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2013

The past weeks at Supply Chain Insights have been busy as work heats up on the Index, so I apologize for my absence. At this point, we've finished or are close to completing one third of the industries and it seems appropriate to take a look back on the work and try to identify any early emerging patterns or themes. We started with a list of 37 Morningstar sectors ranging from discount stores to auto manufacturers to semiconductors. The figure below illustrates a summary of the 12 industries completed to date, the number of companies within the specific Morningstar sector, the correlation (r2 value) and the supply chain financial ratios that showed correlation to market capitalization.

 

http://supplychainindex.com/wp-content/uploads/2013/06/Picture1.png

 

As you can see, there is a variety of r2 values, from a high of 0.89 to a low of 0.35. A r2 value of 0.35 sounds low compared to what we may have been exposed to in physics problem sets, but the fact that 13 supply chain ratios are able to explain 35% of market capitalization for drug manufacturers in the specialty & generic peer group is still quite astonishing. *Disclaimer: I apologize if this explanation of r2 is simplistic and not entirely mathematically accurate. I think the message should resonate for both math and non-math folks.*

 

For me, what is most intriguing in the above figure is the occurrence of different metrics in each equation. Operating margin, for example, correlates across the board. In other words, for every industry profiled above, supply chain folks, financial folks and the executive team should be closely tracking operating margin and looking to improve performance. Similarly, days of inventory correlates for all the industries completed so far with the exception of medical devices.

 

In our mind, we know that margin and inventory management matter to supply chains. However, the results of the Supply Chain Index work provide mathematical backing to our deeply held beliefs. They also help to identify metrics that may not be as meaningful as we have been led to believe.

 

For example, year-over-year revenue growth only correlates for 4 of the 12  industries. This was one of the most surprising revelations of our work as most members of the team expected a positive, not to mention strong correlation between revenue growth and market capitalization performance. Growth will always matter, but perhaps the relationship between supply chain, revenue growth and market capitalization is not as strong as we have thought for most industries. How does this change how we manage our supply chain and where we put our priorities? What other patterns or insights do you see in the above graphic?

 

Next up are 6 separate technology peer groups we will be working on through in the next week or so. The results are set to be presented on our next complimentary webinar on June 27 at 1 EST. Sign up here. I hope to see you there!