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This week, I am grounded due to weather. So, I am spending my time writing. Music is blaring, my toe is tapping, and I am hard at work on what I love. I enjoy writing research.


I am currently writing an article on supply chain excellence.  The time off the road is allowing me to think more critically about the path that got us here, and about what drives supply chain excellence (or more importantly, what does not drive improvement).


For years, I have listened to consultants espouse buzzword bingo.  You know the drill.  Getting "all the way to bright" by "harvesting the low-hanging fruit." Or twisting the arm of the COO to use an Enterprise Resource Planning system to build the "right house of best practice" to drive supply chain excellence. I am tired of buzzword bingo.


To better understand this journey that we have been on together,  I have been analyzing a decade's worth of supply chain financial ratio data for nine industry subsegments. (You would be very proud of the spreadsheet that I am analyzing.) I am poring over the results.


I am trying to find good news; but over and over again, I see the same trend. Progress is stalled. Consider the above table on healthcare.  While companies have increased Revenue per Employee across the healthcare value chain, the Days of Inventory have increased for suppliers, and there is a shift in power to the healthcare provider. Operating Margin is shifting, but total costs are going up.


When I look at a value chain (a cluster of industries chained together to deliver products and services), I see that we are pushing costs backwards in the supply chain, but not decreasing the total costs of the system. I also see that we are not decreasing the total inventory levels in the network or accelerating time to value.



When I evaluate companies at an enterprise level, I see the that growth has flattened, inventories are growing and we are losing operating margin. As a result, I believe that companies are at a Supply Chain Plateau. Performance is stalled.


Consider the case of food manufacturing. Companies in this industry have increased SG&A Margin/Revenue by 1%, lost 1% in operating margin and have increased average inventories by 22% over the last decade.  The only metric that we have improved through ten years of IT investments is the revenue/employee number.  I believe that the only way to get past this plateau of results is through holistic systems thinking, enlightened leadership and holding ourselves accountable to balance sheet results. The company that has done this the best in this food peer group is General Mills.


Sage Advice? Rethinking Conventional Wisdom.


As I share the work that we are doing at Supply Chain Insights LLC on financial ratios and peer group performance with company leadership teams, I am shocked that their supply chain teams are not aware of their year-over-year performance against their peer group.


We have mapped over fifty of these evaluations in our Supply Chain Insights Community and each time, teams are surprised. (I encourage teams to ask us for a custom analysis. We will run this analysis for each company free of charge.)  So, as I sit here and finalize my reports for next week on supply chain excellence, I am thinking hard about all of the sage advice that companies have gotten from consultants.  I am questioning how we got it all so wrong. Here I want to question some of it, because as a cook, I believe that sage is a best fit for turkeys, and I don't believe I am surrounded by turkeys. I want my friends in supply chain management to accelerate performance. I want them to  push themselves off of this supply chain plateau. Here are my thoughts:


  • Don't Harvest the Low-hanging Fruit. Shake the Whole Tree. I cannot count the number of times that a consultant has told me that we need to "harvest the low-hanging fruit." I think that we have spent the last decade putting the fruit in the basket, but not delivering results. As we have taken the fruit from the tree, we have not rethought the orchard.  The practices that got us here in supply chain management need to be rethought. We need to think more about supply chain management as a system. The focus needs to be on the end-to-end value chain, and the processes need to be mapped outside-in. Today, less than 1%  of companies have a person responsible for the end-to-end value chain, and focus on the enterprise outside-in.  The outside-in transformation shakes the tree. Don't stop with the low-hanging fruit. Rethink the entire system.
  • Saving Pennies Can Cost You Dollars. Over the course of the last decade, I have worked with many companies that moved manufacturing to countries with lower labor costs. This elongated their supply chain and increased the replenishment cycle. It also increased working capital and obsolescence.  As I now look at these companies' results, they were penny-wise and pound-foolish. As I look at the corporate performance of these companies, I can see the increase in operating margins, but an even greater increase in cash-to-cash cycles.  This happened because they got greedy and sought to take advantage of lower costs of labor without understanding the impact on the supply chain as a system.  Companies that redesigned the supply chain, understanding the impact on rhythms and cycles, did far better.
  • Don't Save Money in the Back Office to Finance the Front Office.  Use the Back Office to Drive Growth. The folks in the back office are good at process and continuous improvement.  As I look at the increase in SG&A without the increase in growth, I think that we need more process discipline in the front office. I also think that the best supply chain teams are using supply chain initiatives as a pathway forward to drive growth through new channels, new business models and better response.  Don't cut your supply chain to the bone to fuel sales and marketing initiatives without a seat at the table to discuss how to make it more effective.
  • The Supply Chain IS Business, Not a Department Within a Business. For me, this is sad. For the last twenty years, supply chain professionals have fought to get a seat at the table. Suddenly, the term supply chain is being used to describe a department within the enterprise--often composed of distribution and logistics--and the concepts of supply chain management as a better way to run businesses are largely forgotten. I strongly believe that the principles of great supply chain management are key to business. Progress can never be made when the term supply chain is narrowed to only the auspices of a limited set of responsibilities within a supply chain department.
  • Project-based Initiatives Do Not Get Us There. I know that many readers have worked on continuous improvement programs and multi-year IT programs. We have cut our teeth on these. However, I do not see that these project-based initiatives have had the desired impact on the bottom line. I believe that functionally-based projects, in isolation of a multi-year road map, have done us more harm than good. Instead, the most effective results have happened when supply chain enablement was a company initiative, not a functional initiative, and the projects were tied together in a multi-year road map.  For most companies, this is the exception, not the rule.


Gotta run. Two reports to finish before Tuesday's newsletter.  Next week is the first anniversary of Supply Chain Insights. We are planning a big celebration. You will not want to miss it!


For those of you that have helped us in our first year journey, many thanks! We have had over 300 companies fill out our surveys, and more than 60 companies have welcomed us into their organizations to help them solve real-world supply chain problems.  We are proud to have finished 15 research surveys, launched the Supply Chain Index, built the Supply Chain Insights Community, published a book and completed 24 reports. As you will see next week, we are just getting started. Much, much more in store for the upcoming year...  But, more on that later.

Within an organization, the words “Demand Planning” stir emotions. Usually, it is not a mild reaction. Instead, it's a series of emotions defined by wild extremes including anger, despair, disillusionment, or hopelessness. Seldom do we find a team excited about demand planning. Supply chain leaders want to improve it, but are not optimistic that they can make improvements.


After two decades of process and technology refinement, excellence in demand management still eludes supply chain teams. It is the supply chain planning application with the greatest gap between performance and satisfaction, and is the area with the greatest planned future spending. For most teams, it is a conundrum. It is a true love and hate relationship.  They want to improve demand planning, but they remain skeptical that they can ever be successful in improving the process. As shown in figure 1, demand planning is important to supply chain leaders, but also an area with very large gaps in user satisfaction.



In our research at Supply Chain Insights, we find that demand planning is the most misunderstood of any supply chain planning application. Companies are the most satisfied with warehouse and transportation management and the least satisfied with demand planning.

Teams are also confused on the process. What drives excellence in demand planning has changed and well-intentioned consultants give bad advice. In this article, we share insights on the current state and give actionable advice that teams can take to make improvements.

Why it Matters More than Ever. Facing the Supply Chain Plateau.

Supply Chain Management (SCM) concepts are now thirty-years old. The first use of the term supply chain management in the commercial sector was in 1982. Previously, the focus was on a more siloed approach to improving manufacturing, procurement or logistics. When they were lumped together, it gave birth to the concepts of demand planning and integrated supply chain planning.

The first demand planning applications were introduced late in the 1980s. Today, most supply chain professionals believe that the supply chain planning solutions have driven steady progress to reduce costs, improve inventories and speed time to market.  What we find is that we have actually moved backwards over the course of the last ten years on growth, operating margin and inventory turns. We have improved days payable, but this has pushed costs and working capital responsibility backwards in the supply chain, moving the costs to the suppliers.

To move forward, we have to admit the mistakes of the past. We need to fail forward.  In this journey to sense and shape and use demand information to drive a more profitable response, leaders have to confront a number of mistakes made in the design of demand processes over the course of the last decade. Here we start with the seven that we see the most often:

1) One-number Forecasting. It is a Hoax. :  Well-intentioned consultants tout the concept of one-number forecasting. Eager executives drink the magic elixir. But, they realize too late that this is overhyped and too simplistic. As a result, the concept adds, does not decrease, forecast error.  The reason?  It is too simplistic.  The people who push this concept do not understand demand planning.

A demand plan is hierarchical around products, time, geographies, channels, and attributes. It is a complex set of role-based time-phased data.  As a result, a one-number thought process is naïve. An effective demand plan has MANY numbers that are tied together in an effective data model for role-based planning and what-if analysis.

A one-number plan is too constraining for the organization. A forecast is a series of time-phased numbers carefully architected in a data model of products, calendars, channels and regions. The numbers within the plans have different importance to different individuals within the organization.  So, instead of one number, the focus needs to be a common plan with marketing, sales, financial and supply chain views and agreement on market assumptions. This requires the use of an advanced forecasting technology and the design of the system to visualize role-based views that can only be found in the more advanced forecasting systems.

2) Consensus Planning:  In the last ten years, the concept of consensus planning was advanced by the industry with the belief that each organization within the company could add insight to make the demand plan better. The concept is correct; but for most, the implementation was flawed. The issue is that most companies did not hold groups within the organization accountable for bias and error.  Each group within the company has a natural bias and error based on incentives, and unless the process has discipline around this reporting, the process of consensus forecasting will distort the forecast and add error despite well-intended efforts to improve the forecasting process.

I have worked with one company that has redesigned their collaborative demand planning processes three times.  Each time it was to improve the user interface to make data collection easier by sales. Not once did they ever question the value and appropriate use of the sales input or apply discipline on the input that was driving a 40% forecast over-bias. I struggle with why more teams do not apply the principles of Lean to consensus planning process through Forecast-Value Add Analysis. This is best described by Mike Gilliland in his book The Business Forecasting Deal: Exposing Myths, Eliminating Bad Practices, Providing Practical Solutions.

3) Collaborative Planning Forecasting and Replenishment (CPFR). This process was the most widely adopted in the consumer packaged goods industry. The design of the process was for manufacturers to collaborate with their retail partners on the building of a demand plan for the extended network. This process, termed Collaborative Planning Forecasting and Replenishment (CPFR), was designed to align the manufacturer’s demand plan to the retailer’s and reduce the bullwhip effect. The assumption was that the retailer’s forecast would provide better insights.

The maturity of the retailer forecast was never considered. The issue is that the majority of retailers have poor forecasts, and the process never accounted for the inherent bias and error of the retailer forecast. When a consumer product company measures forecast accuracy and holds retailers accountable for bias and error, there is usually only one retailer that measures up to the test and requirements of CPFR. This retailer is Wal-Mart. For the rest, the process of CPFR has increased demand error. Bad inputs lead to a bad output.

4) Data Model Design. Forecasting What to Make Versus Forecasting the Channel Demands. The traditional technique is to forecast what manufacturing should make. This has changed to modeling what is being sold in the channel. This difference, while it may sound trivial, is a major difference. It requires a step for demand translation. Forecasting channel demand reduces demand latency and gives the organization a more current signal. It also allows the augmentation of the forecast with demand insights to improve the quality of the forecast.  For most companies, this requires a re-implementation of the demand planning technologies.

5) Rewarding the Urgent Versus the Important. Time after time, we see companies implement demand planning technologies and improve forecasting processes, but not improve the overall results of the supply chain. The issue is the lack of training on how to “use the better forecast signal.” Most supply-centric teams are not clear.  They see it as a set of numbers to be tightly integrated; whereas, the more mature teams see it as  probability of demand to be used in their network design and supply planning models. For them, it is not as much about the specific number of demand, it is about the demand pattern and the probability of demand.

6) 80% Is Good Enough.  When it comes to a demand planning implementation, the devil is in the details. Seasonality, causal factors, usability, and the depth of predictive analytics are critical.  This can only be determined through the use of the software in conference room pilots.  Unfortunately, teams rush to implement versus spending time to understand the capabilities of the different packages. The best teams carefully evaluate the pros and cons of forecasting packages through testing in conference room pilots.

7) Focusing on "Sell-into" the Channel Versus "Sell-through." Most organizations are only looking at the modeling of "sell-into the channel" versus "sell-through the channel."  By sensing demand at different channel points, and managing the inventories in the channel, manufacturers can avoid returned products and obsolescence.  I was recently speaking at the Institute of Business Forecasting (IBF) conference and a leader of a mature demand-planning process was speaking.  His comment stayed with me, "I can always get better on demand planning. We can work on this over time; however, time is of the essence to measure the velocity of product movement of every channel buffer point.  If we screw up the management of inventories and the sensing of new product launch, it is the difference between success and failure." So many times, the concepts of demand planning are seen as passive and detached from the organization. In this case, the supply chain leader took ownership of channel demand through the channel, and has gotten promoted three times since I last heard him speak.  The shift is invaluable to the organization.

Looking Forward

So while companies want to move forward, and the desire is to re-implement demand planning, in our opinion, they cannot be successful unless they admit the mistakes of the past.


Would love to know your thoughts.  Anything that I have missed?




"A Wolf in Sheep's Clothing" is an idiom of Biblical origin. It is used to describe those playing
a role contrary to their real character, with whom contact is dangerous. - Wikipedia

Buzz words filled the air at the NRF Big Show, held at the Javitz Convention Center in New York last week. The air was thick. Words like big data, omni-channel fulfillment, smarter commerce, mobility and customer-centric retail filled the room. I believe in each of these concepts, and would like to see progression in the execution of the delivery of value in the retail value network. However, I think that it is time to take a time-out. At the NRF event, I feel that the words were largely overhyped and the solutions showcased on the floor largely underdelivered. As my feet got blisters, and my bag grew heavy on my shoulder going from booth to booth, three thoughts kept rolling around in my mind.


A Wolf In Sheep's Clothing?


As these words filled the air in session after session, the promises were vast and overarching, but the solutions showcased in the vendor booths on the floor were largely the same. It was as if we were viewing solutions from five years ago with changed signage. For most providers on the floor, I feel that it is like a wolf in sheep's clothing. It is dangerous for the uneducated buyer because they cannot discern between the hype and reality. In short, we cannot put a wrapper around ERP, traditional reporting, or traditional fulfillment and call it Big Data, Customer-Centric Retailing or Omni-Channel Fulfillment. It requires new forms of analytics, cloud-based solutions and the design of packaged applications from the consumer back. Traditional solutions cannot be retrofitted.


Table 1.


On the show floor it is hard to get to the truth. Too few companies are asking vendors for specifics. The questions should be about workflow, data models and capabilities; but instead, it is a discussion about high-level concepts. To make it worse, we have a broken ecosystem. System integrators want to sell what they know, and solution providers want to sell what they have. The legacy solutions from ten years ago are more expensive and both the traditional software licence model and the consulting model are incented to sell the MOST EXPENSIVE, not the BEST, systems.


The analyst market is also broken. There is pressure for analysts to stay the course and walk the traditional lines of application referrals. The analyst business model was developed when there was more stability in the market. There are fewer and fewer truly objective points of view in the market.


I am saddened. IT spending is tight, market growth is slowing, and most technology vendors are deploying very sales-driven, opportunistic strategies. There are very few, very few, breakthrough solutions that elevate the discussion around retail execution against these goals.


In the old days, when retail profits were high and the competition was not so intense, it did not matter as much. Today, it matters more than ever. I have a short list of retailers that I am watching that I think will fail in 2013 due to the lack of this understanding.


Acronym Babble Falls Short


In the last decade, we defined a set of new terms to describe enterprise requirements. Today, these three- and four-letter acronyms are an impediment versus a useful aid to help buyers of technology. The old terms of CRM, PLM and SCM have lost meaning. With a broken ecosystem of analysts, consultants, and technology providers there are fewer checks and balances. There is more selling and less education. The focus is on the sales cycle, not on raising the level of dialogue. lt has become a stew pot largely driven by sales-motivated approaches to close tactical, short-term deals.


Innovation is slow and the adoption of new approaches is painful. Companies want to adopt the "safe" approach that is ironically risky. I strongly believe that the path forward does not come from the large vendors. Acquisition and consolidation have reduced innovation, moving the market backwards, not forwards.


To meet the goals of multi-channel retailing and the omni-channel consumer, I would rather see companies discussing cross-functional solutions and viewing analytics through the new lens of systems of reference, systems of record, systems of insights, and systems of synchronization with a strong focus on market sensing and commercial orchestration. In this model, we can elevate the discussion to embrace new forms of analytics to enable digital path to purchase, multi-channel retail, learning systems, rules-based ontologies and sentiment analysis. This framework frees us to use new data forms (unstructured and structured data, video, maps, etc.), innovation in visualization (geo-mapping, heat maps, control towers and new forms of predictive analytics) and cloud-based solutions across an extended network.


By giving up the constraints of the enterprise acronym babble, companies can make market-driven orchestration across the network of 3PLs, suppliers, transportation providers, and third-party cloud-based solutions a reality. Yesterday's solutions for DRP, forecasting, merchandising and assortment/fulfillment are just not up to the task, and ERP needs to be recognized as the important system of record, but not the platform for the market-driven retail value network.


Figure 1.


Digital Icing On a Stale Cake?


Investments and excitement over the past five years have accelerated in the areas of digital marketing and eCommerce. Social and mobile interest reigns. However, as more and more retailers attempt to power growth through new digital technologies, they sadly find that this area called "fulfillment" is an Achilles Heel. At the Big Show, I found that it is not well understood. Most of the retailers' presentations described the dilemma as outlined in figure 2. The supply chain is designed from the supplier forward, focused on product assortment and traditional merchandising, with product flowing through well-defined physical channels to the shopper. It is based on traditional signals of orders and shipments, largely voice of consumer insights, and flexible, agile systems to drive a more meaningful response.


Figure 2.


Over the course of history, with the exception of Amazon, Apple and Wal-Mart, retailers have never been supply chain leaders. The adoption of technologies and processes have been slow. What I feel most retailers are missing is that the implementation of multi-channel fulfillment requires the redesign, from the shopper back, based on cross-channel insights and shopping behaviors. It is a redesign, not a modification or tweak of existing processes. The price/merchandising systems need to be fluid to work cross-channel and the fulfillment systems need to be designed for multi-channel fulfillment. A major gap is the lack of a perpetual inventory signal that can show the network levels of inventory, and manage Available to Promise and Allocation in an extended value network, where drop shipments are a reality not an exception. Multiple channels are competing for inventory and this requires a new form of interoperability. As the metronome of the retail supply chain speeds up, it becomes more and more critical to have this real-time network-based signal as shown in figure 3 below.


Figure 3.


As I walked the show and talked to venture capitalists and software vendors about fulfillment, I smiled. Most believe that we can put digital frosting on a stale cake. I think that they are wrong. I believe that we have taken the world of digital as far as the existing supply chain structures can stand. It is time for a redesign, starting from the outside-in, focused on shopper behaviors and market sensing. It is time for retailers to orchestrate demand and supply market-to-market. And, the good news is that cloud-based technologies and new forms of sensors can make this a reality. However, this only becomes a reality if the buyer sidesteps the traditional licensed vendors of ERP, WMS, and BI and embraces the newer more nimble solutions that can help companies to sense, shape, translate and orchestrate demand market-to-market. As a retailer, my focus would be on solutions like RetailNext, Predictix, Revionics, SAS Institute and Quantisence. I would spend little time in discussions with traditional solutions that are trying to put new lingo on an old jalopy. Those old solutions just are not going to get you there.


I also believe that the reinvention of retail needs to focus on service. Recently, I was facilitating a session at a Retail Connections conference on the "Role of the Store in 2013." The discussion was on how to thwart the impact of Amazon. The uniform response was through "service-based offerings." Godiva discussed how they implemented a "fruit dipping station in their stores" to drive foot traffic and net new revenue. A tire retailer discussed the redefinition of car service to improve the sale of tires. More and more, I think that companies need to see "showrooming" as an opportunity. Every time that a shopper enters a store, it is an opportunity to drive brand awareness, provide a service-based offering and drive cross-channel sales. However, this cannot happen unless the retail organization redesigns the organization to support the cross-channel experience. It requires a rethinking of the role of the store and the redesign of metrics. Today, most retailers say "cross-channel," but are organized in silos focused only on a piece of the channel. The focus needs to be on the shopper.


We would love to hear your thoughts on what you are doing and what you thought of NRF. We are currently working on a study on how Retailers are rethinking the Role of the Store. If you fill out our study, we will be glad to share the results. We look forward to hearing from you. Here is the link.

This week, I am attending the annual NRF event in New York. For those that have never been, it lives up to its claim of being a BIG show. Few attendees leave without blisters and the lines of people try your patience. Retailers packed the halls.

I spoke yesterday on Big Data and signed some copies of the book that I have written, Bricks Matter. It is exciting to hold it in my hands and talk to people about it.


Here I write about some general observations on technologies.


Store Sensing: I enjoyed the discussions at the RetailNext booth.  Their new store sensing allows new forms of shopper insights. The cameras can discern gender and the sensor technology can detect patterns in wi-fi addresses. (e.g., phone with wi-fi address x has visited my store Z times with Y behaviors.) The mapping shows heat maps of browsing and buying behavior.  My mind imagined hundreds of use cases. Pretty cool stuff for both retailers and manufacturers. Anyone with a store, and interested in shopper insights, should give them a call.


Sensors: I then stopped by the Tyco Retail booth to catch up with my old friend Jim Caudill and discussed advances in item tagging in the store. RFID for luxury goods is booming, but more interesting to me is the use of dual tags (EAS and RFID) in stores like Zara. Zara is tagging clothing at the distribution center. Imagine a supply chain where you have real-time visibility and monitoring of items. RFI is far from dead in retail.


Cloud. Retailers are moving faster than manufacturers on the use of cloud-based analytics.  I watch the year-over-year growth of the merchandising, forecasting and replenishment vendor Predictix, and the slower growth of the licensed offerings.  It is exciting to see new supply chain applications designed for and implemented in the cloud. Refreshing.


So, as I went to sleep last night, I imagined clouds of sensors and sensing designed to manage the supply chain for retail outside-in not inside-out. After all, it really should start with the shopper, shouldn't it?

Usually in a fairy tale there is a big, bad wolf... or a hairy monster. One that is going to eat you up!


In part one of this blog series, I started the saga of the supply chain fairy tale. It was a story where people believed that functional excellence leads to supply chain superiority. Year after year, well intentioned people toiled against improving metrics that reduced, not improved, the effectiveness of the supply chain. The example that I give in the first post is the focus of manufacturing strategies to drive strong results to improve Return on Assets (ROA) that have actually caused a deterioration in operating margin. For the supply chain traditionalist this may seem counterintuitive, but I make the argument that three primary factors have changed-- go-to-market strategies, cost inputs and the basic rhythms and cycles of the supply chain --and, that there is a need to manage the supply chain cross-functionally to drive end-to-end progress. I strongly feel that a blind focus on functional excellence will cause the supply chain to become out of balance.


Here I want to make the argument that the big bad wolf that is swallowing up the supply chain is investment in traditional technologies that were primarily designed to improve manufacturing decision making processes by reducing only manufacturing constraints. I feel that there is an opportunity cost to the organization to work on their third or fourth ERP upgrade and look blindly, and only, at analytics from the ERP vendor. Instead, I would like to see companies invest in new forms of analytics to better use existing data. The argument that I want to make here is that the supply chain problem has changed, but we are implementing the same old technologies without stopping to realign against new goals. Here is my argument.


Based on recent research, today, over 90% of companies have an Enterprise Resource Planning (ERP) system and an Advanced Planning System. These technologies are mature. We are in the evolution phase of user-based enhancements. The consolidation of this industry has served the technology providers well, but has largely stymied innovation. Yet companies are still investing millions of dollars in these upgrades. I feel that many of these technologies are now legacy.


I feel that continued investment in multi-year ERP systems is the big, bad wolf. The opportunity cost to an organization is huge. Based on the analysis of financial ratios, I can clearly see that companies with the best results on revenue-per-employee have strong ERP systems, but they have implemented once and have avoided multi-year evolution projects. ERP is valuable to improve transactional accuracy, but I can find no evidence that investments in ERP have reduced inventory or improved cash-to-cash cycles. I believe that the ERP and APS systems that were developed in the 1990s are now largely legacy applications. I also believe that companies should stabilize their investments in these technology areas and begin to push the acquisition of technologies that can better align with the organization's need to reduce operating margins, absorb volatility and drive agility.


While some would point to companies like Amazon and Apple as examples of how to solve this dilemma, I think not. Don't get me wrong. I like Amazon and Apple, and I admire the leadership within each of these companies that had the courage to redefine business models. For most companies, the use of supply chains to redefine business models is not a current reality. They see supply chain as a function within the organization not supply chain as a way of doing business. They do not have the power to redefine business systems to be an Apple or an Amazon. So, to hold up Apple and Amazon as points of light to help companies go forward is a bit like saying that Lora Cecere will be the February Cover Girl model on Vogue magazine. You got it! It is a low probability that this will ever happen.


Table 1. Ten-year averages - food manufacturing companies


Figure 1. Metrics comparison of Kellogg Co. vs. General Mills, Inc.


A Case Study


As a researcher, due to merger and acquisition activity, it is getting harder and harder to compare companies. The peer groups are growing more and more complex. It is tough to compare conglomerates, and I do not believe that you can put companies from all industries in a spreadsheet and shake them up. Instead, I think that the best insights come from comparing peer groups. In table 1, I compare ten-year averages (2001-2011) for food manufacturing companies. In this industry, operating margin has decreased by 1%, Return on Assets has decreased by 2%, SG&A margin has increased by 1%, and days of inventory has increased by 3%. The only good news is that revenue/employee has improved by 29%.


The answer is not to be like Amazon or Apple. I think that the answer is to be more like General Mills. Note in the figure above how General Mills has improved operating margin for the past three years. I compare General Mills to Kellogg to give some contrast. Over this period, the cereal business has been hard hit by commodity price increases and private label. Corn and oil have tripled in cost. Both are more volatile.


So why has General Mills been able to increase operating margin, and the peer group has not? The reasons are many; but, I think one of the core reasons is General Mills is good at supply chain planning. They are not only near the top of their peer group in forecasting, but they use their forecasting analytics to drive better plans. They have become best-in-class at network design and they are very active in the use of advanced technologies for inventory optimization. Unlike many companies that buy technologies for a project and then do not use them, General Mills has built the teams to actively model demand and supply and drive better results. They have had the courage to give up ROA to drive better operating margin.


Where to Invest?


So, if you are a supply chain leader, what do you do? Where do you invest? I feel strongly that the answer lies in the use of new forms of analytics for network design, demand and supply sensing, supply chain visualization, demand orchestration (horizontal orchestration of demand and supply variability for price, material substitution, and alternate sourcing), and the use of listening posts to better understand unstructured data from the channel.


It cannot be a fad, it needs to be part of the DNA. Multi-tier inventory optimization was a fad in the last decade. It was overhyped and largely underdelivered. Unfortunately, I see that many companies have invested in inventory optimization and have not reduced inventories. The answer is a lot like why people do not lose weight on diets. It takes commitment, hard work, and discipline. These are three characteristics that elude many organizations.


In closing, I want to leave you with a couple of thoughts. There are many technology vendors that will knock at your door, and your day will be packed with meetings, but stay focused on what matters. Our goal in the supply chain was to reduce costs, improve customer service, reduce inventories and drive growth. Over the course of the last decade, we have gone backwards not forwards. I think that we need to hold ourselves accountable to financial results. I think that it takes new forms of analytics to push us off of this supply chain plateau. However, it has to be part of the DNA: it cannot be a fad diet.


Let me know what you think._

A plateau: a period of stability with no change

Last weekend, I wrote two reports. They published this past week. In the first report, I rolled up my sleeves and analyzed balance sheets of process companies over the past decade with Abby Mayer (@indexgirl). In the process, I discovered that the average process manufacturing company has reached a plateau in supply chain performance. Growth has stalled. To compensate and stimulate revenue, the companies increased SG&A margin by 1%. However, the conditions were more complex; the average company, over the last ten years, experienced a decline of 1% in operating margin, and an increase in the days of inventory of 5%. While cycle times have improved, the majority of the progress has come from lengthening of days of payables and squeezing suppliers.



As I wrote the report, I started thinking about all of the supply chain conferences that I have attended where supply chain leader after supply chain leader has stood before an audience and declared that they had reduced costs, improved inventory and improved customer service levels.

While I believe that individual projects may have had these results, it did not make its way to the balance sheet. I believe that we have reached a plateau and that supply chain performance is declining. One of the primary issues, shown in figure 1, is the executive team's understanding of the supply chain. Over the past ten years complexity has increased, and many well-intentioned executives lack the understanding of the supply chain's potential or how to manage the supply chain as a system.



A Need to Rethink Technologies?

In the second report, I wrote about the current state of supply chain technologies. The greatest gaps are in the areas of the greatest importance. Companies are the happiest with supply chain execution systems, but the gaps in supply chain planning are high, and the ability to use the data from ERP and order management remains a gap.

The good news is that companies are increasing their spend on supply chain solutions. The bad news is that there are major gaps in the solutions where they want to invest. It reminds of the old Turkish proverb, “No matter how far you have gone on a wrong road, turn back." I think that this is true. In my last post, The End of the Fairy Tale, I shared insights on the changing drivers within the supply chain and the need to rethink metrics and business goals. The fundamental design of supply chain systems has not changed since the mid-1990s despite the evolution of greater computing capabilities and the change in the business problem within the supply chain. The process requirements have changed in five fundamental ways that are not reflected in the software:

  • The move from vertical to horizontal processes. There is a need for automation and new forms of predictive analytics to power horizontal processes. The need to automate revenue management, social responsibility, supplier development and Sales and Operations Planning (S&OP).
  • A need for new forms of analytics to sense using structured and unstructured data. Today's supply chains respond. They do not sense. As a result, the response is usually late. There is a need to use unstructured text data mining technologies to listen and learn.
  • Inter-enterprise solutions using cloud-based computing. The supply chain is slowly adopting new forms of cloud-based computing to align and synchronize.
  • Movement from Inside-out to Outside-in. The traditional supply chain planning systems primarily use orders and shipment data for planning. There is a need to redesign the technologies to use channel data market-to-market to sense, shape and drive a more flexible response.
  • Visualization and better use of data. The traditional definition of supply chain planning was data intensive and insight poor. There is an opportunity to build a new generation of applications using new forms of mapping and visualization to drive new insights.

Today, we have the evolution, not the reinvention, of current systems. Vendors are consolidating and innovation is largely absent. The other day, I was reading about IBM in 1964, and the introduction of the IBM 360. The IBM 360 was a tough decision for Thomas Watson because it made the prior computers obsolete. The APS market needs this type of leadership. I think that there is a discontinuity and we need to declare the APS and ERP systems of the 1990s obsolete and start again. I think that they are legacy.


What do you think?


The End of a Fairy Tale

Posted by lcecere Jan 16, 2013

In the end, we were all going to live "happily ever after." At least, that's what was promised.


I was at three clients' sites over the course of the last two weeks. During those visits I heard comments like, "I believe that something has fundamentally changed in the market."  Or, a casual comment of, "We cannot run our supply chains like we used to." I smiled.


Each of these companies performed better than their peer group on Return on Assets (ROA), but worse than their peer group on operating margin. When you run the graphs, there is marked difference for these companies that begins to appear in 2009. (For clarity, Return on Assets (ROA) is defined by net income/total assets, and Operating Margin is calculated by dividing net income/revenue.)


However, none of the three companies knew this before the benchmarking activity. In fact, I am surprised how few companies are knowledgeable on their own performance on supply chain ratios. It constantly amazes me.


Being a long-time student of supply chain, I, like many, have been under the false assumption that companies that outperform their peer group in ROA would also be able to outperform their peer group on operating margin. Traditional supply chains in process-based industries operate on this assumption. Based on the analysis, I no longer think that this is true. I think that three things have changed:


Marketing Teams Are Introducing Demand Volatility to Try to Capture Market Share.  Growth is slowing. It is harder to come by. To maximize volume opportunities, marketing teams are deploying one-to-one marketing tactics that are increasing demand volatility. This includes the automation of path-to-purchase for consumer products, active shaping of demand through price, channel incentives and promotions, eCouponing and mobile commerce for retail, and product proliferation for all. This puts pressure on the supply chain team to deliver a new type of supply chain. It needs to be one that is agile and flexible.

To minimize costs, supply chain teams of manufacturing leaders have designed the value network to absorb this volatility. This supply chain is designed to NOT have the lowest ROA. Instead, it is designed for resiliency. However, for most, there is still not a clear understanding of the problem. For many, this understanding is the worst in the area of supply chain finance. The tendency is to build a supply chain for the lowest manufacturing cost-per-case which they believe is the lowest ROA. With the rising costs of commodities and transportation, reducing ROA can often increase operating margin. (Something that no one wants.


Most Supply Chains Were Built with the Assumption That Manufacturing Was a Greater Contributor to Operating Margin Than Distribution. When I go in to help a company, I first benchmark their supply chain ratios. To do this, I compare each company against their peer group to see if they have made progress on the ratios of growth, profitability, complexity and cycles. (You can also request this data from the SCI Community. We do free analysis in the community on publicly available financial data.)


As I work with these companies, I am noting a trend. Companies that have the best ROA do not have the best operating margin. By focusing so strongly on manufacturing, they have thrown the supply chain out of balance. One of the issues is the rising costs of commodities including the cost of oil. As shown in Figure 1, the cost of Texas crude has increased nearly four times in the last decade; yet, too few companies are actively modeling the trade-offs of make, source and deliver TOGETHER. Instead, the functional teams will often do an ad hoc or partial analysis. I am surprised how many companies are operating their supply chains like the good old days when oil was $30/barrel.


Network Complexity Is Increasing. Because many companies want to maintain high ROA values, they will outsource new products. This adds to total costs. Surprisingly, for most companies, there is little cross-functional oversight into the design of the supply chain for a new product launch.


In short, the times ... they have changed. When I was interviewing Keith Harrison, prior manager of the Procter & Gamble supply chain global team, he commented that the cost of distribution outstripped the cost of manufacturing in 2002 for P&G. It is for this reason that the P&G teams actively began the processes of direct plant shipments, selective placement of items in distribution centers and the active modeling of their supply chains. I am amazed when I talk to supply chain leaders that have not taken this important, and fundamental step to actively model the trade-offs of source, make and deliver at least quarterly. (My preference is monthly as part of the S&OP process.)


In the modeling, my recommendation is to look at the cost metrics in aggregate. Study the trends of your company on operating margin, gross margin and ROA together. Do what-if analysis to understand the drivers and then contrast them to peer groups to mark the progress that you have made on the effective frontier (trade-offs between growth, profitability, complexity and cycles). And, don't be surprised if you also find that the lowest ROA does not lead to the lowest operating margin for you either. For me, it is the end of a fairy tale.


The End.