My journey to understand supply chain Metrics That Matter started three years ago. I was sitting at my kitchen table attempting to write a celebratory book on the 30th anniversary of supply chain management. When I sat down to write the book, Bricks Matter, I believed that companies had used supply chain technologies to reduce operating margin and improve inventory turns. I was surprised to find that I was wrong. What I found was erratic results with many companies going backwards. In fact, I now know that nine out of ten companies are stuck.
I want to help. My quest to understand the impact of supply chain processes and technology on corporate performance is now in its third year. We are currently working with Arizona State University (ASU) to use advanced operations research techniques to understand the patterns in our database of 52 supply chain financial ratios for the period of 2006-2013. We are currently mapping the progress of all public manufacturing, distribution and retail companies on three factors:
- Strength: Year-over-year improvement on operating margin and inventory turns for the past six years
- Resiliency: The pattern or reliability of results at this intersection of operating margin and inventory turns
- Balance: The ability to balance a portfolio of metrics to maximize market capitalization and free cash flow
This work will culminate in the launch of the Supply Chain Index in April. The Supply Chain Index will have a numeric rating of all public companies by industry sector for these three factors. They will be equally weighted and coupled with a peer ranking to stack rank corporate performance. I will use these insights to better understand which processes and technologies matter in delivering corporate performance through supply chain management. The early results from the ASU study will be featured in the book Metrics that Matter and it will be the core of the upcoming Supply Chain Global Summit on September 10-11, 2014 in Scottsdale AZ at the Phoenician. (We would love to see you there!)
Capturing the Voice of the Supply Chain Leaders
In this process, I have learned a lot. My journey of sharing these insights with clients has culminated in the writing of my second manuscript, Metrics that Matter. I am on deadline for 99,000 words due on March 1st. My energy is high. To make the book interesting, I have interviewed 60 supply chain leaders to get their insights. I am unsure how many will make it through corporate review cycles (this is a book in itself), but I wanted to give readers a sampling of their responses. In October, we interviewed Philippe Lambotte, former SVP Supply Chain of Merck and of Kraft Foods, on his thoughts on Supply Chain Metrics that Matter. Philippe is now at Mattel. I love Philippe. He is a great supply chain leader. Here I share his insights:
Philippe, which supply chain metrics do you think matter?
Lora, when I think of metrics, I think of an equilateral triangle: on each corner is a different metric. The corners of the triangle are costs/unit, cash (inventory cycles and working capital), and revenue/growth. In the middle of the triangle is customer service symbolizing the major customer-centric outcome required to balance the three metrics. I think of it as delivering on customer success. I see it as “What do customers think about you?” in transactional and non-transactional interactions. Keeping the triangle sides equal is key to maintain your business in balance while improving your metrics.
How do you balance metrics ?
It is all in the sequence you improve them and what is your starting point. In the operational management of operations, cost most often gets the first focus. This is the one metric within a manufacturer that supply chain/logistics organization, manufacturing and procurement organizations are aligned to. They have clear targets and responsibilities to achieve cost targets and missing them have critical implications. My philosophy however is to focus on service first and optimize the costs at a given service level. I believe it is very difficult to be efficient with a mediocre service. It is even more difficult to improve your cost continuously where service is not a stable capability.
Can you improve service and reduce costs simultaneously ?
Absolutely, it can be done. However, you need to do it with a holistic viewpoint. I encountered situations when cost was overemphasized and reducing transportation costs by filling trucks led to late promotional deliveries, which had a much more negative impact on our company and our customers. On the opposite, I experienced cases when service trumped any other metric and express and unplanned deliveries became the norm, leading to shipments with negative margins. To find the optimal trade-off, it is critical to involve customers in defining service through their eyes.
What does this mean? For example, if you ship your product through a wholesaler or directly to a physician, the on-time shipment targets should be different. I had an experience where the on-time target was plus/minus four hours for all channels and all customers. When we looked closer, we found our distributors needed complete shipments from us only once per week to synchronize with their other suppliers on-time and optimize their own shipments. However, the delivery frequency and on-time expectation of physicians we delivered to directly was much more stringent: they had no storage space in their practice and were scheduling our shipments in relation to their patient visit, so they needed to work within a few hour delivery window. We learned that by adapting our behavior and metric to customer requirements, we did really obtain the best of all worlds.
After service and cost, what is next ?
Once you have the right controls on costs and service, the next level of optimization focus is the cash conversion cycle management. Payables is the place to start because it requires mostly work with external partners. Receivables is hard to change because of the market requirements per country. Working capital and inventory optimization together is the Holy Grail of a balanced scorecard because it deals with both internal and customer facing impact.
The more your company has different set of business lines or products, external challenges and customers channels, the more challenging this balance is to achieve. There is no one-size-fits-all.
An example of segmentation in the pharmaceutical industry: vaccine supply chains deal by definition with live cells and require high investments to be successful. They require cold chain distribution, long-term planning, late stage differentiation opportunities and business is done with a high amount of time-bound tenders. As a result, lead time is often long, inventory needs to be preproduced long in advance. Drugs for diabetes, which is a growing health issue in the world, have very different requirements from vaccines: generally more straightforward manufacturing process, larger volume with ongoing customers and ambient temperature distribution. While metrics are defined similarly for both businesses, the metric trade-offs required to get to the optimal balance in the metric triangle are different.
Another example is in Consumer Goods industry with coffee. Soluble coffee manufacturing is hugely asset intensive with important capital expenditure plant infrastructure. Their high asset utilization is critical to drive fixed cost down. The plant has to run almost continuously, independently of demand. Hence you should be able to work with high inventories since any slowdown of the production line will drive important cost increases at the shelf. Roast and ground coffee on the other side shows a different picture: manufacturing roasting beans is simpler, less capital-intensive and highly commodity driven at the market level. This means a high promotional environment with fluctuating prices requiring high packaging flexibility and low inventory to be able to react. It implies that asset utilization of manufacturing lines as well as inventory targets should be much lower in roast and ground compared to soluble coffee. One size will not fit both coffee businesses.
Companies that successfully manage segmented supply chains integrated with their business requirements are the ones that are successful.
What derails metric performance?
I would say Merger & Acquisitions (M&A) and lack of specific focus were the two key derailers I encountered. Getting to best practice in balancing the metrics triangle I mentioned gets even more difficult when step changes occur to greatly modify your business system – such as in Merger and Acquisitions (M&A) times. The companies I worked with, Procter & Gamble, Kraft Foods, and Merck each had specific challenges as they grew through M&A. Key is for companies to maintain good performance of the part of the business that is already mature to improve the parts of the businesses which are not or need re-engineering.
Secondly, as companies become more complex and larger, the talent and focus get spread over more areas; the tendency is to go for common target and supply chain designs, especially if pressure grows to deliver on synergies and cost reduction. At some point, a company like Kraft used to own biscuits, cheese, pizza, confectionery, beverage, meats… with products delivered to customer directly to stores (DSD), through the customer warehouses or via wholesalers across more than 100 countries. It was extremely challenging to drive one common practice around metrics. Now Kraft is split between a company focused on North America and warehouse delivered products (Kraft Foods Group) and a company mostly focused on Emerging Markets with Snacks with a lot of direct store distribution (Mondelez International). This company split also enabled to segment supply chains and adapt metric targets for the relevant business requirements.
Is there an overriding message needed to keep the metrics that matter healthy ?
Focus on making your customer successful is a key principle. Beyond delivering On Time and in Full Shipments, retailers measure service often differently – and you need to understand what is key for them. For some retailers it is all about missed sales derived from On-Shelf Availability. For others it is all about In-stock at the back of their store. The ability of a manufacturer to understand what matters to their customers and create a joint partnership focused on improving products for our joint customer – the shopper – needs and wants is critical for success.
I hope that this helps.
To hear more from Philippe, check out:
Watch Philippe speak at the 2013 Summit (third from top)