Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry 25 SEP 2012
 

Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry 25 SEP 2012

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Supply Chain Metrics That Matter will be a series of reports published intermittently throughout the year by Supply Chain Insights LLC. Within the world of Supply Chain Management (SCM), each ...

Supply Chain Metrics That Matter will be a series of reports published intermittently throughout the year by Supply Chain Insights LLC. Within the world of Supply Chain Management (SCM), each industry is unique. To help companies understand differences, each report is a deep dive on a different industry.
While we find it useful to understand the evolution of supply chain excellence by comparing industries, we feel that the true stories of supply chain excellence can only be really understood by comparing what happened within a period by peer group. The goal of this series is to share these insights. These reports are intended for you to read, share and use to improve your supply chain decisions.

The average Consumer Products (CP) company is stronger in the execution of supply chain management practices than their retail or pharmaceutical counterparts, but as companies will see in later reports, CP progress has not been equal to that of High-tech and Electronics manufacturers.
CP companies (including both consumer packaged goods (CPG) and food & beverage companies) tend to be marketing-driven. They are struggling to understand the differences between new market-driven, and their well-oiled marketing-driven, supply chains. With a strong legacy in building persuasive marketing programs, the companies have leveraged a global “one-size-fits-all” push-based supply chain strategy. These traditional supply chain management (SCM) definitions have produced supply chains that respond, but don’t sense. They are efficient, but not adaptive. They tend to be long (greater than twenty weeks) with waste pockets between nodes.
The landscape of the industry has been greatly affected by mergers and acquisitions. In the past decade, 57 companies were absorbed into ten. The industry is still digesting this change. While most companies have 150 unique systems, the manufacturers in this industry will often have five times the industry average. Getting to the right data to improve decision making continues to be a challenge.

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    Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry 25 SEP 2012 Supply Chain Metrics That Matter: A Focus on the Consumer Products Industry 25 SEP 2012 Document Transcript

    • Supply Chain Metrics That Matter:A Focus on the Consumer Products Industry Using Corporate Annual Reports’ Financial Data to Better Understand Consumer Packaged Goods and Food & Beverage Supply Chains 9/25/2012 By Abby Mayer Research Associate Supply Chain Insights LLC
    • ContentsResearch ................................................................................................................................... 2Research Methodology .............................................................................................................. 2Executive Overview ................................................................................................................... 3A Closer Look at CPG Companies ............................................................................................. 5A Closer Look at Food & Beverage Companies ......................................................................... 5Industry at a Turning Point ......................................................................................................... 7 Inventory Management ........................................................................................................... 8 Cash: Full Larder .................................................................................................................... 9 Stalled Growth .......................................................................................................................10Global Footprint ........................................................................................................................ 11New Product Investment ...........................................................................................................12Trade Promotion Management ..................................................................................................13Moving Forward ........................................................................................................................15Appendix ...................................................................................................................................17 Metrics & Equations...............................................................................................................17 Figure 5 Methodology ............................................................................................................17 Other Reports in this Series:..................................................................................................17About Supply Chain Insights LLC ..............................................................................................18About Abby Mayer .....................................................................................................................18Copyright © 2012 Supply Chain Insights LLC Page 1
    • ResearchThis independent research was 100% funded by Supply Chain Insights and is published usingthe principle of Open Content research.Supply Chain Metrics That Matter will be a series of reports published intermittently throughoutthe year by Supply Chain Insights LLC. Within the world of Supply Chain Management (SCM),each industry is unique. To help companies understand differences, each report is a deep diveon a different industry.While we find it useful to understand the evolution of supply chain excellence by comparingindustries, we feel that the true stories of supply chain excellence can only be really understoodby comparing what happened within a period by peer group. The goal of this series is to sharethese insights. These reports are intended for you to read, share and use to improve yoursupply chain decisions.Your trust is important to us. As such, we are open and transparent about our financialrelationships and our research process. All we ask for in return is attribution when you use thematerials in this report. We publish under the Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.Research MethodologyThe basis of this report is publicly available information from corporate annual reports from theperiod of 2000-2011 for the Consumer Products (CP) companies. In this report, we use thisfinancial data to understand the supply chain: past trends, the current operating environment,and recommendations for the future. To drive greater insights, we augment this financial datawith information that we have obtained through interactions with clients and recent insights fromour quantitative research studies.Copyright © 2012 Supply Chain Insights LLC Page 2
    • Executive OverviewThe average Consumer Products (CP) company is stronger in the execution of supply chainmanagement practices than their retail or pharmaceutical counterparts, but as companies willsee in later reports, CP progress has not been equal to that of High-tech and Electronicsmanufacturers.CP companies (including both consumer packaged goods (CPG) and food & beveragecompanies) tend to be marketing-driven. They are struggling to understand the differencesbetween new market-driven, and their well-oiled marketing-driven, supply chains. With a stronglegacy in building persuasive marketing programs, the companies have leveraged a global “one-size-fits-all” push-based supply chain strategy. These traditional supply chain management(SCM) definitions have produced supply chains that respond, but don’t sense. They are efficient,but not adaptive. They tend to be long (greater than twenty weeks) with waste pockets betweennodes.The landscape of the industry has been greatly affected by mergers and acquisitions. In thepast decade, 57 companies were absorbed into ten. The industry is still digesting this change.While most companies have 150 unique systems, the manufacturers in this industry will oftenhave five times the industry average. Getting to the right data to improve decision makingcontinues to be a challenge.With rising commodity prices, slowing growth, increased pressure to improve efforts oncorporate social responsibility, and rising issues from product complexity, CP leaders are gettingmore serious about supply chain excellence. They are in the early stage of building Market-Driven Value Networks designed from the customer back to redefine source, make, deliver andsell processes.This transition to Market-Driven Value Networks over the next decade will not be trivial. Theteam will first have to earn a seat at the table to work hand in hand with sales account teams tohelp retailers design a more effective value network from the customer back. In these efforts,companies will quickly realize that the one-size-fits-all push-based supply chain is grosslyinadequate. As a result, unique supply chains will be designed to serve special markets withcustomer opportunities and product assortment tailored by customer demographic. There will besix immediate impacts: • Listening and Sensing. The early work of CP leaders on building Demand Signal Repositories (DSR) will be the foundation for listening and learning strategies. This structured downstream transactional data (e.g., Point of Sale, Warehouse Withdrawal,Copyright © 2012 Supply Chain Insights LLC Page 3
    • Retail Perpetual Inventory, etc.) will be combined with unstructured customer sentiment (e.g., social data, ratings and reviews, customer blogs and recipes) to build effective listening posts for the supply chain. • Compliance. Food legislation will be transformational. Only 1% of food and beverage companies are ready. This change will redefine visibility and tracking systems and move the industry from pallet-level to unit-level tracking. Lot tracking across product transformation points will require a redefinition of manufacturing and order execution systems. This change will permeate warehouse management, transportation, and increase the need and potential of multi-tier visibility. • Rethinking Constraints. They will also find the traditional supply chain that focused on manufacturing as a constraint will need to be rethought. In the next decade, transportation and raw material constraints will overshadow those of manufacturing. • Building Effective Buffers. The original supply chains had two buffers: inventory and manufacturing. With the outsourcing of manufacturing, many consumer value networks now only have one buffer, inventory. As seen in this report, the management of inventory has not been a core competency of this industry. This will need to change to meet the goals of being more adaptive and socially responsible. Companies will be forced to own the entire supply chain. Companies that actively design based on push/pull boundaries will do it best. • Collaboration as a Necessity. Retail expectations will push for smaller and more frequent shipments while corporate social responsibility initiatives will push for lower carbon footprints. The only way that companies will achieve this is by working together in ways that have never been possible before. • Redefining the Supply Chain for Channel Strategies. The evolution of digital technologies—digital media, social listening, mobility along with ecommerce—is redefining the channel. Amazon is growing in importance, and is seizing center store. Companies that have never had an ecommerce channel before will now have it as an important opportunity for growth. Digital Path to Purchase (DP2P) will grow in importance as companies attempt to automate and shape demand in the four moments of truth (the choice to place an item on the list, the decision to put the item in the cart, the check-out and product usage). The result will be the need for data to move in real- time versus near real-time through the supply chain, and the redefinition of supply chain execution for emerging channel strategies.Copyright © 2012 Supply Chain Insights LLC Page 4
    • Over the past three decades, there is a long legacy of supply chain innovation by leaders in thisindustry. This industry moves slowly, but deliberately. While the challenges are many, CPcompanies have a strong base from which to move forward. The struggle is usually in findingleadership that understands the supply chain as a complex system with finite trade-offs to bemanaged versus a cost center to be milked.A Closer Look at CPG CompaniesThe two types of CP companies are consumer packaged goods companies and food &beverage companies. While the remedy is often shared for the two companies, there areseveral unique factors differentiating the two that may help to better understand the currentstate of their operating environments. While both move products through the same channel andface similar challenges and opportunities with retailers, a CPG company has fewer items, lesscomplexity and lower commodity costs than a food & beverage company. CPG companiesproduce products for the commodity categories of paper, laundry, oral care and householdcleaning. They tend to be larger, more global, and have less manufacturing outsourcing thantheir food & beverage counterparts. Their technology systems are also more advanced and theirsupply chain leadership teams are generally more mature. They are more active in talentdevelopment and work with government/industry partnerships.CPG is dominated by four large companies: Colgate-Palmolive, Kimberly Clark, Procter &Gamble and Unilever. They actively invest in new products taking four of the five top spots interms of R & D spending to drive product pacesetter status as seen later in figure 5. In ourreport, Conquering the Supply Chain Effective Frontier, we share insights on how these largeconsumer products companies tackled the Supply Chain Effective Frontier and balanced supplychain metrics while pushing for supply chain excellence in the last decade.A Closer Look at Food & Beverage CompaniesFood & beverage companies operate under a different set of conditions than the more generalCPG companies. Due to the seasonality of raw materials, these companies are moresusceptible to commodity price increases and most hold larger inventory stores as they provideyear-round foodstuffs, but may only purchase in-season commodities. As anyone who buys atank of gas or a loaf of bread can attest, commodity prices have risen and continue to rise asseen in figure 1.Copyright © 2012 Supply Chain Insights LLC Page 5
    • Figure 1. Commodity Prices for 1997-2012Increasing commodity prices are creating a difficult operating environment for food & beveragecompanies whose raw materials are overwhelmingly commodities. Recent annual reports fromfood & beverage companies demonstrate the increasing commodity pricing pressures on thesecompanies: “Net sales and other operating income increased $19.0 billion, or 31%, to $80.7 billion. Net sales and other operating income increased $14.2 billion due to higher average selling prices, primarily related to higher underlying commodity costs, and increased $4.8 billion due to increased sales volumes, including sales volumes from acquisitions.” •Archer Daniels Midland 2011 Annual Report, page 23 “[2010] operating profit grew 9%, reflecting lower commodity costs, primarily cooking oil.” •PepsiCo 2011 Annual Report, page 41 “During 2011, our aggregate commodity costs increased primarily as a result of higher costs of coffee, dairy, grains and oils, packaging materials, other raw materials, meat and nuts. Our commodity costs increased approximately $2.6 billion in 2011 and approximately $1.0 billion in 2010 compared to the prior year.” •Kraft Foods 2011 Annual Report, page 6In addition, food & beverage companies are regulated much more stringently by governmentcompliance and oversight. Their supply chains are more regional.Copyright © 2012 Supply Chain Insights LLC Page 6
    • Industry at a Turning PointFor the CP leader, they face a time of unprecedented challenges. Growth is stalled,collaboration is increasingly an empty buzzword, inventory levels are stagnant, cash is growingin corporate coffers; and opportunities for innovation are rare, expensive, and even more rarelyacted upon. A recent Supply Chain Insights quantitative study reveals the top pain points forindividuals operating within corporate supply chain structures as seen in figure 2. Difficultyaccessing data is the top area of pain (41%) with 32% of respondents having difficulty using thatdata to provide a basis for action and improvement in supply chain execution. It is not an easytime to be a supply chain professional (is it ever?).Figure 2. Top 3 Elements of SCM Pain for RespondentComplexity reigns. Over the last decade, the number of items in the average US grocery storehas increased three-fold. The number of shelf items grew ten times faster than retail stores’profits. With the decline in retail profitability and the attack by Amazon and other online retailerson the “center store,” consumer products companies will need to realize that marginal growthfrom product proliferation is not greater than the rising supply chain costs and retail frustrations.The power in the extended supply chain is shifting to the shopper in the store. Themanufacturer continues to lose power. As a result, companies are abandoning traditionaladvertising and retail practices to drive growth and build brand loyalty in the store throughCopyright © 2012 Supply Chain Insights LLC Page 7
    • Digital Path to Purchase. Each company is jockeying to transform their supply chain to a valuenetwork and capitalize on understanding and using the DP2P to identify and shape themoments of truth leading up to a consumer purchasing their product.Inventory ManagementInventory management, one of the hallmarks of companies with advanced supply chains, isstuck in neutral. CP leaders have been unable to make progress. As seen in table 1, Days ofInventory values have entered a phase of stagnancy. There has been little improvement, andeven lost ground, in regards to inventory management over the past 12 years.One of the major challenges in inventory management is the strong belief that the best supplychain is the most efficient. As a result, many supply chain leaders have increased Return onAssets (ROA) and focused on Continuous Improvement Initiatives (CCI), often throwing thesupply chain out of balance. Since inventory is a corporate metric, and seldom used as a cross-functional metric, there is a lack of accountability for inventory improvement. As a result, mostcompanies lose balance. They decrease manufacturing costs and increase inventory.Table 1. Days of Inventory in Consumer Products for 2000-2011Inventory and value chain costs are being pushed backward in the supply chain, upstream topartners. This is not sustainable. The value chain is weaker and the downstream partners aremore fragile.Copyright © 2012 Supply Chain Insights LLC Page 8
    • Days of Working Capital metrics, as shown in figure 3, have also been stalled with little to noprogress. While some companies made progress in the period of 2003 to 2007, it was achievedprimarily via terms and contracts with suppliers. By passing the costs to upstream partners, CPcompanies may claim a measure of improvement and supply chain excellence that is notorganic, but rather allowed only through the passing on of costs. The CP leaders are guilty ofpassing excess inventories and inefficiencies backwards in the supply chain to the least viablemembers of the chain. Unlike Boeing, Intel or Samsung, these leaders have not learned thatthey need to take responsibility for the entire supply chain. If this lesson is not learned, they willface a similar dilemma as the automotive industry where supplier health is a limitation to growth.Figure 3. Days of Working Capital for 2000-2011Cash: Full LarderThe shift in power in the value chain, and the rampant M&A activity, has created uncertainty.Most CP companies, as shown in table 2, have cash levels that are both high and stagnant.This cash could and should be better utilized to propel companies forward in their journey ofsupply chain evolution.Copyright © 2012 Supply Chain Insights LLC Page 9
    • Table 2. Average Free Cash Flow RatioStalled GrowthFinally, growth is stalled. Both the CPG and food & beverage industries are enduring a time ofslowed growth in regards to other industries. Perhaps most ominously, the growth levels overthe past decade are well below those experienced by downstream retail partners as shownbelow in table 3. With the growth in private label and house brands, retailers and manufacturersare more competitive. It is a battle of brands, and the manufacturer is losing.Table 3. Average Industry Growth by Sector for 2000-2012Copyright © 2012 Supply Chain Insights LLC Page 10
    • In an effort to avoid the stall in growth, CP companies have adopted three different techniquesto continue to drive growth. While these techniques have worked in the past, they are offeringlimited returns at this juncture. The three techniques are geographical spread to emergingeconomies, investment in new products and line extensions, and the use of trade promotionspending to stimulate end-user demand. Here we provide the data to understand the limitedreturns on these old techniques and offer recommendations for new techniques and approachesto return to higher levels of annual growth.Global FootprintCP companies mainly operate on a global platform; but, each company has chosen to defineglobal differently. There are internal struggles between global and regional governance. There isno clear single definition for the “right” global operation structure. It needs to be a part of thedefinition of supply chain strategy. The following data was collected from Supply Chain Insight’sVoice of the Supply Chain survey of supply chain executives conducted in April 2012. While themajority of supply chain executives surveyed in this report operate on a global platform, thedefinition of global is varied.Figure 4. Global DefinitionFor example, the regional structure of Johnson & Johnson is not comparable, apples-to-apples,with Procter & Gamble’s more global structure. These structures are different, but equally viablein the global operating environment. In addition, with the majority of companies operating on aCopyright © 2012 Supply Chain Insights LLC Page 11
    • global footprint already, there are narrowing opportunities for global growth. Africa remains thenext greatest prize, but the “endless” growth into new emerging economies will not continueforever.New Product InvestmentNew product innovation has largely been line extensions in the recent past. This lack ofprogress on breakthrough innovation is clearly seen in figure 5 below. It illustrates the level ofR&D spending in millions of dollars that goes into establishing a new product pacesetter, whichis identified by Symphony IRI Group by exceeding year one sales of $7.5 million. 1 A moredetailed description of figure 5’s underlying methodology is available in the Appendix.Figure 5. Cost of a New Product Pacesetter for 1997-2010Although the term collaboration is bandied about between retailers and manufacturers, it hasfallen short of its promises. Both inter- and intra-company collaborative initiatives all too oftenfail to deliver on the promises. This is not to say that the opportunities don’t exist; they are justnot being effectively optimized. They are sales-driven, not market-driven. Although the supply1 Symphony IRI Group.http://www.symphonyiri.com/Insights/Publications/NewProductPacesetters/tabid/149/Default.aspxCopyright © 2012 Supply Chain Insights LLC Page 12
    • chain is functioning, the value network is breaking down as CP companies struggle with lowgrowth rates and unfulfilled promises at the store.Innovation success is higher when the supply chain is designed for launch. This requires closecoordination between the supply chain team and the commercialization efforts in the stage gateprocesses. The manufacturing and supply chain design of new products should be a keycomponent of the organic R&D process. It should not be an afterthought. Furthermore, thenewest advancements of social and ecommerce enable companies to test new investmentopportunities and products without the large monetary investments of the past. Finally, theopportunities for open design and “coopetition” provide a new perspective for R&D and newproduct innovation.Trade Promotion ManagementThe final technique of CP companies to drive sales growth is investment in trade promotionactivities. Similarly to the global issues highlighted above, each company identifies tradepromotion differently as seen by the balance sheet definitions below.Table 4. Definition of Trade PromotionWhile comparison across companies is not viable in this instance, the pattern that emerges isincreasing trade promotion spend with marginal sales growth benefit. From 2000 to thepresent, the majority of profiled CP companies have steadily increased trade promotionspending as each defines it, as seen in figure 6 below. Only 52% of trade promotions aremeasured for effectiveness.In many ways, trade promotions are a “tax” or a cost of doing business dictated by the groceryretailer. It can add costs and shift demand without adding value. Consider that Kroger, a UnitedCopyright © 2012 Supply Chain Insights LLC Page 13
    • States $82 billion grocery retailer, reported a net profit of $1.1 billion in 2010, but received over$6 billion in trade allowances from suppliers.Figure 6. Trade Promotion Spend of CP Companies for 2000-2011Different companies define and utilize trade promotion in different manners to drive sales, butthe bottom line is that few trade promotions are driving incremental increases in revenue. Table5 illustrates trade promotion spending for the CP companies as a percent of annual revenue.The trend becomes even clearer here, as trade promotion spending as a percent of revenuecontinues to grow, indicating the fact that this spending is not driving equivalent sales gains.Table 5. Trade Promotion Spending as Percent of RevenueCopyright © 2012 Supply Chain Insights LLC Page 14
    • Clearly, the age of driving growth through old patterns is ending. New opportunities arepresenting themselves to CP companies who are willing to listen and engage in evolution to thenext level of supply chain performance. Our recommendations for those supply chain leadersare detailed below.Moving ForwardIn order to break the pattern holding back CP companies, there are several recommendationsaddressing a variety of problems that need solved in order to raise companies to the next levelof supply chain excellence. • Define and Align on Supply Chain Excellence. Supply chain as a discipline is 30 years old, but companies are still struggling to define supply chain excellence and agree on what defines a leading supply chain. The drive for supply chain excellence is a journey to expand the effective frontier constraining profitable growth. A more in- depth look at the Supply Chain Effective Frontier and how to drive improvements is available in Supply Chain Insights’ latest report: Conquering the Supply Chain Effective Frontier .Figure 7. Effective FrontierCopyright © 2012 Supply Chain Insights LLC Page 15
    • These trade-offs, as shown in figure 7, should be made deliberately to drive steady, incremental growth against a business strategy. Make deliberate decisions to avoid haphazard results. • From Supply Chain to Value Network. Secondly, the understanding of a supply chain is gradually being replaced with a value network approach in which each member of the chain adds a level of value to the final product. The old and empty definitions of collaboration will not work within the “value network” world. A value network approach incorporates a serious look at inventory management as opposed to passing holding costs to up- and downstream members. True collaboration requires companies to embrace the reality of a value network as opposed to operating as separate cogs in the supply chain. • Use the Digital Path to Purchase. Recent technological innovations have created an abundance of opportunities to connect directly with the end user by cultivating and understanding the digital path to purchase. This includes opportunities for listening and sensing technologies, and the use of Point of Sale, Warehouse Withdrawal, Retail Perpetual Inventory information with unstructured consumer data from social media, Twitter, as well as ratings and review. The DP2P enables companies to follow the process consumers take in the moments leading up to purchase and better understand what drives decision making at the consumer’s level. More information about the power of the digital path to purchase and Big Data that makes such information available is contained in Supply Chain Insights’ report: Big Data: Go Big or Go Home? • Rethink Partners. In addition, there exists the exciting opportunity for consumer products companies to rethink their partnerships. On the retailer side, they may consider a move to disintermediate traditional brick & mortar outlets by moving sales to an online platform. These companies may initiate their own websites or may sell directly through Amazon now. On the other side, companies should continue to engage in meaningful collaborative projects with suppliers and upstream partners. Take down the barriers and flourish in an open innovation environment.Although there are clear and valuable differences within the CP industry, the prescription is thesame. With an understanding of the effective frontier, the digital path to purchase and thepatience to see it through, companies can propel growth, increase inventory management andinnovation opportunities, and collaborate more closely with suppliers, buyers, and endconsumers to identify and adapt to changing market needs.Copyright © 2012 Supply Chain Insights LLC Page 16
    • AppendixMetrics & EquationsThe followings metrics and equations were used in this analysis.Figure A: Formulas used to calculate the metricsFigure 5 MethodologyFigure 5 was calculated by dividing total R&D spend for the respective companies from 1997-2010 by the number of New Product Pacesetters each company had during the same timeperiod as identified by the Symphony IRI Group.Other Reports in this Series:Check out our other reports in this series:Supply Chain Metrics that Matter: A Focus on RetailPublished by Supply Chain Insights in August 2012.Copyright © 2012 Supply Chain Insights LLC Page 17
    • About Supply Chain Insights LLCSupply Chain Insights LLC (SCI) is a research and advisory firm focused on reinventing theanalyst model. The services of the company are designed to help supply chain teams improvevalue-based outcomes through research-based Advisory Services, a dedicated Supply ChainCommunity and Web-based Training. Formed in February 2012, the company is focused onhelping technology providers and users of technologies improve value in their supply chainpractices.About Abby Mayer Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the original members of the Supply Chain Insights LLC team. She is also the author of the newly-founded blog, Supply Chain Index. During the week, you will find Abby busy in the Supply Chain Insights Community answering questions and helping supply chain professionals obtain financial data for their own analysis. Abby brings a diverse list of experiences, both academic andprofessional, to the team. She has a B.A. in International Policitics and Economics fromMiddlebury College and is completing her master’s thesis, focused upon the utility of the C2Ccycle in shipping & transport companies to complete the requirements for a M.S. in InternationalSupply Chain Management from Plymouth University, located in the U.K.Previously, Abby worked as an operations associate at Peabody Energy in the Powder RiverBasin, a restaurant manager in Montana, and a stone staircase builder along Maine’s portion ofthe Appalachian Trail. A believer in an active lifestyle, she has also completed a thru-hike ofVermont’s 280 mile Long Trail, the oldest long distance hiking trail in the United States. As partof the planning and food prep process, she became interested in supply chain managementwhen she was asked to predict hunger pangs for the entire three-week trip before departure. Ifthat isn’t advanced demand planning, what is?!?!Copyright © 2012 Supply Chain Insights LLC Page 18