This article fits 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 second article, Bram tries to explore balanced target setting in the supply chain triangle. He uses benchmarking in 2 dimensions to reveal trade-offs between inventory turns and EBIT. In next articles we will explore how to make choice in function of a chosen business strategy. We hope you enjoy the reading.

1. Benchmarking and the ‘Best Practice Frontier’
in the Supply Chain Triangle
Solventure © Proprietary and Confidential
+32 (0) 3 685 70 03 or contact@solventure.eu

2. Defining the “Best-Practice-Frontier” in the 3D Supply Chain Triangle
Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
In a previous article “Balancing Cash, Cost and Service. The Supply Chain Triangle” we have
introduced the idea that supply chain management is all about balancing three corners of a triangle:
cash, cost and service. We have also discussed that in many companies we see a lack of alignment
between the three corners. Sales tries to increase service to sustain topline. Operations will focus on
cost. Finance will put the pressure on working capital. Without alignment companies stay stuck in the
middle. Seek for alignment when setting targets. Ensure continued alignment by sharing inventory
turns as a KPI.
In this article we will take the Supply Chain Triangle into 3 dimensions to explain the concept of the
“best-practice-frontier”. We will start by plotting that frontier per 2 dimensions. Figure 1 shows it for
inventory and service. The idea is that more service, typically comes with a higher inventory (or lower
turns). Examples could be: shorter lead times, a higher fill rate, a broader product portfolio, … They
increase the service but require a higher inventory.
Figure 1 -The best practice frontier - Inventory vs Service
In fact, as is illustrated in Figure 2, companies that are not yet on the best practice frontier, can still
improve on both dimensions at the same time, i.e. both reduce inventory (increase turns) and improve
service. The true trade-off between either higher turns or higher service is for the companies that have
reached the best practice frontier. The leaders will try to continually shift the best practice frontier to
escape that trade-off. The laggards can improve on both dimensions by adopting best practices. An
example can be refining the safety stock calculations and adopting a stochastic inventory optimization.

3. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
Like there is a best practice frontier for inventory-service, there is one for cost-service, as illustrated in
Figure 3. In general, increasing service comes at an extra cost. If we assume a fixed inventory, a higher
service could come from ‘excess’ or so called ‘sprint’ capacity, that allows to react quickly to unpredicted
demand. We may also choose to fly material instead of using slower transportation like rail or truck.
These examples reduce lead times, improve agility and as such service, but they come at an extra cost.
Companies that are not yet on the best practice frontier can again improve on both dimensions at the
same time. The true trade-off only occurs at that best practice frontier.
Figure 2 - Improving ‘on’ or ‘below’ the best practice frontier - Inventory vs. Service
Figure 3 - Improving ‘on’ or ‘below’ the best practice frontier - Service vs Cost
Figure 4 shows the finding that inventory can be substituted by cost and vice versa. I can increase turns
by paying extra to my suppliers. They may be happy to deliver more frequent or give some consigment.
Cfr. the red arrow in Figure 4. On the other hand I can reduce my cost by increasing batch sizes in
production or MOQ’s in procurement. It will lower cost but increase inventory or decrease turns, cfr.
the green arrow on the right in Figure 4. As before, companies that have not reached the
best-practice-frontier can typically improve on both dimensions at the same time. That is illustrated on
the left in Figure 4.

4. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
If we follow the 2-dimensional story, where we consider the best practice frontier per 2 dimensions,
assuming the third is constant, we can easily extend the reasoning to 3 dimensions, as illustrated in
Figure 5. In 3 dimensions the best practice frontier shows as a best practice ‘surface’. If we are below
the surface, we can improve on all 3 dimensions at the same time. Once we are on the surface, we try
to shift the surface, but in the short term, we may need to sacrifice at least 1 dimension to improve on
another.
Figure 4 - Improving ‘on’ or ‘below’ the best practice frontier - Inventory vs. Cost
Figure 5 - Improving ‘on’ or ‘below’ the best practice frontier - in 3 dimensions

5. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
In her excellent book ‘Supply Chain Metrics that Matter’1
, Lora Cecere shows how we can reveal the
‘best-practice-frontier’ using so-called ‘orbit charts’. She also couples it to an elegant discussion on
the need for strength, balance and resilience.
Figure 6 shows an orbit chart for 3 competing technology companies. On the X-axis we show the
Inventory Turns, on the Y-axis we show the EBIT as a % of Net Sales. Each dot represents a year, we
track the evolution of the 3 competitors over the last 10 years.
The EBIT combines the ‘service’ and the ‘cost’ dimension of our Supply Chain Triangle. Service is a
driver for Revenue so that’s accounted for in the EBIT. The costs accounted for in the EBIT are the
‘cost of goods’, the so-called ‘selling general and administrative’, any depreciation and amortization
of R&D expenses, former investments in fixed assets, …
Instead of using ‘Inventory Turns’, one could also use the ‘Cash Conversion Cycle’ as a more general
measurement of the ‘Cash’ side of the Supply Chain Triangle. Instead of using EBIT, one could also
use EBTIDA, gross profit, net profit, … as a combined measurement over the service and the cost
axis in our Supply Chain Triangle.
Figure 6 - Orbit Chart on ‘EBIT%’ versus ‘Inventory Turns’ for 3 competing Technology companies
Using Orbit Charts to Benchmark EBIT versus Inventory Turns.
1
Cecere, L.M., Supply Chain Metrics that Matter, John Wiley & Sons, 2015

6. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
Looking at Figure 6 we can say that company 2 shows ‘strength’ in Inventory Turns but it is
‘unbalanced’. It has an average EBIT% of 0.68% which seems below standard. Company 3 has a better
balance between Inventory Turns and EBIT%, however it lacks resilience. It took a hit from 2007 to
2008, most probably because of the financial crisis and it never recovered. Compared to Company 1,
which also took a hit because of the crisis but they rebounded in 2010, 2011 and 2012 to get back to
their pre-crisis EBIT% with higher inventory turns. Performance in 2014 has fallen back.
In summary, as an investor, I’m looking for strength, balance and resilience. Each market is subject to
disruption sooner or later. I might not see it coming. As a result resilience is probably the highest
good.
Figure 7 - Minimum, Median, Maximum EBIT per inventory dollar curvers for Company 1
Extending “Orbit Charts” to Reveal the “Best Practice Frontier”
Company 2 ‘seems’ out of balance in Figure 6. We need to be careful when drawing conclusions.
When comparing Companies 1, 2 and 3, the real measure should be “what’s the EBIT generated per
inventory dollar”. It is OK that the EBIT is lower, as long as the EBIT per inventory dollar is higher.
Figure 7 shows the Minimum, the Median, and the Maximum EBIT per invested dollar curve for
Company 1. From the last 10 years, we have picked the year with the highest EBIT per inventory
dollar, the lowest and the median. For those years, we have shown which other combinations of EBIT
and inventory turns would have led to the same EBIT per inventory dollar. As a benchmark from our
own history, we can already say that any combination on or close to the MAX curve is a good one.
If we did it, we can do it again.

7. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
Figure 8 - Min/Med/Max EBIT per inventory dollar curves for Companies 1, 2 and 3
From Figure 7 we see that Company 2 is in line with the Median performance of Company 1 over the
last 2 years. That may be a surprising fact if you just look back to Figure 6!
Figure 8 shows the Min, Median and Max curves for Company 2 and Company 3 as well. The bottom
right chart compares the Median curves for Companies 1, 2 and 3. We see that the median
performance of Company 1 and 3 is comparable. The 10 year median performance of Company 2 is
well below that of Company 1 and Company 3, though in the last 2 years it seems to have caught up.
What is now the ‘Best Practice Frontier’ and what should be our target for Company 1? Well, as shown
in Figure 9, Company 1 should at least be going back to its Median curve in 2015, being:
- Either return to turns of around 3.75 for an EBIT% of around 6%
- Either boost EBIT% back to 8% if inventory turns stay around 3

8. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
Considering the pre-crisis performance of Company 3 as the ‘Best Practice Frontier’, the more
aggressive targets for Company 1 are to:
- Extend the turns from 3.75 to around 4.75 for an EBIT% of around 13%
- Either boost EBIT% to 20% if inventory turns stay around 3
These targets seem overly aggressive but Company 3 has been close to that performance for 3
consecutive years. A detailed analysis of how they did should reveal opportunities for Company 1 to
shift in that same direction.
The 2 options also seem to go in quite opposite directions. As we will introduce in a next blog, we
believe the choice of direction is one of the choices of strategy.
Figure 9 - Target Setting for Company 1 based on EBIT% vs Inventory Turns analysis

9. Solventure - Software based Services turning your supply chain into a competitive edge
Copyright Prof.dr. Bram Desmet, Managing Director at Solventure
As long as inventory is a shared KPI, any function can take the role of the process owner. Of all
functions we believe that the Supply Chain function is best placed to do so. Through collaborative
processes such as S&OP it has a privileged end-to-end view. It makes an easy spokesperson across
functions. Supply Chain is often responsible for Planning. The planning process is key in avoiding
the wrong inventories. Setting inventory targets requires analytical skills. In general, these
analytical skills are more readily available in the Supply Chain function.
In conclusion, inventories and profitability go together. That was the conclusion of our search
for the ‘best practice frontier’ in our Supply Chain Triangle. That’s also the conclusion of the
benchmarking using the Orbit Charts. In many companies we see that targets for inventory
turns are set ‘in isolation’. It’s another sign of the ‘lack of alignment’ in the Supply Chain Triangle
we also described in our previous blog. We hope that by the method described in this blog,
companies will perform a different type of benchmarking and come to more aligned target
setting in their company.
Supply Chain Metrics That Matter
This article fits in a series of articles inspired by the book ‘Sup-
ply 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 second article, Bram tries to explore balanced target
setting in the supply chain triangle. He uses benchmarking in
2 dimensions to reveal trade-offs between inventory turns and
EBIT. In next articles we will explore how to make choice in
function of a chosen business strategy. We hope you enjoy the
reading.
Figure 10 – Aggressive Target Setting for Company 1 based on EBIT% vs Inventory Turns analysis