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Let the Qs Begin

Posted by lcecere Sep 26, 2014

September 10-11, 2014 was the Supply Chain Insights Global Summit. It was great to see familiar faces at the kick-off. 110 supply chain leaders attended.  I smiled on the week following the conference as the accolades piled up in my inbox.



In preparation for the summit, we readied the final report of the work on translating balance sheet results into a methodology to judge Supply Chain Excellence. This report, Supply Chains to Admire, compares the progress of 200 companies within their respective peer groups on both performance and improvement. Supply Chain Improvement is based on the work that we completed with an Arizona State University Operations Research team to determine the Supply Chain Index. While the performance rankings were based on comparisons of inventory turns, operating margin and Return on Invested Capital (ROIC) for the periods of 2006-2013 and 2009-2013, the concept is that to be a supply chain leader you must outperform and drive improvement. We find that this is true of too few companies.


Attending the conference was Alexia Howard, Senior Research Analyst - US Foods for Sanford C. Bernstein & Co., LLC.  Following the conference, Alexia asked for me to share the methodology with over 150 financial analysts. The script will be distributed to CFOs of apparel, consumer packaged goods, and food/beverage companies next week. So, I wanted to give you a heads-up on their questions, and my answers. My goal in this post is not to surprise you...


The opening statement was:

"Growth is slowed, and supply chain is more important to success. However, we are horrible at figuring out what adds value. Can you help us with what you see in the data?"


Yes, I said. We see that nine out of ten companies are stuck. There are three reasons why:


  1. Vertical excellence—having the best manufacturing, procurement or transportation function—has not worked.
  2. A project focus where each project has to meet a threshold ROI has not worked. (Most companies just have too many disconnected projects.)
  3. A big bang technology focus has not worked. In fact, many companies move backwards—like Campbell's Soup or Kellogg—when they try to implement a large project with too few resources too fast.


There are seven characteristics of the companies that did it best. This is what I think works:


  1. Leadership. Enlightened leadership that focuses on the management of the supply chain as a complex system.

  2. Outside-in Processes. The use of channel data into advanced analytics to sense demand.

  3. Mature Horizontal Processes. Building strong horizontal processes like revenue management, Sales and Operations Planning, Supplier Development and Corporate Social Responsibility.

  4. The right stuff in the organization. Companies with the strongest performance had more advanced supply chain human resource departments, a well-integrated supply chain finance team, and a supply chain center of excellence.

  5. Supply Chain Design. Active, and intentional, design of the supply chain.

  6. Aligned Metrics. To ensure the management of the complex system, the metrics of operating margin, inventory turns, ROIC, customer service, revenue, and forecast accuracy need to be managed together as a non-linear system.

  7. Strong Planning Capabilities. Companies with better planning capabilities score higher on the methodology.


I then finished a 40-minute presentation, and prepared for questions. I was not sure of what would be asked so I share them so that you are prepared for when your CFO reads the script.

What percentage of retail out-of-stocks could be prevented by the manufacturer in these industries? This is an unknown, but in my opinion, 65% of the solution is in the hands of the manufacturer. However, it requires the use of retail data and the redesign of analytics to sense, shape and translate demand. Since most companies struggle with competency in the demand organization—and are working with disconnects in sales, marketing and supply chain processes—very few companies do this well.

Who does this well? I like the work at Kimberly-Clark and PepsiCo. It is stronger than the work you will see at most companies.

What does an investment in SAP mean for a company? What should we watch for? SAP means many different things for different people. An investment in SAP ERP improves transactional effectiveness in order-to-cash and procure-t0-pay. A successful implementation greatly improves a company's abilities to manage the firm. However, the investment in SAP planning, a product termed APO, can often take a company backwards. While it is the best system of record in the industry, the optimizer and the planning software overall is not equal to best-of-breed solutions. Nine out of ten companies regret their decision to implement SAP APO, and Oracle planning is not much better.

What investments in technology do you believe add value? I am a firm believer in new forms of analytics:  this includes test and learn, cognitive computing, demand sensing, visualization, advanced optimization, and simulation. I believe the world is too complex to run your supply chain on an Excel spreadsheet.

Do I believe that the board of Heinz will be able to drive new levels of value? Yes, by breaking down the walls between the silos and focusing on building strong horizontal processes. This is an opportunity for most companies; but unfortunately, they are pushing the wrong levers.

What are the barriers? Companies with extreme levels of IT outsourcing and a focus on project implementation after project implementation have done more poorly.  Companies that have done it well have implemented systems once and stabilized implementations. Take General Mills and Kellogg an example. General Mills implemented SAP once and well, while Kellogg had multiple and difficult ERP implementations.

What insights can you give us on the management of complexity? Complexity comes in many forms—price increases, product portfolio expansion, shelf-ready packaging, packaging-specific artwork, promotions, in-store displays. The secret is to tackle all complexity and decrease the complexity that adds cost but does not drive off-setting value. The difficulty is most companies are so tied up in being marketing-driven, adding products and promotions willy-nilly, that there is no analysis of good and bad complexity.

What should I ask the business leaders at the companies that I follow? I encouraged the financial analysts to ask:

  1. Are you using channel data to sense in your supply chain operations?
  2. Do you actively design networks with a focus on form and function of inventory?
  3. How do you balance the trade-offs between source, make and deliver?
  4. Are you actively building supply chain talent?
  5. How do you make trade-offs between marketing programs and good/bad complexity?


Did I miss anything? I welcome your answers.



Today we published a new report, Supply Chains to Admire. It is the end of a two-year research project, and identifies which publicly held companies outperformed their peer group on balance sheet results. Here we share the answers to the questions that we get the most often about this research:

What is the source of data? The data analyzed to compile the Supply Chains to Admire report came from publicly-available information from balance sheets and income statements.

Which companies were considered in the study?  We built peer groups based on like industries. Companies were selected based on three criteria. They had to be publicly traded, we had to have a nearly complete data set for the years studied, and they had to have a peer group of at least six companies to be able to draw the comparisons. We eliminated several large conglomerates. As a result, you will not find 3M or GE in the data. This left us with a list of nearly 200 companies.

How did you define peer groups? We tried to use NAICS code designations. The NAICS designation was developed by the US Federal Government to characterize groups of companies within an industry.

If the company had multiple divisions crossing over many industries, where did you place them? We placed them in the industry that they were the most like, e.g., the primary source of revenue. For example, Johnson & Johnson has many supply chains in many industries, but the majority of the revenue comes from pharmaceuticals. As a result, we report their results along with their pharmaceutical peer group. We know that this is not perfect; but it is the best that we could do, and we think that it is a fairer comparison than putting all companies in a spreadsheet and shaking them up without any consideration for peer group analysis.

How did you select the final list of fifteen companies?  The companies were selected based on performance better than peer group for 2006-2013 and delivering better than average improvement within the peer group as determined by the Supply Chain Index. We think that supply chain excellence is a combination of performance and improvement.

Was the list of the Supply Chains to Admire hard to select? We thought that it would be; but surprisingly, it was not. After applying the rules for data collection, we ended up with 200 companies. Nineteen of the 200 companies met the performance criteria of improving operating margin, inventory turns, and ROIC together in concert for the years of 2006-2013 or 2009-2013. Four more companies fell out of the list when we applied the supply chain improvement criteria as defined by the Supply Chain Index. The companies that fell out at this point were Diageo, PepsiCo,  Reckitt Benckiser, and The Gap.

How does this compare to the Gartner Top 25? One of the reasons that we built the Supply Chains to Admire is that we don't think that the Gartner Top 25 serves the market well. While you need to make your own decision, here is an overview of the two methodologies:


Will you do this analysis again? Yes, we will do this study yearly in the preparation for our annual conference. This conference is designed to challenge supply chain leaders to think differently.

What is the Supply Chain Index? The Supply Chain Index is a methodology to judge supply chain improvement. It is detailed in our recent reports.

I have some input into the methodology. How do I give you feedback? We would love to hear from you either formally or informally. We get stronger through your feedback.

What did you learn in the analysis?

  • Despite a rise in demand and supply volatility, companies are becoming more resilient in 11 out of 15 companies studied.  However, due to a variety of factors, companies are losing ground on driving progress on both inventory turns and operating margin.  We believe that this is largely due to rising complexity.
  • We are not doing as well as I thought we were doing on driving balance sheet improvement. We have a lot of projects, but many companies are struggling to see these results on the balance sheet. Nine out of ten companies are stuck at this intersection.
  • I am surprised at how many companies are raising improvement in one of the three metrics, but not driving performance improvements in the total portfolio. This is often due to the lack of understanding of the supply chain as a complex system. We find that companies will establish metric targets in isolation and throw the supply chain out of balance.
  • There are a lot of misconceptions about inventory. It is a hot spot of misunderstanding. Inventory is one of two primary buffers in the supply chain. A buffer absorbs volatility. With the rise of demand and supply volatility, buffers are more important that ever. However, most companies are still looking at inventory levels, and we have a host of crazy consultants running from company to company advocating cutting inventory to free-up cash. Cutting inventory without right-sizing the form and function of inventory throws the supply chain out of balance. Each industry has a very different potential, and it is important to not generalize the answer.
  • Excellence is easier to say than to do. Good luck in your journey! And, let us know if you have any questions.


Watch the 15 Supply Chains to Admire video.

To watch all the Summit presentations click Play all on our YouTube Summit Playlist page.

The Supply Chain Insights Global Summit is a week away. We are currently tabulating the results to publish the report, “Top 15 Supply Chains to Admire.” In this report, we track the progress on balance sheet performance of companies by peer group and chart the relative improvement for the period of 2006-2013. This work has taken us two years to finish.

As I look at the results—and reflect back on my ten years of experience as an analyst with these companies—I find the differences between a leader and laggard boil down to five things: supply chain leadership, talent management, active design of the supply chain, strong horizontal processes, and being good at supply chain planning. While consultants and technology providers may preach that you need the latest and greatest technologies, I often see companies implementing the wrong technology, doing it badly, and sending them backwards. Supply chain leaders that make the biggest difference build supply chain potential and make small, incremental progress over time.

A Closer Look at Supply Chain Talent

For most, supply chain talent management is challenging. In the recent report that we completed, Supply Chain Talent – A Broken Link in the Supply Chain, we shared data from a recent study that only one in three companies today thinks that they are managing supply chain talent effectively. When I look at the performance data, I think that it matters.

Figure 1.

Ease or difficulty of filling supply chain positions

Talent management is not trivial, and supply planning is at the nexus of the talent problem.  Today there is a shortage of mid-management supply chain talent; and as shown in Figure 1, some of the toughest positions to fill are in the area of supply chain planning. Supply chain planning requires a good understanding of the business, strong influence skills and deep analytic capabilities. These are hard to build, and the loss of a great planner can hurt.

Job satisfaction for supply chain planners is low. As a result, companies are churning planners—they are moving from one company to another. Due to the unique skill mix, it is difficult to recruit supply chain planners. Which makes me wonder, if we gave our supply chain planners more good old-fashioned love, would we have fewer open positions? And, if the position was more desirable, would the job have higher satisfaction causing others within the company to want to do the job more readily? I think so. Here I share my point of view.

What I See in the Data

From time to time at Supply Chain Insights, we do quantitative assessments of individual companies to understand the dynamics within the supply chain organization. These are private studies that we do for clients, and we keep the results of these studies confidential. However, time after time, we see a consistent theme in the data. Supply chain planners do not feel appreciated. The job is tough and the obstacles are many. Here are the seven issues that we see most frequently:

  1. Changing Priorities. It is hard for a planner to keep up with ever-changing priorities. Planning takes time and the use of optimization requires a clear objective function. With conflicting and ever-changing priorities, it is hard to do.
  2. Rewarding the Urgent. No Time for the Important. Most organizations reward the fire fighters. Planning requires a focus on the important and allowing planners time to plan. Culturally, this is a tough shift.
  3. Giving Planners Time to Plan. Good planning takes time. When an employee is always fighting fires, they do not have the time to plan.
  4. Making Their Positions Meaningful. At the end of the day, when we turn turn out the lights in our offices, we all want to think that we make a difference. Supply chain planners want their work to be used. They want to make a difference. Too few companies actually use their plans to make better decisions. The degree of this gap has grown greater in my time as an analyst. The good have gotten very good, and the average companies have gotten worse.
  5. Giving Planners Technologies That Are Easy to Use. The right supply chain planning tools have the right data model that is set up to adequately model the environment, and the planners are supported by easy-to-use business intelligence tools. As you can see in our reports on technology satisfaction, Voice of the Supply Chain, and Maximizing the ROI in Supply Chain Planning,  both are an issue right now.
  6. Creating the Right Work Environment. Politics, and the lack of understanding of the basics of supply chain, are issues for supply chain planners. The planners see the gaps in the organization first, and they need leadership help drive alignment.
  7. Clarity of Career Paths. In the early days of creating a supply chain planning group, the positions were entry-level and there was high turnover. In the companies that do it well, there are established career paths that reward planning.

What I Hear in Discussions.When groups are doing well, you don’t hear stories like these:

  • “Yesterday, I presented the demand plan to my boss. He asked me to go back to my desk and create a better plan. When I asked him to define a “better plan,” he said that it would be one that showed the company growing with less demand error. When I asked him how to do this, he said just work on the plan and make it better. I shook my head. I cannot change the basics of the business.”
  • “Good news travels fast in our company, and bad news is seldom communicated. So, when we run a demand plan on market data and see that products are not selling, our jobs become very uncomfortable.”
  • “My boss criticized our work today on the demand plan stating that the demand error was too high. He mentioned to one of my colleagues that he wanted to recruit a new demand planning team to reduce the error. He just does not understand that the demand error is characterized by market conditions and what you are selling in the market. He thinks that he can just get a new team and that the demand error will magically go away.”
  • “My general manager believes in having a high bias. He thinks that if you forecast high that you are going to sell more, then you will sell more. When I tried to explain the issues with over-forecasting on waste and inventory obsolescence, he was dismissive. We have to keep two sets of ‘internal books’. One set has the marketing and sales bias and the second has what we think that we are really going to sell.”
  • “We are always on the hot seat. Whatever goes wrong, it is attributed to issues with the demand plan. I often feel that we are the scapegoat.”


Unfortunately, we hear these stories more than we’d like. So, on this sleepless morning, as I sit in Stockholm trying to recover from jet lag, I want to ask you a question. Have you given your supply chain planner some love today? If not, why not stop by their office this morning and make the first step. I think that it matters.

We will be discussing the issues and opportunities with supply chain talent in greater detail at our upcoming Supply Chain Insights Global Summit. We hope to see you there. If not, try to join us by ustream. Supply chain talent and the role of supply chain planning are topics that I think need to be elevated.