Executive Overview
A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The A&D supply chain is largely a story of supply chain excellence in procurement and sourcing strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to survive.
Government spending drives the defense supply chain. Companies in this industry compete for government contracts that range from hundreds of millions to billions of dollars. The magnitude of these contracts defines winners and losers for the industry. Demand is lumpy and volatile. Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the government re defense spending, but they live contract by contract. In contrast, the commercial aircraft side is much different. It is driven by long-term economic trends
Government ups the ante for the latest and best technology for global defense. As the technology in jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more complex with increasing pressures on driving innovation. To better understand the industry in relation to supply chain management, let’s start by looking at it within the larger context of the A&D value network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While the industry is more dependent on software and computer hardware, there has been little collaboration to drive value between trading partners. Also note that this industry has the longest Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-Cash of 152.
Table 1. Industry Overview of Trends for the Period of 2010-2016
In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with excerpts from annual reports to enable the reader to understand the “voice” of the industry.
Conquering the Supply Chain Effective Frontier - 27 NOV 2017 - ReportLora Cecere
Executive Overview
Over the course of the last decade, retailers made more progress on costs and inventory turns than manufacturers. In the rush for technology adoption, we commonly find companies overstating what is possible because they are not clear on the historical trends, and often mistakenly coached to overcommit by industry consultants to justify technology investments.
In studying supply chain metrics, we find that each industry has a definitive pattern. Few are linear. To set reasonable goals, the definitions need to be very industry specific. That is the goal of this report.
In developing supply chain strategy, one of the first objectives is defining what is possible. This involves delineating the metrics, establishing reasonable targets, and rates of improvement. In the review of strategy documents for clients, we find that most companies are not clear on any of these critical sets of assumptions. This report is designed to help. We start with the definition of metrics and then share industry progress for the period of 2006-2016. This report ends with recommendations and conclusions.
• Report Details: This report is based on the analysis of orbit chart charts showing year-over-year supply chain performance at the intersection of operating margin and inventory turns for twenty industries for the period of 2006-2016. The goal is to help supply chain leaders to understand what is possible.
• Objective: As supply chain leaders attempt to define supply chain excellence, they need guidance on industry supply chain performance and overall trends for benchmarking. The goal is to help supply chain leaders make better decisions.
• Hypothesis: Each industry is unique and a good supply chain has different characteristics based upon the specific industry it is in, the product it creates and the customers it serves. Our aim is to help supply chain leaders understand relative industry performance. As shown in this report, each individual industry is charting a unique path on supply chain performance.
Supply Chain Metrics That Matter – A Focus on Auto Parts Companies 19 SEP 2017Lora Cecere
Report Details: This report is based on analysis of financial balance sheet and income statement data within the Automotive Parts industry, for the period of 2004-2016. The data is collected from YCharts.
Objective: To use the financial balance sheet and income statement data to better understand the state of the Automotive Parts industry supply chains and to determine which companies’ supply chains did the best on the delivery of a portfolio of metrics over the last 13 years.
Highlight: As the technology for automotive vehicles continues to evolve, it will become more paramount than ever for Auto Parts companies to become more demand-driven in their supply chain planning processes. Companies across the board saw their revenue drop significantly during the 2004-2016 period. Those who redefined their manufacturing and distribution processes, drove strong balance sheet results. Others learned that doing traditional retail more efficiently was not enough. As a result only one company, Autoliv Inc, made the list of Supply Chains to Admire Winners.
Supply Chain Metrics That Matter: A Focus on the Retail Industry - 16 FEB 2017Lora Cecere
Report Details: This report is based on analysis of financial balance sheet and income statement data within the Retail industry, for the period of 2006-2015. The data is collected from YCharts.
Objective: To use financial balance sheet and income statement data to better understand the state of Grocery Retailers' and Mass Merchants' supply chains and to determine which companies’ supply chains did the best on the delivery of a portfolio of metrics over the last decade.
Highlight: During the Great Recession retailers faced strong declines in spending. It was a critical time, but for many it was an opportunity to emerge stronger. Those who redefined their stores for the dollar-conscious customer or built new and innovative formats while driving supply chain innovation, drove strong balance sheet results. Others learned that doing traditional retail more efficiently was not enough.
Supply Chain Index: Evaluating the Consumer Value Network -24 JUN 2014Lora Cecere
Executive Overview
Supply chain management is a balancing act. It requires alignment. This is easier said than done. The terms lack definition. What is balance? How can companies judge alignment? What defines improvement? In this series of reports, we want to help.
Day by day leaders are forced to make decisions on priorities and trade-offs like growth, profitability, cycle, and complexity. The supply chain leader is charged with improving the potential of an organization at the intersection of operating margins, inventory turns and case-fill rate1. But are the choices that are made conscious or unconscious? This is a strong factor in determining supply chain excellence. It is our hope that through this series of reports the choices can be made consciously, based on an improved knowledge of what is possible.
In our research, we find that laggards are held hostage and struggle to balance disparate demands with the threat of throwing the supply chain out of alignment. Success requires a nuanced approach using a portfolio of carefully selected metrics to ensure success.
While supply chain excellence does not make a company, it is hard for a company to succeed without it. While the discrete industries are more focused on cycles, the consumer value network is more focused on the optimization of flows.
Progress on the Supply Chain Index
The Supply Chain Index is a new methodology to measure corporate performance on the Supply Chain Effective Frontier. It was defined by the Supply Chain Insights team based on 30 months of research.
We find that supply chain practitioners struggle to manage conflicting priorities. To visualize this, we built the Effective Frontier Model. As shown in Figure 2, the Effective Frontier visualizes the competing priorities of every supply chain leader. Growth and profitability should be maximized, cycle time should be reduced, and complexity should be managed. However, an overweighed focus on any one of the four categories can wreak havoc on the operations of a supply chain. A focus on a singular metric can throw the supply chain out of balance.
The Supply Chain Index is designed to measure progress on balance, and metrics alignment. To build the Index, we chose the metrics of year-over-year growth, return on invested capital (ROIC), operating margin and inventory turns.
Supply Chain Metrics That Matter - A Focus on Chemical Companies - 28 May 2015Lora Cecere
The basis of this report is publicly available information from corporate annual reports from the period of 2006-2014 for publicly-owned companies in the chemical industry. The methodology to understand supply chain performance and improvement is based on three years of data mining of supply chain financial ratios. In Table 1, we share the supply chain ratios we analyzed to understand the trends in the Supply Chain Metrics That Matter report series
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
While there are other measurements which we believe are important in the determination of supply chain excellence—forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we cannot find a reliable and consistent source of data for these metrics that covers all industries and the years studied. While these metrics are valuable, we find that the industry data sources are spotty and largely inaccurate due to the self-reporting of data. Without a consistent data source across the industries, we cannot include these factors even though we believe that they are important.
The Supply Chain Index methodology was built on the belief that the supply chain is a complex system with increasing complexity. We believe it is the supply chain leader’s role to build and manage supply chain performance to drive year-over-year improvements which are balanced, strong and resilient. We find that most companies throw the system out of balance and are able to drive progress only on a single metric, not a metrics portfolio. To illustrate this point, in the development of the Supply Chains to Admire Report, we studied public manufacturing and retail companies for the period of 2006-2013, and we found that only 21 of the companies in the study group performed better than their peer group on the portfolio of metrics of operating margin, inventory turns and Return on Invested Capital (ROIC).
In our review of the data in this report with supply chain leaders, we found that most companies are not aware of how they rate relative to their peer group, and many have driven a singular metric as opposed to a balanced portfolio.
In the management of the supply chain, there are many metrics. In fact, we find that most supply chain leaders measure too many, which drives confusion. Our first goal in the research was to determine which metrics should be tracked in the portfolio analysis. To understand the relationship between supply chain performance and market capitalization, we calculated the correlation of seven years of financial ratios (based on quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share price) on a quarterly basis. The results of this study on the correlation to market capitalization are presented in Table 2. Our goal was to select a portfolio of metrics that could be meaningful to all industries.
Supply Chain Metrics That Matter: A Focus on Household, and Beauty, Products...Lora Cecere
Executive Overview
Household and Beauty Products brands dominate our daily lives. For the Household Products industry, this includes items like diapers, laundry detergent, paper towels, while Personal Products brands include Beauty (cosmetic) items, vitamins, shampoo, toothpaste and over-the-counter drugs. These two segments have similar manufacturing processes, but very different supply chain metrics considerations. As will be seen in this report, the flows of cash and inventory are significantly slower in the Beauty Products companies than Household Products.
Progress is tough. Companies in both industries are stuck. Traditional supply chain thinking is not equal to the challenge of driving a step change in performance. Companies struggle to drive improvement in the face of growing complexity. Digital disruption offers promise to move these industries to the next level of supply chain excellence, but few are ready to drive the step change in thinking. Most operate in functional silos. The building of outside-in processes to sense and adapt is new. Organizations are busy on traditional software deployments, and the adoption of new technologies like cognitive computing and the Internet of Things (IOT) lacks sponsorship.
Figure 1. Commodity Volatility
There are three primary shifts:
1) Rising Commodity Costs. In the 1990s, supply chain leaders experienced the shift from regional to global supply chains. In the last decade, the key to driving a competitive advantage was aligning and synchronizing the supply chain to manage material spend, and the network response in the face of ever-changing demand. Few do this well. Most companies are stuck in functional metrics and inside-out processes. They are unable to manage the rising commodity costs and volatility shown in Figure 1. To combat volatile commodity prices, supply chain flows need to be built market-to-market (from consumer to supplier). This capability is beyond the traditional ERP-centric view of an integrated supply chain. The flows are outside-in, while traditional processes are inside-out.
2) Shift in Consumer Expectations. In parallel, the rules of engagement with the consumer are changing. Consumers want brands they can trust. This includes eco-friendly products, safe for their family, with minimal environmental impact. The evolution of brands like “Honest” is changing the landscape of competition. The new shopper wants to scan the shelf and see the source of origin. This level of visibility is not possible in today’s supply chains.
3) Rise in Complexity. The variance of products offered in this industry has been a real problem for companies. This complexity adds cost, increases demand volatility, and creates uncertainty. The average Household Products company added 38% more items to the item master over the past five years .
As a result, it was difficult to maintain performance in either industry segment.
Executive Summary
Supply chain management it is now three decades old. The processes are maturing. With the increase in complexity in markets and new product launch, supply chain excellence matters more than ever.
Manufacturing and distribution companies are looking for insights on how to parlay advances in supply chain management into balance sheet results. This is the goal of this report.
This report is a summary of research conducted during 2015. It provides a short summary of the major insights gathered from six quantitative and four qualitative studies. For more in-depth analysis reference the full reports outlined in the appendix.
Conquering the Supply Chain Effective Frontier - 27 NOV 2017 - ReportLora Cecere
Executive Overview
Over the course of the last decade, retailers made more progress on costs and inventory turns than manufacturers. In the rush for technology adoption, we commonly find companies overstating what is possible because they are not clear on the historical trends, and often mistakenly coached to overcommit by industry consultants to justify technology investments.
In studying supply chain metrics, we find that each industry has a definitive pattern. Few are linear. To set reasonable goals, the definitions need to be very industry specific. That is the goal of this report.
In developing supply chain strategy, one of the first objectives is defining what is possible. This involves delineating the metrics, establishing reasonable targets, and rates of improvement. In the review of strategy documents for clients, we find that most companies are not clear on any of these critical sets of assumptions. This report is designed to help. We start with the definition of metrics and then share industry progress for the period of 2006-2016. This report ends with recommendations and conclusions.
• Report Details: This report is based on the analysis of orbit chart charts showing year-over-year supply chain performance at the intersection of operating margin and inventory turns for twenty industries for the period of 2006-2016. The goal is to help supply chain leaders to understand what is possible.
• Objective: As supply chain leaders attempt to define supply chain excellence, they need guidance on industry supply chain performance and overall trends for benchmarking. The goal is to help supply chain leaders make better decisions.
• Hypothesis: Each industry is unique and a good supply chain has different characteristics based upon the specific industry it is in, the product it creates and the customers it serves. Our aim is to help supply chain leaders understand relative industry performance. As shown in this report, each individual industry is charting a unique path on supply chain performance.
Supply Chain Metrics That Matter – A Focus on Auto Parts Companies 19 SEP 2017Lora Cecere
Report Details: This report is based on analysis of financial balance sheet and income statement data within the Automotive Parts industry, for the period of 2004-2016. The data is collected from YCharts.
Objective: To use the financial balance sheet and income statement data to better understand the state of the Automotive Parts industry supply chains and to determine which companies’ supply chains did the best on the delivery of a portfolio of metrics over the last 13 years.
Highlight: As the technology for automotive vehicles continues to evolve, it will become more paramount than ever for Auto Parts companies to become more demand-driven in their supply chain planning processes. Companies across the board saw their revenue drop significantly during the 2004-2016 period. Those who redefined their manufacturing and distribution processes, drove strong balance sheet results. Others learned that doing traditional retail more efficiently was not enough. As a result only one company, Autoliv Inc, made the list of Supply Chains to Admire Winners.
Supply Chain Metrics That Matter: A Focus on the Retail Industry - 16 FEB 2017Lora Cecere
Report Details: This report is based on analysis of financial balance sheet and income statement data within the Retail industry, for the period of 2006-2015. The data is collected from YCharts.
Objective: To use financial balance sheet and income statement data to better understand the state of Grocery Retailers' and Mass Merchants' supply chains and to determine which companies’ supply chains did the best on the delivery of a portfolio of metrics over the last decade.
Highlight: During the Great Recession retailers faced strong declines in spending. It was a critical time, but for many it was an opportunity to emerge stronger. Those who redefined their stores for the dollar-conscious customer or built new and innovative formats while driving supply chain innovation, drove strong balance sheet results. Others learned that doing traditional retail more efficiently was not enough.
Supply Chain Index: Evaluating the Consumer Value Network -24 JUN 2014Lora Cecere
Executive Overview
Supply chain management is a balancing act. It requires alignment. This is easier said than done. The terms lack definition. What is balance? How can companies judge alignment? What defines improvement? In this series of reports, we want to help.
Day by day leaders are forced to make decisions on priorities and trade-offs like growth, profitability, cycle, and complexity. The supply chain leader is charged with improving the potential of an organization at the intersection of operating margins, inventory turns and case-fill rate1. But are the choices that are made conscious or unconscious? This is a strong factor in determining supply chain excellence. It is our hope that through this series of reports the choices can be made consciously, based on an improved knowledge of what is possible.
In our research, we find that laggards are held hostage and struggle to balance disparate demands with the threat of throwing the supply chain out of alignment. Success requires a nuanced approach using a portfolio of carefully selected metrics to ensure success.
While supply chain excellence does not make a company, it is hard for a company to succeed without it. While the discrete industries are more focused on cycles, the consumer value network is more focused on the optimization of flows.
Progress on the Supply Chain Index
The Supply Chain Index is a new methodology to measure corporate performance on the Supply Chain Effective Frontier. It was defined by the Supply Chain Insights team based on 30 months of research.
We find that supply chain practitioners struggle to manage conflicting priorities. To visualize this, we built the Effective Frontier Model. As shown in Figure 2, the Effective Frontier visualizes the competing priorities of every supply chain leader. Growth and profitability should be maximized, cycle time should be reduced, and complexity should be managed. However, an overweighed focus on any one of the four categories can wreak havoc on the operations of a supply chain. A focus on a singular metric can throw the supply chain out of balance.
The Supply Chain Index is designed to measure progress on balance, and metrics alignment. To build the Index, we chose the metrics of year-over-year growth, return on invested capital (ROIC), operating margin and inventory turns.
Supply Chain Metrics That Matter - A Focus on Chemical Companies - 28 May 2015Lora Cecere
The basis of this report is publicly available information from corporate annual reports from the period of 2006-2014 for publicly-owned companies in the chemical industry. The methodology to understand supply chain performance and improvement is based on three years of data mining of supply chain financial ratios. In Table 1, we share the supply chain ratios we analyzed to understand the trends in the Supply Chain Metrics That Matter report series
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
While there are other measurements which we believe are important in the determination of supply chain excellence—forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we cannot find a reliable and consistent source of data for these metrics that covers all industries and the years studied. While these metrics are valuable, we find that the industry data sources are spotty and largely inaccurate due to the self-reporting of data. Without a consistent data source across the industries, we cannot include these factors even though we believe that they are important.
The Supply Chain Index methodology was built on the belief that the supply chain is a complex system with increasing complexity. We believe it is the supply chain leader’s role to build and manage supply chain performance to drive year-over-year improvements which are balanced, strong and resilient. We find that most companies throw the system out of balance and are able to drive progress only on a single metric, not a metrics portfolio. To illustrate this point, in the development of the Supply Chains to Admire Report, we studied public manufacturing and retail companies for the period of 2006-2013, and we found that only 21 of the companies in the study group performed better than their peer group on the portfolio of metrics of operating margin, inventory turns and Return on Invested Capital (ROIC).
In our review of the data in this report with supply chain leaders, we found that most companies are not aware of how they rate relative to their peer group, and many have driven a singular metric as opposed to a balanced portfolio.
In the management of the supply chain, there are many metrics. In fact, we find that most supply chain leaders measure too many, which drives confusion. Our first goal in the research was to determine which metrics should be tracked in the portfolio analysis. To understand the relationship between supply chain performance and market capitalization, we calculated the correlation of seven years of financial ratios (based on quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share price) on a quarterly basis. The results of this study on the correlation to market capitalization are presented in Table 2. Our goal was to select a portfolio of metrics that could be meaningful to all industries.
Supply Chain Metrics That Matter: A Focus on Household, and Beauty, Products...Lora Cecere
Executive Overview
Household and Beauty Products brands dominate our daily lives. For the Household Products industry, this includes items like diapers, laundry detergent, paper towels, while Personal Products brands include Beauty (cosmetic) items, vitamins, shampoo, toothpaste and over-the-counter drugs. These two segments have similar manufacturing processes, but very different supply chain metrics considerations. As will be seen in this report, the flows of cash and inventory are significantly slower in the Beauty Products companies than Household Products.
Progress is tough. Companies in both industries are stuck. Traditional supply chain thinking is not equal to the challenge of driving a step change in performance. Companies struggle to drive improvement in the face of growing complexity. Digital disruption offers promise to move these industries to the next level of supply chain excellence, but few are ready to drive the step change in thinking. Most operate in functional silos. The building of outside-in processes to sense and adapt is new. Organizations are busy on traditional software deployments, and the adoption of new technologies like cognitive computing and the Internet of Things (IOT) lacks sponsorship.
Figure 1. Commodity Volatility
There are three primary shifts:
1) Rising Commodity Costs. In the 1990s, supply chain leaders experienced the shift from regional to global supply chains. In the last decade, the key to driving a competitive advantage was aligning and synchronizing the supply chain to manage material spend, and the network response in the face of ever-changing demand. Few do this well. Most companies are stuck in functional metrics and inside-out processes. They are unable to manage the rising commodity costs and volatility shown in Figure 1. To combat volatile commodity prices, supply chain flows need to be built market-to-market (from consumer to supplier). This capability is beyond the traditional ERP-centric view of an integrated supply chain. The flows are outside-in, while traditional processes are inside-out.
2) Shift in Consumer Expectations. In parallel, the rules of engagement with the consumer are changing. Consumers want brands they can trust. This includes eco-friendly products, safe for their family, with minimal environmental impact. The evolution of brands like “Honest” is changing the landscape of competition. The new shopper wants to scan the shelf and see the source of origin. This level of visibility is not possible in today’s supply chains.
3) Rise in Complexity. The variance of products offered in this industry has been a real problem for companies. This complexity adds cost, increases demand volatility, and creates uncertainty. The average Household Products company added 38% more items to the item master over the past five years .
As a result, it was difficult to maintain performance in either industry segment.
Executive Summary
Supply chain management it is now three decades old. The processes are maturing. With the increase in complexity in markets and new product launch, supply chain excellence matters more than ever.
Manufacturing and distribution companies are looking for insights on how to parlay advances in supply chain management into balance sheet results. This is the goal of this report.
This report is a summary of research conducted during 2015. It provides a short summary of the major insights gathered from six quantitative and four qualitative studies. For more in-depth analysis reference the full reports outlined in the appendix.
Supply Chain Metrics That Matter - A Focus on Contract Manufacturing - 13 AUG...Lora Cecere
Executive Overview
Growth is stalled. Margin pressure is high. Shorter life cycles, as well as increasing compliance and regulatory pressure, provide additional challenges to the contract manufacturing industry. Finally, excess capacity is a significant problem. Is this a recipe for opportunity or a disaster for the brand owner using outsourced manufacturing partners? We think the latter.
Over the last decade, brand owners from consumer electronics to medical devices have grown more dependent on outsourced contract manufacturing. In fact, the contract manufacturing industry grew up out of a desire to mitigate risk and improve costs for brand owners. However, the market has shifted significantly in recent years and the contract manufacturing industry is struggling. As a result, they pose a risk to brand owners. In this report, we illustrate how the lack of resiliency affecting contract manufacturers represents a serious risk to brand owners and offer advice on what can be done to mitigate the problem.
Over the last decade, many contract manufacturers have attempted to differentiate services and refine their business model to gain competitive advantage. However, in looking at the financial results, we find that most companies are struggling. As a result, it is time to redesign the business model and relationships of contract manufacturers and brand owners. While companies can outsource the role of manufacturing, they cannot outsource the responsibility of managing the extended supplier network. This is one of the many challenges the industry now faces.
Supply Chain Metrics That Matter-A Focus on the Automotive Industry-8 OCT 2013Lora Cecere
The automotive industry is a low margin and concentrated industry with few players. It is a complex business.
Unlike other industries with low margins, the automotive industry has not yet developed supply chain resiliency to weather fluctuations in demand. Over the last decade plus—while other low margin industries have refined processes and technologies to improve profitability and manage cycles and complexity—the automotive industry remains stuck in backwards thinking and old paradigms. This is especially true of the North American automotive companies.
Supply Chain Metrics That Matter: A Focus on Consumer ElectronicsLora Cecere
Executive Overview
Supply chain management is thirty years old. The year 2012 marked the end of the third decade of the evolution of supply chain practices. In the journey for supply chain excellence, each industry has progressed at their own rate based on their own set of opportunities and limitations including market drivers, industry factors and product cycles. No industry has had greater obstacles to overcome than consumer electronics, and no industry has made more progress.
Consumer electronics has led the pack in managing complexity, improving growth and margin performance, reducing inventory, and accelerating productivity in the face of complexity (revenue per employee). Was it an accident? No, we don’t think so. Instead, we see it as an advanced case study of supply chain excellence in action.
Ask any executive of the consumer electronics industry if supply chain matters and you will get a resounding “YES!” While other industries are more likely to define supply chain efforts as a departmental effort focused within silos—procurement, transportation/distribution or manufacturing—the consumer electronics sector is more likely to model the supply chain as a value network focused on end-to-end improvement. They are also more likely to value the planning function and excel at it, as well as understand how to integrate new product launch efforts with value chain design.
For most companies, the consumer electronics industry offers a lot of lessons and insights for supply chain leaders. It is for this reason that we share this report.
Setting the Stage
Over the course of the last decade, the consumer electronics industry has outperformed most other industries in four significant areas: growth, profitability, cycle management, and complexity. Balancing these four categories of metrics is what we term the Supply Chain Effective Frontier, further profiled in our recent report: Conquering the Supply Chain Effective Frontier.
Supply Chain Metrics That Matter: Third Party Logistics Providers-10 DEC 2013Lora Cecere
Executive Overview
Third party logistics (3PL) providers fill a critical role in today’s global supply chains. With the rise in e-commerce, the growth of global markets, and the reshaping of the retail market, dependency on 3PLs is rising. It is an industry with fierce competition. Despite the promises of technology-driven differentiation, as of yet, no 3PL has successfully been able to differentiate and create significant brand loyalty. This is the market opportunity moving forward.
Today, companies on average send 30% of goods through third party logistics (3PL) providers. The 3PL market is now $148 billion in size with single-digit annual growth. Hit hard by the Great Recession, the industry is still in recovery. The 3PL industry has matured over the last 50 years; but it operates at a low margin, struggling to balance what we term The Effective Frontier.
The ongoing inability to drive resiliency on The Effective Frontier by managing tradeoffs of growth, profitability, cycle and complexity should be a concern for those working in, or working with, the 3PL industry. Comparable results from ten industries are shown in Table 1, ranked by average operating margin. 3PLs not only occupy the second lowest ranking, they have also seen the most significant drop in operating margin as a percentage since 2000. In this report, we look more closely at the current state of the industry.
The Supply Chain Index - Improving Strength, Balance and Resiliency - 13 MAY ...Lora Cecere
Supply Chain Metrics That Matter is a series of monthly reports published by Supply Chain Insights LLC. These reports are a deep focus on a specific industry. This was preparatory work to understand the patterns of supply chain ratios for supply chain leaders.
As shown in Figure 1, the Supply Chain Insights team analyzed 15 different industries with deep dives on their progress on the cash-to-cash cycle.
Figure 1. Supply Chain Metrics That Matter Reports Published in 2012-2014
Here we take a next step, and launch the Supply Chain Index. The Supply Chain Index is a mathematical formula that a supply chain leader can use to measure their relative performance to an industry peer group. It was built in cooperation with the Operations Research team at Arizona State University (ASU).
This methodology was designed to measure the balance, strength and resiliency of a company’s supply chain from an objective financial perspective. It is a measurement of supply chain improvement during the period of 2006-2012. In April 2014, we published an in-depth look at the resiliency metric: Supply Chain Metrics That Matter: Improving Supply Chain Resiliency. In this report, adding strength and balance, we examine the calculation of these three values in tandem.
The supply chain is a complex system with increasing complexity. Here we analyze how companies made trade-offs over a period of several years in balancing growth, profitability, cycles, and complexity. Many of the trade-offs were unconscious. As complexity rose, it became more difficult for companies to manage the intersection of growth and inventory turns. For leaders, as you will see in this report, the trade-offs were conscious.
Within the world of Supply Chain Management (SCM), each industry is unique. We believe that it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead, we believe that change needs to be measured over a number of years with a focus on an industry peer group. Here we define, and demonstrate, how the Supply Chain Index can be used to measure supply chain performance. To help the reader, we share insights on three industries—chemical, consumer packaged goods and pharmaceutical—using the methodology.
Supply Chain Metrics That Matter-A Focus on Semiconductor CompaniesLora Cecere
In this report, we share insights on 31 companies in the Semiconductor industry. This industry is the primary raw material provider and driver of innovation in the technology value network. Within the industry, there are three primary shifts defining the market:
1) Advanced analytics are pushing advancement in semiconductor manufacturing
2) New mobility trends are diversifying demand for automotive semiconductors
3) Security issues represent the greatest obstacle to growth of the Internet of Things, and semiconductor companies are helping address the issue
Within the technology value network, the story is survival. Price compression, technology advancement, and short product life cycles transformed supply chains. Most scrambled to keep up.
Due to the degree of change, some of the most advanced supply chain practices within any industry are in the technology value network. Despite the scramble to drive change and improve value, year-over-year change in this maturing value chain is a sea of red. In Table 1, the top number within each cell represents the average during the 2010 through 2016 time period, and the bottom number represents the percentage change in 2016 as compared to the value in 2010. So, the average growth in the Semiconductor industry was 14%, but the net change comparing the growth of 2010 to 2016 was a sharp decline of 23%.
Supply Chain Metrics That Matter: A Focus on Food & Beverage Companies 2017Lora Cecere
Executive Overview
The Food and Beverage industry is a crowded market with many players. While the competition is intense, demand for healthy and fresh food products is high, and the industry is poised to grow in a volatile economy. During tough economic times, consumers will cut spending on products they do not need; however, they will not cut spending on food and beverages to the same extent.
The key to a competitive advantage is aligning and synchronizing the supply chain to manage material spend in the face of ever-changing demand. Few do this well. Consumers want local and fresh. They want brands they can trust. Traditional food manufacturing supply chains are in conflict, offering packaged foods with long shelf lives.
To try to drive excitement, companies invested in line extensions, a variety of different flavors, sizes, and variety packs, all causing supply chain difficulties for them. This complexity added cost, increased demand volatility, and created uncertainty. As a result, companies struggle to anticipate which flavor, or size, consumers will demand at a given time.
Consumers are fickle about what they eat. As a result, the Food and Beverage Industry arguably sees more consumer shift in demand than any other industry. Thus it becomes crucial that food and beverage companies implement outside-In processes. Becoming market-driven allows companies to better sense shifts in demand.
The Food and Beverage industry is also heavily regulated, due to it being a potential risk to so many consumers. The Food Safety Modernization Act dictates that companies must use approved suppliers and perform due diligence in monitoring supplier activity. Product fraud in the Global Food and Beverage industry has been extremely prevalent and presents a high-level risk to the company. Olive oil containing motor oil or corn oil, and alcoholic drinks containing ethanol are examples of fraudulent food products.
Traceability from supplier to consumer becomes ever more important for this industry to ensure product authenticity, as well as establishing trust with the consumer. Smart labeling and track-and-trace visibility are industry imperatives.
Is Mobile the New Answer to Propel Growth?
A new battle wages to redesign the shopping experience. All retailers are turning to mobility, and the use of digital technologies, to capture market share. While mobile strategies offer great opportunities for the extended supply chain, from the shopper through supplier’s supplier, the current focus is on demand generation. It is early. The efforts are in test mode, but excitement abounds.
Supply Chain Metrics That Matter: Driving Reliability in Margins - 6 JAN 2013Lora Cecere
Supply chain management practices are thirty years old. Over the last decade, companies have invested in technology projects to improve financial outcomes (Technology investments over this period have averaged 1.7% of revenue). The ultimate goal was to reduce costs and improve inventory management. While many supply chain leaders believe that they delivered on these metrics, we find a less persuasive story. Through analysis of publically available balance sheet and income statement data, we find that 75% of companies in process industries lost ground on margins and only 5% of companies improved their positions on the number of days of inventory. The goal of this report is to answer the question “Why?” (For more on inventory and the Cash-to-Cash Cycle, see Supply Chain Metrics That Matter: The Cash-to-Cash Cycle.)
To begin our analysis, we wanted to understand the general trends. In table 1, we share the differences in average values for the companies profiled in this report by industry for the period of 2000-2011. In general, we see a decline in operating margins (OM). There is an increase in selling, general & administrative Costs (SG&A) and revenue per employee performance. The industries have mixed results on return on assets (ROA).
Supply Chain Metrics That Matter: A Critical Look at Operating Margin -10 DEC...Lora Cecere
Executive Overview
If a supply chain leader cannot demonstrate improvement in operating margin, they are often fired. Consequences are severe. However, as complexity in global supply chains has increased, it has become increasingly difficult to improve profitability metrics. Among supply chain leaders, operating margin is one of the preferred measures of profitability.
Successful supply chain management is about balance and particularly the balancing of growth, profitability, cycle and complexity. This is what we call The Effective Frontier. Supply chain management is getting tougher as commodity markets get more volatile, wage prices increase, and product life cycles shorten. It is up to the supply chain leader to design the network and processes to protect margin and balance the supply chain. This is becoming an increasingly difficult task.
The challenges are many and they vary by industry. Commodity pressure is higher than at any previous point in time as shown in Figure 2. There is a limited toolkit for how to offset margin pressure. They include better planning, transportation optimization, rethinking network design, improved Sales & Operations (S&OP) execution, and Kanban events with suppliers and customers. None are easy or quick fixes.
Additionally, while many think that calculating cost and monitoring profitability should be easy, this is not true. In our research, we find that only 24% of companies surveyed can easily access total supply chain cost information. The ability to get to the data and connect the dots on cost to operating margin performance remains difficult for most. In fact, as shown in Figure 3, for 53% of survey respondents, getting to total supply chain cost is difficult.
Operating margin is a straightforward calculation with serious implications. Of the ten industries profiled in Table 1, only two have increased operating margin over the period: consumer electronics and consumer packaged goods. Furthermore, of the 18 companies profiled individually in this report, less than 40% (7/18 = 39%) have made progress on margin in 2012 compared to their result in 2000. As shown in Table 1, it is becoming more and more difficult for companies to maintain balance on their portfolio of supply chain metrics. This trend is true across all industry subgroups.
Companies with the highest operating margin tend to be the least mature in their understanding of supply chain principles. As a result, they demonstrate the worst performance in balancing competing priorities on the Supply Chain Effective Frontier and are stuck on the Supply Chain Plateau. The positions of companies, and their relative successes over the last decade, are shown in figure 4.
Table 1 is sorted by average operating margin with pharmaceutical companies returning the highest average value at 0.25 over the period. With the patent cliff, and significant changes in the healthcare environment including ongoing implementation of the Affordable Care Act, ...
Executive Summary
Supply chain excellence makes a difference to corporate value. Resilient, predictable, and forward-looking supply chain processes drive sustained balance sheet improvement. This is especially true in times of declining growth. (In this research, only four industries—aerospace & defense, apparel, automotive, and packaging suppliers—experienced growth for 2009-2014.)
Leaders want to drive excellence. By their nature these leaders are competitive. They want to power performance improvements, increase corporate value, and outpace competitors. It is not easy. The rate of business change is intense and the personal stakes are high. Day after day, supply chain leaders must answer questions like, “Which path should I to take? What are the best technologies to use? What is an acceptable rate of performance? How am I doing against my peer group? And, what can I learn from others that I can use to improve the performance of my own operation?” Until the development of the Supply Chain Index there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology there is now a way to gauge improvement.
When we started this work we were fearful that the methodology would not be selective enough to reward leaders. Our fear was that the list would be too large. However, we should not have worried. For two consecutive years only 10% of the companies studied are performing above the average of their peer group on the Supply Chain Metrics That Matter—operating margin, inventory turns and Return on Invested Capital—while driving improvement to a greater degree than their peer group. It is a select group. Figure 5 shows the 26 winners of the 2015 Supply Chains to Admire analysis.
The 26 companies are: Anheuser-Busch InBev; Audi AG; Biogen Inc; CCL Industries Inc.; Cisco Systems, Inc.; Coloplast Corp.; CVS Pharmacy; Dollar General Corporation; Dollar Tree, Inc.; Eastman Chemical Company; EMC Corporation; The Estée Lauder Companies Inc.; General Mills, Inc.; Intel Corporation; Deere & Company; Lexmark International Inc.; L'Oréal Group; Nike, Inc.; PPG Industries; Qualcomm Inc.; Samsung Electronics Co. Ltd.; United Tractors; Wal-Mart Stores, Inc.; Western Digital Corporation; and Whole Foods Market Inc. (Note: Shorter corporate or trade names are used in the tables within this report.)
Seven companies have made the list for two consecutive years: Cisco Systems, Inc.; General Mills, Inc.; Eastman Chemical Company; EMC Corporation; Anheuser-Busch InBev; Intel Corporation; and Nike, Inc.
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle 30 NOV 2012Lora Cecere
When it comes to supply chain, no two industries are the same; but, improving Cash-to-Cash cycle (C2C) metrics matters across all industries. With over a decade of investment in technology and process improvements, we can now assess progress. In this report, we examine the financial data in three time frames:
2000-2003 Dawn of Business-to-Business (B2B) commerce and Global Connectivity
2004-2007 Pre-recession
2008-2011 Post-recession
The health of the supply chain can be quickly assessed through the analysis of the C2C metric. It is a composite metric that combines decisions on receivables, payables and inventory management. Overall, while supply chain leaders have focused on the reduction of C2C cycles, little progress has been made. For most, despite a decade of investments in channel connectivity and supply chain optimization, there is limited progress on receivables and inventory. Instead, we find that the most mature companies have turned to increasing Days of Payables in an effort to reduce C2C. This can be detrimental to the overall health of the supply chain.
Over the last fifteen years, the only industry that has shown dramatic and continuous improvement in reducing C2C cycles is high-tech and electronics. While there are slight improvements in consumer packaged goods (CPG) and chemical supply chains, the results in pharmaceutical and automotive are much worse. While many supply chain professionals may claim that the changes in the supply chain—offshoring of manufacturing, cost of capital, increasing product complexity and decreasing product life cycle—are reasons that there was not more progress, the interesting fact is that the industry that had the greatest obstacles made the most progress. The reason? We believe it mattered more in the high-tech industry. With short life cycles and declining margins over the course of the product life cycle, it is just too expensive for a high-tech company to neglect inventory management. As a result, the high-tech and electronics industry has developed better and more comprehensive planning processes overall.
In this report, we share insights on the trends in five industries: automotive, high-tech and electronics, chemical, CPG and pharmaceutical. The data supports three facts:
State of Business Networks in Process Industries 2014 - Summary ChartsLora Cecere
Executive Summary
Today, the performance of an organization hinges more than ever on the effectiveness of flows between, and amongst, trading partners. It is not easy. The supply chain is not linear, and the relationships extend across geographic borders and industry sectors.
Outsourcing relationships have grown in the last decade; however, the automation of these networks has not kept pace. In the words of one respondent interviewed for this report in a facilitated workshop to review the data, “Today, we connect trading partners through spreadsheets, email, phone and fax. It is antiquated. I liken it to baling wire, chewing gum and duct tape. I need solutions that can synchronize and harmonize data across trading partners in real-time. My operating committee does not think that it is sexy to invest in B2B solutions, but it is needed. Today, it is almost impossible for us to understand the manufacturing status of purchase orders, and have accurate information readily on supply chain visibility of in-transit shipments. As a result, we make the wrong decisions, and have unnecessary wait times to get information.”
These comments echo the findings in this study. Respondents operate value networks, but they struggle to get to the data they need. The outsourcing of logistics is greater than manufacturing. Eighty-one percent of companies outsource logistics. The volume of outsourced logistics is 48% on average. In contrast, 66% of companies outsource manufacturing. The outsourced volume manufacturing volume varies, but averages 15%.
While the networks are complex, and the goals are many, progress is hard to track. This leads many supply chain leaders to ask, “What is the current state? What is the opportunity?” Answering these questions is the goal of this report.
Let’s start with the current state. As seen in Figure 2, the average respondent in this report believes that the supply chain today is more controlled and global than compared to two years ago. While they have made improvements in agility and proactivity, there is much more left to do. The largest challenges are in the use of outside-in data to improve channel sensing and reduce risk. While the supply chain today has made progress in transactional efficiency, companies are less competent at sensing opportunities and mitigating risks.
Putting Together the Pieces - A Guide to S&OP Technology Selection- 20 AUGUST...Lora Cecere
This report is the third in a three-part series. First we define a market-driven value network, then we apply these concepts to the Sales and Operations Planning process, and finally, we discuss the purchase of technology to enable this vision. Here are links to the reports:
• Building Market-driven Value Networks
• Market-driven Sales and Operations Planning
• Putting Together the Pieces
This report is based on nine years of observations of the Sales and Operations Software market’s evolution. It is built on the premise that the best research is based on year-over-year studies and ongoing market triangulation.
Launch of the Supply Chain Index - 11 JUNE 2013Lora Cecere
Launch of the Supply Chain Index
This research represents eighteen months of work to understand the relationship between supply chain financial ratios and a company’s performance in the financial markets. To complete this research, we constructed a database of specific supply chain financial ratios (from a database of over 50 total financial metrics) and began to run correlations to understand the relationship between financial supply chain ratios and market capitalization for the past seven years. (The market capitalization data and the supply chain financial data used in the analysis was quarterly data from 2006Q1 to 2012Q4.) We use this data to understand which metrics matter to financial markets for twelve Morningstar sectors.
Here we share insights on the Morningstar sectors that make up Consumer and Healthcare Value Networks. In August, we will publish a parallel report that will cover the Automotive, Electronics and Industrial Value Networks. The sectors evaluated in this report include: Apparel Manufacturing, Apparel Stores, Chemical, Drug Manufacturers for Branded and Generic Products, Household and Personal Products (Consumer Packaged Goods), Discount Stores, Medical Care, Medical Devices, Medical Distribution, Medical Instruments & Supplies, and Packaged Food.
Conquering the Supply Chain Effective FrontierLora Cecere
Conquering the Supply Chain Effective Frontier - A Handbook for the Value Chain Leader to Manage Trade-offs in Defining Supply Chain Excellence
Supply chain practices are nearing their third decade of maturation. The term supply chain excellence is bandied about by leaders, consultants and technology providers, but there is no alignment on what it means.
Conventional systems of measurement for supply chain excellence are problematic. In this report, we share insights gained during interviews with 75 supply chain pioneers. Based on their feedback we created a new framework, that we define here as the Supply Chain Effective Frontier, for supply chain leaders to use to determine supply chain excellence. This methodology is based on publicly available financial balance sheet data grouped into four sets of supply chain ratios: growth, profitability, cycle, and complexity.
We believe that supply chain excellence is best defined as the alignment of the supply chain team to deliver results to meet and exceed the requirements of the business strategy. This requires a clear vision and cross-functional coordination and alignment over a multi-year road map. It needs to be holistic. A supply chain is a complex system with increasing business complexity. The analysis needs to facilitate a clear understanding of trade-offs embedded in day-to-day decision making. It is this clarity that we find missing in many teams that we work with, and it is for this reason we wrote this report.
Supply Chain Metrics That Matter: A Focus on Chemical, and Oil & Gas Companie...Lora Cecere
Executive Overview
Chemical supply chains serve global markets and multiple industries at varying levels of maturity. Over the last decade, no company stands out as a leader. The industry is stuck unable to make significant improvement on margin, inventory and asset utilization. The facts run counter to traditional beliefs. In most companies, there is a pervasive belief that Chemical and Oil and Gas companies implemented new technologies, and evolved processes to drive improved balance sheet results. As will be shown in this report, this is not true.
Why did this happen? The focus of the chemical companies remains functional and inside-out. The industry is slow to build adaptive networks and even slower to adopt demand-driven processes. This is in sharp contrast to an industry like consumer electronics where the thrusts and changes were swift and direct. To survive, these companies adopted new processes and technologies at a quicker rate than those in the Chemical, and Oil and Gas industries.
BASF wins the Supply Chains to Admire award while Statoil becomes a finalist. To help the industry to understand the current state and benchmark current processes, here we share insights.
The Race for Growth
The chemical industry experienced a post-recessionary boom with growth rates of 11% in the period of 2010-2012. In the recent three years, the growth rate has slowed to -1%. These recent growth rates were greatly affected by the boon and slowing of the Chinese markets and by the ups and down in crude. Over the period, AgroSciences and Specialty chemicals experienced the highest growth rates of the sector.
With the dramatic impact of the economy of growth and industry sector performance, one would think that the supply chain leaders of this sector would be aggressively pursuing market-driven supply chain practices to forecast based on market indicators and translate channel demand to supply. This is not the case. These processes remain very supply-centered with no chemical company driving market-driven programs.
Supply Chain Metrics That Matter: Semiconductors and Hard Disk Drives - 18 FE...Lora Cecere
Executive Overview
Supply chain leaders struggle to align corporate and supply chain strategy and drive improved performance. We term this difficult balancing act The Effective Frontier and explain it as the process of balancing growth, profitability, cycle and complexity within a company’s supply chain operations.
A supply chain is a complex system with increasing complexity. A major gap in many supply chain strategies is a nuanced understanding of supply chain potential when these elements are viewed together as a system.
The focus of this report is semiconductor and hard disk drive manufacturers. As seen in table 1, when it comes to supply chain performance, the industry is neither the best nor the worst. They fall squarely in the middle. While middle of the pack in operating margin, the industry has shown an increase in the cash-to-cash cycle and a decrease in inventory turns. With increasing complexity, the industry has struggled to maintain inventory turn performance over the period.
Companies further back in the supply chain have struggled to a higher degree to balance The Effective Frontier than those closer to usage. This is largely due to the bullwhip effect—the distortion of a demand signal as it gets passed downstream from trading partner to trading partner. The chemical industry manufacturers, like semiconductor & hard disk drive manufacturers, are three to five levels back in the supply chain. Comparing the results in table 1 for the two industries illustrates how much better the semiconductor & hard disk drive manufacturers have done in a similar orientation. Operating margin is comparable across the two, but the chemical industry has a higher cash-to-cash cycle level and almost a 50% lower inventory turns value.
Semiconductor and hard disk drive manufacturers have been successful in a challenging downstream position. Cost pressure from OEMS has not (as of yet) cut into margin, and growth levels have remained strong with the move to mobile. Inventory remains problematic with all six companies in this report, demonstrating increased DOI and decreased inventory turns, since the start of the century. Part of this is likely due to the lengthening of the global supply chain, while another part is partly due to rising product and process complexity, but it remains a concern.
Historically, the industry has made strong gains on productivity. An increasing move towards automation in the precision driven manufacturing environment is expected to continue the rise in revenue per employee performance.
In this report, we discuss the financial realities of the semiconductor and hard disk drive supply chain and offer recommendations for improvement.
What Drives Inventory Effectiveness in a Market-Driven World? Lora Cecere
Survey Details: The research for this report was conducted from February 12 - October 8, 2015. Surveys were conducted among Manufacturers, Retailers, and Wholesalers/Distributors/Co-operatives with $250M+ in revenue and who use (and are familiar with) inventory optimization software (n=64). Respondents were evenly split between those using basic (ERP or ERP+APS) and advanced (software in addition to ERP/APS) software. All surveys were conducted by Supply Chain Insights.
Objective: To understand the impact of inventory optimization software on supply chain excellence. NOTE: inventory optimization software was defined as "any form of ERP (Enterprise Resource Planning), APS (Advanced Planned Software), or sophisticated inventory planning tools."
Highlight: Companies who use advanced software are more likely to be satisfied with their software, to be effective at making inventory decisions and to drive a return on investment for their software.
Aerospace and Defense Value Creators Report 2015Seda Eskiler
globalaviationaerospace.com
Putting Conventional Wisdom to Test
A&D Segments Outperformed to S&P 500 over the Past Decade
Top-Quartile Performers Derive Almost All Long-Term Value from Growth
Sources of Value for Top Perfomers in the Sector Are in Line with the Top Quartile of the S&P 500
Commercial and Diversified Players Outperformed Defense-Focused Companies
Asset-Light Companies Are Not Earning the Highest Returns
Supply Chain Metrics That Matter: A Focus on Apparel - 9 May 2013Lora Cecere
Different industries are making progress on supply chain excellence at different rates. In the writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer electronics industry is one of the only sectors making consistent and sustainable progress in balancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal plateau. They are treading water with no company able to move forward. In contrast, we see that the apparel industry is trending backwards.
When we analyze progress in the apparel industry over the last decade, we see a degradation of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and three of the six companies show flat or decreasing performance on operating margin. This is the sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain Metrics That Matter series (for a complete series listing see the Appendix).
Figure 1 illustrates the intersection of inventory turns and revenue per employee over the preceding decade. Ideally, companies would be moving consistently from the lower left to the upper right as they increased both inventory turns and revenue per employee performance. Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.
Supply Chain Metrics That Matter - A Focus on Contract Manufacturing - 13 AUG...Lora Cecere
Executive Overview
Growth is stalled. Margin pressure is high. Shorter life cycles, as well as increasing compliance and regulatory pressure, provide additional challenges to the contract manufacturing industry. Finally, excess capacity is a significant problem. Is this a recipe for opportunity or a disaster for the brand owner using outsourced manufacturing partners? We think the latter.
Over the last decade, brand owners from consumer electronics to medical devices have grown more dependent on outsourced contract manufacturing. In fact, the contract manufacturing industry grew up out of a desire to mitigate risk and improve costs for brand owners. However, the market has shifted significantly in recent years and the contract manufacturing industry is struggling. As a result, they pose a risk to brand owners. In this report, we illustrate how the lack of resiliency affecting contract manufacturers represents a serious risk to brand owners and offer advice on what can be done to mitigate the problem.
Over the last decade, many contract manufacturers have attempted to differentiate services and refine their business model to gain competitive advantage. However, in looking at the financial results, we find that most companies are struggling. As a result, it is time to redesign the business model and relationships of contract manufacturers and brand owners. While companies can outsource the role of manufacturing, they cannot outsource the responsibility of managing the extended supplier network. This is one of the many challenges the industry now faces.
Supply Chain Metrics That Matter-A Focus on the Automotive Industry-8 OCT 2013Lora Cecere
The automotive industry is a low margin and concentrated industry with few players. It is a complex business.
Unlike other industries with low margins, the automotive industry has not yet developed supply chain resiliency to weather fluctuations in demand. Over the last decade plus—while other low margin industries have refined processes and technologies to improve profitability and manage cycles and complexity—the automotive industry remains stuck in backwards thinking and old paradigms. This is especially true of the North American automotive companies.
Supply Chain Metrics That Matter: A Focus on Consumer ElectronicsLora Cecere
Executive Overview
Supply chain management is thirty years old. The year 2012 marked the end of the third decade of the evolution of supply chain practices. In the journey for supply chain excellence, each industry has progressed at their own rate based on their own set of opportunities and limitations including market drivers, industry factors and product cycles. No industry has had greater obstacles to overcome than consumer electronics, and no industry has made more progress.
Consumer electronics has led the pack in managing complexity, improving growth and margin performance, reducing inventory, and accelerating productivity in the face of complexity (revenue per employee). Was it an accident? No, we don’t think so. Instead, we see it as an advanced case study of supply chain excellence in action.
Ask any executive of the consumer electronics industry if supply chain matters and you will get a resounding “YES!” While other industries are more likely to define supply chain efforts as a departmental effort focused within silos—procurement, transportation/distribution or manufacturing—the consumer electronics sector is more likely to model the supply chain as a value network focused on end-to-end improvement. They are also more likely to value the planning function and excel at it, as well as understand how to integrate new product launch efforts with value chain design.
For most companies, the consumer electronics industry offers a lot of lessons and insights for supply chain leaders. It is for this reason that we share this report.
Setting the Stage
Over the course of the last decade, the consumer electronics industry has outperformed most other industries in four significant areas: growth, profitability, cycle management, and complexity. Balancing these four categories of metrics is what we term the Supply Chain Effective Frontier, further profiled in our recent report: Conquering the Supply Chain Effective Frontier.
Supply Chain Metrics That Matter: Third Party Logistics Providers-10 DEC 2013Lora Cecere
Executive Overview
Third party logistics (3PL) providers fill a critical role in today’s global supply chains. With the rise in e-commerce, the growth of global markets, and the reshaping of the retail market, dependency on 3PLs is rising. It is an industry with fierce competition. Despite the promises of technology-driven differentiation, as of yet, no 3PL has successfully been able to differentiate and create significant brand loyalty. This is the market opportunity moving forward.
Today, companies on average send 30% of goods through third party logistics (3PL) providers. The 3PL market is now $148 billion in size with single-digit annual growth. Hit hard by the Great Recession, the industry is still in recovery. The 3PL industry has matured over the last 50 years; but it operates at a low margin, struggling to balance what we term The Effective Frontier.
The ongoing inability to drive resiliency on The Effective Frontier by managing tradeoffs of growth, profitability, cycle and complexity should be a concern for those working in, or working with, the 3PL industry. Comparable results from ten industries are shown in Table 1, ranked by average operating margin. 3PLs not only occupy the second lowest ranking, they have also seen the most significant drop in operating margin as a percentage since 2000. In this report, we look more closely at the current state of the industry.
The Supply Chain Index - Improving Strength, Balance and Resiliency - 13 MAY ...Lora Cecere
Supply Chain Metrics That Matter is a series of monthly reports published by Supply Chain Insights LLC. These reports are a deep focus on a specific industry. This was preparatory work to understand the patterns of supply chain ratios for supply chain leaders.
As shown in Figure 1, the Supply Chain Insights team analyzed 15 different industries with deep dives on their progress on the cash-to-cash cycle.
Figure 1. Supply Chain Metrics That Matter Reports Published in 2012-2014
Here we take a next step, and launch the Supply Chain Index. The Supply Chain Index is a mathematical formula that a supply chain leader can use to measure their relative performance to an industry peer group. It was built in cooperation with the Operations Research team at Arizona State University (ASU).
This methodology was designed to measure the balance, strength and resiliency of a company’s supply chain from an objective financial perspective. It is a measurement of supply chain improvement during the period of 2006-2012. In April 2014, we published an in-depth look at the resiliency metric: Supply Chain Metrics That Matter: Improving Supply Chain Resiliency. In this report, adding strength and balance, we examine the calculation of these three values in tandem.
The supply chain is a complex system with increasing complexity. Here we analyze how companies made trade-offs over a period of several years in balancing growth, profitability, cycles, and complexity. Many of the trade-offs were unconscious. As complexity rose, it became more difficult for companies to manage the intersection of growth and inventory turns. For leaders, as you will see in this report, the trade-offs were conscious.
Within the world of Supply Chain Management (SCM), each industry is unique. We believe that it is dangerous to list all industries in a spreadsheet and declare a supply chain leader. Instead, we believe that change needs to be measured over a number of years with a focus on an industry peer group. Here we define, and demonstrate, how the Supply Chain Index can be used to measure supply chain performance. To help the reader, we share insights on three industries—chemical, consumer packaged goods and pharmaceutical—using the methodology.
Supply Chain Metrics That Matter-A Focus on Semiconductor CompaniesLora Cecere
In this report, we share insights on 31 companies in the Semiconductor industry. This industry is the primary raw material provider and driver of innovation in the technology value network. Within the industry, there are three primary shifts defining the market:
1) Advanced analytics are pushing advancement in semiconductor manufacturing
2) New mobility trends are diversifying demand for automotive semiconductors
3) Security issues represent the greatest obstacle to growth of the Internet of Things, and semiconductor companies are helping address the issue
Within the technology value network, the story is survival. Price compression, technology advancement, and short product life cycles transformed supply chains. Most scrambled to keep up.
Due to the degree of change, some of the most advanced supply chain practices within any industry are in the technology value network. Despite the scramble to drive change and improve value, year-over-year change in this maturing value chain is a sea of red. In Table 1, the top number within each cell represents the average during the 2010 through 2016 time period, and the bottom number represents the percentage change in 2016 as compared to the value in 2010. So, the average growth in the Semiconductor industry was 14%, but the net change comparing the growth of 2010 to 2016 was a sharp decline of 23%.
Supply Chain Metrics That Matter: A Focus on Food & Beverage Companies 2017Lora Cecere
Executive Overview
The Food and Beverage industry is a crowded market with many players. While the competition is intense, demand for healthy and fresh food products is high, and the industry is poised to grow in a volatile economy. During tough economic times, consumers will cut spending on products they do not need; however, they will not cut spending on food and beverages to the same extent.
The key to a competitive advantage is aligning and synchronizing the supply chain to manage material spend in the face of ever-changing demand. Few do this well. Consumers want local and fresh. They want brands they can trust. Traditional food manufacturing supply chains are in conflict, offering packaged foods with long shelf lives.
To try to drive excitement, companies invested in line extensions, a variety of different flavors, sizes, and variety packs, all causing supply chain difficulties for them. This complexity added cost, increased demand volatility, and created uncertainty. As a result, companies struggle to anticipate which flavor, or size, consumers will demand at a given time.
Consumers are fickle about what they eat. As a result, the Food and Beverage Industry arguably sees more consumer shift in demand than any other industry. Thus it becomes crucial that food and beverage companies implement outside-In processes. Becoming market-driven allows companies to better sense shifts in demand.
The Food and Beverage industry is also heavily regulated, due to it being a potential risk to so many consumers. The Food Safety Modernization Act dictates that companies must use approved suppliers and perform due diligence in monitoring supplier activity. Product fraud in the Global Food and Beverage industry has been extremely prevalent and presents a high-level risk to the company. Olive oil containing motor oil or corn oil, and alcoholic drinks containing ethanol are examples of fraudulent food products.
Traceability from supplier to consumer becomes ever more important for this industry to ensure product authenticity, as well as establishing trust with the consumer. Smart labeling and track-and-trace visibility are industry imperatives.
Is Mobile the New Answer to Propel Growth?
A new battle wages to redesign the shopping experience. All retailers are turning to mobility, and the use of digital technologies, to capture market share. While mobile strategies offer great opportunities for the extended supply chain, from the shopper through supplier’s supplier, the current focus is on demand generation. It is early. The efforts are in test mode, but excitement abounds.
Supply Chain Metrics That Matter: Driving Reliability in Margins - 6 JAN 2013Lora Cecere
Supply chain management practices are thirty years old. Over the last decade, companies have invested in technology projects to improve financial outcomes (Technology investments over this period have averaged 1.7% of revenue). The ultimate goal was to reduce costs and improve inventory management. While many supply chain leaders believe that they delivered on these metrics, we find a less persuasive story. Through analysis of publically available balance sheet and income statement data, we find that 75% of companies in process industries lost ground on margins and only 5% of companies improved their positions on the number of days of inventory. The goal of this report is to answer the question “Why?” (For more on inventory and the Cash-to-Cash Cycle, see Supply Chain Metrics That Matter: The Cash-to-Cash Cycle.)
To begin our analysis, we wanted to understand the general trends. In table 1, we share the differences in average values for the companies profiled in this report by industry for the period of 2000-2011. In general, we see a decline in operating margins (OM). There is an increase in selling, general & administrative Costs (SG&A) and revenue per employee performance. The industries have mixed results on return on assets (ROA).
Supply Chain Metrics That Matter: A Critical Look at Operating Margin -10 DEC...Lora Cecere
Executive Overview
If a supply chain leader cannot demonstrate improvement in operating margin, they are often fired. Consequences are severe. However, as complexity in global supply chains has increased, it has become increasingly difficult to improve profitability metrics. Among supply chain leaders, operating margin is one of the preferred measures of profitability.
Successful supply chain management is about balance and particularly the balancing of growth, profitability, cycle and complexity. This is what we call The Effective Frontier. Supply chain management is getting tougher as commodity markets get more volatile, wage prices increase, and product life cycles shorten. It is up to the supply chain leader to design the network and processes to protect margin and balance the supply chain. This is becoming an increasingly difficult task.
The challenges are many and they vary by industry. Commodity pressure is higher than at any previous point in time as shown in Figure 2. There is a limited toolkit for how to offset margin pressure. They include better planning, transportation optimization, rethinking network design, improved Sales & Operations (S&OP) execution, and Kanban events with suppliers and customers. None are easy or quick fixes.
Additionally, while many think that calculating cost and monitoring profitability should be easy, this is not true. In our research, we find that only 24% of companies surveyed can easily access total supply chain cost information. The ability to get to the data and connect the dots on cost to operating margin performance remains difficult for most. In fact, as shown in Figure 3, for 53% of survey respondents, getting to total supply chain cost is difficult.
Operating margin is a straightforward calculation with serious implications. Of the ten industries profiled in Table 1, only two have increased operating margin over the period: consumer electronics and consumer packaged goods. Furthermore, of the 18 companies profiled individually in this report, less than 40% (7/18 = 39%) have made progress on margin in 2012 compared to their result in 2000. As shown in Table 1, it is becoming more and more difficult for companies to maintain balance on their portfolio of supply chain metrics. This trend is true across all industry subgroups.
Companies with the highest operating margin tend to be the least mature in their understanding of supply chain principles. As a result, they demonstrate the worst performance in balancing competing priorities on the Supply Chain Effective Frontier and are stuck on the Supply Chain Plateau. The positions of companies, and their relative successes over the last decade, are shown in figure 4.
Table 1 is sorted by average operating margin with pharmaceutical companies returning the highest average value at 0.25 over the period. With the patent cliff, and significant changes in the healthcare environment including ongoing implementation of the Affordable Care Act, ...
Executive Summary
Supply chain excellence makes a difference to corporate value. Resilient, predictable, and forward-looking supply chain processes drive sustained balance sheet improvement. This is especially true in times of declining growth. (In this research, only four industries—aerospace & defense, apparel, automotive, and packaging suppliers—experienced growth for 2009-2014.)
Leaders want to drive excellence. By their nature these leaders are competitive. They want to power performance improvements, increase corporate value, and outpace competitors. It is not easy. The rate of business change is intense and the personal stakes are high. Day after day, supply chain leaders must answer questions like, “Which path should I to take? What are the best technologies to use? What is an acceptable rate of performance? How am I doing against my peer group? And, what can I learn from others that I can use to improve the performance of my own operation?” Until the development of the Supply Chain Index there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology there is now a way to gauge improvement.
When we started this work we were fearful that the methodology would not be selective enough to reward leaders. Our fear was that the list would be too large. However, we should not have worried. For two consecutive years only 10% of the companies studied are performing above the average of their peer group on the Supply Chain Metrics That Matter—operating margin, inventory turns and Return on Invested Capital—while driving improvement to a greater degree than their peer group. It is a select group. Figure 5 shows the 26 winners of the 2015 Supply Chains to Admire analysis.
The 26 companies are: Anheuser-Busch InBev; Audi AG; Biogen Inc; CCL Industries Inc.; Cisco Systems, Inc.; Coloplast Corp.; CVS Pharmacy; Dollar General Corporation; Dollar Tree, Inc.; Eastman Chemical Company; EMC Corporation; The Estée Lauder Companies Inc.; General Mills, Inc.; Intel Corporation; Deere & Company; Lexmark International Inc.; L'Oréal Group; Nike, Inc.; PPG Industries; Qualcomm Inc.; Samsung Electronics Co. Ltd.; United Tractors; Wal-Mart Stores, Inc.; Western Digital Corporation; and Whole Foods Market Inc. (Note: Shorter corporate or trade names are used in the tables within this report.)
Seven companies have made the list for two consecutive years: Cisco Systems, Inc.; General Mills, Inc.; Eastman Chemical Company; EMC Corporation; Anheuser-Busch InBev; Intel Corporation; and Nike, Inc.
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle 30 NOV 2012Lora Cecere
When it comes to supply chain, no two industries are the same; but, improving Cash-to-Cash cycle (C2C) metrics matters across all industries. With over a decade of investment in technology and process improvements, we can now assess progress. In this report, we examine the financial data in three time frames:
2000-2003 Dawn of Business-to-Business (B2B) commerce and Global Connectivity
2004-2007 Pre-recession
2008-2011 Post-recession
The health of the supply chain can be quickly assessed through the analysis of the C2C metric. It is a composite metric that combines decisions on receivables, payables and inventory management. Overall, while supply chain leaders have focused on the reduction of C2C cycles, little progress has been made. For most, despite a decade of investments in channel connectivity and supply chain optimization, there is limited progress on receivables and inventory. Instead, we find that the most mature companies have turned to increasing Days of Payables in an effort to reduce C2C. This can be detrimental to the overall health of the supply chain.
Over the last fifteen years, the only industry that has shown dramatic and continuous improvement in reducing C2C cycles is high-tech and electronics. While there are slight improvements in consumer packaged goods (CPG) and chemical supply chains, the results in pharmaceutical and automotive are much worse. While many supply chain professionals may claim that the changes in the supply chain—offshoring of manufacturing, cost of capital, increasing product complexity and decreasing product life cycle—are reasons that there was not more progress, the interesting fact is that the industry that had the greatest obstacles made the most progress. The reason? We believe it mattered more in the high-tech industry. With short life cycles and declining margins over the course of the product life cycle, it is just too expensive for a high-tech company to neglect inventory management. As a result, the high-tech and electronics industry has developed better and more comprehensive planning processes overall.
In this report, we share insights on the trends in five industries: automotive, high-tech and electronics, chemical, CPG and pharmaceutical. The data supports three facts:
State of Business Networks in Process Industries 2014 - Summary ChartsLora Cecere
Executive Summary
Today, the performance of an organization hinges more than ever on the effectiveness of flows between, and amongst, trading partners. It is not easy. The supply chain is not linear, and the relationships extend across geographic borders and industry sectors.
Outsourcing relationships have grown in the last decade; however, the automation of these networks has not kept pace. In the words of one respondent interviewed for this report in a facilitated workshop to review the data, “Today, we connect trading partners through spreadsheets, email, phone and fax. It is antiquated. I liken it to baling wire, chewing gum and duct tape. I need solutions that can synchronize and harmonize data across trading partners in real-time. My operating committee does not think that it is sexy to invest in B2B solutions, but it is needed. Today, it is almost impossible for us to understand the manufacturing status of purchase orders, and have accurate information readily on supply chain visibility of in-transit shipments. As a result, we make the wrong decisions, and have unnecessary wait times to get information.”
These comments echo the findings in this study. Respondents operate value networks, but they struggle to get to the data they need. The outsourcing of logistics is greater than manufacturing. Eighty-one percent of companies outsource logistics. The volume of outsourced logistics is 48% on average. In contrast, 66% of companies outsource manufacturing. The outsourced volume manufacturing volume varies, but averages 15%.
While the networks are complex, and the goals are many, progress is hard to track. This leads many supply chain leaders to ask, “What is the current state? What is the opportunity?” Answering these questions is the goal of this report.
Let’s start with the current state. As seen in Figure 2, the average respondent in this report believes that the supply chain today is more controlled and global than compared to two years ago. While they have made improvements in agility and proactivity, there is much more left to do. The largest challenges are in the use of outside-in data to improve channel sensing and reduce risk. While the supply chain today has made progress in transactional efficiency, companies are less competent at sensing opportunities and mitigating risks.
Putting Together the Pieces - A Guide to S&OP Technology Selection- 20 AUGUST...Lora Cecere
This report is the third in a three-part series. First we define a market-driven value network, then we apply these concepts to the Sales and Operations Planning process, and finally, we discuss the purchase of technology to enable this vision. Here are links to the reports:
• Building Market-driven Value Networks
• Market-driven Sales and Operations Planning
• Putting Together the Pieces
This report is based on nine years of observations of the Sales and Operations Software market’s evolution. It is built on the premise that the best research is based on year-over-year studies and ongoing market triangulation.
Launch of the Supply Chain Index - 11 JUNE 2013Lora Cecere
Launch of the Supply Chain Index
This research represents eighteen months of work to understand the relationship between supply chain financial ratios and a company’s performance in the financial markets. To complete this research, we constructed a database of specific supply chain financial ratios (from a database of over 50 total financial metrics) and began to run correlations to understand the relationship between financial supply chain ratios and market capitalization for the past seven years. (The market capitalization data and the supply chain financial data used in the analysis was quarterly data from 2006Q1 to 2012Q4.) We use this data to understand which metrics matter to financial markets for twelve Morningstar sectors.
Here we share insights on the Morningstar sectors that make up Consumer and Healthcare Value Networks. In August, we will publish a parallel report that will cover the Automotive, Electronics and Industrial Value Networks. The sectors evaluated in this report include: Apparel Manufacturing, Apparel Stores, Chemical, Drug Manufacturers for Branded and Generic Products, Household and Personal Products (Consumer Packaged Goods), Discount Stores, Medical Care, Medical Devices, Medical Distribution, Medical Instruments & Supplies, and Packaged Food.
Conquering the Supply Chain Effective FrontierLora Cecere
Conquering the Supply Chain Effective Frontier - A Handbook for the Value Chain Leader to Manage Trade-offs in Defining Supply Chain Excellence
Supply chain practices are nearing their third decade of maturation. The term supply chain excellence is bandied about by leaders, consultants and technology providers, but there is no alignment on what it means.
Conventional systems of measurement for supply chain excellence are problematic. In this report, we share insights gained during interviews with 75 supply chain pioneers. Based on their feedback we created a new framework, that we define here as the Supply Chain Effective Frontier, for supply chain leaders to use to determine supply chain excellence. This methodology is based on publicly available financial balance sheet data grouped into four sets of supply chain ratios: growth, profitability, cycle, and complexity.
We believe that supply chain excellence is best defined as the alignment of the supply chain team to deliver results to meet and exceed the requirements of the business strategy. This requires a clear vision and cross-functional coordination and alignment over a multi-year road map. It needs to be holistic. A supply chain is a complex system with increasing business complexity. The analysis needs to facilitate a clear understanding of trade-offs embedded in day-to-day decision making. It is this clarity that we find missing in many teams that we work with, and it is for this reason we wrote this report.
Supply Chain Metrics That Matter: A Focus on Chemical, and Oil & Gas Companie...Lora Cecere
Executive Overview
Chemical supply chains serve global markets and multiple industries at varying levels of maturity. Over the last decade, no company stands out as a leader. The industry is stuck unable to make significant improvement on margin, inventory and asset utilization. The facts run counter to traditional beliefs. In most companies, there is a pervasive belief that Chemical and Oil and Gas companies implemented new technologies, and evolved processes to drive improved balance sheet results. As will be shown in this report, this is not true.
Why did this happen? The focus of the chemical companies remains functional and inside-out. The industry is slow to build adaptive networks and even slower to adopt demand-driven processes. This is in sharp contrast to an industry like consumer electronics where the thrusts and changes were swift and direct. To survive, these companies adopted new processes and technologies at a quicker rate than those in the Chemical, and Oil and Gas industries.
BASF wins the Supply Chains to Admire award while Statoil becomes a finalist. To help the industry to understand the current state and benchmark current processes, here we share insights.
The Race for Growth
The chemical industry experienced a post-recessionary boom with growth rates of 11% in the period of 2010-2012. In the recent three years, the growth rate has slowed to -1%. These recent growth rates were greatly affected by the boon and slowing of the Chinese markets and by the ups and down in crude. Over the period, AgroSciences and Specialty chemicals experienced the highest growth rates of the sector.
With the dramatic impact of the economy of growth and industry sector performance, one would think that the supply chain leaders of this sector would be aggressively pursuing market-driven supply chain practices to forecast based on market indicators and translate channel demand to supply. This is not the case. These processes remain very supply-centered with no chemical company driving market-driven programs.
Supply Chain Metrics That Matter: Semiconductors and Hard Disk Drives - 18 FE...Lora Cecere
Executive Overview
Supply chain leaders struggle to align corporate and supply chain strategy and drive improved performance. We term this difficult balancing act The Effective Frontier and explain it as the process of balancing growth, profitability, cycle and complexity within a company’s supply chain operations.
A supply chain is a complex system with increasing complexity. A major gap in many supply chain strategies is a nuanced understanding of supply chain potential when these elements are viewed together as a system.
The focus of this report is semiconductor and hard disk drive manufacturers. As seen in table 1, when it comes to supply chain performance, the industry is neither the best nor the worst. They fall squarely in the middle. While middle of the pack in operating margin, the industry has shown an increase in the cash-to-cash cycle and a decrease in inventory turns. With increasing complexity, the industry has struggled to maintain inventory turn performance over the period.
Companies further back in the supply chain have struggled to a higher degree to balance The Effective Frontier than those closer to usage. This is largely due to the bullwhip effect—the distortion of a demand signal as it gets passed downstream from trading partner to trading partner. The chemical industry manufacturers, like semiconductor & hard disk drive manufacturers, are three to five levels back in the supply chain. Comparing the results in table 1 for the two industries illustrates how much better the semiconductor & hard disk drive manufacturers have done in a similar orientation. Operating margin is comparable across the two, but the chemical industry has a higher cash-to-cash cycle level and almost a 50% lower inventory turns value.
Semiconductor and hard disk drive manufacturers have been successful in a challenging downstream position. Cost pressure from OEMS has not (as of yet) cut into margin, and growth levels have remained strong with the move to mobile. Inventory remains problematic with all six companies in this report, demonstrating increased DOI and decreased inventory turns, since the start of the century. Part of this is likely due to the lengthening of the global supply chain, while another part is partly due to rising product and process complexity, but it remains a concern.
Historically, the industry has made strong gains on productivity. An increasing move towards automation in the precision driven manufacturing environment is expected to continue the rise in revenue per employee performance.
In this report, we discuss the financial realities of the semiconductor and hard disk drive supply chain and offer recommendations for improvement.
What Drives Inventory Effectiveness in a Market-Driven World? Lora Cecere
Survey Details: The research for this report was conducted from February 12 - October 8, 2015. Surveys were conducted among Manufacturers, Retailers, and Wholesalers/Distributors/Co-operatives with $250M+ in revenue and who use (and are familiar with) inventory optimization software (n=64). Respondents were evenly split between those using basic (ERP or ERP+APS) and advanced (software in addition to ERP/APS) software. All surveys were conducted by Supply Chain Insights.
Objective: To understand the impact of inventory optimization software on supply chain excellence. NOTE: inventory optimization software was defined as "any form of ERP (Enterprise Resource Planning), APS (Advanced Planned Software), or sophisticated inventory planning tools."
Highlight: Companies who use advanced software are more likely to be satisfied with their software, to be effective at making inventory decisions and to drive a return on investment for their software.
Aerospace and Defense Value Creators Report 2015Seda Eskiler
globalaviationaerospace.com
Putting Conventional Wisdom to Test
A&D Segments Outperformed to S&P 500 over the Past Decade
Top-Quartile Performers Derive Almost All Long-Term Value from Growth
Sources of Value for Top Perfomers in the Sector Are in Line with the Top Quartile of the S&P 500
Commercial and Diversified Players Outperformed Defense-Focused Companies
Asset-Light Companies Are Not Earning the Highest Returns
Supply Chain Metrics That Matter: A Focus on Apparel - 9 May 2013Lora Cecere
Different industries are making progress on supply chain excellence at different rates. In the writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer electronics industry is one of the only sectors making consistent and sustainable progress in balancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal plateau. They are treading water with no company able to move forward. In contrast, we see that the apparel industry is trending backwards.
When we analyze progress in the apparel industry over the last decade, we see a degradation of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and three of the six companies show flat or decreasing performance on operating margin. This is the sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain Metrics That Matter series (for a complete series listing see the Appendix).
Figure 1 illustrates the intersection of inventory turns and revenue per employee over the preceding decade. Ideally, companies would be moving consistently from the lower left to the upper right as they increased both inventory turns and revenue per employee performance. Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.
Supply Chain Metrics That Matter: A Focus on the Chemical IndustryLora Cecere
Supply Chain Metrics That Matter is 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 the differences, we share deep analysis in each report.
While we find it useful to understand the evolution of supply chain excellence by comparing industries, we feel 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.
In June of this year, we will publish our fifth analysis of the Supply Chains to Admire. The Supply Chains to Admire methodology celebrates companies that outperform their peer group while driving a faster rate of improvement. Improvement is easier to say than to measure. To create the Supply Chains to Admire, we developed a methodology to measure improvement. It is defined by the Supply Chain Index. To help companies better understand the Supply Chain Index and relative rates of change within an industry, here we dedicate an entire report to the methodology underlying the Index.
Supply Chain Metrics That Matter: Improving Supply Chain Resiliency - 18 MAR ...Lora Cecere
Executive Overview
Ask any supply chain leader which metrics are the most important to deliver, and the most common answers are operating margin, inventory turns, and revenue growth. In our plotting of industry results for the Supply Chain Metrics That Matter reports, we could see that certain industries had greater variation at the intersection of operating margin and inventory turns than others. We wanted to know why.
The supply chain is a complex system. It is growing even more so. Supply chain leaders are charged to deliver reliable results on The Effective Frontier for costs and inventory cycles. Failure to do so can result in termination. The Effective Frontier is depicted in Figure 1.
It is a juggling act. There are finite trade-offs and the metrics are interrelated. Each company is operating at a different potential. A new technology can elevate the frontier and improve the company’s ability to operate at a higher level of performance. Often when companies attempt to drive down costs they will elevate inventory. When complexity increases, it can have an adverse effect on both operating margin and inventory turns. It is a continuous balancing act which has been made easier through the evolution of Advanced Planning Systems (APS).
Progress happens in small increments. It happens over the period of many years (three to five). We believe that reliability of results at the intersection of operating margin and inventory turns is a characteristic of supply chain excellence.
We are trying to understand who’s done it best. It is for this reason that we have been studying these patterns for the last two years. What can we see? Over the last decade, industry progress has been quite different. In Table 1, we list the performance of five industries (The industries are listed from the most to the least profitable as measured by operating margin). Companies have become more efficient, but not necessarily more effective. Note in this table that all manufacturing industries have significantly improved revenue per employee, but only one of the industries has improved both operating margins and inventory turns.
Supply Chain Metrics That Matter: A Focus on the Automotive Industry – 2015 Lora Cecere
RESEARCH OVERVIEW:
Report Details: This report is based on analysis of financial balance sheet and income statement data for the period of 2006-2014 and interactions with clients in the automotive industry in supply chain strategy engagements. The report applies the Supply Chain Index and the Supply Chains To Admire methodology to the automotive industry. In the analysis there are clear distinctions between automotive companies with European, Asian and North American heritages. The European-based companies are top performing with Audi making the Supply Chains to Admire listing for two consecutive years.
Objective: To use financial balance sheet and income statement data coupled with recent research to better understand the state of automotive industry supply chains.
Hypothesis: The automotive industry struggled during the Great Recession and continues the bumpy ride of an ongoing boom-and-bust cycle. With current high growth levels, now is the time to reflect on the lessons of the 2007 recession and build a resilient and agile supply chain for the future.
Supply Chain Metrics That Matter - A Focus on Pharmaceutical Companies - 27 A...Lora Cecere
Executive Overview
When we compiled the Supply Chains to Admire Report in August 2014, no pharmaceutical company made the list. To make the list, a company had to deliver performance (above average results for the period of 2009-2013 than their peer group on a portfolio of metrics including operating margin, inventory turns and Return on Invested Capital) and drive supply chain improvement (based on the Supply Chain Index) faster than their peer group. We believe both performance and improvement matter.
In the pharmaceutical industry, we find most companies to be stuck. They have either regressed in supply chain performance or they are at the same point as they were a decade ago. For many supply chain leaders that attend conferences, this may seem unfathomable. There is an industry belief that companies have implemented new technologies, and evolved processes, and driven improved balance sheet results.
As we will show in this report, as seen in Figure 4, this is not necessarily the case. On average, AstraZeneca has outperformed Bristol-Myers Squibb, and the industry as a whole, but they are not resilient. They have gone backwards in margin and not sustained inventory turn improvements. In contrast, Bristol-Meyers Squibb has not made progress in either performance or improvement and has remained at the same level of performance, without improvement, throughout the period.
2016 Supply Chains to Admire - Report - 26 July 2016Lora Cecere
Executive Summary
Supply chain excellence is easier to say than define. To make progress, companies need to clearly define the journey and the goals. For many this is problematic. The goals are unclear and the financial metrics are not well-understood. We want to provide research to help supply chain leaders correct these issues.
Supply chain leaders want to improve results to drive shareholder value, but there is a problem. There is no industry standard definition of supply chain excellence or clarity on the how actions of the supply chain team drive shareholder value. In this report we try to help fill in the gaps by giving definitions to both.
The Supply Chains to Admire analysis is now in its third year. It is a deep analysis of performance, improvement, and Price to Tangible Book Value (PTBV) of 320 companies across 31 industries for the period of 2009-2015. The source data for the analysis is public reporting of balance sheets and income statements. (Our source of balance sheet and income statement data is YCharts .)
Supply Chains to Admire Analysis for 2019Lora Cecere
This analysis of 2010-2018 is a study of supply chain excellence for 515 public companies in 28 industries. Four percent of companies outperform their peer group while driving improvement. This is the sixth year of the analysis based on a study of growth, operating margin, inventory turns and Return on Invested Capital.
Supply Chains to Admire - An Analysis of Supply Chain Excellence for 2006-2013Lora Cecere
Executive Overview
Supply chain excellence matters. It can make or break corporate performance. To drive improvements, companies need a clear definition of supply chain competency. It is easier to state than to define, and the market is full of beliefs that are not grounded by hard, cold facts.
Now 30-years old, the practice of supply chain management is still evolving. While companies speak of ‘best practices’, and boast about improvements in operating margin, inventory levels and asset management in conference after conference, we do not see it in our analysis of balance sheet information for any industry. The reason? The supply chain is not well-understood by executive teams, and many companies have pursued a project-based approach (implementing multiple projects with ROI above a threshold) or a focus on vertical excellence (where functional charters create very strong functional excellence); however, this is misguided. We do not find that these two approaches make a difference. Instead, we find that it is supply chain leadership driving resilient, predictable, and forward-looking processes that drives sustained balance sheet improvement. We find that for top performers that it happens in a slow and steady pattern versus the big-bang approach.
Supply chain leaders want to drive excellence. By their nature, these leaders are competitive. They want to drive performance improvements, increase corporate value and outpace competitors. It is not easy. The rate of business change is intense and the personal stakes are high. Day after day, leaders must answer questions like, “Which path should I to take? What are the best technologies to use? What is an acceptable rate of performance? How am I doing against my peer group? And, what can I learn from others that I can use to improve the performance of my own operation?” Until the development of the Supply Chain Index there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology, there now is a way to gauge improvement.
Collecting the data and doing the analysis in this report is the result of a 24-month effort. We were fearful at the end of the process that it would be difficult to pick the top performers, but we should not have worried. When we applied the methodology, the top companies hopped off the page. They were easy to spot. Listed by industry, the Companies to Admire are listed in Table 4. Within a peer group, we place them within alpha order. Due to the complexity of the analysis it is hard to rate them more granularly.
No companies made the list from the contract manufacturing, medical device, paper, pharmaceutical or retail peer groups. Likewise, there were more companies that made the list in the industrial than the consumer value networks.
A critical look at three years of supply chain disruption. Using quantitative and qualitative research, Lora Cecere, Founder of Supply Chain Insights, looks critically at the factors within companies that drove resilience and the factors less successful. Companies that won were aligned, used market signals, decreased process latency, used scenario planning, and implemented descriptive analytics. Those that fared worse, had tight integration of supply chain planning to ERP, were not aligned, and were focused on a digital transformation strategy.
River of Demand - ALL RIVERS with QR.pdfLora Cecere
Drawings of demand as a river depicting the issues with flow with the voice overlay of the planner. To hear the voice, scan the QR code at the bottom of the drawing.
Presentation was given at the Longbow presentation on the future of supply chain management and the value of changing processes to make decisions a the speed of business decisions
At the Supply Chain Insights Global Summit, we challenged the audience to think about "social tokens" using this presentation from Luke Layden of Coin Desk.
Today's supply chain processes are inside-out. Outside-in processes, using channel and market data, improve the time to respond. This presentation reflects two years of testing using machine learning to understand the impact on the bullwhip effect and Forecast Value Added.
Now in its ninth year, the Supply Chains to Admire analysis is a study of the progress of each industry sector on the balanced scorecard of growth, operating margin, inventory turns, and Return on Invested Capital (ROIC). Twenty-two companies outperform their peer group, defining and exemplifying supply chain excellence.
Supply Chains to Admire Analysis 2022_2022 presentation.pptxLora Cecere
Supply Chains to Admire is a data-driven analysis based on public reporting of manufacturing and retail companies. The research evaluates which public companies drove improvement while outperforming their peer groups on performance metrics and value for the ten-year period of 2012-2021. The 25 winners are a testimonial to supply chain resilience.
The Role of Analytics In Defining The Art Of The PossibleLora Cecere
Analytics capabilities are evolving faster than organizations can adopt them into their processes. Here we share the research of 92 respondents in their journey to use new forms of analytics in their digital transformation journey.
Enterprise Excellence is Inclusive Excellence.pdfKaiNexus
Enterprise excellence and inclusive excellence are closely linked, and real-world challenges have shown that both are essential to the success of any organization. To achieve enterprise excellence, organizations must focus on improving their operations and processes while creating an inclusive environment that engages everyone. In this interactive session, the facilitator will highlight commonly established business practices and how they limit our ability to engage everyone every day. More importantly, though, participants will likely gain increased awareness of what we can do differently to maximize enterprise excellence through deliberate inclusion.
What is Enterprise Excellence?
Enterprise Excellence is a holistic approach that's aimed at achieving world-class performance across all aspects of the organization.
What might I learn?
A way to engage all in creating Inclusive Excellence. Lessons from the US military and their parallels to the story of Harry Potter. How belt systems and CI teams can destroy inclusive practices. How leadership language invites people to the party. There are three things leaders can do to engage everyone every day: maximizing psychological safety to create environments where folks learn, contribute, and challenge the status quo.
Who might benefit? Anyone and everyone leading folks from the shop floor to top floor.
Dr. William Harvey is a seasoned Operations Leader with extensive experience in chemical processing, manufacturing, and operations management. At Michelman, he currently oversees multiple sites, leading teams in strategic planning and coaching/practicing continuous improvement. William is set to start his eighth year of teaching at the University of Cincinnati where he teaches marketing, finance, and management. William holds various certifications in change management, quality, leadership, operational excellence, team building, and DiSC, among others.
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Supply Chain Metrics That Matter: A Focus on Aerospace & Defense Companies 2017
1. A Focus on Aerospace
& Defense Companies
A Seven-Year View of Progress on Supply Chain Excellence
10/17/2017
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC
and Samuel Borthwick
Research Associate
Supply Chain Insights LLC
Supply Chain Metrics That Matter
2. Page 2
Contents
Research
Disclosure
Executive Overview
A Closer Look at the Industry
Progress Versus Other Industries
A Closer Look at Aerospace & Defense Manufacturers’ Growth
Value
Performance
Cash-to-Cash Cycles
Industry Focus
Recommendations
Conclusion
Appendix
Other Reports in This Series
About Supply Chain Insights LLC
About Lora Cecere
About Sam Borthwick
3
3
4
6
9
11
12
13
14
15
20
21
22
23
24
24
24
3. Page 3
Research
Supply Chain Metrics That Matter is a series of reports published throughout the year by Supply
Chain Insights LLC. Each report in the series is a deep analysis of supply chain performance within
an industry. This report focuses on the Aerospace & Defense industry for the period of 2010-2016.
Here we analyze the trade-offs to balance growth, profitability, cycles and complexity.
Within the world of supply chain management, each industry is unique. It is dangerous to list all
industries in a spreadsheet and declare a supply chain leader. Instead, we believe supply chain
excellence needs to be evaluated based on a balanced portfolio of metrics, over time, by peer group.
In this series of reports, we analyze the potential of a supply chain peer group, share insights from
leaders within each industry, and give recommendations based on general market trends.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research process. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share, and use to improve your supply chain decisions.
Please share this data freely within your company and across your industry. All we ask for in return is
attribution when you use the materials 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.
4. Page 4
Executive Overview
A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in
the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology
innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The
A&D supply chain is largely a story of supply chain excellence in procurement and sourcing
strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to
survive.
Government spending drives the defense supply chain. Companies in this industry compete for
government contracts that range from hundreds of millions to billions of dollars. The magnitude of
these contracts defines winners and losers for the industry. Demand is lumpy and volatile.
Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the
government re defense spending, but they live contract by contract. In contrast, the commercial
aircraft side is much different. It is driven by long-term economic trends
Government ups the ante for the latest and best technology for global defense. As the technology in
jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more
complex with increasing pressures on driving innovation. To better understand the industry in relation
to supply chain management, let’s start by looking at it within the larger context of the A&D value
network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are
increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain
Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the
table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry
was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is
down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green
arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While
the industry is more dependent on software and computer hardware, there has been little
collaboration to drive value between trading partners. Also note that this industry has the longest
Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in
government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-
Cash of 152.
5. Page 5
Table 1. Industry Overview of Trends for the Period of 2010-2016
In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with
excerpts from annual reports to enable the reader to understand the “voice” of the industry.
6. Page 6
A Closer Look at the Industry
When we first started the research on the Supply Chain Metrics That Matter report series, we
believed that through the combination of an investment in technology, people, and process,
companies could drive improvement in inventory turns and operating margin as shown in Figure 1. As
will be seen in this report, this is not the case in the Aerospace & Defense Industry. Metrics
improvement within this industry is largely at a standstill.
Figure 1. Driving Performance Improvement
In the Aerospace & Defense Industry, Heico Corporation (Heico) is the supply chain leader, but most
of the industry is at a stasis in metrics performance. (Heico manufacturers electronic equipment for
aviation.) Heico performed above the industry averages in all metrics except inventory turns.
To understand supply chain excellence, let’s look at year-over-year patterns in metric performance
through visualization via orbit charts. To understand an orbit chart, let’s examine Figure 2. The
performance of Heico and United Technologies is charted year-over-year at the intersection of
inventory turns and operating margin (United Technologies makes products for aircraft engines). The
patterns are used to define supply chain excellence. As can be seen in Figure 2, the average
operating margin for Heico for the period of 2010-2016 is 18%, while United Technologies is lower at
13%. Inventory turns for Heico are 2.89 versus 4.99 for United Technologies.
7. Page 7
Figure 2. Orbit Chart of Heico and United Technologies
The patterns tell the story. It is a story of year-over-year metrics changes. The tight pattern of
continuous improvement makes Heico the winner in resiliency while the upward trend defines
improvement. Even though United Technologies’ patterns have better inventory turns, the margins
are lower, and United Technologies’ wide performance swings show the lack of metrics control.
Patterns of supply chain metrics come in many different forms. Note that in Figure 3, General
Dynamics is performing at a higher level of value, with an operating margin of 11% and inventory
turns of 7.46, but there is a lack of resiliency. The metrics pattern is more variable.
8. Page 8
Figure 3. Orbit Chart of Boeing and General Dynamics
In a similar manner, note the patterns of Lockheed Martin and Northrop Grumman in Figure 4. While
Northrop Grumman shows improvement, both companies show wide swings on the orbit chart,
representing a lack of consistency and the inability to be resilient. It is common of for companies in
this industry to have such wide swings due the amount of volatility associated with the defense
industry making consistency hard to come by.
9. Page 9
Figure 4. Orbit Chart of Lockheed Martin and Northrop Grumman
Progress Versus Other Industries
The Supply Chains to Admire, and the Metrics That Matter, research rewards companies that show
improvement while outperforming their peer groups. Companies with tight upward patterns at the
intersection of the metrics are highlighted as winners, while companies with wide swings and
backward progression are penalized.
To help companies understand supply chain excellence through the insights of orbit chart
performance, we developed the Supply Chains to Admire analysis. An overview of the methodology is
shared in Figure 5, with a more complete discussion in the full Supply Chains to Admire 2017 report.
While no company in the Aerospace & Defense Industry met the criteria required to be a winner in the
2017 Supply Chains to Admire research, Astronics Corporation and Heico Corporation were the top
performers on the Metrics That Matter for the 2010-2016 time period.
10. Page 10
Figure 5. Overview of the Supply Chains to Admire Analysis
Figure 6. Winners of the 2017 Supply Chains to Admire Analysis
Note the short list of 24 companies for the 2017 Supply Chains to Admire Award winners.
11. Page 11
A Closer Look at Aerospace & Defense
Manufacturers’ Growth
Though the Great Recession did not necessarily affect government contracts with Defense
companies, it did affect the commercial side of the Aerospace industry. Growth during 2004-2006 was
15%, falling to 10% during the timeframe of 2007-2009. The industry deteriorated even further with a
4% growth rate in 2010-2016. Notice that nearly every company experienced a decrease in growth in
2007-2009 outside of Woodward and Raytheon.
Table 2. Growth and the Supply Chain Index in the Aerospace & Defense Industry
The Supply Chain Index is a measure of supply chain improvement. The lower the score the faster
the rate of metrics improvement at the intersection of inventory turns and operating margin, and
Return on Invested Capital and Growth. In many industries growth and supply chain improvement are
12. Page 12
tightly coupled. However, this is not the case in the A&D sector. (For more on the Supply Chain
Index, reference the Appendix.)
Note that while Astronics, Astrotech, and KLX drove the highest levels of revenue growth, only KLX
drove improvement. In contrast Astronics’ and Astrotech;s improvement levels rank at the bottom of
the list.
Value
Traditional supply chain leaders focus on costs, not on value. There is no industry-standard definition
for value. To try to drive change, here we share the results on two value metrics: market capitalization
and Price to Tangible Book Value. Overall, for the industry, the Price to Tangible Book Values are
low.
Table 3. Company Overview of Market Capitalization and Price to Tangible Book Value
13. Page 13
Performance
While growth fell from 15% to 4%, the story in the A&D industry for the rest of the Metrics That Matter
is stagnation. As you scan Table 4 and look at the averages, note that while Revenue per Employee
increased slightly in the period from 2004 through 2016, there was very little change in the other
metrics with the exception of Cash-to Cash. Also note that during the recession, with the pressure on
working capital, inventory turns improved slightly, but post-recession the industry reverted to the prior
state.
Table 4. Company Overview and Performance for Aerospace & Defense Companies
The most dramatic change is in the shift of the Cash-to-Cash metric. When the Cash-to-Cash value is
low, the need for working capital is reduced. In this period, while most industries improved cash-to-
cash, this was not the case for the A&D industry. This shift for A&D was driven by the elongation of
Days of Receivables.
14. Page 14
Cash-to-Cash Cycles
Cash-to-cash is a compound metric that combines Days of Receivables, Days of Inventory, and Days
of Payables. The formula is:
𝐶𝑎𝑠ℎ − 𝑡𝑜 − 𝐶𝑎𝑠ℎ = 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 + 𝐷𝑎𝑦𝑠 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 − 𝐷𝑎𝑦𝑠 𝑜𝑓 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
In Table 5 we share the impact of supply chain decisions on the components of cash-to-cash. As
seen, all three components associated with Cash-to-Cash increased from 2004-2006 to 2010-2016.
Days of Receivables and Cash-to-Cash both nearly doubled in this timeframe. This is driven largely
by government receivables.
Table 5. Impact on Cash-to-Cash Elements
15. Page 15
Industry Focus
To get a flavor for the industry, we comb through annual reports to consolidate supply chain related
trends. This allows the reader to “hear the voice of the industry.” Supply chain and procurement in
A&D are often used interchangeably. Innovation is the lifeblood of the industry. In the annual reports,
note the focus on supply, risk management, corporate social responsibility, and improving
procurement processes.
2014
Raytheon
Raytheon Company, together with its subsidiaries, is a technology and innovation leader specializing in
defense and other government markets throughout the world. We are dependent upon the delivery of
materials by suppliers, and the assembly of major components and subsystems by subcontractors used in our
products. Some products require relatively scarce raw materials. In addition, we must comply with specific
procurement requirements which may, in effect, limit the suppliers and subcontractors we may utilize. In some
instances, for a variety of reasons, we are dependent on sole-source suppliers. We enter into long-term or
volume purchase agreements with certain suppliers and take other actions to ensure the availability of needed
materials, components and subsystems. We are also dependent on suppliers to provide genuine original
equipment manufacturer parts and have a robust set of standardized policies to detect counterfeit material,
especially electronic components, throughout our supply chain.
Astronics
2014 was an exceptional year at Astronics and our 11th consecutive year of growth. Our sales nearly doubled
in 2014 to $661 million from $340 million in 2013. Net income more than doubled to $56 million from $27
million, while on a per diluted share basis earnings were $2.48 compared with $1.24 in the prior year. This
strong bottom line was after a hefty $19 million in acquisition accounting expenses for the fair value step up of
inventory. Certainly, much of our success must be attributed to the strong aerospace market in which we
participate. Advances in aerodynamics, propulsion technologies and avionics have resulted in aircraft with
higher levels of safety and cost effectiveness. These advances, in turn, have driven ever higher utilization and
production rates, which is good for everybody involved in the industry. But beyond this, our long-standing
practice of consistent, regular investment in our business has paid off handsomely. We invest both in internal
research and product development, complemented by strategic acquisition. We made three such acquisitions
in the latter half of 2013 and one major one in 2014, while engineering and development spending was $76.7
million, or nearly 12% of revenue, well above industry norms. These investments resulted in organic growth of
15% in 2014 with the rest coming from acquisitions.
Lockheed Martin
In 2014, our Aeronautics business segment generated net sales of $14.9 billion, which represented 32% of our
total consolidated net sales. Aeronautics’ customers include the military services and various other government
agencies of the U.S. and other countries. In 2014, U.S. Government customers accounted for 72% and
international customers accounted for 28% of Aeronautics’ net sales. Net sales from Aeronautics’ combat
aircraft products and services represented 23% of our total consolidated net sales in 2014 and 21% of our total
16. Page 16
consolidated net sales in each of 2013 and 2012. Aeronautics is engaged in the research, design,
development, manufacture, integration, sustainment, support and upgrade of advanced military aircraft,
including combat and air mobility aircraft, unmanned air vehicles and related technologies. Aeronautics’ major
programs include:
• F-35 Lightning II Joint Strike Fighter – international multi-role, multi-variant, fifth generation stealth fighter;
• C-130 Hercules – international tactical airlifter;
• F-16 Fighting Falcon – low-cost, combat-proven, international multi-role fighter;
• F-22 Raptor – air dominance and multi-mission fifth generation stealth fighter; and
• C-5M Super Galaxy – strategic airlifter.
The F-35 program is our largest, generating 17% of our total consolidated net sales, as well as 52% of
Aeronautics’ net sales in 2014. The F-35 program consists of a development contract and multiple production
and sustainment activities. The development contract is being performed concurrently with the production
contracts. Concurrent performance of development and production contracts is used for complex programs to
test aircraft, shorten the time to field systems and achieve overall cost savings. We expect the development
portion of the F-35 program will be substantially complete in 2017, with less significant efforts continuing into
2019. Production of the aircraft is expected to continue for many years given the U.S. Government’s current
inventory objective of 2,443 aircraft for the Air Force, Marine Corps and Navy; commitments from our eight
international partners and three international customers; as well as expressions of interest from other
countries. During 2014, we delivered 36 aircraft to our U.S. and international partners, resulting in total
deliveries of 109 3 production aircraft as of December 31, 2014. We have 100 production aircraft in backlog as
of December 31, 2014, including orders from our international partners. For additional information on the F-35
program, see “Status of the F-35 Program” in Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
2015
Raytheon
U.S. government sales, excluding foreign military sales, accounted for 68% of our total net sales in 2015. Our
principal U.S. government customer is the U.S. Department of Defense (DoD). 29 32 32 40 41 48 65 68 69 69
70 30 On November 2, 2015, the President signed the Bipartisan Budget Act of 2015 (BBA) into law. The BBA
sets fiscal year (FY) 2016 and 2017 DoD spending caps that exceed recent DoD budget funding levels. These
spending caps are recognized by both the Administration and Congress and are therefore expected to lead to
a stable budget process for those two years. In addition, while the spending cap increase does not meet the
DoD's original FY 2016 base budget funding request or its planned FY 2017 funding level, it should provide for
modest growth in the DoD's modernization budgets for FY 2016 and FY 2017. Modernization funding, which
consists of procurement and research and development, is of particular importance to defense contractors.
Despite the expected stability in FY 2016 and 2017, defense budget funding levels, which are subject to
budget and appropriation decisions and processes, are difficult to predict beyond the near-term.
We are also continuing to build strong customer relationships by working with them as partners and including
them on Raytheon Six SigmaTM teams to jointly improve their programs and processes. We are increasingly
focused on responding to our customers' changing requirements with rapid and effective solutions to real-world
problems. In recognition of our customers' constraints and priorities, we also continue to drive various cost
17. Page 17
reductions across the Company by continuing to focus on enterprise collaboration and improving productivity
and strong execution throughout our programs. We have worked to reduce costs across the Company and
improve efficiencies in our production facilities, and we continue to increase value through Raytheon Six
SigmaTM, the implementation of lean processes, reduced cycle times and strategic supply chain initiatives, in
addition to other initiatives.
Astronics
The markets we serve are cyclical and sensitive to domestic and foreign economic conditions and events,
which may cause operating results to fluctuate. Demand for our products is to a large extent dependent on the
demand and success of our customers' products where we are a supplier to an OEM. In our Aerospace
segment, demand by the business jet markets for our products is dependent upon several factors, including
capital investment, product innovations, economic growth and wealth creation and technology upgrades. In
addition, the commercial airline industry is highly cyclical and sensitive to fuel price increases, labor disputes,
global economic conditions, availability of capital to fund new aircraft purchases and upgrades of existing
aircraft and passenger demand. A change in any of these factors could result in a reduction in the amount of
air travel and the ability of airlines to invest in new aircraft or to upgrade existing aircraft. These factors would
reduce orders for new aircraft and would likely reduce airlines’ spending for cabin upgrades for which we
supply products, thus reducing our sales and profits. A reduction in air travel may also result in our commercial
airline customers being unable to pay our invoices on a timely basis or not at all.
Lockheed Martin
Certain of our products require relatively scarce raw materials. Historically, we have been successful in
obtaining the raw materials and other supplies needed in our manufacturing processes. We seek to manage
raw materials supply risk through long-term contracts and by maintaining an acceptable level of the key
materials in inventories. Aluminum and titanium are important raw materials used in certain of our Aeronautics
and Space Systems programs. While we do not anticipate material problems regarding the supply of our raw
materials and believe that we have taken appropriate measures to mitigate these variations, if key materials
become unavailable or if pricing fluctuates widely in the future, it could result in delay of one or more of our
programs, increased costs or reduced operating profits. No material portion of our business is considered to be
seasonal. Various factors can affect the distribution of our sales between accounting periods, including the
timing of government awards, the availability of government funding, product deliveries and customer
acceptance.
Boeing
We are highly dependent on the availability of essential materials, parts and subassemblies from our suppliers
and subcontractors. The most important raw materials required for our aerospace products are aluminum
(sheet, plate, forgings and extrusions), titanium (sheet, plate, forgings and extrusions) and composites
(including carbon and boron). Although alternative sources generally exist for these raw materials, qualification
of the sources could take one year or more. Many major components and product equipment items are
procured or subcontracted on a sole-source basis with a number of companies.
We are dependent upon the ability of a large number of suppliers and subcontractors to meet performance
specifications, quality standards and delivery schedules at our anticipated costs. While we maintain an
extensive qualification and performance surveillance system to control risk associated with such reliance on
third parties, failure of suppliers or subcontractors to meet commitments could adversely affect production
schedules and program/contract profitability, thereby jeopardizing our ability to fulfill commitments to our
18. Page 18
customers. We are also dependent on the availability of energy sources, such as electricity, at affordable
prices.
2016
Raytheon
We launched this strategy in 2014. At the time, our U.S. government defense customers had reduced their
budgets, and we needed to respond. We did so by executing our four-pillar growth strategy: building on our
areas of strength within our key mission areas; focusing additional resources on emerging U.S. Department of
Defense opportunities and technologies; engaging key foreign countries as individual markets with multiple
customers; and expanding our advanced cyber solutions into international and commercial markets.
Astronics
2016 was a challenging year for Astronics, one in which the company navigated some significant transitions.
The final numbers are evidence of the challenge: consolidated sales were down 8.5% to $633 million and net
income declined 28% to $48 million. While 2016 was our first year of sales decline since 2003, at the same
time we made progress addressing the challenges and preparing ourselves for success in the immediate
future. Our results were largely driven by transitions in our avionics and semiconductor test product lines, both
the result of customer decisions related to their own market position and both clearly evident early in the year.
We spent much of 2016 working on recovery plans, which we expect will begin to bear fruit as 2017 goes on.
In the end, our Aerospace business saw a decline in sales of 2.9%, or $16 million, which was more than
explained by the $23 million decline in avionics sales. It should be noted that our Test segment, despite a sales
decline of 31% to $99 million, still managed to produce an operating profit of 8.6% of sales. This speaks to the
strong actions taken by our Test management team and the inherent margin potential of the business.
Lockheed Martin
We derived 71% of our total net sales from the U.S. Government in 2016, including 59% from the Department
of Defense (DoD). We expect to continue to derive most of our sales from work performed under U.S.
Government contracts. Those contracts are conditioned upon the continuing availability of Congressional
appropriations. Congress usually appropriates funds on a fiscal-year basis even though contract performance
may extend over many years. Consequently, contracts are often partially funded initially and additional funds
are committed only as Congress makes further appropriations. If we incur costs in excess of funds obligated on
a contract, we may be at risk for reimbursement of those costs unless and until additional funds are obligated
to the contract.
There is also uncertainty regarding actions that may be taken by the new Presidential Administration in light of
recent criticisms of the F-35 program and other large defense programs. President Trump has publicly
expressed concerns over past cost overruns and delays in the program as well as overall program cost and
has publicly requested that a competitor price out an alternative.
Boeing
Market conditions have a significant impact on demand for our commercial aircraft. The commercial aircraft
market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors
underlying long-term traffic growth are sustained economic growth and political stability both in developed and
emerging markets. Demand for our commercial aircraft is further influenced by airline profitability, availability of
aircraft financing, world trade policies, government-to-government relations, technological changes, price and
19. Page 19
other competitive factors, fuel prices, terrorism, epidemics and environmental regulations. Traditionally, the
airline industry has been cyclical and very competitive and has experienced significant profit swings and
constant challenges to be more cost competitive. In addition, availability of financing to non-U.S. customers
depends in part on the continued operations of the Export Import Bank of the United States. Significant
deterioration in the global economic environment, the airline industry generally, or in the financial stability of
one or more of our major customers could result in fewer new orders for aircraft or could cause customers to
seek to postpone or cancel contractual orders and/or payments to us, which could result in lower revenues,
profitability and cash flows and a reduction in our contractual backlog. In addition, because our commercial
aircraft backlog consists of aircraft scheduled for delivery over a period of several years, any of these
macroeconomic, industry or customer impacts could unexpectedly affect deliveries over a long period.
Operational challenges impacting the production system for one or more of our commercial aircraft programs
could result in production delays and/or failure to meet customer demand for new aircraft, either of which would
negatively impact our revenues and operating margins. Our commercial aircraft production system is extremely
complex. Operational issues, including delays or defects in supplier components, failure to meet internal
performance plans, or delays or failures to achieve required regulatory certifications, could result in significant
out-of-sequence work and increased production costs, as well as delayed deliveries to customers, impacts to
aircraft performance and/or increased warranty or fleet support costs. Further, if we cannot efficiently and cost-
effectively incorporate design changes into early build 787 aircraft, we may face further profitability pressures
on this program.
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Recommendations
In evaluating supply chain performance, it is important to look at trends within a peer group over time.
Here we look critically at the Aerospace & Defense industry for the period of 2010-2016. A focus on
procurement, cost containment, and continuous improvement drove the industry. Few companies
delivered on a balanced scorecard. As a result, the industry is stuck, and even going backwards, in
important metrics like growth, inventory, and particularly cash-to-cash. Days of receivables is
increasing at a massive rate. As companies study supply chain excellence and corporate
performance, we recommend that supply chain leaders:
1) Build a Guiding Coalition to Drive Improvement Based on Industry-Specific Data.
Organizations should benchmark companies within an industry. Each industry has unique rhythms
and cycles. As a result, supply chain excellence analysis needs to be within an industry.
2) Understand Supply Chain Potential and Orchestrate Trade-offs on the Effective Frontier. The
supply chain is a complex system, with interrelated metrics, with nonlinear relationships. Supply
chain leadership teams should analyze the total portfolio of metrics and study progress at the
intersections of the Effective Frontier. Growth has the highest correlation to market capitalization.
Companies with higher performance are using more advanced analytics to plan outcomes and
design the supply chain.
Figure 7. The Supply Chain Effective Frontier
3) Apply Systems Theory. Teams should evaluate performance over time to understand
improvement, while realizing they are managing a complex system. The functions should be
aligned to a balanced portfolio of metrics representing the Effective Frontier, while functional
metrics should be focused on improving reliability (e.g., first-pass yield, hands-free orders, and
supplier quality, etc.).
21. Page 21
4) Focus on Building Value Networks. While many of these companies could be a powerbroker in
the industry to redefine outside-in processes, all companies are accepting the limitations of the
inside-out supply chain. They operate functional silos with a traditional supply paradigm. The
traditional focus of Lean is not sufficient. This is an opportunity for the industry.
5) Learn from Other Industries. Use a Steady Hand/Focused Leadership to Drive Improvement.
To make the necessary improvements, companies today must move past an “ERP-centric view”
and build outside-in processes with a focus on value-based outcomes. Network design, supply
chain planning, and revenue management are opportunities for process excellence. The aerospace
and defense industry should turn to the high-tech industry to benchmark and drive innovation.
Conclusion
The story of the A&D industry is a story of survival. With larger increases in the requirements in
working capital, and the lumpy demand of the defense industry, the industry developed strong
procurement practices to drive technology improvements. In order to drive growth and perform better
on the balance sheet, A&D companies need to adopt new procurement practices and stop resistance
to change. For most industries, volatility is the result of seasonality; however, the defense industry is
one that is driven on the unpredictability of government contracts. The lack of seasonality makes it
much more difficult for companies to prepare for such demand volatility. The commercial aircraft
market is the complete opposite in that it depends on long-term economic trends, and is very much
affected by seasonality. These are two very different industries with different challenges, and yet
many companies have a stake in both commercial aircraft and defense. The challenge will be for
companies to effectively create two different strategies that effectively addresses the specific
challenges (government and seasonal volatility) for each sub-industry.
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Appendix
The Supply Chain Index is a measurement of supply chain improvement. We find that supply chain
leaders are usually above their peer group in performance, in the upper 2/3 of the Supply Chain
Index. Companies with low Supply Chain Index scores are usually driving improvement, but are new
at the journey. As a result, the rate of change on Supply Chain Improvement is quicker than that of a
more mature company.
Table A. Performance Factor Analysis on the Supply Chain Index
23. Page 23
Other Reports in This Series
Supply Chain Metrics That Matter – A Focus on Automotive Companies 2017
Published by Supply Chain Insights in August 2017
Supply Chain Metrics That Matter – A Focus on Chemical Companies
Published by Supply Chain Insights in July 2017
Supply Chains to Admire 2017
Published by Supply Chain Insights in June 2017
These reports, and additional information on the Supply Chain Metrics That Matter methodology, are
available at our Supply Chain Insights website and in the Beet Fusion community.
24. Page 24
About Supply Chain Insights LLC
Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is in its sixth year of operation.
The Company’s mission is to deliver independent, actionable, and objective advice for supply
chain leaders. If you need to know which practices and technologies make the biggest difference to
corporate performance, we want you to turn to us. We are a company dedicated to this research. Our
goal is to help leaders understand supply chain trends, evolving technologies and which metrics
matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in August 2015, the fifth book, The Shaman’s Journal 2016,
published in June 2016 and the sixth book, The Shaman’s Journal 2017, published in July 2017.
With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and is a frequent speaker on the
evolution of supply chain processes and technologies. Her research is designed for the early adopter
seeking first mover advantage.
About Sam Borthwick
As a Research Associate, Samuel Borthwick analyzes balance sheet and income
statement data for the Supply Chains to Admire Report along with the monthly
Metrics That Matter series. A recent graduate of Purdue University, majoring in
Supply Chain Management, Sam loves data. He lives in Indianapolis, Indiana
where he enjoys playing tennis and spending time with his family.