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What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
What Drives Supply Chain Excellence? A Look Back and a Look Forward
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What Drives Supply Chain Excellence? A Look Back and a Look Forward

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This report is based on analysis of financial balance sheet and income statement data for the period of 2000-2012, quantitative survey research results, and interactions with clients in various …

This report is based on analysis of financial balance sheet and income statement data for the period of 2000-2012, quantitative survey research results, and interactions with clients in various industries in supply chain strategy sessions. We examine the performance of companies in a cross-section of industries on various metrics. We find that most companies and most industries are stuck in an environment of low results, with the exception of the hi-tech & electronics industry. Finally, we offer our perspective and advice on advancing supply chain excellence and moving the needle for better supply chain performance across company and industry lines.

Highlights
• A project-based approach has failed. Our gains are much lower than we believed in inventory management and a long-term perspective is needed to drive permanent and sustainable improvements.
• The hi-tech industry is the only of the six industries profiled to drive sustained gains across most metrics considered during the time period.
• The definition of supply chain excellence is still evolving as companies move through different maturity stages. Industrial and pharmaceutical companies are mainly stuck at low levels of maturity and could benefit greatly from applying lessons learned in other industries to their own supply chains.
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  • 1. What Drives Supply Chain Excellence? A Look Back and a Look Forward A Closer Look at Supply Chain Excellence and Progress Over the Last Decade 2/15/2013 By Lora Cecere and Abby Mayer Supply Chain Insights LLC
  • 2. ContentsResearch ........................................................................................................................................................... 3Disclosure.......................................................................................................................................................... 3Research Methodology ...................................................................................................................................... 3Executive Overview ........................................................................................................................................... 4Facing the Supply Chain Plateau....................................................................................................................... 6What Is Supply Chain Excellence? .................................................................................................................. 11A Closer Look at Supply Chain Resilience by Industry ..................................................................................... 17 High-tech and Electronics ......................................................................................................................... 18 Consumer Packaged Goods ..................................................................................................................... 19 Food ......................................................................................................................................................... 20 Chemical .................................................................................................................................................. 21 Industrial................................................................................................................................................... 22 Pharmaceutical ......................................................................................................................................... 23Recommendations........................................................................................................................................... 24Conclusion....................................................................................................................................................... 26Appendix ......................................................................................................................................................... 27 Demographics .............................................................................................................................................. 27 Company Profiles......................................................................................................................................... 30 Metric Equations .......................................................................................................................................... 33 Detailed Metrics Reports You Will Find Useful:............................................................................................. 33About Supply Chain Insights LLC .................................................................................................................... 34About Lora Cecere .......................................................................................................................................... 34About Abby Mayer ........................................................................................................................................... 34Copyright © 2013 Supply Chain Insights LLC Page 2
  • 3. ResearchThis report is based on data collected from financial balance sheets and income statements during the periodof 2000-2011.This report is augmented by data from quantitative research studies done on supply chainexcellence during the period of March-December 2012.Within the world of Supply Chain Management (SCM), each industry is unique. We believe that it is dangerousto list all industries in a spreadsheet and declare a single supply chain leader. Instead, we believe thatindustries need to be measured over time by peer group.In this report, we take a closer look at the chemical, consumer packaged goods (CPG), food, high-tech andelectronics, industrial and pharmaceutical industries and their progress over the last decade.DisclosureYour trust is important to us. This independent research is 100% funded by Supply Chain Insights. As aresearch analyst firm, we are open and transparent about our financial relationships and our researchprocesses.These reports are intended for you to read, share and use to improve your supply chain decisions. Pleaseshare this data freely within your company and across your industry. As you do this, all we ask for in return isproper attribution when you use the materials.We publish our Open Content research under a Creative Commons License, i.e. Attribution-NonCommercial-ShareAlike 3.0 United States; and, you will find our citation and attribution policy on this page at our SupplyChain Insights website.Research MethodologyThe source of financial information used in this report is publicly available from corporate annual reports andincome statements covering the period of 2000 through 2011. To help us better understand supply chainexcellence, we have invested in building a database of 21 supply chain financial ratios for publically heldcompanies. The use of financial ratios helps us to better analyze companies across geographies and ofdifferent sizes. We share this data freely with members of the Supply Chain Insights Community. Thequantitative data were primarily collected across seven online surveys, among 368 respondents(manufacturers, retailers and distributors), from March through December 2012.Copyright © 2013 Supply Chain Insights LLC Page 3
  • 4. Executive OverviewSupply chain processes are now three decades old. They are maturing. Our understanding of supply chainexcellence is evolving.Most companies feel that they have made great results in driving growth, reducing costs, improving inventoriesand managing complexity; however, data from the financial balance sheets and income statements showotherwise. The financial results support that while all industries have made progress on improving performanceas measured by revenue per employee through the use of technology, substantial progress on costs andinventory management has only happened in the high-tech and electronics industry. For everyone else,progress has stalled. The worst results are in the pharmaceutical and industrial peer groups. In general, low-margin businesses, or industries facing major inflections in market downturns, tend to move the fastest inmaturing supply chain processes.We find that most industries are at a plateau on the journey of managing supply chain excellence. Growth hasstalled, costs are rising, inventory levels are increasing and complexity reigns. We previously examined thesechallenges in the September 2012 Supply Chain Insights Report, Conquering the Supply Chain EffectiveFrontier. Companies are frustrated. They have invested in systems, people and processes; but yet, theprogress is elusive.Figure 1. Current Issues for the Supply Chain ProfessionalCopyright © 2013 Supply Chain Insights LLC Page 4
  • 5. As frustration rises in the boardroom, the tendency is to have a knee-jerk reaction and try to reduce singularmetrics without understanding the impact on the supply chain as a holistic system. As shown in figure 1, supplychain team frustration with executive level decisions is mounting. We find too few companies reallyunderstand the role of the supply chain in driving business excellence.The biggest opportunity to improve these business results lies deep within the organization. It comes fromleadership and clear articulation of a supply chain strategy. It takes discipline and patience. Results on thesupply chain Effective Frontier (the management of growth, costs, complexity and cycles) does not happenquickly: these results take three to five years at a minimum. To make progress, companies need to: educateand align on the principles, evolve the organization’s understanding of supply chain processes, and learn fromthe industries that have done it well.Bottom line, we believe that excellence in supply chain matters. The companies that have made the mostprogress have managed the supply chain as a complex system. While information technology companies toutthat IT systems made the difference, we believe that the results in this report are all about leadership andtalent development. The greatest issue for the supply chain department is the lack of clear understanding ofsupply chain excellence by the executive team. The goal of this report is to help close this gap.Copyright © 2013 Supply Chain Insights LLC Page 5
  • 6. Facing the Supply Chain PlateauThe definition of supply chain processes started within the company’s processes of manufacturing ordistribution. Today, the center is stronger than the ends. The vertical processes are stronger than thehorizontal. Unfortunately, the term supply chain can often be construed as the supply chain department; not asa better way of doing business for the company. We believe that supply chain excellence is essential for thedelivery of business results.The original goal of the use of supply chain processes to connect from the customers’ customer to thesuppliers’ supplier has gotten bogged down in functional processes, siloed metrics and a myriad of IT projects.Less than 1% of companies have focused on end-to-end processes and most have learned from failure versussuccess. Overall, progress against the goals of improving customer service, propelling growth, reducinginventories and reducing costs have stalled.Supply chain excellence is about balance and discipline over a multiyear journey. The best companies managethe supply chain as a system, understanding the relationships between growth, costs, cycles and complexity.Supply chain leaders recognize that they have more than one supply chain, each with its own potential.As we look back over the last decade, we find that most industries are stuck. They are currently experiencing asupply chain performance plateau. The high-tech industry is the only peer group that we can find that has usedsupply chain processes to propel growth, improve operating margin, and better manage supply chain cycles.Consider these results supported by tables 1-4. • High-tech Industry: Companies within the high-tech and electronics industry grew at a rate of 19%, while reducing inventories by 40%, and improving cost of goods sold by 12%. As an industry sector, the companies have done the best in navigating the Supply Chain Effective Frontier. They were the first to embrace supply chain planning, network design, the use of channel data, and the building of extended value networks with suppliers and contract manufacturers. • Consumer Packaged Goods (CPG): While many think of CPG as a leader within supply chain management, over the course of the last decade, progress has stalled. The companies with the CPG peer group grew topline revenue by 7%, increased the number of days of inventory by 3%, and fought an uphill and then a downhill battle to manage operating margins. The efforts towards supply chain excellence have been more project-based than systemic, and the industry has been slow to manage the end-to-end value chain. Barriers exist to design supply chains across sales and marketing to improve the end-to-end flows, and costs and waste are being pushed backwards in the chain towards suppliers. These companies tend to be more sales-driven (opportunistic) or marketing-driven (focused on share) than driving long-term value. CPG companies will have to adopt market-driven practices like demand sensing, test and learn practices, and demand orchestration in order to drive themselves off of the current supply chain plateau.Copyright © 2013 Supply Chain Insights LLC Page 6
  • 7. • Chemical Companies: The average chemical company grew 7%, decreased inventories by 22%, but lost ground on costs over the last decade. The segment has survived numerous mergers and acquisitions (M&A) and successfully built global supply chain teams. While operating margins improved from 2000 to 2007, this improvement could not be sustained in the Great Recession. Conversely, the impact of the 2007-2009 recession was less than the impact of the 2000-2002 downturn. Only through diligence in supply chain management has the sector been able to return to prerecession operating margins. In the peer group, there is no SINGLE leader. Overall, the industry has done a good job in attempting to build supply chain talent through Centers of Excellence and the building of global teams. In the face of global corporate social responsibility initiatives, the chemical industry will be forced to think more holistically and end-to-end. • Food: The average food manufacturing company grew 7% with slight improvement in the number of days of inventory. Costs rose with a 4% increase in cost of goods sold as a percentage of revenue. Overall, the industry made some progress; but, the leaders are battling rising commodity volatility and bracing for escalating costs. The concepts of market-driven value networks are the most critical in the face of market volatility. The industry lags the chemical and consumer products sectors in their understanding of supply chain excellence. With the rising costs of materials, and the shortage of food in the global supply chain, this peer group will be pressured to step-up their practices quickly. • Industrial Companies: In the last decade, the industrial companies grew at a rate of 4%, inventories increased at a rate of 10%, and the industry made no progress in improving operating margins. This sector has been slow to adopt new practices and there is no one in the sector that we can point to as an industry leader. While the industry Leaned-out the enterprise, they pushed costs and wastes downstream onto their suppliers with adverse implications through the downturn of the 2007 recession. There is a great need to retool the thinking of the industrial sector to better compete in the next decade. • Pharmaceutical Companies: The average pharmaceutical company has three times the levels of inventory of any other process industry with only slight improvements in inventory levels since 2003. Growth over the last decade averaged 9% and operating costs increased 22%. As an industry, the companies in the peer group shown have one of the lowest levels of understanding of supply chain fundamentals. Due to high margins and a focus on new product launch, the industry has been slow to adopt supply chain practices. As the rate of new products slow and the number of new drugs protected by patents decrease, supply chain excellence will matter more than ever to the industry, but each company will struggle to build talent and build winning processes. These processes need an overhaul.As shown in tables1-4, the rate of progress on the supply chain Effective Frontier was the best by companieswith the tightest margins and a focus on supply chain excellence. Over the last decade, the high-tech andelectronics industry outperformed all other industry segments.Copyright © 2013 Supply Chain Insights LLC Page 7
  • 8. The Tech Wreck of 2000-2001 was a rallying cry for the industry segment to redefine processes and bettermanage supply chain cycles. During that time, high-tech companies faced negative earnings, escalating costs,shortening life cycles and a low return on assets (ROA). The industry used supply chain practices to return thesector to health. This industry has the best adoption of supply chain planning processes, the most zealousprocesses for inventory management, and the most enlightened leadership on why supply chain excellencematters. As an industry, they focused on accelerating new product launch by insourcing new products andredefining the role of manufacturing to accelerate the time to market for new innovation. They were alsosuccessful in the use of contract manufacturing and the building of end-to-end supply chain visibility systems.Table 1. Changes in Year-over-Year Sales Growth Over the Period of 2000-2011Year-over-year sales growth values vary greatly amongst the different industries and different time periods. Asseen above in table 1, overwhelmingly, most industries have seen slowing or stagnant sales growth over thepast decade.Copyright © 2013 Supply Chain Insights LLC Page 8
  • 9. Table 2: Changes in Operating Margin over the Period of 2000-2011Operating margin has remained relatively stagnant as companies struggle to move off of the supply chainplateau, with the notable exception of high-tech & electronics manufacturers who saw a significant increase inoperating margins over the time period.Table 3: Changes in Cost of Goods Sold/Revenue for the Period of 2000-2011Copyright © 2013 Supply Chain Insights LLC Page 9
  • 10. Some of these critical trends on costs can be seen in the cost of goods sold ratios to revenue, as shown intable 3. The rising pressures of commodity prices have had an adverse effect on most industries.Table 4: Changes in Days of Inventory for the Period of 2000-2011While most companies have “talked” about reducing inventories, the greatest impact on the reduction ofinventories happened in the high-tech and electronics industry. In looking at company-specific data, we findthat there has been little impact on bottom-line results by companies adopting new inventory optimizationtechnologies. The problem is that most companies have adopted these as projects, not as a systemic way ofdoing business.The organizations look slightly different by design. As shown in table 5, with the highest cost of raw materials,the high-tech groups are more likely to have the procurement organization directly reporting to the supply chainfunction. This industry has the most mature processes for the management of outsourced manufacturing, andcommodity councils and buying strategies for direct materials. They are also the best in the use of supply chainplanning technologies and are less likely to see the supply chain as “a functional department.” For them, it is away of doing business.Copyright © 2013 Supply Chain Insights LLC Page 10
  • 11. Figure 2. Supply Chain Reporting RelationshipsIn this report, we contrast the progress of these industries and take a look at where we are in the definition ofsupply chain excellence.What Is Supply Chain Excellence?Ironically, the need to move the supply chain forward faster has never been greater. The metronome, or pace,of the supply chain process has increased. Data has proliferated and the frequency of market inputs has neverbeen higher. Yet, many companies are stuck on a performance plateau.The question seems simple, but the definition of supply chain excellence is not. As shown in figure 3, the stepsto deliver supply chain excellence are progressive with each step building and encompassing the prior.Companies cannot move along this framework, from bottom-left to upper-right, without achieving mastery inthe preceding phase. Progress on this path requires disciplined leadership to build cross-functional teams in amultiyear journey. It also requires the support and understanding of the executive leadership team.Copyright © 2013 Supply Chain Insights LLC Page 11
  • 12. Figure 3. Market-driven Value Network Maturity ModelFirst Stage Processes Definition: The Efficient Supply Chain. In the beginning, supply chain excellencewas defined as the lowest manufactured cost. The belief was that supply chain excellence could be achievedby “sweating the assets.” This set of beliefs formed the foundation for the efficient supply chain. Through theevolution of supply chain processes, costs were reduced, inventory levels lowered and waste eliminated; buteach company reached a point where they could no longer just cut costs without trading off customer serviceto customers. They had reached their effective frontier. The effective frontier is the capability of each supplychain within each company to balance the results for growth, profitability, complexity and cycles.The supply chain is a complex system that has increasing complexity. It can only be managed effectively bymanaging it as a system. Companies that try to manage “pieces of the supply chain” in isolation to the wholesystem will throw the supply chain out of balance.As shown in figure 4, 7% of companies are at this level of maturity, defining supply chain excellence as “TheEfficient Supply Chain. Lowest cost per unit.” Many pharmaceutical and industrial companies’ supply chainteams are at the first stage of the Market-driven Value Network Maturity Model shown in figure 3. They arestuck at the lowest level running only an “efficient” supply chain.Copyright © 2013 Supply Chain Insights LLC Page 12
  • 13. Figure 4. Levels of Supply Chain Maturity in 2012The Second Stage in Supply Chain Processes: The Evolution of the Reliable Supply Chain. The lack ofreliability to deliver customer service was the efficient supply chains’ Achilles heel. This realization gave rise tothe concepts of the reliable supply chain. With this shift, the focus changed to how companies could balancecosts and also achieve reliability in customer service and working capital management. The goal of this supplychain evolution was the right product, at the right place, at the right time, at the right cost. At this level ofmaturity, companies focused on improving the decision-support systems to increase the potential, or theeffective frontier, of the supply chain.For many companies there was a detour. There was a general belief that the best supply chain was a tightlyintegrated supply chain. As companies worked on the implementation of processes to become more reliable,they found tight integration was not always beneficial. Instead, they found that the supply chain neededsynchronization of processes through the building of strong horizontal processes (for more on this referencethe Supply Chain Insights report The Art of the Possible: Actionable Analytics for Value Networks ). Thesehorizontal processes are revenue management, Sales and Operations Planning (S&OP), supplier developmentand corporate social responsibility. As a result, planning grew in importance and there was a need to focus on“what-if” analysis and simulations to test for reliability. Each planner needed their own workbench to test thefeasibility of solutions and these solutions required a different technology configuration.Copyright © 2013 Supply Chain Insights LLC Page 13
  • 14. As shown in figure 4, 47% of companies are currently at this level of maturity, defining supply chain excellenceas “Right product, right place, right time at the right cost.” Redesigning the supply chain to improve resiliency isessential for food and consumer packaged goods companies. Without designing the supply chain to buffermarket variations, companies will not be able to move off of the supply chain plateau.Third Stage in Supply Chain Processes: Building the Resilient Supply Chain. During the Great Recessionof 2007-2009, companies quickly learned that they had to build supply chains that could withstand the winds ofdemand volatility or the pressure of supply disruption. These supply chains were built to sense outside-in andchange the supply chain response based on market conditions. Supply chain leaders that built resilient supplychains, and decreased the latency of—or time to sense—demand and supply changes, adapted the quickest tomarket changes. Based on a qualitative survey of sixty Fortune 500 manufacturing companies that wereinterviewed on the impacts of the Great Recession, that started in December 2007 and stretched over twentymonths, we found the companies that were better at demand sensing aligned their supply chains five timesfaster. As shown in figure 4, 11% of companies are at this level of maturity, defining supply chain excellence as“A resilient supply chain that can withstand the shocks of demand and supply volatility.”Fourth Stage in Supply Chain Processes: The Adaptive or Demand-Driven Supply Chain. In theadaptive, or demand-driven, supply chain, companies increased sensing capabilities and infused theprocesses of source, make and deliver into the discussions with both buy- and sell-side trading partners.These top-to-top meetings and relationships became more data driven. As a result, the metrics changed.Procurement discussions focused on total landed costs, not just purchase costs. In addition, suppliers wereincented to contribute through innovation networks and alignment to Corporate Social Responsibility (CSR)programs. Scorecards and performance management processes evolved. The emphasis evolved to focus onbuilding win-win partnerships through supplier development programs.To build supply chain sensing capabilities in the downstream channel, the processes needed to be turnedoutside-in. Demand planning processes changed from focusing on predicting what to ship from factories topredicting what would be sold in the channel. For many companies, this made the investment that they hadmade in the “integrated supply chain” and multiyear Enterprise Resource Planning (ERP) programs obsolete. Itwas no longer sufficient to be tightly integrated to order and shipment processes. Instead, the companyneeded to define the process of demand translation: the translation of market demands to supply operationswith minimal latency. These processes were built on channel data, not corporate history. Demand architecturesneeded to be built to sense and then translate the meaning of channel or downstream data. The largest benefitof a demand-driven value network is assessing and building the value network to meet upcoming demand.In the adaptive, or demand-driven, supply chain, the processes first sense and then shape demand based onrevenue management practices. Demand shaping includes the active processes of new product launch, pricemanagement, trade promotion management, marketing and advertising, and incenting sales against revenueCopyright © 2013 Supply Chain Insights LLC Page 14
  • 15. management processes. These processes are designed outside-in to evaluate “what really matters tocustomers.” Companies that mature in this capability usually are also mature in the processes of determiningcustomer profitability through cost-to-serve analysis and looking at product profitability to decide upon the rightproduct portfolio. They actively manage complexity.This stage of development requires tight integration of the research and development efforts (R&D) to thesupply chain processes. Since 60-80% of the costs of a product are defined in new product launch and manysupply chain networks are defined at the time of launch, in the maturation of these processes, companies needto carefully define the coupling of cross-functional, horizontal processes. This includes the integration of theprocesses of Sales and Operations Planning (S&OP) with R&D Stage Gate Planning and Corporate SocialResponsibility (CSR) with Supplier Development programs. This is even more critical in heavily regulatedindustries like pharmaceutical, agro sciences, and aerospace and defense supply chains. If these companiesdo not get it right on the product launch, they have a very difficult time amending the process later.In this stage of supply chain development, one of the toughest change management issues is the role of“sales” in driving a profitable demand response. Since most sales organizations are incented on volume, notprofitability, there is a strong resistance to shape demand unless the incentives are aligned to focus on sellinga profitable unit. This is a change management issue worth fighting. As the adaptive supply chain evolves,leaders find that one of the largest impacts is improved customer service and the reduction of the cost of salesas a percentage of revenue. Customer satisfaction improves and the dialogue is now focused more on whatthe customer values versus internal, self-serving metrics.Supply chain design and the architecture of supply chain strategy increases in importance. This changed froman ad hoc or annual process to be an integral part of the monthly S&OP process. Companies also learn thatforecasting is more important than ever, but that the focus needs to change. It is no longer about the accuracyand tight integration of numbers; instead, it is a focus on sensing market drivers, aligning on assumptions, andplanning the network based on the predicted level of demand volatility.Today, this stage of maturity is largely aspirational for most companies and not well understood. In the survey,as shown in figure 4, only 16% of companies rated themselves as “A responsive supply chain that can adaptas markets change.”Fifth Stage of Supply Chain Process Evolution: Align the Supply Chain Market-to-Market. The market-driven supply chain is future state aspiration for the supply chain leader. The concepts are based on buildingadvanced processes to test and learn. This definition is the most closely aligned with the work that is currentlyhappening in the high-tech and electronics industry.These networks are termed Market-Driven Value Networks: Market-driven Value networks are adaptivenetworks that can quickly align organizations market-to-market, focused on delivering a value-based outcome.Copyright © 2013 Supply Chain Insights LLC Page 15
  • 16. They sense and translate market changes (buy- and sell-side markets) bidirectionally with near real-time datalatency to align sell, deliver, make and sourcing operations. The focus is on horizontal process orchestration.With the evolution of market-driven supply chains, companies can focus on delivering value-based outcomesthrough complex networks.High-tech companies have been the most aggressive in the adoption of new forms of analytics. With thedecrease in innovation in the supply chain planning market, many of these advancements are being built in-house. They clearly know that the traditional supply chain could not sense; instead, it was a fixed response. Market-Driven Case Study: Cargill Beef is a market-driven leader. The company uses price optimization tools to evaluate the market potential for beef. Before the company decides what to package for the market, they first evaluate the market potential for each cut of beef and then optimize how they harvest their inbound herds to maximize the opportunity and minimize the risk. There are 197 ways to cut up beef cattle. Since each breed of cow has a different potential or finite mix of products—steaks, ground beef, roast, etc.—Cargill uses the technology in Sales and Operations Planning to drive rancher insights to define which breeds are best for customer demand. This process of being adaptable to trade-offs from market-to-market based on the use of optimization technologies is termed demand orchestration. It is a key capability requirement for market-driven leaders.It was often wrong and late. Despite what was happening in themarket, the response remained the same. Likewise, supply Market-driven supply chains arechains were not built to test and learn. With the evolution of adaptive networks that quickly aligntechnologies for learning systems, supply chains can now across an organization to sense andorchestrate demand across the organization market-to-market shape a market-to-market response.while executing test-and-learn strategies. These processes are focused onThe design of market-driven supply chains is dependent on the delivering a value-based outcome.building of value networks, strong horizontal processes, the When successfully implemented,redesign of forecasting and supply, and a retraining of the these supply chains sense andorganization. It should not be confused with a marketing-driven translate market changes (buy- andsupply chain. In the marketing-driven supply chain, the focus is sell-side markets) bidirectionallyon an internal signal from sales or marketing, not a market with near real-time data latency tosignal from the channel. In addition, it does not adapt align sell, deliver, make and sourcinghorizontally market-to-market (buy-side to sell-side markets). operations to market conditions.The market-driven supply chain stretches horizontally across theCopyright © 2013 Supply Chain Insights LLC Page 16
  • 17. extended supply chain from market-to-market.A Closer Look at Supply Chain Resilience by IndustryA resilient supply chain is one that is able to push forward on the effective frontier to drive continuousimprovement in growth, cost, complexity and cycles despite market downturns and volatility. Over the lastdecade, there were two recessions. The first recession was March through November, 2001 with a peak-to-trough GDP decline of -.3%. The larger recession was December, 2007 through June, 2009, with a -5.1%peak-to-trough GDP decline. With a closer look at the data, we can see that the high-tech and electronicsindustry survived the second recession better than the first, but that the chemical, industrial andpharmaceutical industries stumbled. In tables 5-12, take a closer look at the differences, the averages and thestandard deviations to understand the level of variation on these two key metrics of operating margins anddays of inventory.To achieve supply chain resiliency, the company needs to manage the supply chain as a system whilebalancing market impacts to drive progress on growth, profitability, supply chain cycles and complexity. In thissection, we take a closer look at the industries—high-tech and electronics, consumer packaged goods, food,chemical, industrial and pharmaceutical companies—and their performance over the last decade to illustratethe principles of supply chain resiliency.Companies have to master this third level of supply chain excellence in order to move forward and becomedemand-driven or market-driven. Today, the best results and the most advanced processes are in the high-tech industry.Copyright © 2013 Supply Chain Insights LLC Page 17
  • 18. High-tech and ElectronicsThe industry that has shown the greatest resilience in managing the Supply Chain Effective Frontier is high-tech and electronics. Supply chain excellence is necessary to compete, and was a key factor in drivingrevenue and inventory improvements. While Apple is always touted as the inventory leader, readers canquickly see the continuous improvement by most of the companies in the high-tech and electronics peer group.At this point, Research in Motion and Motorola lag the peer group in managing the Effective Frontier.Tables 5 & 6. Days of Inventory and Operating Margin (High-tech & Electronics)Copyright © 2013 Supply Chain Insights LLC Page 18
  • 19. Consumer Packaged GoodsCompanies within the CPG industry show greater resilience than companies in either the chemical orpharmaceutical peer groups, with more reliable results in both operating margin and days of inventory. In theCPG industry sector, Colgate Palmolive consistently outperforms its peers on operating margin.The least resilient company in the peer group is Unilever. While many think of Unilever as a supply chainleader, we do not. The company has grown slower than its peers, consistently posting lower margins, withstruggles to manage inventories. Unilever has consistently thrown the supply chain out of balance by themanagement of project-based initiatives and metrics in functional silos. The company has also been lesssuccessful in building supply chain talent with many layoffs in global regions, and a failure to rebuild supplychain talent for continuity.Tables 7 & 8. Days of Inventory and Operating Margin (Consumer Packaged Goods)Copyright © 2013 Supply Chain Insights LLC Page 19
  • 20. FoodThe food industry is stalled on the supply chain plateau. Operating margins have declined and inventory levelshave started to rise. There is no clear leader.Tables 9 & 10. Days of Inventory and Operating Margin (Food)Copyright © 2013 Supply Chain Insights LLC Page 20
  • 21. ChemicalThe chemical industry has struggled to manage costs and generate consistency in operating margin throughthe Great Recession of 2007-2009. The industry has recently rebounded on the back of higher energy prices.Over the last decade, the chemical sector has decreased inventories by 22%. Next to the high-tech andelectronics industry, this sector has been one of the most diligent in the management of working capital.The company showing the greatest improvement in the supply chain as a system is Eastman ChemicalCompany. The worst management of the supply chain as a system is by Akzo Nobel N.V.Tables 11 & 12. Days of Inventory and Operating Margin (Chemical)Copyright © 2013 Supply Chain Insights LLC Page 21
  • 22. IndustrialFor industrial companies, the impact of supply chain excellence on operating margins and cost of goods soldhas been slow, and the impact on inventories has been slow. This industry has been slow to adopt leadingsupply chain thinking. Instead, the industry has followed more predatory procurement policies that haveweakened the value network, making the value network less resilient through the downturn.Tables 13 & 14. Days of Inventory and Operating Margin (Industrial)Copyright © 2013 Supply Chain Insights LLC Page 22
  • 23. PharmaceuticalThe pharmaceutical industry struggled with both costs and inventory management over the last decade. With afocus on stage 1 of the Market-Driven Supply Chain Excellence model shown in figure 3, the companies withgrowing global supply chains struggled to manage inventories and manage consistency in operations to drivereliability in operating margins. There is no clear leader.As you look at the year-over-year results, you will see that the companies have had a serious decline inoperating margins, and a slight improvement in inventory levels, despite the fact that the levels of inventoriesare 3 times those of process industry comparisons in the chemical and consumer packaged goods industries.The pharmaceutical sector is a great example of why industries with consistently high margins have a toughtime getting serious about supply chain management.Tables 15 & 16. Days of Inventory and Operating Margin (Pharmaceutical)Copyright © 2013 Supply Chain Insights LLC Page 23
  • 24. RecommendationsAt Supply Chain Insights, we have mapped financial ratios for over 75 companies in the Supply Chain InsightsCommunity and each time, when we share the data, we are surprised to find that the teams are unaware oftheir own financial results. Without the accountability to the balance sheet results, the general belief is thatcompanies have made far more progress than they have. For companies to push themselves off of this supplychain plateau, we offer these seven recommendations: 1. Redefine and Clarify Supply Chain Excellence. Use figure 3 (on page 12) to help your teams gain a better understanding of supply chain excellence. Understand where your company is on the supply chain plateau and use the discussion of supply chain excellence to help teams to cross-functionally align for progress. 2. Put Someone in Charge of the Design of End-to-End Processes. The greatest opportunity in the supply chain is in its “joints” or “links.” Take responsibility for the performance of your company end-to- end. Pushing costs and waste to suppliers is a short-term strategy that causes long-term damage. Focus on quality data sharing (forecasts and inventory) and strive to be the easiest to do business with in your sector. Take out the hidden costs. By focusing someone on the end-to-end process flows, companies can take advantage of the design of outside-in processes and the building of strong horizontal processes. It works: one company that we are following returned $2 million to the bottom line in one year by focusing on horizontal processes outside-in. 3. Don’t Harvest the Low-hanging Fruit. Shake the Whole Tree. We cannot count the number of times that we have heard a well-intending consultant tell us to “harvest the low-hanging fruit.” We have spent the last decade putting the fruit in the basket, but not delivering results. 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 surveyed have a person responsible for the end-to-end value chain and is focused on the enterprise outside-in. The outside-in transformation to build the market-driven value network shakes the whole tree. Don’t stop with the low- hanging fruit. Rethink the entire system. 4. Saving Pennies May Have Cost Dollars. Over the course of the last decade, we 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 we now look at these companies’ results, they were penny-wise and pound-foolish. We can now see the impact of such decisions with 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 labor costs without understanding the impact on the supply chain as a system.Copyright © 2013 Supply Chain Insights LLC Page 24
  • 25. Companies that redesigned the supply chain, understanding the impact on rhythms and cycles, did far better. 5. 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 we look at the increase in Selling, General & Administrative Expenses (SG&A) without the increase in growth, we believe that we need more process discipline in the front office. We 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.Table 17. SG&A Margin as a Percentage of Revenue Over the Period of 2000-2011 6. The Supply Chain IS Business, Not a Department Within the Business. For us, this is the saddest recommendation to give. 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. We strongly believe that the principles of great supply chain management are key to driving business performance, but it cannot be driven by a manager level in a functional department. 7. Project-based Initiatives Do Not Get Us There. We know that many readers have worked on continuous improvement programs and multiyear IT programs. We have cut our teeth on these initiatives. However, we do not see that these project-based initiatives have had the desired impact on the bottom line. We believe that functionally-based projects, in isolation of a multiyear road map, haveCopyright © 2013 Supply Chain Insights LLC Page 25
  • 26. 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 multiyear road map. For most companies, this is the exception, not the rule.ConclusionCurrently, we are at a supply chain plateau. To drive growth, and improve costs while better managinginventories, we need to rethink practices and gain organizational alignment on a new definition of supply chainexcellence.Copyright © 2013 Supply Chain Insights LLC Page 26
  • 27. AppendixDemographicsThe data from figures 1, 2 and 4 are based on quantitative studies fielded by Supply Chain Insights in thecalendar year of 2012. These surveys were conducted online. The respondents answered the surveys of theirown free will. The only offer made was to share the responses in the form of Open Content research.The names of those that completed the surveys are held in strict confidence, but the demographics are sharedto help the readers of this report gain perspective on the respondents. The demographics supporting thesefigures are found in figures A-C.Copyright © 2013 Supply Chain Insights LLC Page 27
  • 28. Figure A: Industry DemographicsFigure B: Company DemographicsCopyright © 2013 Supply Chain Insights LLC Page 28
  • 29. Figure C: Position within the Supply Chain OrganizationCopyright © 2013 Supply Chain Insights LLC Page 29
  • 30. Company ProfilesListed below are some of the overall company characteristics of the industry peer groups which were profiled intables 1-17 of this report.Copyright © 2013 Supply Chain Insights LLC Page 30
  • 31. Copyright © 2013 Supply Chain Insights LLC Page 31
  • 32. Copyright © 2013 Supply Chain Insights LLC Page 32
  • 33. Metric EquationsDetailed Metrics Reports You Will Find Useful:Supply Chain Metrics That Matter: A Focus on RetailPublished by Supply Chain Insights in August 2012.Supply Chain Metrics That Matter: A Focus on Consumer ProductsPublished by Supply Chain Insights in September 2012.Supply Chain Metrics That Matter: A Focus on the Chemical IndustryPublished by Supply Chain Insights in November 2012Supply Chain Metrics That Matter: The Cash-to-Cash CyclePublished by Supply Chain Insights in November 2012Supply Chain Metrics That Matter: A Focus on the Pharmaceutical IndustryPublished by Supply Chain Insights in December 2012Supply Chain Metrics That Matter: A Focus on HospitalsPublished by Supply Chain Insights in January 2013Supply Chain Metrics That Matter: Driving Reliability in MarginsPublished by Supply Chain Insights in January 2013Copyright © 2013 Supply Chain Insights LLC Page 33
  • 34. About Supply Chain Insights LLCSupply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst model. Theservices of the company are designed to help supply chain teams improve value-based outcomes throughresearch-based Advisory Services, a dedicated Supply Chain Community and public training. Formed inFebruary 2012, the company is focused on delivering actionable and objective advice for supply chainleaders.About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and author of the popular enterprise software blog Supply Chain Shaman currently read by 5,000 supply chain professionals. Her book, Bricks Matter, (co-authored with Charlie Chase) was published on December 26th, 2012. With over nine years as a research analyst with AMR Research, Altimeter Group, and Gartner Group, and now as a Founder of Supply Chain Insights, Lora understands supply chain. She has worked with over 600 companies on their supply chain strategy and speaksat over 50 conferences a year on the evolution of supply chain processes and technologies. Her research isdesigned for the early adopter seeking first mover advantage.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. Her supply chain interests include connecting financial performance and supply chain excellence as well as talent management issues, emerging markets, and improving risk management practices through the use of big data and analytical analysis. Abby has a B.A. in International Politics and Economics from Middlebury College and a M.S. in International Supply Chain Management from Plymouth University in the UnitedKingdom. She has also completed a thru-hike of Vermont’s 272 mile Long Trail, the oldest long distance hikingtrail in the United States. As part of the planning and food prep process, she became interested in supply chainmanagement when she was asked to predict hunger pangs for the entire three-week trip before departure. Ifthat isn’t advanced demand planning, what is?!?!Copyright © 2013 Supply Chain Insights LLC Page 34

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