This article is the fifth and last in a series of articles inspired by the book ‘Supply Chain Metrics That Matter’. In her latest book Lora Cecere introduces ‘which are the metrics that matter’, ‘how to ensure strength, balance and resilience’, what are the ‘evolutions in different sectors’, … In this fifth article, we investigate who are the product leader, the customer intimacy players and the operational excellence leaders, in our technology benchmark. We derive targets for Gross Profit, EBIT and Inventory Turns, and show how they differ by chosen strategy. We hope you enjoy the reading.

1. Supply Chain Metrics That Matter
This article is the fifth and last in a series of articles inspired by the book ‘Supply
Chain Metrics That Matter’. In her latest book Lora Cecere introduces ‘which are
the metrics that matter’, ‘how to ensure strength, balance and resilience’, what
are the ‘evolutions in different sectors’, …
In this fifth article, we investigate who are the product leader, the customer
intimacy players and the operational excellence leaders, in our technology
benchmark. We derive targets for Gross Profit, EBIT and Inventory Turns, and
show how they differ by chosen strategy. We hope you enjoy the reading.
Strategic Benchmarking in the Supply Chain Triangle
In our previous blog “Linking the Supply Chain Triangle to Strategy”, we have shown how we can map
the 3 strategic options proposed by Treacy & Wiersema to the Supply Chain Triangle. We’ve recaptured
the result in Figure 1.
Figure 1 - Mapping Treacy & Wiersema to the Supply Chain Triangle
A next logical question is if we can somehow capture this from publicly available financial data and
benchmark companies on this strategic level. Inventory turns are available. What about service and
cost?
Analyzing differences in Gross Profit and R&D Spending using Orbit
Charts
As we’ve also argumented in our previous blog, we expect a product leader to have the highest spending
on R&D. His business model is driven by innovation. Being the first on the market and having the best
product, should also lead to a premium. Many technology companies give data on their R&D expense in
their financial reports. To check whether that leads to a premium, we can analyze the ‘Gross Profit’ from
the financial reports. The Gross Profit shows the Net Sales minus the Cost of Goods Sold. The Cost of
Goods, also called the Cost of Sales, include all costs of purchase, costs of conversion and other costs

2. incurred in bringing the inventories to their present location and condition. If the product leader drives a
higher premium from his customer, he should have a higher gross margin compared to his customer
intimacy or opex colleagues.
Figure 2 analyzes the R&D spending versus the gross profit for our 3 technology companies. We notice
there is a big difference in R&D spending. Company 1 ranges from 7 to 11%. Company 2 from 5 to 8%.
Company 3 from 3 to 5%. If Company 1 were to be a product leader, that higher R&D spending should
translate into a higher gross margin. From Figure 2 we see that has been the case in the pre-crisis period
2004 – 2007. As gross profit has come down during the crisis and did not fully recover, we see that
Company 1 has been cutting its R&D spending. However, the R&D spending remains high compared to
the spending of Company 3, which has comparable gross profit levels. Company 3 has been increasing
R&D spending. Company 2 went up and down, doesn’t show a consistent pattern.
Figure 2 - R&D expense vs Gross Profit, both as % of sales
Analyzing differences in Gross Profit and SG&A Spending using Orbit
Charts
As we’ve mentioned in our previous blog, we expect a product leader to have a higher spending on Sales
and Marketing as well. You can have the best product in the world, if potential clients are unaware it will
be left unsold. Again, the premium derived from the product (the higher gross profit), should allow for
the higher spending on Sales & Marketing.
In financial statements, sales costs and marketing costs are typically not mentioned separately but
under a more general umbrella calles ‘Sales, General and Administrative’ or ‘SG&A’. When
benchmarking SG&A it is crucial to verify whether that includes or excludes the R&D costs. If the R&D
costs are not mentioned as a separate line, they are typically included in the SG&A in the consolidated
Profit & Loss. You will most probably find the R&D costs mentioned separately somewhere in the

3. financial report. By substracting them from the SG&A you can come to the SG&A excluding the R&D
costs.
Figure 3 shows the SG&A excluding R&D versus gross profit for our 3 technology companies. Though the
3 companies seem more in line, notice the big range of the spending, from 15% to 23% which is an 8%
difference! As gross profits for Company 1 have declined, during the crisis period, we see the company
has been reducing the SG&A spending. Company 3 has been increasing the SG&A spending. Company 2
has remained relatively stable.
Figure 3 - SG&A expense (excl. R&D) vs Gross Profit, both as % of sales
Analyzing differences in R&D and SG&A Spending using Orbit Charts
In our discussion so far we’ve assumed that a product leader would have both high R&D and SG&A
costs. Figure 4 shows the combined graph of R&D expense and SG&A expense (excl. R&D).
Figure 4 shows company 3 driving up spending on both Sales and R&D, for the same gross profit, so at
the expense of EBIT. That could be an attempt to reach that product leadership position. If it goes to the
expense of EBIT, it’ll be important that investors support this strategy.
It shows Company 2 is relatively flat on sales but oscillates on R&D spending.
Company 1 is oscillating most on R&D spending. Sales spending has come down. From Figure 2 and
Figure 3 we have seen that Company 1 has problems to sustain the above normal gross profit position
which is typical to a product leader. In response it has reduced spending.

4. Figure 4 - R&D expense vs. SG&A expense (excl. R&D), both as % of sales
Extending the analysis to extra benchmark companies
To get a good view on the industry, we typically want to expand this analysis to extra companies. Figure
5 and Figure 6 again show the same figures but for an extended set of benchmark companies. Company
4 is a noticeable exception in that it manages to increase gross profits in the 40% direction. As of 2005, it
uses that increased margin to increase R&D spending (cfr. Figure 5) and to increase sales spending (cfr.
Figure 6). Company 5 has more or less stable gross profit (though it is the lowest in the benchmark). You
can see that over the 10 year period it has decreased R&D expense in favour of SG&A. Company 6 sees a
decreasing gross profit and cuts in both R&D and SG&A expense.
Figure 5 - R&D expense vs Gross Profit, both as % of sales, for benchmark companies 4, 5 and 6

5. Figure 6 - SG&A expense (excl. R&D) vs Gross Profit, both as % of sales, for benchmark companies 4, 5 and 6
Figure 7 -R&D versus SG&A expense (excl. R&D), both as % of sales, for benchmark companies 4, 5 and 6
To be able to complete our benchmark, we will also need data on the inventory turns. For that reason
we have also added the EBIT versus Inventory Turns for our 6 benchmark companies in Figure 8.

6. Figure 8 - Orbit Chart EBIT% vs Inventory Turns with Benchmark Lines and extra competitors 4, 5 and 6
Deriving a strategic benchmark for Product Leadership, Operational
Excellence and Customer Intimacy in the Supply Chain Triangle.
From the benchmark data gathered in the previous sections and the previous blogs, we can distil the
benchmark for Product Leadership, Operational Excellence and Customer Intimacy, shown in Figure 9.
The benchmark is specific for the segment of the high-tech sector we have been studying. However, the
approach can be used for other sectors as well.
As a general approach, we will use the gross margin as a financial measure for the service dimension. As
discussed above, we expect a product leader can drive superior gross margin through superior service
and emotion. A higher gross margin allows for higher Sales and Marketing and R&D costs. These are the
costs we will show on the ‘cost dimension’. On the inventory axis we will show inventory turns.

7. Figure 9 - Benchmarking product leaders, opex leaders and customer intimacy players in the Supply Chain Triangle
We start with defining the benchmark for a product leader. From Figure 5 we see a premium gross profit
for Company 1 in the period 2004-2007. Gross profit around 40%, with combined SG&A and R&D
spending around 30%, leading to an EBIT of around 10%. The 10% EBIT corresponding with an average
inventory turn of 3, as shown in Figure 8.
From that same Figure 5 we see that company 4 is moving in the direction of the 40% gross margin. As it
has been moving in the direction of the 40% gross margin, it has been increasing SG&A and R&D
spending in the 30% direction. From Figure 8 we see the inventory has been moving in the direction of 3
turns. That confirms the chosen position of the product leader in Figure 9.
From Figure 5 we also see the gross profit of Company 1 has come down to around 32%. In general we
see some consistency around the 30-32% for Company 1 (post-crisis), for Company 2, for Company 3
and for Company 4 pre-crisis. Company 6 has a lower level of gross profit. Company 5 goes in the
direction of 20% gross profit. 20% gross profit means razor thin margins, leaving little room for SG&A
and R&D spending. We take that as the gross profit position for the Opex Leader. We’ll take the 30%
gross profit as the position for the customer intimacy leader.
When defining target levels for the turns, we turn back to Figure 8. Company 1 and 2 are around turns of
3. Company 4 starts around 6 and is coming down, cfr. our comment above, it is moving in the product
leadership direction. Company 5 and 6 range between 6 and 8 turns. Company 2 even goes to 9 and 10
turns. Given 9 turns is possible in the industry, it is proven by Company 2, we will take that as the target
for the Opex Leader. We will position the turns of 6 as the target level for a customer intimacy player.
If we have fixed the ‘gross profit’ and the ‘inventory turns’ position, we can calculate the corresponding
‘cost’ position starting from the assumption that each of the strategies should give a comparable EBIT
per inventory $. We will not show the math here but the result is that the EBIT% for a Customer
Intimacy player should be 5.83%, for an Opex player it should be 4.44%.
If the target EBIT% for the customer intimacy leader is 5.83%, let’s say 6%, for a gross margin of 30%,
this means he can spend 24% on SG&A and R&D. If the target EBIT% for the Opex leader is 4.44%, let’s

8. say 4%, for a gross margin of 20%, this means he can spend 16% on SG&A and R&D. Hence the 24% and
the 16% as rounded figures on the cost axis of Figure 9.
Using the Strategic Benchmark to Compare the Strategic Positioning of
our 6 Benchmark Companies.
For each of the companies 1 to 6 we can now plot their position ‘at the beginning of the 10 year period’
and ‘at the end of the 10 year period’. To smoothen the effects of individual years, we have taken the
average of the first 3 years and the average of the last 3 years.
Figure 10 - Benchmarking companies 1 to 6 on the Supply Chain Triangle using competitive benchmarks for a Product Leader, a
Customer Intimacy and an Opex Leader

9. The following can be learned from Figure 10 for each of the 6 companies:
• Company 1: compared to its original position as a product leader, it is overspending (especially
on R&D) and carries to much inventory to reflect its new gross profit situation
• Company 2: is overspending on SG&A and R&D, seems too aggressive in its inventory turns,
keeping some more inventory can probably help it to get costs down
• Company 3: was underspending in the first three years, is slightly overspending today,
inventories are not in line with its gross profit position
• Company 4: is gaining ground as a product leader, gross margins have improved, they are
slightly overspending, inventories have increased in line with the expectations of a product
leader
• Company 5: gross profit is too low for the current spending and inventory levels, to gain a
decent EBIT per inventory $ both should be reduced
• Company 6: the original position was quite balanced, the position over the last 3 years shows
signs of overspending or below standard EBIT per inventory $
This competitive benchmark now allows connecting inventory targets to targets for gross profit and for
SG&A and R&D spending. It also allows connecting the targets to the competitive strategy.
If we continue taking Company 1 as an example, we could say that either it tries to regain its position as
a product leader. To do so it might need to divest some of the lower margin business and push
innovation to drive gross margin. Or either the company leaves the position as a product leader and
plays in the middle ground. To be competitive there, it will need to reduce costs, especially in R&D, and
reduce inventories. To reduce inventories, it will need to shed some complexity of its past as a product
leader. This might include divesting some of the innovation intensive and more complex businesses.
Treacy & Wiersema advocate we need to make explicit choices and stay true to them. If not, we will
send mixed signals and may get caught in the middle. The strategic benchmarking helps in making the
choices clear.
In conclusion, we can use public financial data to do strategic benchmarking. Deriving the strategic
benchmark requires the analysis of a larger set of companies. Once the strategic benchmark has been
derived, it clarifies the choices for each of the benchmark companies. It touches on the inventory, but
goes much further to include targets for gross profit, R&D and SG&A spending. This concludes our series
of ‘Inventory Benchmarking’ blogs. Any thoughts or comments are most welcome on …
Dr. Bram Desmet is adjunct professor in Operations and Supply Chain at the Vlerick
Business School. He obtained his Phd at Gent University on the topic of “Safety stock
optimization in multi-echelon production-distribution networks”. He is working on a book
on “Supply chain strategy” and “Managing Working Capital”. As the Managing Director of
Solventure and a Partner at MÖBIUS Consulting he helps global production and retail
organizations in the domains of Strategy, Supply Chain and Operations. He welcomes
your feedback at bram_desmet@solventure.eu