metrics. What we see in the research is that a project may drive improvements, but it is hard for the organization to drive systemic improvements through a project-based focus. An improvement in project X may offset improvements in project Y. In a similar manner, many companies operate continuous improvement programs, and believe that they are driving great improvements on the Supply Chain Metrics That Matter, but an improvement in cost in a continuous improvement project can quickly be offset by a shift in complexity.

In the research, we find that success cannot happen through a project-based focus, a continuous improvement program-based focus or a functional metric focus. Instead, it requires cross-functional alignment on the Supply Chain Metrics That Matter. What are the Supply Chain Metrics That Matter? These are the metrics that have the highest correlation to an objective measure of value. We use market capitalization (price of shares outstanding by the number of shares outstanding in public markets) and market-to-tangible book in our research, and believe that companies should manage the metrics of growth (year-over-year revenue progress), operating margin, inventory turns, Return on Invested Capital (ROIC) and customer service (unit fill rates shipped on time)

My Answer

The fastest progress of a company happens when there is:

Continuity of Leadership. Progress is faster when the leader stays in place for the journey. Leadership disruption can halt progress. For example, in the time that I have been an analyst (2000-2015), P&G has had three leaders and Dow has had nine. 
Vision. When the leader understands that the supply chain is a complex system with increasing complexity, the rate of progress is faster. In contrast, when the metrics are managed in isolation and complexity is allowed to proliferate unchecked, supply chain progress against the goals is slower.
Reporting Relationships. As shown in Figure 1, when source, make and deliver report to the same leader, the progress is faster. There is faster progress when there is a supply chain organization that has been in existence for at least ten years.
 Figure 1. Characteristics of Supply Chains That Are Working Well

Technology. Companies rating themselves higher on using data, and supply chain visibility make faster progress. In addition, companies that are better at supply chain planning make faster progress. 

The next question was, "How can companies make faster progress?" My answer is:

• Build a guiding coalition
• Align with sales and finance, and drive data-driven discussions on complexity and cost-to-serve.
• Define a balanced portfolio and hold functional leaders responsible for corporate metrics as shown in Figure 2.

Figure 2: Setting Corporate Targets

I hope this helps! I am almost done with my spring tour. I have a presentation in Barcelona, Peru and South Africa left in May/June. I hope to see you in my travels.

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.