What I Wished I Knew Then About Supply Chain Excellence

To keep supply chain leaders up to date, I will share my monthly articles through the Linkedin Newsletter. As always, I welcome your thoughts, and please share it with your colleagues. Here I reflect on learnings from recent research and work with clients.

Supply Chains to Admire 2020

In 2014, I wrote my first book on supply chain excellence. In chapter four of the book, I wrote extensively on the need for the supply chain leader to shift their focus from saving money to driving value. In the peer review of the book, Keith Harrison, the prior leader of Global Supply at P&G, said, " In your article, you write on shifting the focus in the supply chain from cost to value. I agree conceptually, but you do not define value. I don’t know the answer, but how should a supply chain leader define value and align with peers within the business to deliver against the right goals?”

When I read his feedback, I sighed. He was right. In the industry, there is no clear definition of supply chain excellence or metrics to deliver value, and in my zest to finish the book, I had not provided a definition. Answering his question became a seven-year research project titled the Supply Chains to Admire analysis.

The Response To Tough Love

To answer his question, I chartered a project with the Arizona State University statistics department to analyze which combination of metrics drove the highest market capitalization. The research project analyzed 1200 combinations of 180 metrics for four hundred companies for the period of 2010-2012. After six months of analysis, we decided the best fit was the combination of growth, inventory turns, operating margin, and Return on Invested Capital. My interest peaked when I started plotting the progress of these companies at the intersection of these metrics year-over-year in orbit charts.

In Figure 1, I share an example. Note that Schneider Electric for the period of 2010-2019 is below the industry sector average for inventory, and at the industry average for operating margin. However, in this nine-year period, Schneider is less resilient. (Larger swings in the pattern than the average of the industry sector).

Figure 1. Schneider Electric Orbit Chart and Performance Against Peer Group

Tracking Supply Chain Performance

To understand supply chain excellence, each year, in my research, I plot the orbit chart performance of publicly-held manufacturing companies. The goal is to track performance and improvement against the metrics of year-over-year growth, operating margin, inventory turns, and Return on Invested Capital (ROIC) for all publicly-held manufacturing and retail companies for the period of 2010-2019.

The supply chain is a complex and non-linear system, and these metrics have complex and interconnected relationships. Performance improvement is easy when you have a lot to lose, but as a company approaches the sector average improvement slows. In the analysis, as shown in Figure 2, only 22 companies beat their industry sector averages for the period of 2010-2019.

Figure 2. Winners of the Supply Chains to Admire Analysis for 2020

In 2020, twenty-two companies meet the criteria to be a Supply Chains to Admire Award Winners. The list of winners includes AbbVie Inc., Assa Abloy AB, BorgWarner Inc., Broadcom, Dollar Tree Stores, Ecolab Inc., iRobot Corporation, Lockheed Martin Corporation, Koninklijke Ahold N.V. (Ahold), L'Oréal S.A, Monster Beverage Company, PACCAR Inc, Reckitt Benckiser Group plc, ResMed, Rockwell Automation, Samsung, Sleep Number, Taiwan Semiconductor Manufacturing (TSMC) Company, The Toro Company, TJX Companies, United Tractors, and VF Corporation.

While the companies of Becton, Dickinson, and Company (B.D.), Schneider Electric, and Urban Outfitters did not qualify as sector winners, in the analysis, each company shows marked improvement and notable achievement; and as a result, is worth a mention.

The list of Supply Chain to Admire Award Winners is a stark difference from the perception of industry leaders. While the performance of some like L'Oreal and Samsung are commonly accepted as supply chain leaders, the performance and recognition of other companies on the list are not as well known. Since the Supply Chains to Admire is a data-driven analysis, it is less subject to industry bias. As a result, the Supply Chains to Admire methodology is a useful assessment tool for companies of all sizes globally.

Characteristics Of Winners

When I finish the analysis, I interview the leadership teams to understand why they think they won. The answers are never centered on a technology implementation or a consulting project. Instead, the results are the product of year-over-year focus by a leadership team. There are five characteristics:

1. A Shift from Functional to Cross-Functional Metrics. Organizations that underperform focus on functional optimization of make, source, and deliver processes without clarity on total cost or the reason for shorting customer orders. In winning companies, the metric of Operational Efficiency (OEE) is replaced by Production Schedule Adherence, and functional costs are de-emphasized to focus on cross-functional trade-offs to manage total costs. (Only 29% of companies can easily access total cost data.)
2. Consistency of Leadership Team Direction. The organization side-steps fads, shiny objects, and financial reengineering projects. Weekly and daily information flow to focus on understanding customer service and sentiment. The organization is closely aligned with R&D and sales teams.
3. Mission Clarity. The teams are clear on the goal and the culture to win. Leaders understand that it is not enough to say that employees need to be team players. There is a realization that culture needs to be defined by principle-based leadership and ongoing training.
4. Definition of Supply Chain. In winning companies, the supply chain is defined as a process that starts with the customer and crosses over the organization market-to-market (sales to procurement). The supply chain is continually redesigned to maximize value. Lower performing companies define the supply chains as a function within a functional organization.
5. Continual Process Innovation. These teams realize that the supply chain needs to constantly adapt to channel shifts and makes these programs a part of doing business. The efforts of teams are never hamstrung by financial hurdles to minimize cost. The supply chain is recognized as an engine of growth. The leaders constantly test and learn to drive innovation.

The Checklist

In summary, I summarize the characteristics of winners and laggards in Table 1.

Table 1. Qualitative Observations of Supply Chains to Admire Winners and Laggards

I hope that this analysis helps you and your teams. Look for the company case studies of the leaders in subsequent articles. Access the full report and supporting presentation materials on slideshare.

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Demand Management: If Only I Knew Then What I Know Now

In the 1990s, I was very excited to implement a simple form of demand planning. The algorithm used historic order patterns to generate a forward-looking product-based mix-level forecast. Three decades later, despite an abundance of market data, companies are applying similar techniques. The practice of forecasting, based on my work with manufacturers, regressed with the evolution of Advanced Planning in the last three decades. Here I share my observations on why:

The Role of the Budget. Companies are enamored with tight coupling of a financial forecast with a supply chain forecast. In the process, there is little realization that the only thing that the two have in common is the word forecast. Best in class companies use the budget as a comparative input while laggards tightly couple the forecasts and clamp-down on the supply chain to meet the budget. The attempts create many problems including that the financial forecast lacks the mix-level detail to run the supply chain and the budget is wrong and out of pace with the market on the date that it is published. The rise of Integrated Business Planning in Sales and Operations Planning (S&OP) degraded S&OP success by 25% over the last decade due to botched attempts to tightly integrated supply chain forecasting to financial budgets.

 Chasing Shiny Objects. One of the worst issues is the continued chasing of shiny objects in the evolution of the demand plan. Two decades ago, it was Vendor Managed Inventory (VMI) and CPFR. Today, none of these programs connect to the central demand plan. Now the focus is on machine learning and cognitive computing. However, what good is a new technique if we are not clear on the goal?

The Focus on Technology Implementation. In the last decade, most forecasting projects were treated as an IT project. The Select/Purchase/Implement cycles went on and on. However, the processes of model tuning, data cleansing, and forecast refinement were not included. Most companies side-stepped the processes of backcasting and lacked the understanding of forecast measurement. I am working with a company today that has implemented three different technologies and instead of model tuning, backcasting, and refinement, they built technology on top of the three demand planning systems to evaluate which system to use for which item to write to the system of record. The problem? We get enamored with technology and lose our way.

Market Shifts. Supply Chains were unprepared for the pandemic. Despite an abundance of market data—consumption, rating/review, and activity—only 1% of companies changed their models to be more market-driven. The shifts were different by industry—a shift from restaurants to eating at home, buying loungewear versus formal apparel, and the delay of elective surgery—yet, the majority of organizations continued to focus on the output of traditional models using order data as the basis for the modeling. Market-driven forecasting versus enterprise-focused modeling will be the downfall of many organizations.

Governance. Governance is an ongoing issue. I work with a 35B$ food manufacturer that has thirty-five instances implemented for demand planning. Each is custom and there is no discipline on demand planning metrics. The organization spins constantly on the upgrade cycles and refinement of the many instances. Upon closer evaluation, each instance averaged a negative 20% Forecast Value Added. In contrast, P&G, a 65B$ global leader in demand planning, has one instance with well-defined demand management goals and objectives. The planners at P&G average twelve years in the position with a clear career path while the planners at the food company change jobs frequently with no clear career path in demand planning. The issue? Lack of clear governance and definition of a good demand planning solution.

In closing, one client that I work with stated, “The Company will never be good at demand planning. Why should she try? Shouldn’t she just focus on driving an agile response and give up on demand planning?” In response, I hung my head. In the statement, there was a lack of understanding of the need for demand planning in the organization that required leadership. The Company will be forever snarled in the quagmire of the issues listed until there is enlightened leadership. Unfortunately, in my experience, the understanding of demand planning and the role in supply chain excellence is not well understood.

Let me end with a point of view. Demand is a river that flows through the organization. The river starts with the customer and winds through the value chain. Each step of ordering and replenishment introduces the bullwhip effect. Forecasting is a time-phased snapshot of the river at a place in time. Laggards get enamored with the snapshot attempting to be very precise on imprecise numbers. The art of sensing, translating, and shaping demand is understood by very few manufacturers. In the last decade, despite the increase of new and promising technologies and techniques, the industry went backward. The largest issue? The lack of understanding of the role of demand management in the delivery of supply chain excellence.

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I welcome your thoughts.