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2014

One of the core beliefs backing the new Supply Chain Index is that companies face wildly different operating environments and should be compared only against peers in similar situations. Safeway Inc.'s supply chain is so structurally and strategically different from American Apparel Inc that any comparison is almost entirely meaningless. Of course, there are lessons to be learned from one industry and implemented into another, but it is rarely as simple as copy-and-paste. For that reason, we like to conduct our Supply Chain Index analysis along strict industry lines.

 

Every once in a while though, we branch out and compare different industries. Usually, this comparison is based upon the idea of a value chain or value network. Industries that cooperate and collaborate to bring products to consumers may not be apples-to-apples comparable, but it can be insightful to gain a longer value chain perspective stretching across different industries. The table below illustrates some preliminary work we have conducted on the consumer value network encompassing retail, consumer packaged goods, food & beverage and chemical companies.

 

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The three metrics: balance, strength and resiliency are objective measures based upon financial performance. The best companies or industries will have high values for balance and strength, but low values for resiliency. Resiliency, the calculation of tightness of the pattern at the intersection of inventory turns and operating margin, is best when the value is low and the pattern is tight.

 

In the table above, based upon a rather selective number of companies you can see that the food & beverage industry has the best performance on balance and strength, while consumer packaged goods leads the way on resiliency. Fluctuating commodity costs make resiliency a different task in the food & beverage world.

 

The chemical industry turns in negative performance on both balance and strength, meaning the industry as a whole has lost ground since 2006. The Great Recession created significant challenges for chemical manufacturers and that is reflected in their results.

 

What else do you see in the results? Do the results for this value chain or value network surprise you? We'll be profiling these four industries in greater detail in a June research report. In the meantime, you can check out our latest Index methodology report here and take a listen to a podcast over here.

Nearly two and half years of work on financial ratios in connection with supply chain excellence have led us to this point. This week we are publishing the results of the 2014 Supply Chain Index. Our report (The Supply Chain Index: Improving Strength, Balance and Resiliency) examines the methodology of the Index as well as three industry peer groups (chemical, consumer packaged goods and pharmaceutical). Here is what I have learned through the process -

 

*This is hard work. Connecting financial metrics with supply chain performance is not as simple as it sounds. Maybe to wiser people it doesn't sound easy, but to me it initially sounded straight forward. It has not been. This has been a long project full of mistakes and iterations and improvements.

 

*Cross industry analysis and comparisons are fun but not always meaningful. Comparing well known supply chain leaders like Wal-Mart, McDonald's and Apple is a fun exercise, but the realities of the different business environments means practices are not always transferable across industries. Comparing against a similar peer group of public companies or even down to divisional analysis provides much more actionable insight.

 

*Big companies may be disadvantaged in the race for supply chain excellence. Companies with a larger supply chain footprint and more complexity stretching across the globe deal with more inertia than smaller more agile companies. It is for this reason we are aiming to include public companies of all different sizes in our ranking, not only the largest by revenue.

 

*Change takes time. It takes several years to measure consistent and sustained change within a supply chain. Most leaders are surprised to see that, in general, inventory levels over the past decade have not come down significantly. A short-term project mentality has led us to exaggerate inventory improvements. In an effort to provide the necessary time horizon, the Supply Chain Index is based on seven years of results (2006-2012).

 

I hope you will catch the whole report available here and consider joining our webinar on May 19 at 11 EST. The webinar is the second on the list here.

Our exploration of supply chain excellence divides financial metrics into four categories. Growth, profitability, cycle and complexity are the four components of the Supply Chain Effective Frontier. We believe supply chain leaders have to make conscious trade-offs of these four priorities in order to improve supply chain performance in a calculated and controlled manner. Many of you are familiar with our seesaw of the Supply Chain Effective Frontier.

 

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One of the most common questions we get in our discussions of supply chain excellence is "where are the customer service metrics?". Unfortunately, for the time being, they are not here. For several reasons we are not comfortable including customer service metrics. There are no objective standards for customer service metrics. Because they are not reported in annual reports (with the rest of our metrics), we do not believe companies can be expected to objectively measure and report their performance.

 

Inventory is a proxy for customer service. Large swings in inventory are evident in financial metrics including days of inventory or inventory turns. Excessive fluctuation in these indicates an underlying issue within the supply chain which may manifest in reduced customer service levels. It is not perfect, but it is the best we have for the time being.

 

Finally, when we conduct deep dives into divisional data for clients, we are able to get a more nuanced look including some measures of customer service levels. After signing an NDA, companies are more willing to share that data and we can look at performance across different divisions or categories. The figure below illustrates an example of inventory turn and case fill percentage across three different categories.

 

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If you're interested in complimentary benchmarking or a deeper dive into your company's financials, send me a note at abby.mayer@supplychaininsights.com. If you're developing a measure of customer service based on financial performance or other objective measures, definitely let me know. In the meantime, thanks for following along!