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 Aerospace & Defense Companies 2017Lora Cecere
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 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 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 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.
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%.
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: A Focus on Aerospace & Defense Companies 2017Lora Cecere
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 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 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 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.
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%.
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: 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.
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 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.
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 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.
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 Hospitals - 6 JAN 2013Lora Cecere
Executive Overview
Growth is slowing. Profitability is tougher. Compliance mandates are growing. How do companies balance the goals for value-based outcomes for health and wellness with costs? In this environment, supply chain matters more than ever.
In this report, we share insights on healthcare supply chains. Grown out of the offices of procurement, the supply chain function of the hospital is still in its infancy; but based on increasing business requirements and complexity, it is only beginning to show its true potential.
Growth: Futures are Uncertain.
The hospital administrator is facing many challenges. Growth is slowing and pressures are growing. The question is how to balance patient outcomes with better cost management. How does a hospital move forward with an uncertain future? And, what will be the impact of healthcare reform?
In table 1, we list top line growth over the past decade for four companies operating within the hospital industry. While there are ups and downs, the general trend is downward.
What Drives Supply Chain Excellence? A Look Back and a Look ForwardLora Cecere
This report is based on analysis of financial balance sheet and income statement data for the period of 2000-2012, quantitative survey research results, and interactions with clients in various industries in supply chain strategy sessions. We examine the performance of companies in a cross-section of industries on various metrics. We find that most companies and most industries are stuck in an environment of low results, with the exception of the hi-tech & electronics industry. Finally, we offer our perspective and advice on advancing supply chain excellence and moving the needle for better supply chain performance across company and industry lines.
Highlights
• A project-based approach has failed. Our gains are much lower than we believed in inventory management and a long-term perspective is needed to drive permanent and sustainable improvements.
• The hi-tech industry is the only of the six industries profiled to drive sustained gains across most metrics considered during the time period.
• The definition of supply chain excellence is still evolving as companies move through different maturity stages. Industrial and pharmaceutical companies are mainly stuck at low levels of maturity and could benefit greatly from applying lessons learned in other industries to their own supply chains.
Research Results
Full report
Supply Chain Metrics That Matter: A Focus on RetailLora Cecere
■Survey Details: The basis of this report is publically available information from corporate annual reports from the period of 2000-2012. In this report, we use this data to understand the past trends and future projections of retail industry supply chains. To drive insights, we augment this financial data with information that we have obtained through interactions with retail clients and recent insights from our quantitative research studies.
■Objective: To use financial balance sheet data coupled with recent research to better understand the state of retail supply chains.
■Hypothesis: With the shifts in the channel, the role of the store has changed, and there is a need to redefine value in the value chain.
Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013Lora Cecere
The bricks and mortar retailer is being squeezed. Growth is slowing and margin is under pressure. With the rise of e-commerce, the role of the store is being redefined. It is about service and the customer experience. As a result, it is time to rethink the metrics that matter and focus outside-in on the shopper experience.
In this report, we share insights on the current state of bricks and mortar retail and offer our suggestions.
Brick & mortar retailers have weathered an intense decade with the persistent rise of e-commerce. The shopper has changed and recovery from the Great Recession is ongoing, but slow. Our previous Supply Chain Metrics That Matter: A Focus on Retail report focused on the broader industry trends affecting five different divisions of retailers and the challenges of multi-channel retail. This report narrows the focus to three segments of brick & mortar retailers struggling to adapt to the new world.
A retailer is not a retailer. We believe that retailers should be compared by business model. We do not believe that one can throw all retailers together and identify the “most improved” or “best” supply chain. There are too many variables and circumstances affecting the retail landscape to make valid comparisons. In our research, we find that small and well-defined peer groups offer the best way forward for understanding both segment and industry specific trends.
The industry segments analyzed in this report are grocery, mass and specialty. Grocery retailers are involved in the sale of perishable and non-perishable food stuffs. Mass retailers are larger companies focused on providing a comprehensive retail experience to their customers. Finally, specialty retailers are dedicated to specific customers, activities and goods. The companies in this analysis represent both American and global retailers.
Our grocery peer group consists of Carrefour, Delhaize Group, Safeway and The Kroger Co. The mass retailer peer group includes Costco, Metro, Target and Walmart. The choice of specialty retailers was by far the most difficult because there are so many dedicated stores in this category. For this publication, our peer group includes Bed Bath & Beyond, Dick’s Sporting Goods, Foot Locker and Ross Stores. Additional information about all of these companies is presented in the Appendix.
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 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 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 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, ...
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:
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).
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.
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 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.
The Supply Chain Index: Evaluating the Industrial Value Network - 18 AUG 2014Lora Cecere
Executive Overview
Supply chain performance matters. It can make or break corporate performance. 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.
By their nature, supply chain leaders are competitive. They want to drive performance improvements and increase corporate value. Their goal is to outpace competitors. 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 by Supply Chain Insights, 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.
While it is easy to say the term supply chain excellence, it is difficult to define. Many people think that they know the definition, but there is no agreed-upon standard. The lack of a clear definition, and a methodology to measure improvement, makes progress hard to quantify and track.
The Supply Chain Index is designed to help. It is an objective measurement of supply chain improvement. It enables the comparison of companies’ progress within a peer group for a given time period. The Index is based upon financial performance of companies on four metrics integral to supply chain operations: Year-over-Year Revenue Growth, Return on Invested Capital, Inventory Turns, and Operating Margin. In building the Supply Chain Index, we had three goals:
1. Quantify Levels of Supply Chain Improvement. The Index is a composite metric based on the calculation of balance, strength and resiliency factors for a given time period. Each factor is measuring the pattern of performance over time. In the analysis, there is an underlying assumption that the companies that can sustain the best improvement in these three areas are driving the highest rates of supply chain improvement. The input metrics of Year-over-Year Revenue Growth, Return on Invested Capital, Inventory Turns, and Operating Margin were selected in part due to their high correlation to market capitalization.
2. Bridge the Gap between Finance and Supply Chain. Our second goal is to bridge the gap between the supply chain organization and the financial team...
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.
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 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.
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 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.
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 Hospitals - 6 JAN 2013Lora Cecere
Executive Overview
Growth is slowing. Profitability is tougher. Compliance mandates are growing. How do companies balance the goals for value-based outcomes for health and wellness with costs? In this environment, supply chain matters more than ever.
In this report, we share insights on healthcare supply chains. Grown out of the offices of procurement, the supply chain function of the hospital is still in its infancy; but based on increasing business requirements and complexity, it is only beginning to show its true potential.
Growth: Futures are Uncertain.
The hospital administrator is facing many challenges. Growth is slowing and pressures are growing. The question is how to balance patient outcomes with better cost management. How does a hospital move forward with an uncertain future? And, what will be the impact of healthcare reform?
In table 1, we list top line growth over the past decade for four companies operating within the hospital industry. While there are ups and downs, the general trend is downward.
What Drives Supply Chain Excellence? A Look Back and a Look ForwardLora Cecere
This report is based on analysis of financial balance sheet and income statement data for the period of 2000-2012, quantitative survey research results, and interactions with clients in various industries in supply chain strategy sessions. We examine the performance of companies in a cross-section of industries on various metrics. We find that most companies and most industries are stuck in an environment of low results, with the exception of the hi-tech & electronics industry. Finally, we offer our perspective and advice on advancing supply chain excellence and moving the needle for better supply chain performance across company and industry lines.
Highlights
• A project-based approach has failed. Our gains are much lower than we believed in inventory management and a long-term perspective is needed to drive permanent and sustainable improvements.
• The hi-tech industry is the only of the six industries profiled to drive sustained gains across most metrics considered during the time period.
• The definition of supply chain excellence is still evolving as companies move through different maturity stages. Industrial and pharmaceutical companies are mainly stuck at low levels of maturity and could benefit greatly from applying lessons learned in other industries to their own supply chains.
Research Results
Full report
Supply Chain Metrics That Matter: A Focus on RetailLora Cecere
■Survey Details: The basis of this report is publically available information from corporate annual reports from the period of 2000-2012. In this report, we use this data to understand the past trends and future projections of retail industry supply chains. To drive insights, we augment this financial data with information that we have obtained through interactions with retail clients and recent insights from our quantitative research studies.
■Objective: To use financial balance sheet data coupled with recent research to better understand the state of retail supply chains.
■Hypothesis: With the shifts in the channel, the role of the store has changed, and there is a need to redefine value in the value chain.
Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail-18 FEB 2013Lora Cecere
The bricks and mortar retailer is being squeezed. Growth is slowing and margin is under pressure. With the rise of e-commerce, the role of the store is being redefined. It is about service and the customer experience. As a result, it is time to rethink the metrics that matter and focus outside-in on the shopper experience.
In this report, we share insights on the current state of bricks and mortar retail and offer our suggestions.
Brick & mortar retailers have weathered an intense decade with the persistent rise of e-commerce. The shopper has changed and recovery from the Great Recession is ongoing, but slow. Our previous Supply Chain Metrics That Matter: A Focus on Retail report focused on the broader industry trends affecting five different divisions of retailers and the challenges of multi-channel retail. This report narrows the focus to three segments of brick & mortar retailers struggling to adapt to the new world.
A retailer is not a retailer. We believe that retailers should be compared by business model. We do not believe that one can throw all retailers together and identify the “most improved” or “best” supply chain. There are too many variables and circumstances affecting the retail landscape to make valid comparisons. In our research, we find that small and well-defined peer groups offer the best way forward for understanding both segment and industry specific trends.
The industry segments analyzed in this report are grocery, mass and specialty. Grocery retailers are involved in the sale of perishable and non-perishable food stuffs. Mass retailers are larger companies focused on providing a comprehensive retail experience to their customers. Finally, specialty retailers are dedicated to specific customers, activities and goods. The companies in this analysis represent both American and global retailers.
Our grocery peer group consists of Carrefour, Delhaize Group, Safeway and The Kroger Co. The mass retailer peer group includes Costco, Metro, Target and Walmart. The choice of specialty retailers was by far the most difficult because there are so many dedicated stores in this category. For this publication, our peer group includes Bed Bath & Beyond, Dick’s Sporting Goods, Foot Locker and Ross Stores. Additional information about all of these companies is presented in the Appendix.
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 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 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 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, ...
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:
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).
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.
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 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.
The Supply Chain Index: Evaluating the Industrial Value Network - 18 AUG 2014Lora Cecere
Executive Overview
Supply chain performance matters. It can make or break corporate performance. 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.
By their nature, supply chain leaders are competitive. They want to drive performance improvements and increase corporate value. Their goal is to outpace competitors. 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 by Supply Chain Insights, 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.
While it is easy to say the term supply chain excellence, it is difficult to define. Many people think that they know the definition, but there is no agreed-upon standard. The lack of a clear definition, and a methodology to measure improvement, makes progress hard to quantify and track.
The Supply Chain Index is designed to help. It is an objective measurement of supply chain improvement. It enables the comparison of companies’ progress within a peer group for a given time period. The Index is based upon financial performance of companies on four metrics integral to supply chain operations: Year-over-Year Revenue Growth, Return on Invested Capital, Inventory Turns, and Operating Margin. In building the Supply Chain Index, we had three goals:
1. Quantify Levels of Supply Chain Improvement. The Index is a composite metric based on the calculation of balance, strength and resiliency factors for a given time period. Each factor is measuring the pattern of performance over time. In the analysis, there is an underlying assumption that the companies that can sustain the best improvement in these three areas are driving the highest rates of supply chain improvement. The input metrics of Year-over-Year Revenue Growth, Return on Invested Capital, Inventory Turns, and Operating Margin were selected in part due to their high correlation to market capitalization.
2. Bridge the Gap between Finance and Supply Chain. Our second goal is to bridge the gap between the supply chain organization and the financial team...
State of Transportation: Where Are We on the Vision of Automation? - 7 NOV 2012Lora Cecere
For the purpose of this report, transportation management is defined as technologies that automate and improve decision making in domestic and international logistics.
This report is based on a quantitative study conducted between August 16th, 2012 and October 9th, 2012. The summary reflects responses from 75 respondents from 55 companies active in transportation freight decisions. The goal of the study was to understand how business complexity and maturity have affected the deployment and development of supply chain technologies to improve transportation management. The study contrasts the views of line-of-business transportation solution users and providers of the technologies.
The quantitative study results are enriched with insights from Supply Chain Insights’ work on supply chain ratios and interviews with business leaders to validate and clarify the results.
Supply Chain Metrics That Matter: A Focus on the High-Tech Industry - 2015Lora Cecere
Executive Summary: Current State of the High-Tech Industry
Globalization. Commodity inflation. Margin squeeze. Economic uncertainty. Warranty issues. Shortening product life cycles. Recalls. Labor arbitrage and outsourcing. The list of market pressures could go on and on, but one thing is clear: the high-tech industry was redefined over the course of the last decade. In Table 4 we show the progress of discrete industries for the periods of 2006-2014 and 2011- 2014. Notice there is more red (lack of progress) than green (progress) in the industry trends.
Table 4. Supply Chain Performance by Industry within the Discrete Industries
High-tech companies have the most advanced practices for inventory management, planning and analytics. They are just treading water (keeping slightly ahead of the market dynamics). The rate of change drives innovation. Within this industry there are more supply chain innovators taking a hard look and driving the adoption of prescriptive analytics and canonical value network infrastructures.
Taking a closer view at the value chain of the sub-industries within high-tech, i.e. consumer electronics, B2B Electronics, and semiconductor industries, the impact of the industry drivers and the importance of supply chain performance becomes clearer.
Table 5. Supply Chain Performance by Industry within the High-Tech Sector
The entire value chain is struggling to maintain margins and improve inventory turns. For consumer electronics and B2B electronics, growth is down, operating margins are degrading and inventory turns worsening. Supply chain matters more than ever.
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.
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.
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 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.
The Supply Chain Index: Evaluating the Healthcare Value NetworkLora Cecere
Executive Overview
Supply chain performance matters. It can make or break corporate performance. 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.
By their nature, supply chain leaders are competitive. They want to drive performance improvements and increase corporate value. Their goal is to outpace competitors. 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 by Supply Chain Insights, there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology, there now is.
While it is easy to say the term supply chain excellence, it is difficult to define. Many people think that they know the definition, but there is no agreed-upon standard. The lack of a clear definition, and a methodology to gauge improvement, makes progress hard to quantify and track. The Supply Chain Index is designed to help. It is an objective measurement of supply chain improvement. It enables the comparison of companies’ progress within a peer group for a given time period. The Index is based upon financial performance of companies on four metrics integral to supply chain operations: inventory turns, operating margin, Return on Invested Capital and year-over-year revenue growth. There were three goals.
1. Quantify Levels of Supply Chain Improvement. The Index is a composite metric based on the calculation of balance, strength and resiliency factors for a given time period. In the analysis, there is an underlying assumption that the companies that can sustain the best improvement in these three areas are driving the highest rates of supply chain improvement. The input metrics of inventory turns, operating margin, ROIC and year-over-year revenue growth were selected in part due to their high correlation to market capitalization.
2. Bridge the Gap between Finance and Supply Chain. Our second goal is to bridge the gap between the supply chain organization and the financial team. While the financial team is often backwards-looking at transactions, the supply chain team is forward-looking based on flows. There is often a temptation to focus on a single financial ratio in isolation, like inventory turns, not realizing that the supply chain is a complex system with tightly interrelated relationships amongst metrics based on supply chain potential.
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.
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.
Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies - 2015Lora Cecere
Executive Summary: Current State of Food and Beverage Industries
Over the last decade, consumer confidence in the food and beverage industry supply chains has waned. Shopper distrust is high; and as a result, growth in many categories like carbonated beverages and cereals declined.
While these two industries have similarities, there are different underlying dynamics in business drivers. The potential of the food supply chain is different than that of beverage. As a result, in this report, we share information on the two industries separately.
For both industries, the last decade was a tough market. Despite attempts to stimulate demand through trade programs, new product launch, and product expansion into new continents, growth declined. In 2003-2006, growth in the food industry was 7% while in 2011-2014, year-over growth was 4%. In parallel, in 2003-2006, growth in the beverage industry was 22%; yet, in 2011-2014, it was 7%. As growth declined, supply chain maturity mattered more than ever. Most companies were not equal to the challenge.
Traditional marketing tactics are not as effective in these two industries as they were a decade ago. To try to stimulate growth, 33% new items were introduced into the retail chain from these two industries. This rise in complexity reduced the effectiveness of the supply chain at a time of declining volumes. In Table 4, we profile the results in the food industry, while in Table 5 we portray the trends in the beverage industry.
In both industries, operating margin declined despite improved productivity in revenue per employee. In parallel, despite multiple investments in technologies, inventory turns declined in the food industry. Companies were unable to balance metrics in times of declining volumes. The reason? Rising commodity costs and the slow development of supply chain skills.
Companies that did the best in driving improvement in key metrics in times of declining volumes have seven characteristics: core competency in network design; strong capabilities in transportation management; a focus on inventory management; use of more advanced forms of supply chain planning; balance and understanding of the trade-offs of volume, price and mix; use of channel data; and continuity of leadership.
Table 4. Progress on the Effective Frontier for Food Companies
Table 5. Progress on the Effective Frontier for Beverage Companies
When we compiled the Supply Chains to Admire Report in August 2014, two food and beverage companies—General Mills and ABInBev—made the list. To make the list, a company had to deliver performance (posting above-average results for the period of 2009-2013 when compared to their peer group on a portfolio of metrics including operating margin, inventory turns and Return on Invested Capital). They also had to drive supply chain improvement (based on the Supply Chain Index as defined in the Research Methodology section) faster than their peer group. We believe b
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 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.
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.
The Supply Chains to Admire™ analysis is an annual study of supply chain excellence. Now in its fifth year of development, the focus of this research is to better understand supply chain performance and improvement of 655 publicly held companies in 28 peer groups for the period of 2010-2017. This year there are 31 winners! At the 2018 Supply Chain Insights Global Summit, winners from the analysis will share insights on driving supply chain excellence.
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.
Imagine the Supply Chain of the Future - 21 OCT 2014Lora Cecere
Executive Overview
When we ask companies to imagine the supply chain of the future, they have to start with what they have today. Most companies today are stuck, and find it hard to conceive the supply chain of the future. To free their thinking they have to learn from the past, to unlearn what they believe is a world of best practices, and establish methodologies to imagine the supply chain of the future. Changing traditional paradigms is a starting point.
For most, the journey is not easy. As shown in Figure 1, the terms most commonly used to describe the supply chain today are traditional, tactical, and cautious. Today there is significant room for improvement, with only one in three supply chain leaders feeling that what they have now is working well. Most of the supply chain processes are inside-out which is a barrier to sensing demand and building demand-driven or market-driven processes.
The incentive to change lies in balance sheet performance. When we analyze financial balance sheet performance for the period of 2006-2013, we find that nine out of ten companies are stuck at the intersection of the two critical metrics of operating margin and inventory turns. Publicly-held companies are unable to power improvements in both metrics for more than two consecutive years. For most, improvement has become an OR condition with companies making improvements in one of the two metrics, but not both together. This is an area of frustration and disappointment for business leaders that want to leverage supply chain technologies and processes to deliver both cash and cost savings to the organization. As growth slows, this shift is more important. In this report, we share highlights on the research gathered for our recent conference, Supply Chain Insights Global Summit.
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Now in its eighth year, the Supply Chains to Admire methodology charts the progress of companies to drive financial results for their companies through their supply chain process. Companies that drive improvement while outperforming their peer group in the metrics of growth, margin, inventory turns, and Return on Invested Capital make it to the Winner's Circle. This year, there are 20 winners. Their stories are shared through case studies and presentations at the Supply Chain Insights Global Summit. The goal is to understand what makes a difference.
In this presentation, we share the industry results by industry along with the analysis of industry winners.
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Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
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The effects of customers service quality and online reviews on customer loyal...
Supply Chain Metrics That Matter – A Focus on Auto Parts Companies 19 SEP 2017
1. A Focus on Auto Parts Companies
A Seven-Year View of Progress on Supply Chain Excellence
9/19/2017
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
A Closer Look at Auto Parts 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
Endnotes
3
3
4
6
11
13
14
15
16
27
28
29
30
31
31
31
32
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 Auto Parts industry for the period of 2010-2016. Here we
analyze how companies made trade-offs to balance growth, profitability, cycles and complexity.
Within the world of supply chain management, each industry is unique. We believe 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 managed with a focus on a balanced portfolio of metrics, over time, by peer
group. In this series of reports, we analyze the potential of each 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
While our last report, Supply Chain Metrics That Matter – A Focus on Automotive Companies,
focused on the shifts in the auto market—electric vehicles, autonomous cars, and shared car
ownership—the challenge of the automotive parts industry is keeping up with the technological
innovation of automotive assembly brands. As new cars emerge based on artificial intelligence
technology and electric engines, the variety of auto parts is expanding and supply chain processes
are becoming more complex. Complexity and innovation challenges reliability. The past decade
experienced an exponential shift in repair and warranty issues stemming from a myriad of quality
problems
To better understand the industry in relation to supply chain management, let’s start by looking at it
within the larger context of the automotive value network. As shown in Table 1, the impact of the
recession, with an attendant decrease in consumer spending, drove growth rates of 10% in the
aftermarket parts industry. This is more than double the growth rates of the other industries included
in the table for the automotive value network.
Table 1. Industry Overview of Trends for the Period of 2010-2016
5. Page 5
Over 4,000 suppliers are required for final car assembly. Many of the leaders in this industry, and
outlined in this report, are unknown names by the average consumer or stock trader, but their
contribution is vital to the automotive value chain. Many are 1/3 or ¼ the size of their downstream
automotive assemblers. During 2010-2016, no major automotive company initiated and executed a
value network platform. The Covisint supply chain operating network was largely a failure.
In this industry, there are more sticks than carrots. Over the course of the last decade, the sticks
became bigger and the carrots smaller. As a result, all the elements of cash-to-cash degraded and
costs and inventory increased. While data is shared freely, supplier and/or buying relationships are
largely adversarial. The automotive industry lacks supplier development programs, innovation
networks, and collaboration on shared outcomes. The traditional model with a focus on sticks and
buyer penalties is a barrier to change and driving value.
Autonomous vehicles and electric cars will drive massive change. In the past, the automotive parts
industry manufactured standard parts continuously. Parts were updated to match newer models. This
is changing. The arrival and growing popularity of electric vehicles will double the amount of batteries
sold to consumers.
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 results as shown in Figure 1. As will be seen in this report, this is not the case
in the automotive industry.
Figure 1. Driving Performance Improvement
In the automotive parts industry, Autoliv Inc. (Autoliv) is the supply chain leader. In our 2017 Supply
Chains to Admire research, Autoliv drove greater metrics improvement, and higher performance in its
supply chain, than any other competitor in the auto parts industry
To understand the Supply Chains to Admire methodology, let’s take a closer look at the concept of
orbit charts. In Figure 2, the performance of Autoliv and WABCO Holdings are charted with year-over-
year performance at the intersection of inventory turns and operating margin. The patterns are used
to define supply chain excellence.
WABCO manufacturers vehicle controls, and Autoliv makes safety systems. As can be seen in Figure
2, the average operating margin for Autoliv for the period of 2010-2016 is 8%, while WABCO
Holdings is higher at 12%. Inventory turns for Autoliv are 10 versus 9.6 for WABCO Holdings.
7. Page 7
Figure 2. Orbit Chart of Autoliv Inc and WABCO Holdings
So why, you might ask, do we believe Autoliv’s performance is better than WABCO’s, when WABCO
has a much better operating margin for the period? The patterns tell the story. It is a story of supply
chain resiliency. The tight pattern of continuous improvement makes Autoliv a winner. The wide
performance swings of WABCO Holdings show a lack of metrics control.
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.
Patterns of supply chain metrics come in many different forms. Note that in Figure 3, Gentex, an
electro-optical company is performing at a higher level of value, with an operating margin of 26% and
inventory turns of 95.1. However, Gentex’s performance in inventory shows a sharp downturn in
8. Page 8
2007-2009. Gentex is less resilient than Danaher. (Danaher is a provider of tools and motion-sensing
equipment.) While Danaher is a recognized leader in Lean process management, which leads to
more reliable behavior, they are not driving the level of performance of Gentex. Danaher’s
performance is at a lower level, with greater reliability.
Across the industries, companies struggle to balance improvement with performance. The stronger
the performance of a company, the harder it is to drive improvement. An analogy is that of a lean
athlete in top performance. When individuals train, it is easier to drive lean muscle mass for the unfit.
For a top tier athlete, the rate of performance improvement is slower.
Figure 3. Orbit Chart of Gentex Corporation and Danaher
In a similar manner, note the patterns of Johnson Controls and Valeo. There is continuous
degradation in Johnson Controls’ performance, and steady improvement in Valeo’s operating
9. Page 9
margins. While our methodology rewards improvements in a balanced portfolio of operating margin
and inventory turns, few would argue that Valeo is performing with a preferred pattern to Johnson
Controls.
Figure 4. Orbit Chart of Johnson Controls and Valeo
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.
The only company to meet the criteria of driving improvement, and outperforming on a balanced
portfolio of metrics, while posting value higher than their peer group in the auto parts industry is
Autoliv Inc.
10. Page 10
Figure 5. Overview of the Supply Chains to Admire Analysis
Figure 6. Winners of the 2017 Supply Chains to Admire Analysis
11. Page 11
Note the short list of 24 companies for the 2017 Supply Chains to Admire Award winners. In the
automotive value chain, only Autoliv, Bridgestone, and Fuji Heavy Industries made the list.
A Closer Look at Auto Parts Manufacturers’ Growth
Through the Great Recession consumers slowed the rate of automotive purchases and focused on
maximizing vehicle life to preserve their investment. While we shared performance patterns in Figures
2-4 to help the reader, in Table 2 we contrast growth with improvement in the Metrics That Matter as
measured by the Supply Chain Indexi. The Supply Chain Index is a vector analysis of improvement at
the intersection of operating margin and inventory turns, and growth and Return on Invested Capital.
Table 2. Growth and the Supply Chain Index in the Automotive Parts Industry
12. Page 12
Gentherm, LKQ Corp, and Motorcar Parts of America enjoyed the highest levels of growth. However,
there is also no correlation between growth and improvement. While most industries show greater
rates of performance improvement with higher growth rates, this is not the case in the auto parts
industry. Much of this can be attributed to the integration of new product launch, and other horizontal
processes like S&OP and supplier development. The auto parts industry is still rather immature in
supply chain practices, lagging the high-tech and electronics industries.
Post-recession growth was 50% of pre-recession sales. This is due to more and more consumers
holding onto cars longer and maximizing the value of the asset.
13. Page 13
Value
Traditional supply chain leaders focus on costs, not on value. There is no industry-standard definition
for value. Here we share the results on two value metrics: market capitalization and Price to Tangible
Book Value. For the industry, the Price to Tangible Book Values are low. Danaher is the top
performer based on reliability.
Table 3. Company Overview of Market Capitalization and Price to Tangible Book Value
14. Page 14
Performance
Cost improved while inventory turns steadily declined from 2004 through 2016. This is due to a
continuous focus by upstream assemblers to reduce procurement costs and push inventory back into
the supply chain.
Inventory turns were at 10.3 during the 2007-2009 period while revenue growth was at a staggering
1%. There are many factors. Auto companies pushed Just-in-Time programs and forced the suppliers
to hold more inventory, while the complexity of platforms and make/models increased the cost of
components.
Table 4. Company Overview and Performance for Automotive Parts Companies
15. Page 15
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
receivables increased from downstream customers, the industry elongated payables, improving cash-
to-cash. The impact penalizes their suppliers.
The industry is regressing on all three factors of cash-to-cash. This is largely due to the buy/sell
relationship with the automotive brand owner. Over the decade, costs, inventory, and cash
requirements were progressively pushed backwards in the value chain. This value chain is ripe for a
redesign to improve value versus a focus on mitigating costs.
Table 5. Impact on Cash-to-Cash Elements
16. Page 16
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.” Significant trends for the period of
2014-2016 were a scramble for growth in the expanding Chinese market, an increase in recalls and
warranty issues, coping with globalization, increasing regulation, and the management of suppliers.
The primary focus was reducing costs.
Note that no industry player during this period made a significant improvement in building a value
network with their suppliers. Using portals, and EDI documents for data sharing, the industry is ripe
for change. Here we share relevant excerpts from annual reports:
2014
Autoliv Inc.
Starting in 2014 we put further focus on globalizing our products and processes through our “one product one
process” (1P1P) strategy. This combined with initiatives to reduce costs for components from external
suppliers, ensures that we continuously optimize our supply base footprint, consolidate purchase volumes to
fewer suppliers, improve productivity in our supply chain, standardize components and redesign our products.
In 2014-2016, raw material commodity cost was reduced by around $90 million compared to the beginning of
2014. To reduce labor costs while offsetting the price erosion on our products, we continuously implement
productivity improvement programs, expand production in Best Cost Countries [BCC] and institute restructuring
and capacity alignment activities. The productivity improvements in Autoliv’s manufacturing were
approximately 6% for every year during the last three-year period. This is well in line with our productivity
improvement target of at least 5% per year, which helps us to partly offset the price reductions to our
customers. The level of employees in the BCCs has increased to 75% in 2016 from 74% in 2014. These
changes, in combination with our restructuring activities and several other actions, were almost enough to
offset the market price erosion during the three-year period. As a result, total personnel costs in relation to
sales in 2016 were unchanged at 22.4% from 2014, despite a higher number of engineers and technicians to
support investment in R,D&E and vertical integration.
The number of vehicles recall in the automotive industry has risen sharply over the last few years, beginning in
2014, a year influenced by a massive recall of the General Motors ignition switch. In 2015 and 2016 the Takata
airbag inflators recall created further record years. Although we continue to strive for the highest quality in our
processes, it is difficult to predict future significant recalls. We expect overall recall numbers to remain high for
years to come, and it cannot be ruled out that we may be adversely impacted by a future recall. For Autoliv
quality has always been our number one priority and we continue to sharpen our focus in this area. We now
command a market share of 39%1
1
Annual Report 2014, February 19, 2015, p. 12, https://www.autoliv.com/Investors, accessed August 28, 2017
17. Page 17
Gentex Corp.
Automotive Industry 97% of our net sales are to customers within the automotive industry. The automotive
industry has always been cyclical and highly impacted by levels of economic activity. The current economic
environment, while improving, continues to be uncertain (especially in Europe and the Japan and Korean
markets, which collectively are larger for us than North America as shipping destinations) and continues to
cause increased financial and production stresses evidenced by volatile production levels, volatility with
customer orders, supplier part shortages, automotive plant shutdowns, customer and supplier financial
issues/bankruptcies, commodity material cost increases, consumer preference shift to smaller vehicles, where
we have a lower penetration rate and lower content per vehicle, and supply chain stresses. If automotive
customers (including their Tier 1 suppliers) and suppliers experience bankruptcies, work stoppages, strikes,
part shortages, etc., it could disrupt our shipments to these customers, which could adversely affect our
business, financial condition, and/or results of operations. Automakers continue to experience volatility and
uncertainty in executing planned new programs, which result in delays or cancellations of new vehicle
platforms, package configurations, and inaccurate volume forecasts. This challenge makes it difficult for us to
forecast future sales and manage costs, inventory, capital, engineering, research and development, and
human resource investments.2
Supply Chain Disruptions Due to the just-in-time supply chains within the automotive industry, a disruption in a
supply chain caused by one or more of our suppliers and/or an unrelated tier one supplier due to part
shortages, natural disasters, work stoppages, strikes, bankruptcy, etc. could disrupt our shipments to one or
more automakers or Tier 1 customers, which could adversely affect our business, financial condition, and/or
results of operations.3
Company net sales increased by $72.3 million, or 7% compared to the prior year. Automotive net sales
increased by 6% on a 10% increase in auto-dimming mirror shipments, from 23.8 million units in 2012 to 26.2
million units, primarily reflecting increased overall penetration of auto-dimming mirrors. North American
automotive mirror unit shipments increased 6% in 2013 compared with the prior year, primarily due to
increased penetration of the Company’s exterior auto-dimming mirrors, as well as a 5% year over year
increase in North American light vehicle production. International automotive mirror unit shipments increased
13% in 2013 when compared with the prior year, primarily due to increased penetration of both interior and
exterior auto-dimming mirrors to certain European and Japanese automakers, in spite of flat vehicle production
in Europe and a 4% decline in vehicle production in the Japanese/Korean markets on a year over year basis.4
WABCO Holdings Inc.
Most of our manufacturing sites and distribution centers produce and/or house a broad range of products and
serve different types of customers. Currently, approximately 69% of our manufacturing workforce is located in
best cost countries such as China, India, Brazil and Poland up from approximately 45% in 2007. Facilities in
best cost countries have historically helped reduce costs on more labor-intensive products, while the facilities
in Western Europe are focused on producing more technologically advanced products. However, the
increasing need for more advanced products and systems in emerging markets leads us to expand local
2
Annual Report 2014 Products That Look Out For You, February 23, 2015, p. 19, ir.gentex.com/financials-and-filings/annual-reports-
and-proxy-statements, accessed August 28, 2017
3
Annual Report 2014 Products That Look Out For You, February 23, 2015, p. 21, ir.gentex.com/financials-and-filings/annual-reports-
and-proxy-statements, accessed August 28, 2017
4
Annual Report 2014 Products That Look Out For You, February 23, 2015, p. 27, ir.gentex.com/financials-and-filings/annual-reports-
and-proxy-statements, accessed August 28, 2017
18. Page 18
supply chain capabilities to progressively cover more complex manufacturing. All facilities globally are
deploying Six Sigma Lean initiatives to continuously generate productivity and improve service levels. By
applying the Six Sigma philosophy and tools, we seek to improve quality and predictability of our processes.
Lean is geared toward eliminating waste in our supply chain, manufacturing and administrative processes.
Methodologies are customer driven and data based. In addition, our global supply chain team makes decisions
on where to manufacture which products taking into account such factors as local and export demand,
customer approvals, cost, key supplier locations and factory capabilities. Our global sourcing organization
purchases a wide variety of components—including electrical, electromechanical, cast aluminum products and
steel, as well as copper, rubber and plastic containing parts—that represent a substantial portion of
manufacturing costs. We source products on a global basis from three key regions: Western Europe, Central
and Eastern Europe, and Asia. To support WABCO’s continuing shift of manufacturing to best cost countries,
we also continue to shift more of our sourcing to best cost regions. Under the leadership of the global sourcing
organization, which is organized around commodity and product groups, we identify and develop key suppliers
and seek to integrate them as partners into our extended enterprise. Many of our Western European suppliers
are accompanying us on our move to best cost countries. Since 2007, the share of our sourcing from best cost
regions has increased from 36% to approximately 44%. We have developed a strong position in the design,
development, engineering and testing of products, components and systems. We are generally regarded within
our global industry as a systems expert, having in-depth technical knowledge and capabilities to support the
development of advanced technology applications. Key customers depend on us and will typically involve us
very early in the development process as they begin designing next generation platforms. We have
approximately 1,874 employees dedicated to developing new products, components and systems as well as
supporting and enhancing current applications and manufacturing processes. Our sales organization hosts
application engineers that are based near customers in different regions around the world and are partially
resident at some customer locations. We also have significant resources in best cost countries where we
perform functions such as drawings, testing and software component development. We operate test tracks in
Germany and India as well as in Finland for extreme weather test conditions.5
Allison Transmission
Our manufacturing strategy provides for distributed capability in manufacturing and assembly of our products
for the global commercial vehicle market. Our primary manufacturing facilities, located in Indianapolis, Indiana,
consist of approximately 2.3 million square feet of usable manufacturing space in six plants. We also have
established customization and parts distribution in the United States, The Netherlands, Brazil, China, Hungary,
India and Japan, and plants in Chennai, India and Szentgotthard, Hungary. Our high volume on-highway
products are produced in multiple global locations while off-highway, hybrid-propulsion and defense tracked
products are produced in Indianapolis.
A significant amount of the part numbers that make up our transmissions are purchased from outside
suppliers, and during 2014, we purchased approximately $750.0 million of direct materials and components
from outside suppliers. The largest elements of our direct spending are aluminum and steel castings and
forgings that are formed by our suppliers into our larger components and assemblies for use in our
transmissions. However, our spending on aluminum and steel raw materials directly and indirectly through our
purchase of these components constituted approximately 10% of our direct material and component costs in
2014. The balance of our direct and indirect materials and components costs are primarily composed of value-
added services and conversion costs. Our supply contracts, along with an intensive supplier selection and
performance monitoring process, have enabled us to establish and maintain close relationships with suppliers
5
WABCO 2014 Annual Report, February 19, 2015, p. 9, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
19. Page 19
and have contributed to our overall operating efficiency and industry-leading quality.6
In 2014, approximately 75% of our total spending on components was sourced from approximately 40
suppliers. All of the suppliers from which we purchase materials and components used in our business are fully
validated suppliers, meaning the suppliers’ manufacturing processes and inputs have been validated under a
production part approval process (“PPAP”). Furthermore, there are only a limited number of suppliers for
certain of the materials used in our business, such as corrosion-resistant steel. As a result, our business is
subject to the risk of additional price fluctuations and periodic delays in the delivery of our materials or
components if supplies from a validated supplier are interrupted and a new supplier must be validated or
materials and components must be purchased from a supplier without a completed PPAP. Any such price
fluctuations or delays, if significant, could harm our profitability or operations. In addition, the loss of a supplier
could result in significant material cost increases or reduce our production capacity. We also cannot guarantee
we will be able to maintain favorable arrangements and relationships with these suppliers. An increase in the
cost or a sustained interruption in the supply or shortage of some of these raw materials or components that
may be caused by a deterioration of our relationships with suppliers or by events such as natural disasters,
power outages, labor strikes, or the like could negatively impact our business, results of operations and
financial condition. Although we have agreements with many of our customers that we will pass such price
increases through to them, such contracts may be cancelled by our customers and/or we may not be able to
recoup the costs of such price increases. Additionally, if we are unable to continue to purchase our required
quantities of raw materials on commercially reasonable terms, or at all, if we are unable to maintain or enter
into purchasing contracts for commodities, or if delivery of materials from suppliers is delayed or non-
conforming, our operations could be disrupted or our profitability could be adversely impacted.7
2015
Autoliv Inc.
Our One Product One Process ("1P1P") strategy towards global standardization picked up momentum in 2015
with the new operating model in place. The objective is to improve management of our cost base by reducing
complexity in our products, components and manufacturing processes. Doing this, we aim to: Improve total
cost to increase profitability; apply lessons learned to increase robustness and prevent incidents; and create
increased customer satisfaction and value. With 1P1P we drive standardization and cost reduction in our core
products and customer features without sacrificing the need for customer variations in our product designs.
Day-to-day 1P1P is executed with a global mindset in the areas of product design (One Product), supplier
management (Global Sourcing) and knowledge transfer within Autoliv and our partners (Lessons Learned).
The standardization process is driven by global cross functional teams with the authority and responsibility to
manage one or several product families. This ensures that best practices, lessons learned and other product
related knowledge is properly and efficiently collected, transferred and applied into product and production for
both existing products and new customer developments throughout Autoliv and to our partners. The
standardization decision is based on the total cost of the life time business case and the reduced complexity
also allows us to optimize logistics and supply chain management. Besides translating Autoliv’s vision into
reality, 1P1P supports our annual cost efficiency targets: • Consolidate supply base through global sourcing to
optimize cost without compromising service and knowledge • Reduce direct material costs by at least 3% •
Improve labor productivity by at least 5%. BASE Through 1P1P we can more efficiently focus on global
6
Heritage of Excellence 2014 Annual Report, February 20, 2015, p. 12,
http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual, accessed August 28, 2017
7
Heritage of Excellence 2014 Annual Report, February 20, 2015, p. 20,
http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual, accessed August 28, 2017
20. Page 20
sourcing to gain leverage and optimize our supplier footprint in order to improve quality, and reduce risk and
cost. In 2015, we reduced number of suppliers by 10% (see graph). We targeted to reduce the number of
supplier groups to 1,000 by the end of 2016 from the peak of 1,600. Approximately half of our revenues are
spent on direct materials (DM) from external suppliers. The raw material content in these components costs
currently represents 50% of the direct material cost, while the other 50% represents the value added by our
supply base (for more details, see "Component Costs" on page 55). Our strategy to mitigate higher commodity
prices is to develop more cost-efficient designs, for example by replacing steel with reinforced plastics. This
often reduces weight, an important added advantage in the continuing pursuit for more fuel efficient vehicles.
By standardizing components we reduce complexity and gain cost advantages. By doing this we have met our
direct material cost reduction target of at least 3% every year, except in 2011 when steel prices increased
significantly. In 2015, the estimated net savings for direct materials were 4.4%.8
2014 and 2015 saw significant changes in Autoliv’s competitive landscape. TRW, a key competitor in passive
safety, was acquired by German group ZF Friedrichafen during 2015. The new company is the third largest
automotive supplier globally. The other main competitor in passive safety, Takata, experienced severe issues
and subsequent recalls, particularly in the United Sates, related to malfunctioning airbag inflators which has led
to significant costs for them. The third largest competitor in passive safety, Key Safety Systems, announced in
February 2016 that it had agreed to be acquired by Ningbo Joyson Electronic Corp. In the Electronics market
our competitors includes Continental, Bosch, Denso, TRW, Delphi, Mobis and Hella of which we believe
Continental and Bosch have strong positions.9
Changes in component costs and raw material prices could have a major impact on margins, since the cost of
direct materials is approximately 54.3% of sales. Autoliv does not generally buy raw materials, but rather
purchases manufactured components (such as stamped steel parts and sewn airbag cushions). In spite of this,
raw material price changes in Autoliv’s supply chain could have a major impact on its profitability since
approximately 50% of the Company’s component costs (corresponding to 27% of net sales) are comprised of
raw materials. The remaining 50% are value added by the supply chain.10
Gentex Corp.
Pricing Pressures. We continue to experience on-going pricing pressures from our automotive customers and
competitors, which have affected, and which will continue to affect our profit margins to the extent that we are
unable to offset the price reductions with engineering and purchasing cost reductions, productivity
improvements, increases in unit shipments of mirrors and electronics with advanced features, each of which
pose an ongoing challenge, which could adversely impact our business, financial condition, and/or results of
operations.11
Company net sales increased by $168.1 million, or 12% compared to the prior year. Automotive net sales
increased due to a 14% increase in automatic-dimming mirror shipments, from 29.0 million units in 2014 to
33.0 million units in 2015, primarily reflecting increased overall penetration of automatic-dimming mirrors. North
American automotive mirror unit shipments increased 13% in 2015 compared with the prior year, primarily due
to a 37% increase in shipments of the Company’s exterior automatic-dimming mirrors and a 5% increase in
shipments of interior automatic-dimming mirrors, each on a year over year basis. International automotive
8
Annual Report 2015, February 19, 2016, p. 12, https://www.autoliv.com/Investors, accessed August 28, 2017
9
Annual Report 2015, February 19, 2016, p. 44, https://www.autoliv.com/Investors, accessed August 28, 2017
10
Annual Report 2015, February 19, 2016, p. 55, https://www.autoliv.com/Investors, accessed August 28, 2017
11
Annual Report 2015, February 23, 2016, p. 25, ir.gentex.com/financials-and-filings/annual-reports-and-proxy-statements, accessed
August 28, 2017
21. Page 21
mirror unit shipments increased 14% in 2015 when compared with the prior year, primarily due to increased
penetration of both interior and exterior automatic-dimming mirrors to certain European and Japanese
automakers. Other net sales increased 4% to $36.7 million compared to the prior year, as dimmable aircraft
window sales increased 6% year over year and fire protection sales increased 2% year over year.
Cost of Goods Sold. As a percentage of net sales, cost of goods sold increased from 60.8% in 2014 to 60.9%
in 2015, primarily due to annual customer price reductions and foreign currency fluctuations, which were
essentially offset by purchasing cost reductions and product mix. Purchasing cost reductions impacted cost of
goods sold as a percentage of net sales by approximately 100 – 125 basis points. All of the remaining factors
is estimated to have impacted cost of goods sold independently as a percentage of net sales by approximately
50 basis points.12
WABCO Holdings Inc.
WABCO’s early globalization has enabled outstanding customer connectivity. It fuels growth as we continue to
partner with every leading maker of trucks, buses and trailers in every region of the world. By anticipating our
industry’s globalization, WABCO can now firmly furnish OEMs with strategies for global platforms and
modularity.13
All facilities worldwide are deploying Six Sigma Lean initiatives and global standards to continuously generate
productivity and improve service levels. By applying Six Sigma policy, methodologies and tools, we seek to
improve quality and predictability of our processes on a continual basis. Lean is geared toward eliminating
waste in our supply chain, manufacturing and administrative processes. Methodologies are customer driven
and data based. In addition, our global supply chain team is tightly connected throughout regions and at each
site. They make decisions on where to manufacture which products taking into account such factors as local
and export demand, customer approvals, cost, key supplier locations and factory capabilities. WABCO’s global
manufacturing and logistics also support our customers in the aftermarket as we continue to perform at
industry-leading levels for ontime delivery and inventory fulfillment, among other drivers of customer
satisfaction.14
In the third quarter of 2015, we announced proposals to cease manufacturing operations at two production
facilities in Western Europe to preserve the our global competitiveness for certain mechanical products.
Pending the timing of the outcome of the formal processes, production could cease at our Meppel, Netherlands
facility by the second half of 2016, and at our Claye-Souilly, France plant in the second half of 2017, with
production being transferred to other facilities within WABCO’s globally integrated supply chain. In 2015,
WABCO officially opened a new production facility in Wroclaw, Poland to support our supply chain initiative to
provide additional capacity in best cost countries. In addition to manufacturing capability, this new facility also
includes administrative offices for the newly created WABCO General Accounting Team, a centralized service
center for some of WABCO’s administrative functions.15
Allison Transmission
In 2015, we introduced several new bus and coach transmission models which feature industry-leading product
enhancements and our newest fuel efficient technology—collectively they are marketed as the xFE™
12
Annual Report 2015, February 23, 2016, p. 35, ir.gentex.com/financials-and-filings/annual-reports-and-proxy-statements, accessed
August 28, 2017
13
WABCO 2015 Annual Report, February 11, 2016, p. 5, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
14
WABCO 2015 Annual Report, February 11, 2016, p. 11, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
15
WABCO 2015 Annual Report, February 11, 2016, p. 12, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
22. Page 22
transmissions. This patented Allison technology has demonstrated fuel economy improvements of up to 7
percent in city bus duty cycles. As an added benefit for original equipment manufacturers (OEMs), the space
required to install these new transmissions is the same as our current B 400R and T 310R bus transmission
models which allows for seamless vehicle integration. These new models are upgrades of existing reliable
products using many of the same components. The Ann Arbor Area Transportation Authority in Michigan
received the first xFE equipped bus during a ceremony at their facility this past year, and we are excited about
the interest this new product is generating. The xFE transmissions and the Allison H 40/50 EP™ hybrid
propulsion systems offer transit fleet operators the ability to decide which mode of technology best fits their
business. Even with global off-highway end market condition challenges, we continue to upgrade existing
products for the global hydraulic fracturing and pressure pumping market through innovative and cost effective
development initiatives. One of the outcomes of this strategy has been our new 3,200 horsepower pressure
pumping transmission, known as the 9832 Oil Field Series™ (OFS), which began field testing in 2015 and has
joined our existing OFS product line. Pressure pumping operators who desire higher horsepower will
appreciate the smooth and precise shifting ability and gear ratios that this new transmission provides. The
launch of the 9832 OFS transmission provides a higher power-toweight ratio and substantiates our belief that
next generation products can be built upon well-proven product architectures.16
We compete on the basis of product performance, quality, price, distribution capability and service in addition
to other factors. We face competition from numerous manufacturers of various types of transmissions for
commercial vehicles. We also face competition from manufacturers in our international operations and from
international manufacturers entering our domestic market. Furthermore, some of our customers are OEMs that
manufacture transmissions for their own products. Despite their transmission manufacturing abilities, our
existing OEM customers have chosen to purchase certain transmissions from us due to the quality, reliability
and strong brand of our transmissions and in order to limit fixed costs, minimize production risks and maintain
company focus on commercial vehicle design, production and marketing.17
2016
Autoliv Inc.
To reduce labor costs while offsetting the price erosion on our products, we continuously implement
productivity improvement programs, expand production in Best Cost Countries [BCC] and institute restructuring
and capacity alignment activities. The productivity improvements in Autoliv’s manufacturing were
approximately 6% for every year during the last three-year period. This is well in line with our productivity
improvement target of at least 5% per year, which helps us to partly offset the price reductions to our
customers. The level of employees in the BCCs has increased to 75% in 2016 from 74% in 2014. These
changes, in combination with our restructuring activities and several other actions, were almost enough to
offset the market price erosion during the three year period. As a result, total personnel costs in relation to
sales in 2016 were unchanged at 22.4% from 2014, despite a higher number of engineers and technicians to
support investment in R,D&E and vertical integration.18
At each stage of production, relies on internal or external suppliers in order to meet its delivery commitments.
In some cases, customers require that the suppliers are qualified and approved by them. Autoliv’s supplier
16
2015 Annual Report, February 19, 2016, p. 1, http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual,
accessed August 28, 2017
17
2015 Annual Report, February 19, 2016, p. 13, http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual,
accessed August 28, 2017
18
Annual Report 2016, February 23, 2017, p. 40, https://www.autoliv.com/Investors, accessed August 28, 2017
23. Page 23
consolidation program seeks to reduce costs but increases our dependence on the remaining suppliers. As a
result, the Company is dependent, in several instances, on a single supplier for a specific component.
However, this dependence is mitigated by the fact that we seldom are applying a specific manufacturing
technology. Consequently, we can often change suppliers, albeit with some costs and time for validation and
customer approval. Consequently, there is a risk that disruptions in the supply chain could lead to the
Company not being able to meet its delivery commitments and, as a consequence, to extra costs. This risk
increases as suppliers are being squeezed between higher raw material prices and the continuous pricing
pressure in the automotive industry. This risk also increases when our internal and external suppliers are to a
higher degree located in countries which have a higher political risk. The Company’s strategy is to reduce
these supplier risks by seeking to maintain an optimal number of suppliers in all significant component
technologies, by standardization and by developing alternative suppliers around the world. However, for
various reasons including costs involved in maintaining alternative suppliers, this is not always possible. As a
result, difficulties with a single supplier could impact more than one customer and product, and thus materially
impact our earnings.19
Gentex Corp
The Company utilizes the light vehicle production forecasting services of IHS Worldwide, and IHS current
forecasts for light vehicle production for calendar year 2017 are approximately 17.6 million units for North
America, 21.8 million for Europe and 13.2 million for Japan and Korea. The Company currently estimates that
top line revenue for calendar year 2017 will be between $1.78 and $1.85 billion. All estimates are based on
light vehicle production forecasts in the primary regions to which the Company ships product, as well as the
estimated option rates for its mirrors on prospective vehicle models and anticipated product mix. The Company
continues to see order rates and booked business that allow for these estimates despite modest vehicle
production increases in our primary markets. Continuing uncertainties, including: light vehicle production levels;
supplier part or material shortages; automotive plant shutdowns; sales rates in Europe, Asia and North
America; challenging macroeconomic and geopolitical environments; OEM strategies and cost pressures;
customer inventory management and the impact of potential automotive customer (including their Tier 1
suppliers) and supplier bankruptcies; work stoppages, strikes, etc., which could disrupt shipments to these
customers, make forecasting difficult. The Company is estimating that the gross profit margin will be between
39.0% and 40.0% for calendar year 2017. Historically, annual customer price reductions place significant
pressure on gross margin on an annual basis. However, given the current sales forecast and projected product
mix for 2017, the Company continues to believe it may be able to offset the majority of those annual customer
price reductions with purchasing cost reductions, operational efficiencies, and by leveraging fixed overhead.
The Company also currently estimates that its operating expenses, which include engineering, research and
development expenses and selling, general and administrative expenses are expected to be between $165
and $172 million for calendar year 2017, with the increase primarily due to staffing and benefit costs which
continue to support growth and the development of new business. The Company also plans to continue to
invest in selling and marketing efforts at a rate of growth that approximates the rate of sales growth for the
Company.20
19
Annual Report 2016, February 23, 2017, p. 54, https://www.autoliv.com/Investors, accessed August 28, 2017
20
Annual Report 2016, February 22, 201, p. 34, ir.gentex.com/financials-and-filings/annual-reports-and-proxy-statements, accessed
August 28, 2017
24. Page 24
WABCO Holdings Inc.
WABCO grew sales to $2.8 billion, up 8.7% in local currencies from a year ago, outperforming global truck and
bus production, which increased by 6% in 2016. WABCO’s Operating System, our globally standardized
management environment, responded with agility to rapidly changing and contrasting swings in regional
market demand. Moreover, it generated $83 million of supply chain productivity, an increase of 14.5% from a
year ago. At the same time, it delivered a record 7% conversion productivity in our factories. Our relentless
drive for lean operations delivered over $15 million cost savings in operating expenses in the past year.21
A fundamental driver of demand for our products is commercial truck and bus production. The number of new
commercial vehicles built fluctuates from year to year in different regions of the world. Nonetheless, over the
last five years, we have demonstrated our ability to outperform the market by increasing the amount of
WABCO content on each vehicle. During the five year period through 2016, WABCO’s European sales to truck
and bus (T&B) OEM customers, excluding the impact of foreign currency exchange rates, outperformed the
rate of European T&B production by an average of 4% per year.22
In 2016, we began selling our industry leading air disc brakes, vacuum pumps and telematics product in India,
seeding other new sources of additional sales. In South Carolina, U.S.A., our new stateof-the-art factory began
local delivery of MAXX air disc brake products to meet growing demand from customers based in North
America. This geographical expansion is compelling evidence of the successful globalization of WABCO’s
industry-leading air-disc brake technology. In 2016, we also transferred an additional 51 production lines into
existing factories in best cost countries, propelling sharp gains in productivity within our globally integrated
supply chain. Also in 2016, we further globalized our logistics network by opening a new distribution center in
Singapore to better serve Australia and 25 countries and territories in the Oceania region. We continued
investing in our Global Business Services, operating from Poland and India. A growing team of over 200
professionals drives productivity gains throughout WABCO’s operations worldwide by delivering continuous
process optimization for corporate functions.23
Executive Overview
In 2016, WABCO continued to strongly outperform the global market. During this year, global production of
trucks and buses greater than six tons increased by an estimated 6% globally, primarily driven by a 27%
increase in China where, unfortunately, the available content-per-vehicle for our products is still the lowest
across all regions. WABCO’s sales during the full year 2016 increased by 6.9% (8.7% excluding foreign
currency translation effects) compared with 2015, of which 1.9% was contributed by our acquisitions both on a
reported basis and excluding foreign currency translation effects. Our global aftermarket sales increased by
4.9% (6.3% excluding foreign currency translation effects) over this same period. WABCO is the first supplier
of advanced emergency braking systems (AEBS) homologated in Europe in accordance with European Union
regulations. WABCO’s OnGuardACTIVE™ AEBS for trucks and buses complies with European Union
regulations that went into effect in 2016. It detects moving, stopping and stationary vehicles ahead. It alerts the
driver via acoustic, visual and haptic signals. OnGuardACTIVE autonomously applies the brakes and can bring
the vehicle to a complete stop, helping to prevent or mitigate rear-end collisions.24
21
WABCO 2016 Annual Report, February 17, 2017, p. 2, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
22
WABCO 2016 Annual Report, February 17, 2017, p. 5, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
23
WABCO 2016 Annual Report, February 17, 2017, p. 6, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
24
WABCO 2016 Annual Report, February 17, 2017, p. 29, http://ir.wabco-auto.com/annuals-proxies.cfm, accessed August 28, 2017
25. Page 25
Allison Transmission
Suppliers and Raw Materials
A significant amount of the part numbers that make up our transmissions are purchased from outside
suppliers, and during 2016, we purchased approximately $600.0 million of direct materials and components
from outside suppliers. The largest elements of our direct spending are aluminum and steel castings and
forgings that are formed by our suppliers into our larger components and assemblies for use in our
transmissions. However, our spending on aluminum and steel raw materials directly and indirectly through our
purchase of these components constituted approximately 19% of our direct material and component costs in
2016. The balance of our direct and indirect materials and components costs are primarily composed of value-
added services and conversion costs. Our supply contracts, along with an intensive supplier selection and
performance monitoring process, have enabled us to establish and maintain close relationships with suppliers
and have contributed to our overall operating efficiency and industry-leading quality.25
Continued volatility in and disruption to the global economic environment could adversely affect the ability of
customers and suppliers to obtain credit and may have a material adverse effect on our business, results of
operations and financial condition. The commercial vehicle industry as a whole has been more adversely
affected by volatile economic conditions than many other industries, as the purchase or replacement of
commercial vehicles, which are durable items, can be deferred for many reasons, including reduced spending
by end users. Future changes in the regulatory and business environments in which we operate may adversely
affect our ability to sell our products or source materials needed to manufacture our products. Furthermore,
financial instability or bankruptcy at any of our suppliers or customers could disrupt our ability to manufacture
our products and impair our ability to collect receivables, any or all of which may have a material adverse effect
on our business, results of operations and financial condition. In addition, some of our customers and suppliers
may experience serious cash flow problems and, thus, may find it difficult to obtain financing, if financing is
available at all. As a result, our customers’ need for and ability to purchase our products or services may
decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. Any
inability of customers to pay us for our products and services, or any demands by suppliers for different
payment terms, may materially and adversely affect our results of operations and financial condition.
Furthermore, our suppliers may not be successful in generating sufficient sales or securing alternate financing
arrangements, and therefore may no longer be able to supply goods and services to us. In that event, we
would need to find alternate sources for these goods and services, and there is no assurance we 16 would be
able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could
adversely affect our ability to manufacture and deliver our products on a timely basis, and thereby affect our
results of operations.26
Labor unrest could have a material adverse effect on our business, results of operations and financial
condition. As of December 31, 2016, approximately 58% of our U.S. employees, representing over 50% of our
total employees, were represented by the UAW and are subject to a collective bargaining agreement. This
agreement expires in November 2017. While we intend to negotiate in good faith with the UAW, we cannot
guarantee we will be able to renew a collective bargaining agreement on similar or more favorable terms than
those that presently exist. We may incur increased labor costs as a result of any of these renegotiations. In
addition to our unionized work force, many of our direct and indirect customers and vendors have unionized
25
2016 Annual Report, February 24, 2017, p. 12, http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual,
accessed August 28, 2017
26
2016 Annual Report, February 24, 2017, p. 15, http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual,
accessed August 28, 2017
26. Page 26
work forces. Strikes, work stoppages or slowdowns experienced by these customers or vendors or their other
suppliers could result in slowdowns or closings of assembly plants that use our products or supply materials for
use in the production of our products. Organizations responsible for shipping our products may also be
impacted by strikes. Any interruption in the delivery of our products could reduce demand for our products and
could have a material adverse effect on us. In general, we consider our labor relations with all of our
employees to be good. However, in the future we may be subject to labor unrest. The inability to reach a new
agreement could delay or disrupt our operations in the affected regions, including the acquisition of raw
materials and components, the manufacture, sales and distribution of products and the provision of services. If
strikes, work stoppages or lock-outs at our facilities or at the facilities of our vendors or customers occur or
continue for a long period of time, our business, results of operations and financial condition may be materially
adversely affected.27
27
2016 Annual Report, February 24, 2017, p. 16, http://ir.allisontransmission.com/phoenix.zhtml?c=227924&p=irol-reportsAnnual,
accessed August 28, 2017
27. Page 27
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 auto parts 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, and inventory. 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.).
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
28. Page 28
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
automotive industry should turn to the high-tech industry to benchmark and drive innovation.
Conclusion
Post-recession, the auto parts industry made the most progress of any manufacturing sector; and
while automotive aftermarket companies experienced growth and were able to improve costs, the
elements of cash-to-cash degraded. Most companies in this sector struggle with volatility and
delivering results that are reliable and resilient. With more sticks than carrots, the auto parts industry
is the whipping boy of the automotive value chain struggling to survive. Few have been equal to the
challenge.
29. Page 29
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
30. Page 30
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 the Automotive Industry
Published by Supply Chain Insights in November 2012
Supply Chain Metrics That Matter: A Closer Look at Automotive Companies
Published by Supply Chain Insights in May 2014
Supply Chain Metrics That Matter – A Focus on Automotive Companies – 2015
Published by Supply Chain Insights in May 2015
Supply Chain Metrics That Matter: A Focus on Consumer Products – 2015
Published by Supply Chain Insights in August 2015
Supply Chain Metrics That Matter: A Focus on the High-Tech Industry – 2015
Published by Supply Chain Insights in January 2016
Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies – 2016
Published by Supply Chain Insights in May 2016
Supply Chain Metrics That Matter: A Focus on Medical Device Companies – 2016
Published by Supply Chain Insights in May 2016
Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies-2016
Published by Supply Chain Insights in June 2016
Supply Chain Metrics That Matter – A Focus on Chemical Companies
Published by Supply Chain Insights in July 2017
Supply Chains to Admire 2014
Published by Supply Chain Insights in September 2014
Supply Chains to Admire 2015
Published by Supply Chain Insights in September 2015
Supply Chains to Admire 2016
Published by Supply Chain Insights in July 2016
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.
31. Page 31
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.
32. Page 32
Endnotes
i
Supply Chain Index, Supply Chain Insights, http://supplychaininsights.com/portfolio/launch-of-the-supply-chain-index/, July 17,
2017