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Does supply chain matter?

Posted by lcecere Mar 15, 2012

Does supply chain matter?  I think so.


In this blog, I want to convince you that it does.


In preparation for writing the book Bricks Matter, my co-author, Charlie Chase, and I interviewed 75 supply chain leaders.  When asked, Who does supply chain best?  Procter & Gamble got the most mentions.  P&G was mentioned 38% of the time, Apple was mentioned 21% of the time, and Dell was mentioned in 17% of the interviews.


I am a firm believer that you cannot determine supply chain excellence by putting all industries into a spreadsheet and shaking them up or by only looking at one year snapshots.  I believe that it takes at least three years to make a substantial change in the supply chain and that supply chains can only be compared within peer groups.  <As a result, I strongly disagree with some of the methodologies in the market.>


Bricks Matter

To make the story in the book compelling, we wanted to tie supply chain excellence to balance sheet performance.  We worked to get financial data over the past 20 years.  We tried to look at correlations of different sets of supply chain balance sheet metrics to supply chain maturity, economic factors and market valuations.  We could not find a correlation. <While I think that there is a correlation there, I think that I need more data.  This is future work; but for right now, I have to get this book to press.>


In essence, with the data that we have, the results of supply chain leaders are masked by higher impact results from R&D and marketing.  We have not been able to find a way to isolate the impact of supply chain leadership as a primary driver on the market value of the company.



However, as I was scrubbing and analyzing the numbers, a quote by Keith Harrison, leader of Global Product Supply at P&G ran through my head.  P&G was an early leader in the design of the supply chain organization.  In 1985, the company moved source, make and deliver teams to a single reporting relationship through one common organization globally.  Keith led the Global Product Supply Group during the period of 2001-2011. The largest team at P&G was product supply.  Keith stated in the interview that, “As technology matured, the possible span of control of a manager increased.  …technology enabled the effective management of larger teams.”


Currently, 78,000 of the 127,000 employees in the P&G Company work across the Product Supply organization.  While they are ultimately
accountable to the Product Supply Organization, they report in a matrix’d organization to the Business leaders in the region.  In his prior position, Keith presided over the strategy development, identification of breakthrough objectives and talent development/rotation. He has now retired.

I have run a number of charts on the companies in this chart over the course of the last 20 years:  revenue/employee, Earnings before Interest and Taxes/employee, IT investment, and overlaid other metrics and compared the performance of these consumer products leaders to leaders in the chemical industry, pulp and paper, and high tech and electronics.  Bottom line: I cannot find another industry where an industry leader was able to pace themselves so far ahead of their peers in year over year results on revenue/employee or EBIT/employee.


P&G’s story does not end there.  Their success was not 2-dimensional.  Their leaders were primarily engineers. In conversations, they clearly understood that the supply chain was a system and that there were innate trade-offs resulting from supply chain decisions.  They pushed the effective frontier of their supply chain on many fronts.  The many graphs that I could show of P&G versus their competitors in this industry show that in this period of time, P&G outperformed their peer group on successful new product introductions (Nielsen and Symphony IRI data), retailer ratings of supply chain satisfaction (Cannondale ratings on Supply Chain Satisfaction by Retailers (now Kantor Retail)) , days of inventory (DOI) and Days of Working Capital (DWC).  Bottomline.  I think that supply chain does matter and that P&G led the way for the development of many practices like demand-driven value networks, open innovation, top-to-top meetings and corporate social responsibility.  No, they are not perfect, but as I end my analysis for my book, I have to tip my hat to the P&G team as being the best example that I can find of why supply chain matters.


Organizational Insights

These are complex organizations, and each defined their supply chain organizations differently.  I have worked for over seven years with these four companies.  While many of the stories are sealed in NDAs and promises of confidentiality, here I share public domain insights surrounding this graph, that I think made a difference:


  • Definition of Global: In this period, companies within the Consumer Products industry defined the term GLOBAL very differently.  They were not aware of their choices.  For many it just evolved.  P&G moved quickly to build a global organization with a strong vision of global planning for local execution.  They defined a matrix’d organization where global teams set standards and teams were trained to a common set of standards.  While other companies had a global product footprint, and put strong energies into  opening global channels, the organizational design for the supply chain team was quite different.  For companies like Colgate, Johnson & Johnson (J&J) and Unilever, the organization had a strong regional bias.  In these companies, the regional teams had a strong amount of autonomy.  Kimberly-Clark was slow to create a global organization; and when they did, it was primarily regional (North America and Europe).
  • Supply Chain Organization Definition: P&G was an early mover to consolidate make, source and deliver into a common organization.  In all of the other organizations, in the chart above, there was strong functional and regional autonomy.  During the period of 1985-2008, they were the only organization on the chart to have these supply functions reporting to one common global leader.
  • Technology Selection:  Each of the companies also selected and adopted technology differently.  While Colgate consolidated on a SAP strategy, Unilever allowed the regions to select their own technologies.  Unilever had lots of small projects with each region doing their own thing.  In this period, Procter & Gamble was consistently an early adopter of technology.  They funded corporate development efforts and often worked with small vendors to drive innovation.


It is late…time to finish the book.


There are more snippets to come in the next couple of weeks as I get ready to push the manuscript to the printer.  I think supply chain matters. Have I convinced you?


Tomorrow, I will be writing about S&OP HANA product release and my upcoming trip to the SAP Insider Conference in Orlando.  Will I see you there?

It was a beautiful Phoenix afternoon. The temperature was a welcome relief from the east coast rain.

As I was basking in the sun, the conference coordinator at The Institute of Business Forecasting (IBF) Conference, approached me to moderate their round robin discussion on S&OP. The topic was How do I have a Reliable and Resilent Sales and Operations (S&OP) Process? As I rushed in to facilitate the workshops, I found a full table ready to tackle the topic.


There were three rounds of rapid fire discussion. Here are the insights.



Most companies say that they want to be agile, <Or reliable. Or resilient. Or Flexible. Or fill in your own noun…> However, when you ask what this word means? Supply chain leaders do not know. Of the 67 supply chain practitioners that joined my table discussion, one person was confident in his definition of the word resilient. My Point of View. These words get bandied about, but there is no working industry standard definition for these terms. Without a definition, it is hard to make it a goal. I feel that for most people that it is a bit like US Justice Potter Stewart’s attempt to explain “hard-core” ***********, or what is obscene, by saying, “I shall not today attempt further to define the kinds of material I understand to be embraced . . . [b]ut I know it when I see it . . . However, I don’t think that supply chain professionals will know it when they see it, instead I think that it needs a definition.


So, to facilitate the discussion, I threw out my definitions:


·         Resilient: The ability to have the same cost, quality and customer service in the face of market volatility (a given level of supply and demand variability).

·         Reliable: The ability of a supply chain to deliver the right product, at the right place at the right time and at the right cost day after day.

·         Responsive: Short cycles for a quicker response


The group accepted these as working definitions and we then moved on to discuss how to achieve this as a goal. <Note that the supply chain to achieve these three very different supply chain responses would look quite different.>


We then moved to discuss, what would it take to be resilient? Only one attendee had a definitive answer. The Chief Financial Officer from Jawbone stated that:


One of the ways that he checks to see if the supply chain is resilient is to watch the rate of change of inventory in each stage of the supply chain. When they are out of sync–one stage moving faster than the other–then you will have resiliency issues. ”


One of the goals for him is to align each stage of the supply chain–contract manufacturing inventories, raw materials, inventory in transit, inventory in the enterprise, inventory in the channel–as part of his S&OP process.


The rest of the group was not as certain; but through discussion, the more mature members of the roundtable agreed that:


·         Reporting Matters. The reporting structure for S&OP should be to someone that had responsibility for both profit and loss. It needs to report to a line of business leader. Preferably the profit center manager. The S&OP process should not report to finance, sales, manufacturing, procurement or supply chain planning. The reporting structure is paramount to hitting the goal of being resilient or reliable.

·         The Best Look Forward. The mature members of the group also agreed that 80% of the effort should be focused forward. A great discussion ensued about why most groups look backwards, and why they cannot look forward.

·         Align on Assumptions--Don’t Waste your Time on Aligning on Numbers. I think that this is an important insight for most companies that I work with. A mistake companies make is getting very precise on imprecise numbers. There is an opportunity cost to the process to try to get to the gnat’s eyebrow of precision. Instead, be sure that the group aligns on assumptions.

·         Metrics Must be Balanced. The group agreed that there need to be 5-7 metrics that are cross-functional and support balance. My favorites are forecast accuracy, customer service, inventory, profit and revenue. And, while we can argue on how to best measure forecast accuracy or inventory, the key is that these metrics show the balance and the trade-offs of the supply chain as a complex system.


Yes, no suntan for this east coast gal on that afternoon, but it was interesting to facilitate the group and see just how large a gap there is between stating a supply chain goal and knowing what to do to achieve it.


What do you think? Are you clear on how to be resilient in your supply chain efforts?