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2013

I have traveled 12,000 miles recently. When I get off a plane, I am accosted by the signs at airports around the world. SAP touts "best-run companies" while the Accenture ads claim "high-performance supply chains."

 

As I shuffle along, I am not sure. I shake my head. I am a nomad, searching for a good definition of supply chain excellence. It is a quest and the subject of my next book, Metrics That Matter, which will publish in September, 2014.

 

Why Does It Matter?

 

Supply chain leaders are naturally competitive, and they want to know how well they are doing.  Similarly, organizations want to see how they measure up. They want to understand which practices and technologies make a difference. I think that this is unanswered. It is for this reason that we started the work on the Supply Chain Index.

 

Most readers of this blog know how I feel about the Gartner Top 25. It was a good starting point, but it has not matured. I just do not think that you can put companies in a spreadsheet and shake them up.  A chemical company just should not be compared to a high-tech company using this methodology. It is biased towards companies that DO NOT have assets. I am searching for something that can be meaningful across industries and across company sizes. It is for this reason that I started the work on the Supply Chain Index.

 

Current State:

 

What is The Supply Chain Index? It  is a formulaic representation of supply chain excellence based on market capitalization. Over the course of the last eighteen months, we have attempted to build a linear regression model to build a formula using supply chain ratios that can predict market capitalization. We used the period of 2006 to 2012 to build the model and we used the formula to attempt to predict 2013. The result is outlined in figure 1.

 

Figure 1.

 

We came close, as the reader can see in figure 1, to building a predictive model for household and personal care (CPG), medical care (hospitals) and discount stores (mass merchants).  But, we have failed to build a predictive model for the rest of the industries. However, we are not done. This week I am finalizing an agreement with Arizona State University to fund a PhD student in statistics under the guidance of George Runger to try to finish the work.

 

What Now?

 

When you are doing research you have starts and stops and turns. We have spent the last eighteen months charting the intersections of companies on the Supply Chain Effective Frontier to understand growth, profitability, cycles, and complexity.  We have found that nine out of ten organizations are stuck on their ability to make improvements on both operating margin and inventory turns in the same year. However, the research has taught us a lot.  Here we share some insights.

 

What did we learn? Overall, supply chain leaders deliver results that have strength (year-over-year performance improvements), balance (a set of balanced metrics within a portfolio) and resilience (predictable and reliable results with few swings). You can see it in the patterns. Let's look at this more closely:

 

Figure 2.


1) Strength: Continuous year-over-year improvements on the Effective Frontier based on a well-defined Supply Chain Strategy.  Not every company wants to make the same trade-offs of growth, profitability, working capital cycles, and complexity. However, leaders make these choices consciously showing year-over-year improvements while laggards lose ground.  Let's take the example of Colgate, Procter & Gamble, and Unilever in figure 2. Colgate is making a conscious choice to drive profitability. (There is no company that I have studied that has been as successful in driving year-over-year profitability as Colgate.) And recently, Procter & Gamble is more focused on improving inventory turns. Both P&G and Colgate are more resilient than Unilever. In the past four years, Unilever made progress in inventory turns, but then lost ground on both the management of inventory and improvement in margin.


2) Balance: The right balance of supply chain financial ratios to improve market capitalization.  If we take the formula that we developed for the Supply Chain Index, which is a linear regression of supply chain financial ratios that is correlated to market capitalization (as shown in table 1), we find that P&G has the best balance of the financial ratios.

 

Table 1.

 

3) Resiliency: A tight, positive pattern at the intersection of inventory turns and operating margin. In the BASF and DuPont case study below, BASF is more resilient than DuPont. Notice the wild swings in the DuPont trajectory. BASF has a more consistent, and focused, supply chain strategy. DuPont has implemented many Information Technology systems, but few well.

 

Figure 3.

 

We believe that strength, balance and resiliency are important components of a high-performing supply chain organization. We hope that you agree.  So, what are our next steps on this methodology?


1) Strength. We will give each public company a measurement on ability to drive year-over year performance of the factors on the effective frontier.


2) Balance. We will finish the work on the Supply Chain Index with Arizona State and rank the companies within industry peer groups based on a balance of the metrics against market capitalization. Our date to finish this work is March.


3) Resiliency. We will also work with ASU to measure the trajectory of resilience of results at the intersection of inventory turns and operating margin for the last 12 years. We will translate this into a measurement of resiliency.

 

In the writing of the book, Metrics That Matter, we will rank companies by SIC code based on these three factors, and share the insights of supply chain leaders on the management of supply chain metrics over the last decade. The chapters will be rich with case studies.

 

We will then place the rankings on these three factors into our community and allow supply chain leaders (one per company) to vote. The final stack ranking of supply chain excellence will be rated equally on the four factors of strength, balance, resiliency, and peer feedback. We will share this data at our Supply Chain Insights Global Summit to be held in Scottsdale, AZ on September 10-11, 2014.

 

I would love your thoughts. Check out the prior blog posts on the development of the Supply Chain Index to read for perspective:

Will Arrogance Stunt Your Growth?

Why I No Longer Believe in the Gartner Top 25

What I have Learned Working on the Supply Chain Index

Talk does not Cook the Rice

lcecere

Applause!

Posted by lcecere Nov 8, 2013

Rcently, I wrote about the evolution of supply chain planning. In my blog post, I commented on HOW little supply chain planning has  changed in its twenty-year evolution. As I worked with clients this week, I had a long and hard talk with myself. I am part of the problem. I, like other analysts, are stuck in the traditional software APS paradigm.

In this post, I want to pay homage to trailblazers. This post is a commentary to companies that are challenging the traditional Advanced Planning System (APS) paradigms and trying to forge a new path.  As a start-up, I understand how hard it is to pave a new road forward. Here I share insights on four enterprise solutions. (Next week, I will focus on the new forms of business networks that are evolving.)

 

1) Kinaxis. The Kinaxis solution is probably one of the most misunderstood supply chain planning platforms. With its origins in “fast MRP”, the company has gone through multiple name changes to establish an identity and gain market traction.  It is a flexible, in-memory model and platform that enables visibility, demand and supply balancing, what-if analysis, allocation and available-to-promise (ATP) functionality. Throwing APS tradition to the wind, Kinaxis branded under the term “rapid response” five years ago and has recently been pushing the promise of the Supply Chain Control Tower.

 

In leaving the Kinaxis user meeting, I was struck by three things.  First, their recent work on mobility and defining the user experience on a mobile application is very cool. Secondly, the flexibility of the Kinaxis solution makes the product hard to message, but the clients that have figured it out, are very happy.  (Some of the happiest….) And, third, the solution is most often deployed in material-intensive supply chains for what-if simulation and visibility. It is a cloud-based solution that scales easily for hundreds of users. It has helped many clients that were too constrained by the inflexibility of the traditional APS platform.

 

At the conference, Kinexions, I heard many clients speaking freely about the deployment of Kinaxis and the turning-off of Oracle and SAP APS solutions.  Many were almost giddy. The ease-of-use of the Kinaxis system was freeing for their teams.

 

2) Logility. I like the work that Logility has done in the redefinition of demand planning. Their work on New Product Profiler (a product to forecast a new product) and on attribute-based planning termed Proportional Profile Planning is very encouraging. It should be considered by all Logility customers struggling with demand accuracy in new product launch and promotion management.

 

3) Solvoyo. This week, I also spent time in Istanbul discussing the evolution of concurrent planning with some of the best minds in supply chain operations research.  Many of you may recall the great work that Koray Dugan and Omer Bakkalbasi did at i2 Technologies.  They are now teamed together working on the development of concurrent planning.

 

Essentially, the team is removing the partitions between network design, sales and operations planning (S&OP), inventory optimization, fulfillment and transportation planning. Originally, supply chain planning had to be compartmentalized to enable optimization solvers to run within a feasible timeframe. However, with the advent of cloud computing and more advanced optimization techniques, the team at Solvoyo is using parallel processing in the cloud at Amazon to provide decisions on demand (Software as Service that delivers the output and decisions integrating with the client’s existing software). As a result, the solution is solving inventory, transportation, and fulfillment in one model across strategic, tactical, operational, and executional horizons.  Is this important? Yes for three reasons…. The depth of the solution, a more scalable solution, and the bringing of the decisions on demand helps companies that are struggling to get and retain talent.

 

Inventory problems solved in isolation have had little adoption. Inventory needs to be part of a deeper, more connected solution. The Solvoyo technologies allow users to evaluate the form and function of inventory in network design and connect it to fulfillment and transportation planning. For an old gal in supply chain planning, I love seeing a new definition of supply chain planning.

 

4) Terra Technology. Terra Technology has dubbed its solution demand sensing and with twenty consumer goods companies using the solution, the company is attempting to gain new clients in distribution-centric industries that are not consumer goods (e.g. distribution, chemical processing. food manufacturing and apparel). The solution replaces rules-based forecast consumption improving the translation of demand from a tactical forecast to a more useable and accurate demand signal for fulfillment. Companies using the Terra solution are averaging a 10% reduction in inventory on the balance sheet and an improvement in customer service fulfillment. However, despite seven years of product marketing, the company is still not well understood by prospects requiring ongoing dialogues with the buyers.

 

While the replacement of rules-based demand consumption, may seem like a small thing, the impact is significant, and the math has not been matched by the several want-a-be competitors that have tried….

 

Each of these companies have attempted to blaze a new trail in their own way. They are fighting bigger competitors that have done less platform innovation that charge much more for their solutions, but are more aggressive in marketing. Additionally, the higher costs of the extended ERP solutions makes them much more desirable for large system integrators to implement and recommend.

 

As I sit in seat 16C on a packed plane winging my way to Minneapolis, I just wanted to raise my glass and applaud the innovators. Hopefully, you will check them out too….

Today, I launched the The Supply Chain Shaman's Journal. The Journal will be published quarterly, and will be a collection of posts from the Supply Chain Shaman blog. Each Journal is centered around a theme.

 

It published today in PDF format, and will be released later as an ePub on the Apple iBookstore, and as a .mobi for Kindles on Amazon.  In the meantime it can be downloaded  as a .pdf from the Supply Chain Insights Journal page. Using the link, you can also sign up for future issues as they become available.

 

In January, 2014 the Shaman's blog will be four-years old. How time flies...

 

One of the problems with a blog is that as it becomes bigger, it becomes more and more difficult for the reader to access old posts. And, as many of you know, I like to pound a keyboard. I have posted 1-2 articles a week for over four years. I wanted to make access to the content easier. So, the design of the Journal is meant to enable readers access what I have written here in an easily digestible format.

 

The inaugural issue focuses on Sales and Operations (S&OP) planning and features 23 select articles on the subject.

 

The Journal will publish quarterly.  Each will be a collection of blog posts on a new theme. The winter edition will feature articles on Supply Chain Organizational Design, and the spring edition will focus on the Metrics that Matter. Even though it is copyrighted, consistent with our mission, it is being released today with social sharing in mind, and under the principle of Open Content research. We just feel that content should not be locked behind a paywall. Read it, share it and enjoy!

 

We welcome your feedback!

Last week on my way to Frankfurt, I uploaded software files while over the Atlantic ocean using Lufthansa's WI-FI service. I was able to work, and be effectively connected to my office, all the way to Europe. As I uploaded a 5 meg file to Slide Share somewhere over England, I smiled.

 

Similarly, tonight, as I write this blog post, country music is blaring from my iPhone. It is based on MP3 files. Over my lifetime, I have successfully transcended the music experience from records, to tapes, to digital files. The music experience today is far more portable and enjoyable than the days of vinyl. While I still hold onto my Beatles and Rolling Stones records, it is mainly for nostalgia. They are no longer played...

 

I also smiled this weekend as I unpacked boxes from my recent move.  I held my old, well-worn Road Atlas fondly. At one time, it was very important in my life. I have the uncanny ability to get lost every time I turn. There were notes from trips twenty-years ago with my young daughter that is now thirty in the margins. I reminisced about the days when you plotted the trip with yellow markers and called ahead for a hotel room. Over my lifetime, I have moved from a paper-based Atlas, to MapQuest, to a satellite-based Garmin, and now to an iPhone. With each transition, my life got easier.

 

I recently attended SAPICS in South Africa. A speaker on robotics spoke on the potential impact of robotics and manless vehicles to reduce logistics costs by 40%. We see the constant evolution in the warehouse with robotics, voice and automated vehicles, so why not planning?

 

So, as I sat in my seat 5D and crossed the Atlantic, I asked myself the question, "Why have supply chain planning technologies not been reinvented through technology evolution in a similar manner?" By and large, companies are unhappy with the user experience of supply chain planning and feel that the system output is too difficult to use.

 

So, why has there not been a step change? In the words of Rick Sather, Kimberly Clark, "Why is there not an app for that?"   Here is my answer:

  • Incentives: The market incentives are aligned to sell traditional software. Consultants are incented to sell traditional enterprise software. Companies are risk averse and consultants want to sell the software that gives them the greatest margin.  The technology evolution reduces the margin for ecosystem. This surprises many. During the week, I had a long conversation with a good friend that moved from a manufacturing role to a consulting role and has now decided to move to a supply chain role in a distribution company. She was shocked at the level and amount of kick-backs made to consulting companies to sell traditional software.
  • Consolidation: As the software matured, the market consolidated. Most of the energy of the software providers was focused on platform migration and the protection of maintenance revenues. The protection of maintenance revenues is a deterrent for technology innovation. I know of no software company that has successfully migrated their product platform to new technology.  In my decade of serving the industry as an analyst, each time that a company attempts to innovate on a new platform, they are pulled back by user enhancements and the need to protect license revenues.
  • History. The supply chain planning space has a legacy of long and expensive sales cycles with large payouts to the enterprise sales team. The deals are carefully planned and the battles are artfully waged. Sales teams have made large sums of money. The movement to cloud computing and mobility reduces the cost of software and changes the business model. No longer are sales teams able to generate the size of deals and the commission checks of yesteryear.
  • Sex and Fifty Shades of Gray. The software for supply chain planning is just not as sexy in the eyes of venture capitalists. Most of the money has poured into social and marketing technologies that are aligned to drive corporate growth. Supply chain problems require an enterprise-class solution that works. For many this is just not exciting.

 

So, as I write this, I am encouraged to be working with several new start-ups that want to change this picture. They are enjoying the challenge of creating cloud-based optimization solutions and new forms of visualization and analytics for mobile devices. They are poking holes in the old Advanced Planning Footprints of the 1990s and asking me to help them design it differently. They understand that the movement to the tightly integrated ERP footprint was a step back for the industry. Their interest is in building effective business networks that can sense and adapt using new techniques.

 

Shouldn't it be this way? Shouldn't technology evolution improve the experience? We shouldn't start with process. Instead, we need to ask how the process could be improved with new forms of technology? Don't we need to admit that the supply chain planning today is largely legacy, and that like the Atlas that I carefully packed away, that it is also needs to be shelved?

 

So, what can you do to change this?

 

1) Encourage innovation. Work with small and innovative solutions and open up the world of opportunities.

2) Push existing technology providers to also drive innovation in a meaningful way. Challenge them to think about problems differently.

 

I look forward to getting your thoughts and writing about these new forms of analytics as they evolve. But, tonight, as I recover from my jetlag and tap my foot to my blaring country music, I think that I will just toddle off to bed and dream about the world that could be.

The healthcare provider network is fragmented. As the power shifted from the supplier to the healthcare provider, over the last decade, the healthcare provider responded. The hospital built a supply chain organization that is now viewed as stronger than that of its suppliers. Today, providers of healthcare self-assess that they are more successful meeting their goals than the supplier.

 

The supplier, or healthcare manufacturer (pharmaceutical or medical device) in the healthcare value chain is three times larger than the provider. They have four times the profits. However, in our recent study on healthcare, the supplier rates themselves 15% less successful than healthcare providers in their ability to deliver on their supply chain goals.

 

 

Here are the highlights from our recent study:

1) Rising Complexity. Nearly two-thirds of manufacturers are offshoring to reduce costs. They have longer more complex supply chains, but rate themselves low on their ability to plan demand and manage a network.

 

2) Enterprise Alignment. Only 1/3 of suppliers feel that they can effectively integrate their supply chain and sales processes within their own organization. This is a barrier to forming a successful value network.

 

3) End-To-End Focus not in Sight for Suppliers. Two out of five manufacturers report that they have someone responsible for the end-to-end supply chain. For the supplier, the focus to move from a supply chain to build a value network is just starting. To focus on the patient, there needs to be a value-chain focus.

 

4) Stalled Progress on Inventory and Cash-To-Cash Cycles. While hospitals have improved inventory turns by pushing the responsibility backwards onto the supplier, in the last decade, there has been no improvement in cash-to-cash and inventory cycles for the value network. Each party self-assesses their capabilities in demand, supply and network planning at a very low level.  There is a need for both parties to step up and improve capabilities.

 

 

So, in the absence of supply chain leadership, the government will step in to try to heal the healthcare value chain. What they will find is:

 

1) Value Analysis and Supplier Collaboration Programs by Hospitals Just Starting. Over 70% of healthcare providers now have value analysis programs. They are being used to evaluate new products and services. Sixty-seven percent of companies rate them effective in meeting the goals of managing costs, determining physician preferences and reducing infection rates. However, most of the processes are not about VALUE; instead, they are about cost mitigation. There is a need to align value-based outcomes to serve the patient. The toughest nut to crack is the incentive systems.

 

2) Business Model Innovation Needed. Unlike other industries, no company in the healthcare value chain has stepped forward to use power to drive business model innovation (E.g. like Wal-Mart in retail or Intel in the semiconductor industry) to significantly improve the end-to-end value chain. This is an opportunity for a company like Eli Lilly or Nova Nordisk. Both of these companies actively provide medications to diabetic patients. The movement to patient sensing and monitoring and direct delivery of services to the patient through better communication and monitoring for the physician is now within our grasp at a technology level. The greater barriers lie in the building of systems and effective networks for patient delivery.  The most movement is with CVS and Walgreens.

 

3) Lack of Alignment on Outcomes. Regulations, taxation and talent are the top three challenges for manufacturers while the top three challenges for providers are costs, inventory, and contract management. Sadly, the patient does not make the list. We are a long way from a focus on value-based outcomes to serve the patient.

 

If I had a magic wand, what I would like to see happen is:

 

1) A redesign from the Patient back with a Focus on Wellness. I would like to see us rethink the value network and the delivery systems to focus end-to-end. Since, we are facing government intervention, perhaps a tax credit for big pharma and medical device companies to invest in innovation to use the Internet of Things to focus on real-time patient monitoring to improve wellness?

 

2) Investment by Manufacturers in Supply Chain Planning. It is hard for companies that have high profit margins to focus on supply chain planning to improve costs, inventories and customer service. With the rise in complexity, it is time for manufacturers to get to work to close the gap between themselves and the other manufacturing industries. Perhaps an audit system on supply chain excellence to get reimbursement levels?

 

3) Data Sharing on Usage. The management of goods throughout the channel and the sharing of downstream data in a meaningful way can streamline the entire value network. The redesign of these systems outside-in could dramatically reduce costs and improve service.

 

4) Eliminate Rebates. The healthcare value network has the most antiquated and ineffective system for rebate management. The waste and time spent trying to manage bifurcated trade should be eliminated.

 

5) Building of Strong Networks for Case Management. I like what GHX is doing on the building of an inter-enterprise system of record for case management for scheduling a patient and the management/tracking of use in the operating room. I would love to see this type of approach be more widely adopted.

 

What are your thoughts?

 

For more on the study, please check it out at Insights on Building Effective Value Networks.