Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies – 2016
2006-2015
This report is based on analysis of financial balance sheet data and income statements for the pharmaceutical industry over the period of 2006-2015. (Data is sourced from YCharts). The report reflects insights from the pre- and post-recession periods and compares the progress of companies within the peer group(s).
RESEARCH OVERVIEW:
Report Details: This report is based on analysis of financial balance sheet and income statement data within the pharmaceutical 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 pharmaceutical supply chains and to determine which Pharmaceutical company’s supply chain did the best on the delivery of a portfolio of metrics over the last decade.
Hypothesis: The supply chain within the pharmaceutical industry is increasing in importance to deliver on the objectives of quality, drug efficacy and reliability. Risk mitigation, and counterfeiting are important cornerstones for the end-to-end supply chain vision.
Supply Chain Metrics That Matter: A Focus on Chemical, and Oil & Gas Companie...Lora Cecere
Executive Overview
Chemical supply chains serve global markets and multiple industries at varying levels of maturity. Over the last decade, no company stands out as a leader. The industry is stuck unable to make significant improvement on margin, inventory and asset utilization. The facts run counter to traditional beliefs. In most companies, there is a pervasive belief that Chemical and Oil and Gas companies implemented new technologies, and evolved processes to drive improved balance sheet results. As will be shown in this report, this is not true.
Why did this happen? The focus of the chemical companies remains functional and inside-out. The industry is slow to build adaptive networks and even slower to adopt demand-driven processes. This is in sharp contrast to an industry like consumer electronics where the thrusts and changes were swift and direct. To survive, these companies adopted new processes and technologies at a quicker rate than those in the Chemical, and Oil and Gas industries.
BASF wins the Supply Chains to Admire award while Statoil becomes a finalist. To help the industry to understand the current state and benchmark current processes, here we share insights.
The Race for Growth
The chemical industry experienced a post-recessionary boom with growth rates of 11% in the period of 2010-2012. In the recent three years, the growth rate has slowed to -1%. These recent growth rates were greatly affected by the boon and slowing of the Chinese markets and by the ups and down in crude. Over the period, AgroSciences and Specialty chemicals experienced the highest growth rates of the sector.
With the dramatic impact of the economy of growth and industry sector performance, one would think that the supply chain leaders of this sector would be aggressively pursuing market-driven supply chain practices to forecast based on market indicators and translate channel demand to supply. This is not the case. These processes remain very supply-centered with no chemical company driving market-driven programs.
Supply Chain 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.
Executive Summary
Supply chain excellence makes a difference to corporate value. Resilient, predictable, and forward-looking supply chain processes drive sustained balance sheet improvement. This is especially true in times of declining growth. (In this research, only four industries—aerospace & defense, apparel, automotive, and packaging suppliers—experienced growth for 2009-2014.)
Leaders want to drive excellence. By their nature these leaders are competitive. They want to power performance improvements, increase corporate value, and outpace competitors. It is not easy. The rate of business change is intense and the personal stakes are high. Day after day, supply chain leaders must answer questions like, “Which path should I to take? What are the best technologies to use? What is an acceptable rate of performance? How am I doing against my peer group? And, what can I learn from others that I can use to improve the performance of my own operation?” Until the development of the Supply Chain Index there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology there is now a way to gauge improvement.
When we started this work we were fearful that the methodology would not be selective enough to reward leaders. Our fear was that the list would be too large. However, we should not have worried. For two consecutive years only 10% of the companies studied are performing above the average of their peer group on the Supply Chain Metrics That Matter—operating margin, inventory turns and Return on Invested Capital—while driving improvement to a greater degree than their peer group. It is a select group. Figure 5 shows the 26 winners of the 2015 Supply Chains to Admire analysis.
The 26 companies are: Anheuser-Busch InBev; Audi AG; Biogen Inc; CCL Industries Inc.; Cisco Systems, Inc.; Coloplast Corp.; CVS Pharmacy; Dollar General Corporation; Dollar Tree, Inc.; Eastman Chemical Company; EMC Corporation; The Estée Lauder Companies Inc.; General Mills, Inc.; Intel Corporation; Deere & Company; Lexmark International Inc.; L'Oréal Group; Nike, Inc.; PPG Industries; Qualcomm Inc.; Samsung Electronics Co. Ltd.; United Tractors; Wal-Mart Stores, Inc.; Western Digital Corporation; and Whole Foods Market Inc. (Note: Shorter corporate or trade names are used in the tables within this report.)
Seven companies have made the list for two consecutive years: Cisco Systems, Inc.; General Mills, Inc.; Eastman Chemical Company; EMC Corporation; Anheuser-Busch InBev; Intel Corporation; and Nike, Inc.
Supply Chain Metrics That Matter: 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).
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 Food and Beverage Companies - 15...Lora Cecere
Executive Overview
Food and Beverage supply chains serve local markets. Regional taste buds drive localized assortment. While many are attempting to be global, they have strong regional governance drivers. As a result, growth agendas have driven an increase in items by 32% since 2010. Product complexity grew faster than growth. Average sales per item dropped 22% . This increase in complexity lengthened the long tail of the supply chain affecting both cost and inventory.
We hope this report can be a guide to help companies understand what is possible to determine more accurate set points, and understand the relationship between supply chain metric performance and value.
As will be seen, in the Food and Beverage industries we find most companies to be stuck on the critical metrics that drive value. They have either regressed in supply chain performance or they are at the same point they were a decade ago. For many supply chain leaders who 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 will be shown in this report, this is not true.
The analysis also demonstrates the importance of outside-in supply chain excellence programs. Who does the best? Hershey outperforms within the Food group and makes the Supply Chains to Admire list for 2016; and while AB/InBev drives the strongest performance in the Beverage category, it is not sufficient to make the list. The goal of this report is to enable benchmarking and to spark a new conversation on value in the definition of supply chain excellence.
Supply Chain Metrics That Matter - A Focus on Chemical Companies - 28 May 2015Lora Cecere
The basis of this report is publicly available information from corporate annual reports from the period of 2006-2014 for publicly-owned companies in the chemical industry. The methodology to understand supply chain performance and improvement is based on three years of data mining of supply chain financial ratios. In Table 1, we share the supply chain ratios we analyzed to understand the trends in the Supply Chain Metrics That Matter report series
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
While there are other measurements which we believe are important in the determination of supply chain excellence—forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we cannot find a reliable and consistent source of data for these metrics that covers all industries and the years studied. While these metrics are valuable, we find that the industry data sources are spotty and largely inaccurate due to the self-reporting of data. Without a consistent data source across the industries, we cannot include these factors even though we believe that they are important.
The Supply Chain Index methodology was built on the belief that the supply chain is a complex system with increasing complexity. We believe it is the supply chain leader’s role to build and manage supply chain performance to drive year-over-year improvements which are balanced, strong and resilient. We find that most companies throw the system out of balance and are able to drive progress only on a single metric, not a metrics portfolio. To illustrate this point, in the development of the Supply Chains to Admire Report, we studied public manufacturing and retail companies for the period of 2006-2013, and we found that only 21 of the companies in the study group performed better than their peer group on the portfolio of metrics of operating margin, inventory turns and Return on Invested Capital (ROIC).
In our review of the data in this report with supply chain leaders, we found that most companies are not aware of how they rate relative to their peer group, and many have driven a singular metric as opposed to a balanced portfolio.
In the management of the supply chain, there are many metrics. In fact, we find that most supply chain leaders measure too many, which drives confusion. Our first goal in the research was to determine which metrics should be tracked in the portfolio analysis. To understand the relationship between supply chain performance and market capitalization, we calculated the correlation of seven years of financial ratios (based on quarterly reporting) to market capitalization (the number of outstanding shares multiplied by the share price) on a quarterly basis. The results of this study on the correlation to market capitalization are presented in Table 2. Our goal was to select a portfolio of metrics that could be meaningful to all industries.
Supply Chain Metrics That Matter: A Focus on Chemical, and Oil & Gas Companie...Lora Cecere
Executive Overview
Chemical supply chains serve global markets and multiple industries at varying levels of maturity. Over the last decade, no company stands out as a leader. The industry is stuck unable to make significant improvement on margin, inventory and asset utilization. The facts run counter to traditional beliefs. In most companies, there is a pervasive belief that Chemical and Oil and Gas companies implemented new technologies, and evolved processes to drive improved balance sheet results. As will be shown in this report, this is not true.
Why did this happen? The focus of the chemical companies remains functional and inside-out. The industry is slow to build adaptive networks and even slower to adopt demand-driven processes. This is in sharp contrast to an industry like consumer electronics where the thrusts and changes were swift and direct. To survive, these companies adopted new processes and technologies at a quicker rate than those in the Chemical, and Oil and Gas industries.
BASF wins the Supply Chains to Admire award while Statoil becomes a finalist. To help the industry to understand the current state and benchmark current processes, here we share insights.
The Race for Growth
The chemical industry experienced a post-recessionary boom with growth rates of 11% in the period of 2010-2012. In the recent three years, the growth rate has slowed to -1%. These recent growth rates were greatly affected by the boon and slowing of the Chinese markets and by the ups and down in crude. Over the period, AgroSciences and Specialty chemicals experienced the highest growth rates of the sector.
With the dramatic impact of the economy of growth and industry sector performance, one would think that the supply chain leaders of this sector would be aggressively pursuing market-driven supply chain practices to forecast based on market indicators and translate channel demand to supply. This is not the case. These processes remain very supply-centered with no chemical company driving market-driven programs.
Supply Chain 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.
Executive Summary
Supply chain excellence makes a difference to corporate value. Resilient, predictable, and forward-looking supply chain processes drive sustained balance sheet improvement. This is especially true in times of declining growth. (In this research, only four industries—aerospace & defense, apparel, automotive, and packaging suppliers—experienced growth for 2009-2014.)
Leaders want to drive excellence. By their nature these leaders are competitive. They want to power performance improvements, increase corporate value, and outpace competitors. It is not easy. The rate of business change is intense and the personal stakes are high. Day after day, supply chain leaders must answer questions like, “Which path should I to take? What are the best technologies to use? What is an acceptable rate of performance? How am I doing against my peer group? And, what can I learn from others that I can use to improve the performance of my own operation?” Until the development of the Supply Chain Index there was no independent and objective data-driven methodology that could answer these questions. With the development of this methodology there is now a way to gauge improvement.
When we started this work we were fearful that the methodology would not be selective enough to reward leaders. Our fear was that the list would be too large. However, we should not have worried. For two consecutive years only 10% of the companies studied are performing above the average of their peer group on the Supply Chain Metrics That Matter—operating margin, inventory turns and Return on Invested Capital—while driving improvement to a greater degree than their peer group. It is a select group. Figure 5 shows the 26 winners of the 2015 Supply Chains to Admire analysis.
The 26 companies are: Anheuser-Busch InBev; Audi AG; Biogen Inc; CCL Industries Inc.; Cisco Systems, Inc.; Coloplast Corp.; CVS Pharmacy; Dollar General Corporation; Dollar Tree, Inc.; Eastman Chemical Company; EMC Corporation; The Estée Lauder Companies Inc.; General Mills, Inc.; Intel Corporation; Deere & Company; Lexmark International Inc.; L'Oréal Group; Nike, Inc.; PPG Industries; Qualcomm Inc.; Samsung Electronics Co. Ltd.; United Tractors; Wal-Mart Stores, Inc.; Western Digital Corporation; and Whole Foods Market Inc. (Note: Shorter corporate or trade names are used in the tables within this report.)
Seven companies have made the list for two consecutive years: Cisco Systems, Inc.; General Mills, Inc.; Eastman Chemical Company; EMC Corporation; Anheuser-Busch InBev; Intel Corporation; and Nike, Inc.
Supply Chain Metrics That Matter: 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).
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 Food and Beverage Companies - 15...Lora Cecere
Executive Overview
Food and Beverage supply chains serve local markets. Regional taste buds drive localized assortment. While many are attempting to be global, they have strong regional governance drivers. As a result, growth agendas have driven an increase in items by 32% since 2010. Product complexity grew faster than growth. Average sales per item dropped 22% . This increase in complexity lengthened the long tail of the supply chain affecting both cost and inventory.
We hope this report can be a guide to help companies understand what is possible to determine more accurate set points, and understand the relationship between supply chain metric performance and value.
As will be seen, in the Food and Beverage industries we find most companies to be stuck on the critical metrics that drive value. They have either regressed in supply chain performance or they are at the same point they were a decade ago. For many supply chain leaders who 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 will be shown in this report, this is not true.
The analysis also demonstrates the importance of outside-in supply chain excellence programs. Who does the best? Hershey outperforms within the Food group and makes the Supply Chains to Admire list for 2016; and while AB/InBev drives the strongest performance in the Beverage category, it is not sufficient to make the list. The goal of this report is to enable benchmarking and to spark a new conversation on value in the definition of supply chain excellence.
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.
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 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
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.
Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (20...Lora Cecere
Executive Overview
When it comes to metrics that matter, the cash-to-cash cycle is one of the top metrics cited by supply chain professionals. It is among the best financial metrics to provide a comprehensive picture of a company’s supply chain and the management of working capital.
The supply chain is a complex system. Successful management requires both orchestration and balance. To drive supply chain excellence, companies are required to balance four competing priorities: growth, profitability, cycle management and complexity. Several popular metrics, including the cash-to-cash cycle, for a variety of industries are presented in table 1.
Launch of the Supply Chain Index - 11 JUNE 2013Lora Cecere
Launch of the Supply Chain Index
This research represents eighteen months of work to understand the relationship between supply chain financial ratios and a company’s performance in the financial markets. To complete this research, we constructed a database of specific supply chain financial ratios (from a database of over 50 total financial metrics) and began to run correlations to understand the relationship between financial supply chain ratios and market capitalization for the past seven years. (The market capitalization data and the supply chain financial data used in the analysis was quarterly data from 2006Q1 to 2012Q4.) We use this data to understand which metrics matter to financial markets for twelve Morningstar sectors.
Here we share insights on the Morningstar sectors that make up Consumer and Healthcare Value Networks. In August, we will publish a parallel report that will cover the Automotive, Electronics and Industrial Value Networks. The sectors evaluated in this report include: Apparel Manufacturing, Apparel Stores, Chemical, Drug Manufacturers for Branded and Generic Products, Household and Personal Products (Consumer Packaged Goods), Discount Stores, Medical Care, Medical Devices, Medical Distribution, Medical Instruments & Supplies, and Packaged Food.
Inventory Optimization in a Market-Driven World - 27 APR 2015Lora Cecere
Executive Overview
Growth is slowing and the complexity in today’s supply chain is unprecedented. As a result, within a company, inventory management is often a hot issue. Shrinking inventory spins off a one-time, and highly desirable, cash windfall. In most industries there is a connection between market capitalization and inventory management. This drives pressure to reduce inventory and question existing practices. However, while companies are quick to ask questions, they often make the wrong judgements about inventory strategies. The goal of this report is to improve this dialogue.
Most companies have invested in many inventory optimization solutions over the last decade. Within the company, there is mounting frustration about the failure of these projects to actualize and maintain targets. What most companies fail to realize is that the technology strategy needs to be worked in concert with supply chain strategy. Often we find while companies improve inventory levels through the deployment of inventory technologies, operational decisions to widen the item master or lengthen the supply chain will undermine the project targets.
There are many drivers of inventory, and the management of inventory levels requires discipline and a cross-functional focus. It is a story of people, process, and technology. Let’s start with people. Today, fewer than 5% of companies have an end-to-end focus (as defined from the customer’s customer to the supplier’s supplier), and most companies lack alignment and balance. The largest gaps between are between operational and commercial groups. (Cecere L. , Three Techniques to Improve Organizational Alignment, 2013). As companies close the organizational gap, progress is made on inventory. Likewise, when it comes to balance, 68% of organizations surveyed lack balance in Sales and Operations Planning between the commercial groups (the “S”) and the operational groups (the “OP), When balance is achieved, the organization rates itself as more agile, and aligned, and there is an 11% improvement in inventory turns (Cecere L. , Research in Review, 2014).
Supply chain processes are now over 30-years old. While there is a generalized belief that maturity of supply chain processes has improved inventory turns, as can be seen in Figure 2, the improvements in cash-to-cash have primarily been driven by lengthening payables. In industries like beverage, pharmaceuticals, consumer packaged goods and medical device, the industry averages have gone backwards (inventory turns have decreased not increased). Only the food and apparel industries have posted double-digit improvements in inventory turns. Why? Food and apparel are largely regional supply chains which are maturing. They lag consumer packaged goods in supply chain maturity. While consumer packaged goods companies are more mature, they are more global. The rise of the global multinational has greatly impacted inventory requirements.
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 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.
The Global Supply Chain Ups the Ante for Risk ManagementLora Cecere
Executive Summary
Unfortunately, supply chain disruptions are a fact of life for today’s global multinational company. The reasons are many. A risk management event can be triggered by natural events, geopolitical shifts, economic uncertainty and demand/supply volatility.
Historically, the roots and genesis of risk management programs were based on attempts to reduce insurance costs. Today it is much, much more. The focus is on prevention, early sensing, and the execution of well-orchestrated plans to mitigate the impact of a disruption. Global supply chain leaders understand that designing and implementing a robust risk management practice is essential and fundamental to running a global business. The size of the bubble in Figure 2 indicates the relative level of risk today, and the colors correspond to the level of risk.
Figure 2. Comparison of Risk Drivers for the Past Five Years and Future Five Years
While product quality and supply chain visibility are declining but still important, the areas of operations complexity and the definition of globalization infrastructure is increasing. The areas of economic uncertainty, supplier reliability, along with demand volatility, are continued risk factors.
Over time, as supply chains morphed from regional to global multinational organizations, globalization and regulatory compliance increased. As a result, procurement has shifted from traditional programs focused solely on contract management, price and term negotiations, and supplier scorecards to include the evolution of supplier development, to manage product quality and multi-tier supplier relationships, in and across value chain relationships.
Today is a less certain world than a decade ago. Geopolitical shifts, economic uncertainty and demand/supply volatility are rising. In addition, to spur growth companies are quick to add products to the item master, but slow to rationalize the portfolio. The rising complexity of items sold decreases the organization’s ability to forecast, and the longer lead times across multiple tiers of sourcing and supply increases the Bullwhip Effect’s impact (distortion of the demand signal across multiple tiers of the value network). As a result, there is a greater need for supplier development and supplier sensing to reduce supply risk. Inventory management and supplier financial sensing grow in importance with the increase in uncertainty.
Risk management is no longer narrowly focused: a technology, a response to a natural disaster, or improving supply chain visibility. Instead, it is more holistic with a focus on managing demand and supply variability cross-functionally and improving outcomes in an uncertain world.
In this report, we share insights on the current state of risk management programs while providing recommendations on what defines excellence.
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 Apparel - 9 May 2013Lora Cecere
Different industries are making progress on supply chain excellence at different rates. In the writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer electronics industry is one of the only sectors making consistent and sustainable progress in balancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal plateau. They are treading water with no company able to move forward. In contrast, we see that the apparel industry is trending backwards.
When we analyze progress in the apparel industry over the last decade, we see a degradation of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and three of the six companies show flat or decreasing performance on operating margin. This is the sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain Metrics That Matter series (for a complete series listing see the Appendix).
Figure 1 illustrates the intersection of inventory turns and revenue per employee over the preceding decade. Ideally, companies would be moving consistently from the lower left to the upper right as they increased both inventory turns and revenue per employee performance. Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.
Supply Chain Metrics That Matter: A Focus on the 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: A Focus on the High-Tech Industry - 2016Lora Cecere
Executive Overview
High-Tech supply chains serve global markets with regional preferences. They include some of the most advanced processes and strongest supply chain leadership across all industries. As a result, the value chain made more progress than others in the course of the last decade.
Unlike other value chains, all four segments of this value chain improved inventory turns. It was through hard work, network design, and a focus on planning. While other industries implemented supply chain planning and then turned to spreadsheets, this industry got good at managing inventories. The stakes were higher. As inventories sit in the channel for the High-Tech industry, prices fall. As a result, this industry has developed some of the best inventory practices across all industries.
On the flip-side, the lack of growth and the declining margins of the Contract Manufacturing industry is a risk for this value chain. Within the High-Tech value chain, Contract Manufacturing is the weak link.
The industry will drive the autonomous supply chain. These leaders will make the digital pivot first. With some of the earliest technology adopters, and with more to gain from the adoption of technology, look for companies like Apple, Cisco, Dell, EMC, Emerson, Intel, and Samsung to drive cloud-based computing, cognitive computing, the Internet of Things (IoT), sensor development, and prescriptive analytics. The industry is also driving a shift through wide adoption and use of Open Source code from the Apache Software Foundation. These manufacturing leaders will pave the way for others. Their ability to lead will drive cross-industry demand and growth agendas.
We hope that this report is a useful guide for companies in other industries to understand the impact of technology adoption on supply chain excellence.
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.
What Is the Value Proposition of Sales and Operations Planning?Lora Cecere
Survey Details: The research for this report was conducted online from January 6 - September 14, 2015 by Supply Chain Insights. Surveys were conducted among Manufacturers and Wholesalers/Distributors/Co-operatives with $250M+ in revenue and who have at least one S&OP process (n=73). For the purpose of analysis, respondents were split between those with a self-reported "effective" S&OP (n=31) and those without (n=42).
Objective: To understand the value proposition of an effective S&OP (Sales and Operations Planning) process. NOTE: An S&OP process was defined as a "tactical planning process to forecast sales and plan operations."
Highlight: Companies with a more effective S&OP process are more aligned, agile and balanced, which leads to greater control and improved response.
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.
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: Improving Supply Chain Resiliency - 18 MAR ...Lora Cecere
Executive Overview
Ask any supply chain leader which metrics are the most important to deliver, and the most common answers are operating margin, inventory turns, and revenue growth. In our plotting of industry results for the Supply Chain Metrics That Matter reports, we could see that certain industries had greater variation at the intersection of operating margin and inventory turns than others. We wanted to know why.
The supply chain is a complex system. It is growing even more so. Supply chain leaders are charged to deliver reliable results on The Effective Frontier for costs and inventory cycles. Failure to do so can result in termination. The Effective Frontier is depicted in Figure 1.
It is a juggling act. There are finite trade-offs and the metrics are interrelated. Each company is operating at a different potential. A new technology can elevate the frontier and improve the company’s ability to operate at a higher level of performance. Often when companies attempt to drive down costs they will elevate inventory. When complexity increases, it can have an adverse effect on both operating margin and inventory turns. It is a continuous balancing act which has been made easier through the evolution of Advanced Planning Systems (APS).
Progress happens in small increments. It happens over the period of many years (three to five). We believe that reliability of results at the intersection of operating margin and inventory turns is a characteristic of supply chain excellence.
We are trying to understand who’s done it best. It is for this reason that we have been studying these patterns for the last two years. What can we see? Over the last decade, industry progress has been quite different. In Table 1, we list the performance of five industries (The industries are listed from the most to the least profitable as measured by operating margin). Companies have become more efficient, but not necessarily more effective. Note in this table that all manufacturing industries have significantly improved revenue per employee, but only one of the industries has improved both operating margins and inventory turns.
Supply Chain Metrics That Matter: A 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 Centers of Excellence Study - Summary Charts - 2014 - 2015Lora Cecere
Executive Overview
Growth is slowing and the complexity in today’s supply chain is unprecedented. No two centers of excellence are the same, and no two supply chains are alike. There are different drivers and obstacles to building and running a Center of Excellence. However, if done right, the organization rates itself as more aligned, proactive and agile. The high-level results from our study are shown in Figure 2.
Figure 2. Centers of Excellence Infographic
Based on our qualitative interviews with clients, we find that these seven drivers to build a Center of Excellence:
• Increase in the Importance of Supply Chain Management. As growth slows, and the global multinational organization matures, more and more companies are interested in driving supply chain excellence. The reasons are many; but, at the top of the list is improving reliability in the face of volatility. How so? Demand volatility is increasing and supplier viability is growing more fragile. Driving reliability in global operations in the face of these challenges is fundamental to defining and executing supply chain excellence.
• Building of Global Teams and the Development of Supply Chain Talent. With the shortage of students from academia, and the retirement of the first- and second-generation supply chain pioneers, more and more companies are developing and executing programs to build supply chain talent. There is a shortage of mid-management talent with pressure on planning job retention. There is a limited supply of supply chain knowledge workers: leaders that are technologically savvy, analytical problem solvers, and astute in business processes.
• Continuation of Work on Enterprise Resource Planning (ERP). When companies complete a large ERP project, there is a strong impetus to get the value from the investment and ensure technology usage. The focus of the Center of Excellence often becomes an extension of the global implementation team.
• Metrics and Implementation of Analytics. While the management of supply chain excellence sounds easy, it is not. The management of order-to-cash and procure-to-pay processes and the supply chain execution processes are easier because they are well-defined. Most companies struggle with the definition of planning and the use of new forms of analytics.
• Network Design and the Orchestration of Flows. Most companies start on their supply chain design journey to save costs in logistics. With the increasing cost of transportation, and the fragility of freight networks, network design for transportation and logistics networks is paramount. One client likened it to “minting money.”
• Testing of New Technologies. Cloud technologies. Supply chain operating networks. The Internet of Things. 3D Printing. New forms of analytics. The list of technology and process disruptors could go on and on. While most companies feel stuck in their existing, and more traditional, processes they want to understand and explore technology
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.
Supply Chain Metrics That Matter: A Focus on Medical Device Companies – 2016Lora Cecere
Executive Overview
Globalization. Compliance. Risk Management. Corporate Social Responsibility (CSR). Patient outcomes. Over the last decade the number and variety of supply chain initiatives exploded for the medical device leader. As a result, the supply chain group, and the related business imperatives, grew in importance.
Overall the medical device supply chain fared better through the decade than other industries, despite the fact that they are smaller, more focused companies trying to become global. (see Table C in the appendix for company size). On average the industry performance on operating margin and inventory turns was better in 2006 than 2015. The reason? The medical device supply chain entered the decade as a supply chain laggard. Through focused supply chain programs they were able to catch up to the level of other industries.
Table 6. Industry Snapshot of Performance
We hope this report can be a guide to help companies understand what is possible, and how supply chain metrics drive value. In the medical device industry we find most companies to be stuck. They have either regressed in supply chain performance or they are at the same point 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. The goal of this report is to enable benchmarking and to spark a new conversation on the definition of supply chain excellence.
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 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
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.
Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (20...Lora Cecere
Executive Overview
When it comes to metrics that matter, the cash-to-cash cycle is one of the top metrics cited by supply chain professionals. It is among the best financial metrics to provide a comprehensive picture of a company’s supply chain and the management of working capital.
The supply chain is a complex system. Successful management requires both orchestration and balance. To drive supply chain excellence, companies are required to balance four competing priorities: growth, profitability, cycle management and complexity. Several popular metrics, including the cash-to-cash cycle, for a variety of industries are presented in table 1.
Launch of the Supply Chain Index - 11 JUNE 2013Lora Cecere
Launch of the Supply Chain Index
This research represents eighteen months of work to understand the relationship between supply chain financial ratios and a company’s performance in the financial markets. To complete this research, we constructed a database of specific supply chain financial ratios (from a database of over 50 total financial metrics) and began to run correlations to understand the relationship between financial supply chain ratios and market capitalization for the past seven years. (The market capitalization data and the supply chain financial data used in the analysis was quarterly data from 2006Q1 to 2012Q4.) We use this data to understand which metrics matter to financial markets for twelve Morningstar sectors.
Here we share insights on the Morningstar sectors that make up Consumer and Healthcare Value Networks. In August, we will publish a parallel report that will cover the Automotive, Electronics and Industrial Value Networks. The sectors evaluated in this report include: Apparel Manufacturing, Apparel Stores, Chemical, Drug Manufacturers for Branded and Generic Products, Household and Personal Products (Consumer Packaged Goods), Discount Stores, Medical Care, Medical Devices, Medical Distribution, Medical Instruments & Supplies, and Packaged Food.
Inventory Optimization in a Market-Driven World - 27 APR 2015Lora Cecere
Executive Overview
Growth is slowing and the complexity in today’s supply chain is unprecedented. As a result, within a company, inventory management is often a hot issue. Shrinking inventory spins off a one-time, and highly desirable, cash windfall. In most industries there is a connection between market capitalization and inventory management. This drives pressure to reduce inventory and question existing practices. However, while companies are quick to ask questions, they often make the wrong judgements about inventory strategies. The goal of this report is to improve this dialogue.
Most companies have invested in many inventory optimization solutions over the last decade. Within the company, there is mounting frustration about the failure of these projects to actualize and maintain targets. What most companies fail to realize is that the technology strategy needs to be worked in concert with supply chain strategy. Often we find while companies improve inventory levels through the deployment of inventory technologies, operational decisions to widen the item master or lengthen the supply chain will undermine the project targets.
There are many drivers of inventory, and the management of inventory levels requires discipline and a cross-functional focus. It is a story of people, process, and technology. Let’s start with people. Today, fewer than 5% of companies have an end-to-end focus (as defined from the customer’s customer to the supplier’s supplier), and most companies lack alignment and balance. The largest gaps between are between operational and commercial groups. (Cecere L. , Three Techniques to Improve Organizational Alignment, 2013). As companies close the organizational gap, progress is made on inventory. Likewise, when it comes to balance, 68% of organizations surveyed lack balance in Sales and Operations Planning between the commercial groups (the “S”) and the operational groups (the “OP), When balance is achieved, the organization rates itself as more agile, and aligned, and there is an 11% improvement in inventory turns (Cecere L. , Research in Review, 2014).
Supply chain processes are now over 30-years old. While there is a generalized belief that maturity of supply chain processes has improved inventory turns, as can be seen in Figure 2, the improvements in cash-to-cash have primarily been driven by lengthening payables. In industries like beverage, pharmaceuticals, consumer packaged goods and medical device, the industry averages have gone backwards (inventory turns have decreased not increased). Only the food and apparel industries have posted double-digit improvements in inventory turns. Why? Food and apparel are largely regional supply chains which are maturing. They lag consumer packaged goods in supply chain maturity. While consumer packaged goods companies are more mature, they are more global. The rise of the global multinational has greatly impacted inventory requirements.
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 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.
The Global Supply Chain Ups the Ante for Risk ManagementLora Cecere
Executive Summary
Unfortunately, supply chain disruptions are a fact of life for today’s global multinational company. The reasons are many. A risk management event can be triggered by natural events, geopolitical shifts, economic uncertainty and demand/supply volatility.
Historically, the roots and genesis of risk management programs were based on attempts to reduce insurance costs. Today it is much, much more. The focus is on prevention, early sensing, and the execution of well-orchestrated plans to mitigate the impact of a disruption. Global supply chain leaders understand that designing and implementing a robust risk management practice is essential and fundamental to running a global business. The size of the bubble in Figure 2 indicates the relative level of risk today, and the colors correspond to the level of risk.
Figure 2. Comparison of Risk Drivers for the Past Five Years and Future Five Years
While product quality and supply chain visibility are declining but still important, the areas of operations complexity and the definition of globalization infrastructure is increasing. The areas of economic uncertainty, supplier reliability, along with demand volatility, are continued risk factors.
Over time, as supply chains morphed from regional to global multinational organizations, globalization and regulatory compliance increased. As a result, procurement has shifted from traditional programs focused solely on contract management, price and term negotiations, and supplier scorecards to include the evolution of supplier development, to manage product quality and multi-tier supplier relationships, in and across value chain relationships.
Today is a less certain world than a decade ago. Geopolitical shifts, economic uncertainty and demand/supply volatility are rising. In addition, to spur growth companies are quick to add products to the item master, but slow to rationalize the portfolio. The rising complexity of items sold decreases the organization’s ability to forecast, and the longer lead times across multiple tiers of sourcing and supply increases the Bullwhip Effect’s impact (distortion of the demand signal across multiple tiers of the value network). As a result, there is a greater need for supplier development and supplier sensing to reduce supply risk. Inventory management and supplier financial sensing grow in importance with the increase in uncertainty.
Risk management is no longer narrowly focused: a technology, a response to a natural disaster, or improving supply chain visibility. Instead, it is more holistic with a focus on managing demand and supply variability cross-functionally and improving outcomes in an uncertain world.
In this report, we share insights on the current state of risk management programs while providing recommendations on what defines excellence.
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 Apparel - 9 May 2013Lora Cecere
Different industries are making progress on supply chain excellence at different rates. In the writing of the Supply Chain Metrics That Matter series of reports, we see that the consumer electronics industry is one of the only sectors making consistent and sustainable progress in balancing growth, profitability, cycles and complexity. We also see that many other industries—chemical, consumer products, pharmaceutical and medical device—are stuck on a horizontal plateau. They are treading water with no company able to move forward. In contrast, we see that the apparel industry is trending backwards.
When we analyze progress in the apparel industry over the last decade, we see a degradation of results on the Supply Chain Effective Frontier: days of inventory are flat or increasing and three of the six companies show flat or decreasing performance on operating margin. This is the sharpest reversal in progress on supply chain excellence that we have seen in the Supply Chain Metrics That Matter series (for a complete series listing see the Appendix).
Figure 1 illustrates the intersection of inventory turns and revenue per employee over the preceding decade. Ideally, companies would be moving consistently from the lower left to the upper right as they increased both inventory turns and revenue per employee performance. Instead, we see inconsistency, a lack of resiliency and stagnancy across the industry.
Supply Chain Metrics That Matter: A Focus on the 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: A Focus on the High-Tech Industry - 2016Lora Cecere
Executive Overview
High-Tech supply chains serve global markets with regional preferences. They include some of the most advanced processes and strongest supply chain leadership across all industries. As a result, the value chain made more progress than others in the course of the last decade.
Unlike other value chains, all four segments of this value chain improved inventory turns. It was through hard work, network design, and a focus on planning. While other industries implemented supply chain planning and then turned to spreadsheets, this industry got good at managing inventories. The stakes were higher. As inventories sit in the channel for the High-Tech industry, prices fall. As a result, this industry has developed some of the best inventory practices across all industries.
On the flip-side, the lack of growth and the declining margins of the Contract Manufacturing industry is a risk for this value chain. Within the High-Tech value chain, Contract Manufacturing is the weak link.
The industry will drive the autonomous supply chain. These leaders will make the digital pivot first. With some of the earliest technology adopters, and with more to gain from the adoption of technology, look for companies like Apple, Cisco, Dell, EMC, Emerson, Intel, and Samsung to drive cloud-based computing, cognitive computing, the Internet of Things (IoT), sensor development, and prescriptive analytics. The industry is also driving a shift through wide adoption and use of Open Source code from the Apache Software Foundation. These manufacturing leaders will pave the way for others. Their ability to lead will drive cross-industry demand and growth agendas.
We hope that this report is a useful guide for companies in other industries to understand the impact of technology adoption on supply chain excellence.
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.
What Is the Value Proposition of Sales and Operations Planning?Lora Cecere
Survey Details: The research for this report was conducted online from January 6 - September 14, 2015 by Supply Chain Insights. Surveys were conducted among Manufacturers and Wholesalers/Distributors/Co-operatives with $250M+ in revenue and who have at least one S&OP process (n=73). For the purpose of analysis, respondents were split between those with a self-reported "effective" S&OP (n=31) and those without (n=42).
Objective: To understand the value proposition of an effective S&OP (Sales and Operations Planning) process. NOTE: An S&OP process was defined as a "tactical planning process to forecast sales and plan operations."
Highlight: Companies with a more effective S&OP process are more aligned, agile and balanced, which leads to greater control and improved response.
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.
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: Improving Supply Chain Resiliency - 18 MAR ...Lora Cecere
Executive Overview
Ask any supply chain leader which metrics are the most important to deliver, and the most common answers are operating margin, inventory turns, and revenue growth. In our plotting of industry results for the Supply Chain Metrics That Matter reports, we could see that certain industries had greater variation at the intersection of operating margin and inventory turns than others. We wanted to know why.
The supply chain is a complex system. It is growing even more so. Supply chain leaders are charged to deliver reliable results on The Effective Frontier for costs and inventory cycles. Failure to do so can result in termination. The Effective Frontier is depicted in Figure 1.
It is a juggling act. There are finite trade-offs and the metrics are interrelated. Each company is operating at a different potential. A new technology can elevate the frontier and improve the company’s ability to operate at a higher level of performance. Often when companies attempt to drive down costs they will elevate inventory. When complexity increases, it can have an adverse effect on both operating margin and inventory turns. It is a continuous balancing act which has been made easier through the evolution of Advanced Planning Systems (APS).
Progress happens in small increments. It happens over the period of many years (three to five). We believe that reliability of results at the intersection of operating margin and inventory turns is a characteristic of supply chain excellence.
We are trying to understand who’s done it best. It is for this reason that we have been studying these patterns for the last two years. What can we see? Over the last decade, industry progress has been quite different. In Table 1, we list the performance of five industries (The industries are listed from the most to the least profitable as measured by operating margin). Companies have become more efficient, but not necessarily more effective. Note in this table that all manufacturing industries have significantly improved revenue per employee, but only one of the industries has improved both operating margins and inventory turns.
Supply Chain Metrics That Matter: A 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 Centers of Excellence Study - Summary Charts - 2014 - 2015Lora Cecere
Executive Overview
Growth is slowing and the complexity in today’s supply chain is unprecedented. No two centers of excellence are the same, and no two supply chains are alike. There are different drivers and obstacles to building and running a Center of Excellence. However, if done right, the organization rates itself as more aligned, proactive and agile. The high-level results from our study are shown in Figure 2.
Figure 2. Centers of Excellence Infographic
Based on our qualitative interviews with clients, we find that these seven drivers to build a Center of Excellence:
• Increase in the Importance of Supply Chain Management. As growth slows, and the global multinational organization matures, more and more companies are interested in driving supply chain excellence. The reasons are many; but, at the top of the list is improving reliability in the face of volatility. How so? Demand volatility is increasing and supplier viability is growing more fragile. Driving reliability in global operations in the face of these challenges is fundamental to defining and executing supply chain excellence.
• Building of Global Teams and the Development of Supply Chain Talent. With the shortage of students from academia, and the retirement of the first- and second-generation supply chain pioneers, more and more companies are developing and executing programs to build supply chain talent. There is a shortage of mid-management talent with pressure on planning job retention. There is a limited supply of supply chain knowledge workers: leaders that are technologically savvy, analytical problem solvers, and astute in business processes.
• Continuation of Work on Enterprise Resource Planning (ERP). When companies complete a large ERP project, there is a strong impetus to get the value from the investment and ensure technology usage. The focus of the Center of Excellence often becomes an extension of the global implementation team.
• Metrics and Implementation of Analytics. While the management of supply chain excellence sounds easy, it is not. The management of order-to-cash and procure-to-pay processes and the supply chain execution processes are easier because they are well-defined. Most companies struggle with the definition of planning and the use of new forms of analytics.
• Network Design and the Orchestration of Flows. Most companies start on their supply chain design journey to save costs in logistics. With the increasing cost of transportation, and the fragility of freight networks, network design for transportation and logistics networks is paramount. One client likened it to “minting money.”
• Testing of New Technologies. Cloud technologies. Supply chain operating networks. The Internet of Things. 3D Printing. New forms of analytics. The list of technology and process disruptors could go on and on. While most companies feel stuck in their existing, and more traditional, processes they want to understand and explore technology
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.
Supply Chain Metrics That Matter: A Focus on Medical Device Companies – 2016Lora Cecere
Executive Overview
Globalization. Compliance. Risk Management. Corporate Social Responsibility (CSR). Patient outcomes. Over the last decade the number and variety of supply chain initiatives exploded for the medical device leader. As a result, the supply chain group, and the related business imperatives, grew in importance.
Overall the medical device supply chain fared better through the decade than other industries, despite the fact that they are smaller, more focused companies trying to become global. (see Table C in the appendix for company size). On average the industry performance on operating margin and inventory turns was better in 2006 than 2015. The reason? The medical device supply chain entered the decade as a supply chain laggard. Through focused supply chain programs they were able to catch up to the level of other industries.
Table 6. Industry Snapshot of Performance
We hope this report can be a guide to help companies understand what is possible, and how supply chain metrics drive value. In the medical device industry we find most companies to be stuck. They have either regressed in supply chain performance or they are at the same point 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. The goal of this report is to enable benchmarking and to spark a new conversation on the definition of supply chain excellence.
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 .)
Designing Usage Dashboards for mHealth Program MonitoringJSI
Presentation from the MERL Tech Panel on "Dashboards: Force for Good, Great, or Greater Confusion?" on the challenges of developing a dashboard of mobile app usage.
Big Data study charts used in 12 FEB 2015 Supply Chain Insights webinerLora Cecere
Big data. A big idea, but what does it mean for supply chain? Today, companies struggle to get to data. Many are drowning in data, and struggle to get to insights. Join this webinar to learn from the latest research on big data and gain insights from a panel of experts.
The international community is at a cross-roads, keep allowing counterfeit medicinal drugs, or create legislation that prevents that from happening in the future. The legislation has been created, so how will you ensure compliance?
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.
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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.
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...
Executive Summary
The term ‘supply chain finance’ has different definitions on each continent. In Europe, it is often used to describe ‘tax efficiency’, or the design of the supply chain to reduce the burden of taxation of cross-border shipments. In many procurement organizations the term is often used to describe the use of favorable capital rates to finance downstream trade. In this study the focus is on the management of costs by either effectiveness of a Supply Chain Finance team or Supply Chain Center of Excellence, Sales and Operations Planning (S&OP) processes, Cost-to-Serve Analysis and Supplier Development efforts.
For the supply chain leader, managing costs is job one. It is easier said than done. The supply chain is a complex system with interrelationships between growth, inventory, cost and complexity. Cross-functional processes, organizational focus, and access to data are critical to align and maintain cost effectiveness in this complex system called supply chain. We term this model the Supply Chain Effective Frontier. This is shown in Figure 2. When companies operate on the Supply Chain Effective Frontier they maximize the value of the firm . We measure value by either Price to Tangible Book Value or Market Capitalization.
Figure 2. Supply Chain Effective Frontier
As will be shown in this report, managing costs is a struggle for most companies. While 88% of companies have implemented Enterprise Resource Planning (ERP), the hard work of process evolution and maturity continues. In this report we share the current state of supply chains in managing costs, and then take a look at the processes and organizational design factors to evaluate the impact on cost management.
Executive Summary
No two supply chains are alike, but supply chain leaders across all industries face common challenges. The supply chain is becoming more strategic—an engine of growth and the driver of new business models—to drive new opportunities. For supply chain leaders, it is no longer just a discussion of cost and inventory management.
However, frustration abounds. Companies struggle to improve balance sheet results in the face of rising complexity and slowing growth. While all companies have improved revenue per employee, this efficiency improvement has not translated into operating margin improvements; and while cash-to-cash cycles have improved, it is not due to improvements in inventory positions. Most companies feel stuck, as if they are being held hostage by traditional supply chain practices.
Table 1. Industry Progress Across the Last Decade
In this report, we highlight the current state of supply chains—the supply chain organization, technologies, and process evolution—to enable supply chain leaders to take the next step in their strategy development. This report reflects the current state of supply chains, and is designed as a foundational document for supply chain leaders to build their 2015 strategies.
Understanding the Supply Chain Organization
Improving corporate performance is the driver of today’s supply chain organization. Increasingly, supply chain leaders are adopting new business models—ecommerce, digital business, and growth in new economies—to drive the top line.
Today, for the leader, it is about more than cost management. Instead, it is about the management of a portfolio of metrics to drive corporate performance. The supply chain is a complex system, with increasing complexity, and an increasing importance of driving balance sheet results. It is not easy. Improvement is hard work, and many are stuck. When we analyze financial balance sheet performance for the period of 2000-2013, we find that nine out of ten companies are stuck at the intersection of the two critical metrics of operating margin and inventory turns. Cash flow has been improved through elongating payables, and most companies are struggling to improve inventory in the face of complexity. This is an area of frustration and disappointment for business leaders who want to leverage supply chain technologies and processes to deliver both growth opportunities along with cash and cost savings to the organization.
The reason why? Today, the supply chain organization is traditional, tactical and cautious (see Figure 2). Most leaders would like to have a supply chain that is more agile and proactive. This is not possible with the current state of technologies and processes. To make the shift, companies need to reinvent the supply chain. The processes need to be redesigned outside-in with open sharing through business networks. These new forms of business networks, with many-to-many data models supported by canonical infrastructure, a
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.
2017 Supply Chains to Admire - 13 JUN 2017 reportLora Cecere
The Supply Chains to Admire™ analysis is an annual study of supply chain excellence. Now in its fourth year of development, the focus of this research is to better understand supply chain performance and improvement of 494 publicly held companies in 31 peer groups for the period of 2010-2016. At the 2017 Supply Chain Insights Global Summit, winners from the analysis will share insights on driving supply chain excellence.
In Search of Supply Chain Excellence - Report - 17 MAR 2016Lora Cecere
Executive Summary
No two supply chains are alike. While business is changing quickly, the supply chain processes are evolving slowly. The average supply chain organization is 14-years old, and as is shown in Figure 2, one out of three companies state that there is room for improvement in their supply chain.
Figure 2. Descriptors Used by Supply Chain Leaders to Describe Their Supply Chains
While companies desire a supply chain that is more aligned, fast, agile, and proactive, today the supply chain is controlled and becoming more global. In the building of today’s supply chain, as will be seen in this report, the tightly integrated IT infrastructure defined in the last two decades is an impediment to building an agile, proactive and aligned supply chain. In Figure 3 we contrast the current state of the supply chain with the desired state of supply chain leaders.
Figure 3. Supply Chain Descriptors: Current State versus Desired Operation
As shown in Figure 3, while supply chain leaders desire a more proactive, aligned and faster supply chain, these are areas for improvement. The current supply chain is controlled and global, but with significant opportunity for improvement. Ironically, despite the gaps in overall performance, many supply chain leaders term current practices as “best practices.” In this report we challenge the status quo. We do this by teasing out the data to understand business drivers. For example, in Table 1 we can see that a company which rates itself as “having a supply chain working well” is more likely to be in the process industry, and have a supply chain organization where manufacturing reports to the overall supply chain leader. In addition, within the organization there is a greater understanding of the supply chain by the executive leadership team, stronger alignment of metrics cross-functionally, stronger capabilities in supply chain visibility, and the organization is better at managing change. The companies that outperform are also better at accessing and using data.
It is also significant to note that we do not find a correlation between “working well” and the presence of a Supply Chain Center of Excellence, fewer ERP instances, or maturity in Sales and Operations planning. The reason? These processes and practices are evolving.
Today only one in three business leaders are satisfied with their supply chain. One of the issues is the lack of agility. In this report, we share case studies on how to improve supply chain agility. This report first defines supply chain agility and then shares case studies of agility techniques that work to improve the ability to deliver the same cost, quality and customer service given the rising levels of demand and supply volatility. Each case study is supported by the Supply Chains to Admire financial analysis.
While agility is bandied about in supply chain discussions, it is often meaningless because companies do not define and execute agility strategies. In this report, we share case studies of companies successfully implementing agility strategies.
Sales & Operations Planning - The State of the Union - 10 June 2013Lora Cecere
Sales and Operations Planning processes are now in their fourth decade of maturity. The processes are growing more complex. Progress is slow. The infographic below shows the current state of the union of sales and operations into S&OP processes. In this world of uncertainty, good planning matters. Complexity and volatility are escalating. Improving S&OP in a systematic approach, focused on goal evolution and systemic process governance, makes a difference; but, it requires education. A barrier to improvement is the executive team not understanding the supply chain as a complex system. It is the goal of this report to help alleviate this problem.
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.
How Do We Heal the Healthcare Value Chain? - 9 MAY 2013Lora Cecere
Over the last decade, as shown in figure 1, the hospital supply chain has been one of the few that has improved operating margin, reduced inventory and improved revenue/employee. In contrast, the manufacturing suppliers to the hospital organization have grown inventories and struggled to preserve margins. Across the value chain from the patient to the raw material suppliers, total inventories have grown and costs have escalated. With pending regulations, hospitals are being forced to rethink processes, redefine value and work more holistically to improve sourcing practices. The suppliers to the hospital systems are having to rethink their systems to rethink the customer (from selling to the physician to selling to a more formal buying organization based on patient outcomes) and adapt to the new processes within the hospital for value analysis.
Supply chain processes within the hospitals have matured. Hospitals have made more progress on improving cash-to-cash cycles than their upstream manufacturing trading partners. They have reduced inventories and attempted to work with suppliers. As shown in figure 2, it is notable to see that this industry is one of the few where downstream trading partners have actually improved payable terms for their suppliers.
The future lies before the healthcare provider. As the provider of patient care, they have the greatest potential to lead in the healthcare value chain’s redesign to improve value. They have come a long way, but the changes have been incremental. They have focused primarily on traditional sourcing techniques; not a redesign of the healthcare value chain from the outside in, and the redefinition of complex and antiquated processes.
Orchestrating a Supply Chain Competitive EdgeCognizant
An effective supply chain is the key to creating business value. This paper will help you benchmark your performance today and take a methodical organizational approach to improving your supply chain effectiveness.
Driving a Customer-Centric Supply Chain - 7 NOV 2016Lora Cecere
Report Details: The research for this report was conducted via an online survey from August 12 - October 14, 2016. Surveys were conducted among Manufacturers, Wholesalers/Distributors/Co-operatives and Third-Party Logistics Providers (n=56).
Objective: To determine how companies build a customer-centric supply chain and how well it is working for them.
Highlight: In this study, 80% of companies have a customer-centric strategy; yet the majority (54%) state that there is room for improvement to drive performance changes in their supply chain. Companies struggle to drive alignment and build constancy of purpose.
Building a Digital Supply Chain - report - 9 APR 2018Lora Cecere
Report Details: This report is based on survey research, financial analysis, and discussions with manufacturers attempting to gain first-mover advantage.
Highlight: Digital innovation needs to be focused on ‘test and learn.’ The convergence of new technologies to redefine the atoms and electrons of the supply chain is quite promising, but there needs to be alignment. Read the report for nine insights on how to move forward.
Improving Supplier Reliability -15 June 2016 - ReportLora Cecere
Executive Summary
Trust, but verify. During the recession of 2007, trust in the extended supply chain was broken. As companies throttled-back production to adjust to falling demand, many suppliers who thought that they were strategic were left “holding the bag.” Risk was pushed backwards in the supply chain violating the tenants of many strategic relationships.
As a result, shipments were refused and orders canceled. Payments were delayed and trust was violated. Many supplier companies never recovered, tightening the supply of materials in discrete value chains like automotive and high-tech.
As growth slowed over last five years, the supply chain focused on an agenda to reduce costs. Commodity price volatility increased and procurement pressures to reduce costs resulted in transactional buying (a focus to minimize price variance). In many companies, strategic sourcing and commodity management through category buying programs took a “back seat.” Supplier programs become more reactive.
In this environment, as shown in Figure 2, supplier viability—an environment for a supplier to manage a successful business—became a pressing risk issue. Sitting four and five levels back in the value network, suppliers experienced a double-whammy—pressure to reduce price along with the lengthening of Days of Payables.
Ironically, while technology in supply chain finance progressively improved to enable a quick transfer of funds across industries, Days of Payables increased 30 and 60 days. The second irony is the cost of capital. While brand owners have a lower cost of capital than their suppliers, few companies extend their brand capabilities in supply chain finance to their suppliers. While companies talk supply chain finance, squeezing suppliers is the market reality.
In parallel, economic uncertainty and demand volatility increased, also putting pressure on the supplier base. While the adoption of demand-driven processes could improve supplier alignment, demand-driven process adoption is slow. Few companies are taking ownership of demand signals to their supply base.
Traditional processes dominate. Companies are strongly wedded to supply-centric processes based on traditional forecasting processes using order patterns. With the lengthening of order latency, and the lengthening of the long tail of the supply chain, the synchronization of suppliers into the value network is out-of-step, creating waste and obsolescence.
Similar to Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies - 2016 (16)
A critical look at three years of supply chain disruption. Using quantitative and qualitative research, Lora Cecere, Founder of Supply Chain Insights, looks critically at the factors within companies that drove resilience and the factors less successful. Companies that won were aligned, used market signals, decreased process latency, used scenario planning, and implemented descriptive analytics. Those that fared worse, had tight integration of supply chain planning to ERP, were not aligned, and were focused on a digital transformation strategy.
River of Demand - ALL RIVERS with QR.pdfLora Cecere
Drawings of demand as a river depicting the issues with flow with the voice overlay of the planner. To hear the voice, scan the QR code at the bottom of the drawing.
Presentation was given at the Longbow presentation on the future of supply chain management and the value of changing processes to make decisions a the speed of business decisions
At the Supply Chain Insights Global Summit, we challenged the audience to think about "social tokens" using this presentation from Luke Layden of Coin Desk.
Today's supply chain processes are inside-out. Outside-in processes, using channel and market data, improve the time to respond. This presentation reflects two years of testing using machine learning to understand the impact on the bullwhip effect and Forecast Value Added.
Now in its ninth year, the Supply Chains to Admire analysis is a study of the progress of each industry sector on the balanced scorecard of growth, operating margin, inventory turns, and Return on Invested Capital (ROIC). Twenty-two companies outperform their peer group, defining and exemplifying supply chain excellence.
Supply Chains to Admire Analysis 2022_2022 presentation.pptxLora Cecere
Supply Chains to Admire is a data-driven analysis based on public reporting of manufacturing and retail companies. The research evaluates which public companies drove improvement while outperforming their peer groups on performance metrics and value for the ten-year period of 2012-2021. The 25 winners are a testimonial to supply chain resilience.
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
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Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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Cracking the Workplace Discipline Code Main.pptxWorkforce Group
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Supply Chain Metrics That Matter: A Focus on Pharmaceutical Companies - 2016
1. A Focus on Pharmaceutical Companies
A Ten Year View of Progress on Supply Chain Excellence
05/12/2016
Lora Cecere
Founder and CEO
Supply Chain Insights LLC
Heather Hart
Research Director
Supply Chain Insights LLC
Regina Denman
Client Services Director
Supply Chain Insights LLC
Helen King
Research Associate
Supply Chain Insights LLC
Supply Chain Metrics That Matter
2. Page 2
Contents
Research
Disclosure
Research Methodology
Understanding the Data
A Complex System with Nonlinear Relationships
Driving Profitability
Improving Cycles
Managing Complexity
A Closer Look at Value
Driving Improvement
Supply Chain Index: A Measurement of Supply Chain Improvement
Balance
Strength
Resiliency
Evaluating Supply Chain Excellence: Putting It All Together
Executive Overview
The Race for Growth
What Is Value?
Judging Supply Chain Performance
Managing Cycles
A Closer Look at Generic Pharma
Industry Focus
Recommendations
Conclusion
Prior Reports in This Series
Methodology: Understanding the Math and Ratios
Supply Chain Index Methodology: Formulas and Calculations
Balance
Strength
Resiliency
A Closer Look at Inventory Turns: An Important Measurement
Looking at Trends
Corporate Overview Data
About Supply Chain Insights LLC
About Lora Cecere
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Research
Supply Chain Metrics That Matter is a series of industry-specific reports published throughout the
year by Supply Chain Insights LLC. The series starts in May when full-year corporate reporting is
complete for the prior year. In this report series we provide a deep focus on progress over the past
decade on supply chain excellence for a specific industry. This report is a deep analysis of the
pharmaceutical industry.
This analysis is based on data collected from financial balance sheets and income statements over
the period of 2006-2015. In these reports we examine how companies made trade-offs over the
course of the last decade. Here we analyze which pharmaceutical company’s supply chain did the
best on the delivery of a portfolio of metrics during that period.
Within the world of Supply Chain Management (SCM), each industry is unique. The pattern for
pharmaceutical companies is distinctly different than consumer products or medical device
companies. It is for this reason we believe it is dangerous to list all companies across industries in a
spreadsheet and declare a supply chain leader. Instead, we think it is more prudent to evaluate
change over time, with a focus on business results within an industry peer group.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research processes. 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. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and you will find our citation policy here.
Research Methodology
Supply chain leaders are in a race to deliver supply chain excellence. The question is “What defines
excellence?” and “What defines value?” Here we answer these questions. To complete this analysis,
and understand the patterns, we analyze both performance and improvement of pharmaceutical
supply chains. We believe that the best supply chains out-perform their peer groups while driving
improvement.
4. Page 4
Performance is easier to measure than improvement. To build a method to measure improvement,
we partnered with a research team from the School of Computing, Informatics and Decision Systems
Engineering at Arizona State University (ASU) during the spring of 2014 to develop the Supply Chain
Index methodology to analyze supply chain improvement. Details on the math used in this
methodology are outlined in the Appendix of this report. We have refined this over time.
Understanding the Data
In this analysis we use supply chain financial ratios as opposed to absolute numbers. The use of
ratios allows us to compare large companies to small entities, and also to compare the progress of
companies operating in different countries using differing currencies. Additionally, it allows us to
easily track progress over time.
Our first step was to determine which metrics to use. In Table 1 we share the supply chain ratios we
considered.
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
We find that most supply chain leaders measure too many indicators. To select the metrics in the
analysis we mined trends and discussed them with supply chain leaders. After a year of research, we
5. Page 5
determined that the patterns and trade-offs between Year-Over-Year Revenue Growth, Operating
Margin, Inventory Turns and Return on Invested Capital (ROIC) were the most helpful in the
determination of performance and improvement. We term these as the Supply Chain Metrics That
Matter™.
While there are other measurements which we believe are important in the determination of supply
chain excellence—like 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
years studied. In our research 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 they are important.
A Complex System with Nonlinear Relationships
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. In our research we see that it takes at least three years. On
the journey we often find companies throwing the system out balance. As a result, leaders are able to
only drive progress on a single metric, not the entire metrics portfolio. A balanced metrics portfolio
has a higher correlation to value-based metrics of either market capitalization or market-to-tangible
book.
Our goal was to select a portfolio that would be meaningful across all industries. It is important to note
that the maximization of market capitalization requires the management of a balanced portfolio on the
effective frontier of growth, cost, cycles and complexity. We believe that supply chain leaders improve
a balanced portfolio of metrics.
Figure 1. The Effective Frontier
6. Page 6
In our writing it is deliberately not termed the ‘Efficient Frontier’—a term used in economic theory.
Why? Quite simply it is because the term ‘efficiency’ in supply chain processes is usually linked to the
lowest cost or the best revenue per employee. The concepts of the Effective Frontier are based on
the balance of growth agendas with cost, cycle metrics (a focus on inventory), and complexity. We
use Return on Invested Capital (ROIC) as a proxy for complexity.
In this report we analyze the progress of the pharmaceutical industry on the Effective Frontier. Across
all industries we find that nine out of ten companies are stalled at the intersection of two important
metrics, i.e. inventory turns and operating margin. While some companies made no improvement
over time, most companies were able to either improve inventory turns, or cost, but not both together.
The reasons? One of the reasons is unchecked complexity. The second is the focus on functional
metrics to the detriment of corporate performance. In the last five years 25% more items were added
to the item master of the average pharmaceutical company. As will be seen in this report, unchecked
complexity throws the supply chain out of balance.
Driving Profitability
There is often an inverse relationship between margin and supply chain excellence. Industries with
the thinnest margins are more serious about delivering on the promise of supply chain leadership.
With the historically high margins in the pharmaceutical industry, driving supply chain leadership has
not been an important industry imperative. Today, with globalization, affordable healthcare, and the
drug patent cliff there is more focus on building a strong supply chain. In our analysis for this report,
we use operating margin as the measure of profitability. The methodology is equally applicable to
EBITDA.
Improving Cycles
When it comes to managing cash-to-cash cycles, a small number is better than a large one. The
question in the boardroom is “How small can supply chain working capital cycles be managed to
pump cash into the organization?” There is seldom the question of “How low can we go in working
capital cycles before we put the supply chain at risk?” Cash-to-cash is a composite metric of days of
receivables, days of inventory, and days of payables. As can be seen through the charts, the greatest
improvement in supply chains in the last decade has been made in payables—lengthening payment
terms to suppliers. Inventory levels and receivables have been more constant.
In our analysis we use inventory turns as our measure of supply chain cycles. While companies want
a smaller number for days of inventory, they want to turn inventory faster. The higher the inventory
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turn value, the stronger the results. There are two primary ways to calculate inventory turns. In this
report we measure inventory turns as:
Inventory Turns = Cost of Goods Sold/Inventory
Managing Complexity
By definition the pharmaceutical industry is an asset intensive industry. Manufacturing reliability is at
the core of supply chain excellence. Within the pharmaceutical company supply chain there are many
forms of complexity: increase in items, customer policies, geographic reach, changes in
manufacturing, serialization of items, cold chains, and new product launch. In the last decade
complexity abounds. As complexity rises it is hard to drive asset effectiveness.
There are many measurements of asset effectiveness: Return on Assets (ROA), Return on Net
Assets (RONA) and Return on Invested Capital (ROIC). Return on Invested Capital is a less well-
known metric compared to Return on Assets. In this report we use ROIC as a measure of asset
effectiveness.
The reasoning? Return on Assets has a narrower focus. Our research indicates that ROIC has a
better correlation with stock market capitalization, and provides a broad perspective on cash flow
generation and profitability based on shareholder equity. The formula used for ROIC is:
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑇𝑜𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦
ROIC is a measurement of the company’s use of capital. The goal of the measurement is for the firm
to drive higher returns than the market rate of the cost of capital. As will be seen in this report, for
many companies this is a struggle.
A Closer Look at Value
Traditionally the supply chain team’s focus was a cost agenda. Increasingly the organization is asking
the supply chain team to focus on value. However, to guide this journey there has to be a clear
definition of value. There is no industry-standard definition of value.
To help, we started this undertaking with an analysis between supply chain performance and market
capitalization. In 2012 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 initial study on the correlation to market capitalization
are presented in Table 2.
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Table 2. Correlation of Supply Chain Financial Ratios to Market Capitalization
Within the firm, 60-80% of total costs are controlled by the supply chain team. In parallel, most of the
physical assets are driven and/or defined by supply chain strategy. While market capitalization is
often driven by economic cycles we find Price to Tangible Book Value (PTBV) is a more disciplined
look at value.
Price to Tangible Book Value is calculated by dividing the share price of a public company by its
tangible book value per share. It is a ratio depicting what investors are paying for each dollar of
physical assets. For example, let's assume that Company XYZ has 10,000,000 shares outstanding
which are trading at $3 per share. Let’s assume that the same company’s tangible book value was
$15,000,000 last year. The calculation would be:
Price to Tangible Book Value = $3 / ($15,000,000/10,000,000) = 2.0
The PTBV ratio excludes intangibles: intellectual property, patents, goodwill and other intangible
assets. It is a representation of what debt holders or investors would receive if the company liquidated
all physical assets. We feel this is a measure which supply chain leaders can impact. In this report we
use the metrics that have the highest correlation to market capitalization and also evaluate which
companies have driven the greatest improvement on Price to Tangible Book Value.
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Driving Improvement
In the analysis of supply chain excellence, it is a mistake to look at singular metrics at a point in time
and declare a supply chain winner. Instead, it needs to be measured as a pattern over many years.
The best supply chain improvements take at least five to six years.
Sustaining competitive advantage is difficult. A bad project, a quality issue, or a merger, drives
gyrations. As a result, most companies go through ups and downs with distinct patterns. We believe
that the patterns matter. It is for this reason in this report we analyze companies’ progress during the
time periods of 2006-2015, 2006-2009, and 2010-2015. Why these time periods? Here we are
analyzing pre-recession and post-recession progress within specific industries as defined by NAICS
code designations.
To understand the differences by industry, let’s take a closer look at the healthcare value chain.
When we compare the 2006 to 2015 industry averages, we can see that the pharmaceutical industry
improved in all of the metrics covered in this report. The pharmaceutical industry is one of the few
industries with higher performance in 2015 when compared to 2006. The reason? Historically, the
pharmaceutical industry is a supply chain laggard. As product development slowed in clinical trials,
and global complexity increased, supply chain became a more valued core competency.
Table 3. Changes in Industry Average Values of the Supply Chain Metrics That Matter When the 2006 Averages
Are Compared to 2015
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Supply Chain Index: A Measurement of Supply Chain
Improvement
The Supply Chain Index is the measurement of improvement used in this report. The foundation of
the Supply Chain Index starts with understanding the resulting pattern when two supply chain metrics
(generally ratios) are plotted over time on an orbit chart. As shown in Figure 2, the orbit chart enables
the visualization of performance patterns. In this case the company is Amgen. The average values for
the two financial ratios of operating margin and inventory turns are shown in the box, and the annual
progress is shown as points on the chart. The best scenario is notated in the upper right-hand corner.
The pattern of Amgen’s performance, as shown in Figure 2, is very characteristic of most companies.
While there is improvement for 2013-2015, the company struggled to drive improvement in these two
critical metrics over the period of 2006-2013.
Figure 2. Example Orbit Chart of Amgen
This is not unusual. We seldom see a company making linear improvement at the intersection of
these two important metrics. As you will see in the case of pharmaceutical companies, many
companies are not even making improvement in one of the two metrics.
11. Page 11
Contrast the patterns of BMS and Merck in Figure 3. While BMS is operating at a higher level of
inventory turns (6.27), the company has a lower operating margin (.08). In contrast, Merck has a
higher operating margin (.15) and lower value for inventory turns (2.77). Both companies are at the
same performance level in 2015 as they were in 2006. This is despite many, many continuous
improvement and Lean projects. You might ask, “How can this be?” Answering this question is the
goal of this report.
Figure 3. Example Orbit Chart of Inventory Turns versus Operating Margin for 2006-2015 of BMS vs. Merck
Also note BMS has a tight pattern while Merck’s results have greater variability. We call this
resiliency. A tighter pattern is more resilient. In this case BMS’ results were more resilient than those
of Merck.
Due to the complexity of the charts, our first challenge in the creation of a methodology was to define
‘Supply Chain Improvement’. This was our goal in building the Supply Chain Index. We wanted to
develop a means to analyze improvement across a variety of industries, with applicability to
companies with different levels of revenue, and at different levels of supply chain maturity. With each
chart we measure balance, strength and resilience in performance metrics within a peer group for the
Supply Chain Metrics That Matter.
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Balance
Balance in the supply chain is a constant struggle. Growth requires an increase
in inventory. Forecasting and managing a new product launch is difficult.
Excessively long Days of Payables leads to weakened supplier health. The
examples are endless. The two metrics which comprise our balance measure
are Revenue Growth and Return on Invested Capital.
The balance measure in the Supply Chain Index is a mathematical calculation
of the vector trajectory of the pattern between growth and ROIC for the periods of 2006-2015 and
2009-2015.To understand this measurement, imagine a four quadrant grid with growth and ROIC on
the two axes. In our calculation, the overall trajectory of this vector from Year 0 (2006) to Year 9
(2015) is simplified into a single value which represents the company’s ability to balance growth while
improving ROIC.
Companies that were able to drive improvement in both metrics scored the best, while companies
that deteriorated in both metrics scored the worst. The companies are then stack-ranked based on
factor ratings. In Figure 4 we profile Amgen at this intersection.
Figure 4. Orbit Chart of Growth vs. Return on Invested Capital (ROIC) for 2006-2015 for Amgen
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The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high
balance score.
Strength
A successful supply chain is strong and reliable. Supply chain leaders strive to
deliver year-over-year improvements in both cost and inventory management.
Our research on pattern recognition has uncovered a rich relationship between
operating margin and inventory turns. For most supply chain leaders, these are
some of the most important measures of their performance. Not only are they
important, they are more directly influenced by day-to-day supply chain
decisions than other, and more broadly used, corporate metrics. It is for this reason they are the two
components of our strength factor in the Supply Chain Index.
The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between inventory turns and operating margin for the periods of 2006-2015 and 2010-
2015. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.
To understand the calculation, imagine a plot—an orbit chart—of inventory turns and operating
margin. In this report, performance is graphed on an annual basis from an origination point
representing performance on the two metrics at Year 0 (2006). The overall trajectory of this vector
from Year 0 (2006) to Year 9 (2015) is simplified into a single value which represents strength.
Improvement on both metrics simultaneously is graphically shown as movement to the upper-right
quadrant with increasing values for both inventory turns and operating margin over the period.
For example, let’s compare Eli Lilly and Novo Nordisk. These two companies compete in the diabetic
care sector. Note in Figure 5 that Novo Nordisk is driving a slow rate of improvement on the two
metrics, while Eli Lilly is struggling to drive improvement and going backwards during the period of
2011-2015.
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Figure 5. Orbit Chart: Operating Margin vs. Inventory Turn Comparison of Eli Lilly and Novo Nordisk A/S
As a result of this pattern, and driving higher and more sustainable results, Novo Nordisk’s ranking on
strength in the Supply Chain Index is higher. The companies are then stacked-ranked based on
performance and assigned a strength factor. The strength ranking is 1/3 of the Supply Chain Index.
Resiliency
Resiliency is an adjective easily tossed around as one of the important qualities
of a successful supply chain in today’s volatile world. However, the concept of
resiliency is difficult to define, and there is rarely clarity among stakeholders as
to what resiliency is or should be.
As we plotted orbit chart after orbit chart, we could see that some supply chains
had very tight patterns at the intersection of operating margin and inventory
turns, and that other companies had wild swings. We wanted to find a way to measure the variation.
So, we turned to the experts at ASU. After evaluating several methods to determine the pattern in the
orbit chart, we settled upon the Euclidean Mean Distance between the points.
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These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving
Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection
of inventory turns and operating margin. (The calculation is outlined in the Appendix of this report.)
These metrics, both critical for any supply chain, are components of both the strength and resiliency
metrics in our Supply Chain Index model.
The tightness of the pattern (mathematically speaking, the Euclidean Mean Distance) indicates the
ability of a supply chain to maintain a tight, consistent pattern across these two metrics as the
business environment shifts and changes over a nine-year period (2006-2015). As shown in Table 4,
supply chain resiliency varies considerably by industry. The pharmaceutical industry is more resilient
than contract manufacturing and consumer electronics, but more volatile than consumer packaged
goods.
Table 4. Supply Chain Resiliency by Industry
The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower
number for resiliency is an indicator of a tighter pattern and greater reliability in results over the time
period.
16. Page 16
Judging Supply Chain Improvement
In the overall analysis each company is judged by their own potential to make progress. While the
average values of a company’s performance may be higher, in the Supply Chain Index we are
evaluating companies on their ability to drive year-over-year improvement and reliable progress on
the metrics that we believe matter.
The Supply Chain Index is a measurement of supply chain improvement. Each of the factors—
balance, strength and resiliency—as defined above, comprises 1/3 of the total score.
𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐼𝑛𝑑𝑒𝑥™ =
1
3
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑅𝑒𝑠𝑖𝑙𝑖𝑒𝑛𝑐𝑦 𝐹𝑎𝑐𝑡𝑜𝑟
The Supply Chain Index results for Pharmaceutical companies are shown in Table 5.
Table 5. Supply Chain Index for Pharmaceutical Companies for the Years of 2006-2009, 2010-2015 and 2006-2015
The companies making the most improvement are Amgen, Bayer Group, Biogen Inc., Novo Nordisk
A/S, and Roche Holding AG. Three of these companies also outperform their peer group on Price to
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Tangible Book Value.
Companies that are underperforming their peer group can drive supply chain improvement faster than
higher-performing companies. As a result, when evaluating supply chain excellence, it is important to
look at improvement and performance together. We use this analysis to determine the best
performing supply chains through our Supply Chains to Admire methodology.
Evaluating Supply Chain Excellence:
Putting It All Together
In the overall analysis for the Supply Chains to Admire, each company is judged by their own
potential to make progress. While the average values of a
company’s performance may be higher, in the Supply Chain
Index we are evaluating companies on their ability to drive
year-over-year improvement and reliable progress on the
metrics that we believe matter.
The companies that are above the industry peer group on this balanced portfolio, and have driven
supply chain improvement, are given a “Supply Chains to Admire” award. This recognition award is
now in its third year. The 2016 winners are shown in Figure 6.
Figure 6. 2016 Supply Chains to Admire Award Winners
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To meet the criteria for The Supply Chains to Admire for 2016, companies needed to score better
than their peer group average for performance metrics, while driving a higher level of improvement
than 2/3 of their industry peer group. No company meets the qualification in the pharmaceutical
industry for 2016.
The calculation process is:
Supply Chain Index. The Supply Chain Index is calculated for the peer group. A ranking in the top
2/3 of the peer group qualifies a company for further analysis. A company in the lower 1/3 for the
period is eliminated from consideration.
Price to Tangible Book Value. This analysis determines which companies are driving the greatest
value. We first throw out the outliers in the (PTBV)i calculation. After the elimination of outliers, we
include companies that are at or above the PTBV value (allowing for no more than 5% below the
mean for the peer group to account for rounding errors).
Companies passing these two tests are then analyzed against the performance factors for 2009-
2015:
Growth. Higher percentage growth than the industry average.
Operating Margin. Greater margin performance than the industry average for the peer group for
the period studied.
Inventory Turns. Better performance in inventory turns than the peer group average for the period
studied.
Return on Invested Capital (ROIC). Higher performance on ROIC than the average for their peer
group for the period.
In the analysis of the performance factors, companies are divided into two classifications:
Supply Chains to Admire Winners: In the analysis of the performance factors of growth, operating
margin, inventory turns, and Return on Invested Capital, companies scoring at or above the industry
peer group average for all four of the factors are listed as Supply Chains to Admire winners. (Must
be within 5% of the mean of the peer group to account for rounding.)
Supply Chains to Admire Finalists. Companies meeting the Supply Chain Index and the PTBV
criteria, but falling below the peer group averages on the performance factors, are ranked as
finalists if they are no more than 10% below the industry average for three out of four of the
performance factors, and no more than 25% below on any single performance factor.
After doing this comparative analysis of the performance factors, we form a short list of companies.
The methodology is not limited to the best company in the peer group. Within a peer group, there can
be multiple winners.
19. Page 19
Executive Overview
Globalization. Serialization. Clinical trials. Cold chain operations. Custom drug protocols. Compliance.
Risk Management. Corporate Social Responsibility (CSR). First pass yield. Over the last decade, the
number and variety of supply chain initiatives exploded for the pharmaceutical leader. As a result, the
supply chain group, and the business imperatives, grew in importance.
Overall, the pharmaceutical supply chain fared better through the decade than that of consumer
products or food/beverage. The reason? The pharmaceutical supply chain entered the decade as a
supply chain laggard. They were able to focus and catch up to the level of other industries.
As shown in Table 6, when the industry averages of 2016 are compared to 2015, the pharmaceutical
supply chain grew revenue while driving improvements in operating margin, inventories, cash-to-cash
and Return on Invested Capital (ROIC).
Table 6. Industry Snapshot of Performance
20. Page 20
However, when we look at the balance sheets and income statements, and compare company
performance, there is not clear supply chain winner. While Biogen and Novo Nordisk are clearly
driving improvement, and Price to Tangible Book Value, neither company outperforms on inventory.
As a result, no pharmaceutical company will make the 2016 Supply Chains to Admire list. To make
the list, a company had to deliver performance (above average results for the period of 2009-2015
than their peer group on a portfolio of metrics including Price to Tangible Book Value, growth,
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. We hope this report can be a guide to help companies
understand what is possible, and how supply chain metrics drive value.
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. The goal of this report is to enable benchmarking and to spark a new conversation on
the definition of supply chain excellence.
The Race for Growth
Growth rates for the pharmaceutical companies were faster early in the decade than the last part of
the decade. The overall growth for the period of 2006-2015 is 6%. As shown in Table 7, note that two
companies in the peer group posted growth rates greater than the industry average and are in the top
half of the Supply Chain Index (measurement of supply chain improvement) for the periods of 2006-
2015 and 2010-2015. These companies are Amgen and Biogen. Conversely, Merck beat the growth
rates for the period of 2006-2015, but struggled to drive supply chain improvement. Companies with
the highest growth rates also did the best on driving supply chain improvement.
Many supply chain leaders don’t believe it is possible to grow and manage the Supply Chain Metrics
That Matter simultaneously. In the analysis, we see that as growth slowed in the Pharmaceutical
industry that it was harder to drive improvement on the Supply Chain Metrics That Matter.
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Table 7. Industry Growth Rates Over the Last Decade with a Comparison to the Supply Chain Index
What Is Value?
As noted in Table 8, companies outperforming in market capitalization may not outperform in Price to
Book, or Price to Tangible Book Value. Also note the trend between PTBV and the Supply Chain
Index. While a company like AstraZeneca PLC is outperforming on many metrics, the supply chain
performance is declining with a falling Price to Tangible Book valuation.
22. Page 22
Table 8. Comparison of Market Capitalization, Market-To-Book Value and Market-To-Tangible Book Value
Judging Supply Chain Performance
When it comes to overall supply chain performance, Biogen and Novo Nordisk are posting results
better than the peer group while still driving improvement. However, neither company is pushing
above the industry average on all of the metrics to meet the Supply Chains to Admire definition. As
shown in Table 9, both Biogen and Novo Nordisk are outperforming in growth, operating margin and
ROIC, but underperforming on inventory turns. Shire is showing improvement in the later part of the
decade, but is a late bloomer.
23. Page 23
Table 9. Comparison of Performance and Improvement for the Periods of 2006-2009, 2010-2005 and 2006-2015
Managing Cycles
When comes to managing cash-to-cash cycles, a small number is better. The question in the
boardroom is “How small can supply chain cycles be managed before we put the supply chain at
risk?” To understand the management of cycles in the pharmaceutical industry we evaluated them in
three time periods: pre-recession, during the recession and post-recession. We wanted to understand
how the components of cash-to-cash cycles had changed across competitors over time.
Cash-to-cash is a composite metric of receivables, inventory and payables. As can be seen through
the charts, the greatest improvement in supply chains in the last decade has been made in
payables—i.e. lengthening payment terms to supplies—while inventory levels and receivables have
been more constant. However, with the exception of AstraZeneca, the pharmaceutical companies
have not been as aggressive as other industries on the elongation of payables.
24. Page 24
Table 10. Comparison of Cash-to-Cash Components: Pharmaceutical Industry During 2006-2009 and 2010-2015
While it looks like AstraZeneca has made the most progress in managing cash-to-cash cycles, a
closer examination of the payables in Figures 6 and 7 tells a different story. The improvement is
primarily coming from lengthening payables. The movement from 300 to over 500 days by
AstraZeneca is dangerous. This is especially true in the Pharmaceutical industry where there is a
critical dependence on suppliers and contract manufacturers.
Figure 6. Cash-To-Cash Cycles for Major Pharmaceutical Companies for the Period 2006-2009
25. Page 25
Figure 7. Cash-To-Cash Cycles for Major Pharmaceutical Companies for the Period of 2010-20015
We find that the supply chain leaders who are making the most progress on the Effective Frontier,
and have the tightest resiliency on orbit charts (at the intersection of inventory turns and operating
margins), usually have lower payables in the 30- to 120-day range.
A Closer Look at Generic Pharma
While the first part of this report focuses on branded pharmaceuticals, a new industry for generic
drugs has evolved. These companies operate at a lower margin, where supply chain performance
should be paramount. However, note that the generic pharma leaders Teva and Mylan have not been
able to drive higher levels of supply chain performance or improvement. As shown in Figure 8, both
companies lack resiliency at the intersection of operating margin and inventory turns. There is an
opportunity in generic pharma to use supply chain as a competitive advantage which has not
happened yet.
26. Page 26
Figure 8. A Study of Teva and Mylan at the Intersection of Operating Margin and Inventory Turns
Industry Focus
To grow, the industry was rife with acquisitions. During 2010-2015 the supply chain focus was Lean
Six Sigma, the prevention of counterfeit products and protection of intellectual property, and
globalization. Pharmaceutical companies are more mature on Risk Management and Supplier
Development programs than consumer products or food/beverage. In this section we share significant
supply chain related quotes from the corporate reports for this period.
Abbot Laboratories 2010: in recent years. Just as our Guidant acquisition in 2006 capped a long-
term strategy that gave us critical mass in an attractive new business, our more recent strategic
actions have taken Abbott to a new level in emerging markets. In 2010, we:
Acquired Solvay Pharmaceuticals, bringing us approximately $2 billion in stable, branded generic sales;
Acquired Piramal’s Healthcare Solutions business, making Abbott the largest pharmaceutical company in
India, an $8 billion market expected to double in the next five years;
Completed an agreement with Zydus Cadila for 24 branded generic pharmaceutical products in 15 emerging
markets;
Created a new Established Products Division (EPD) to maximize the strong commercial opportunities
for branded generics outside the United States. EPD launched at the beginning of 2011 with
approximately $5 billion in annual sales. All these actions give us the right commercial footprint to
27. Page 27
become one of the largest pharmaceutical companies in emerging markets.
We expect that roughly one-third of our global pharmaceutical sales will come from high-growth
emerging markets within five years.1
In the domestic pharmaceutical business, the most significant charges against gross sales are for
Medicaid and Medicare Rebates, Pharmacy Benefit Manager Rebates and Wholesaler Chargebacks.
In order to evaluate the adequacy of the ending accrual balances, management uses both internal
and external data to estimate the level of inventory in the distribution channel and the rebate claims
processing lag time. External data sources used to estimate the inventory in the distribution channel
include inventory levels periodically reported by wholesalers and third party market data purchased
by Abbott. Management estimates the processing lag time based on periodic sampling of claims data.
To estimate the price rebate percentage, systems and calculations are used to track sales by product
by customer and to estimate the contractual or statutory price. Abbott’s systems and calculations
have developed over time as rebates have become more significant, and Abbott believes they are
reliable.2
AstraZeneca 2010: We seek to maximize the efficiency of our supply chain through a culture of
continuous improvement. We focus on what adds value for our customers and patients, and what
eliminates waste. This program has delivered significant benefits in recent years, including reduced
manufacturing lead times and lower stock levels, both of which improve our ability to respond to
customer needs and reduce inventory costs. Changes have also been achieved without
compromising customer service and quality. We have been applying Lean business improvement
tools and ways of working to improve the efficiency of our manufacturing plants for a number of years,
and are now applying them to the whole of our supply chain. In 2010, we reinforced our commitment
to creating a Lean supply and manufacturing organization with a global campaign to recruit more
Lean experts into our manufacturing sites and supply chain functions. This has included the creation
of a new global centre of excellence comprising Lean experts from a broad range of industrial
backgrounds to provide support and co-ordination to the accelerated development of our Lean supply
system. This enables us to learn from other industries how to operate our supply chains at a much
higher performance level than is generally found in the pharmaceutical sector. The inauguration of a
new regional packing centre in Wuxi, China in 2010 was a key milestone. We operate this centre to
1
Abbot Laboratories, 2010 Annual Report, March 3, 2011, p.3, http://www.abbott-
laboratories.si/uploads/datoteke/Global%20citizenshi p%20report%202010.pdf, accessed April 1, 2016.
2 Abbot Laboratories, 2010 Annual Report, March 3, 2011, p.65, http://www.abbott-
laboratories.si/uploads/datoteke/Global%20citizenshi p%20report%202010.pdf, accessed April 1, 2016.
28. Page 28
our global standards and apply a broad range of Lean techniques and principles. We believe it will
improve our competitiveness in Asian markets.3
At the end of 2010, approximately 9,300 people at 23 sites in 16 countries were working on the
manufacturing and supply of our products. Approximately 8,350 people work in formulation and
packaging and 350 people work in active pharmaceutical ingredient (API) supply. Our principal small
molecule manufacturing facilities are in: the UK (Avlon and Macclesfield); Sweden (Snäckviken and
Gärtuna, Södertälje); the US (Newark, Delaware and Westborough, Massachusetts); France (Reims);
Japan (Maihara); Australia (North Ryde); China (Wuxi); Puerto Rico (Canovanas); Germany (Wedel);
Mexico (Lomas Verdes); Brazil (Cotia); and Argentina (Buenos
We continue to work to make sure that our purchasing is directed only to those organizations which
embrace ethical standards consistent with our own. This is particularly important given the strategic
changes to our geographic footprint and our increased outsourcing activity to support improved
efficiency and effectiveness across the organization. Our Global Responsible Procurement Standard
defines the process for integrating our ethical standards into our procurement activity and decision
making worldwide. The process is based on an escalating set of risk-based due diligence activities,
applied in a pragmatic way. The same initial assessment process is used for all suppliers and more
detailed, specific assessments are then made as required, proportionate to the level of risk a supplier
presents. The Standard includes detailed expectations of suppliers which suppliers sign up to as part
of the contracting process. We will work with suppliers to help them improve their standards, rather
than automatically excluding them from our supply chain but we will not use suppliers who are unable
or unwilling to meet our expectations in a timely way.
Implementing our approach across the many thousands of suppliers we work with around the world
will take time. We started with our largest suppliers, whose contracts with AstraZeneca are managed
centrally by our Procurement team. In 2009, we completed Responsible Procurement assessments of
over 800 suppliers accounting for around 65% of our third party spend. In 2010, we extended the
program to other companies in our supply chain, including smaller suppliers and those whose
contracts are managed locally. Since the program began, we have completed over 1,950
assessments which account for around 75% of our third party spend. The ongoing program will
continue throughout 2011 and beyond.
3 AstraZeneca, 2010 Annual Report, March 2011, p.34, https://www.astrazeneca.com/content/dam/az/our-
company/investor-relations/presentations-and-webcast/Annual-Reports/2010-Annual-Report.pdf, accused April
1, 2016.
29. Page 29
In late 2010, we introduced a requirement that our key suppliers provide independent audit
verification that their ethical standards are being applied in practice. Together with our suppliers, we
are partnering with experienced third party providers in this work and using an assessment program
that reflects best practice from other industry sectors, as well as the principles of the Pharmaceutical
Supply Chain Initiative (a group of major pharmaceutical companies working to support suppliers in
operating in line with industry expectations). We are in the early stages of engaging with suppliers on
the introduction of this requirement and it will take time to embed the practice. However, we believe
that this move significantly strengthens the framework for working together with our suppliers to drive
continuous improvement. We continued our Integrated Supplier Evaluation Protocol audit program
during the year and have now supplemented this with the introduction of focused Responsible
Procurement assessments. In 2010, the program covered 48 audits at 42 different suppliers (2009:
51 audits at 45 suppliers).4
Roches Holdings AG 2010: In the Pharmaceuticals Division the operating profit increased by $2.2
billion to $5.9 billion, driven primarily by synergies from the Genentech integration in all functions,
higher positive effects of cost-sharing agreements with related parties and resource prioritization,
notably in marketing and distribution, despite the initial costs for the
Operational Excellence program of $0.4 billion. Cost of sales decreased in comparison to 2009, as a
result of lower royalty expenses and lower expenses for collaboration and profit-sharing agreements
in 2010, further to an amended agreement with GlaxoSmithKline in the U.S. for Bonviva/Boniva. 2010
also includes the impacts of productivity improvements in technical operations, offset by unfavorable
product mix effects. The comparative period includes the one-time impact of the inventory write-off for
the voluntary withdrawal of Raptiva. Research and development costs, excluding intangible assets
impairments, decreased by 4% mainly due to the positive impact of cost sharing agreements with
related parties, resource prioritization and synergies. Research and development expenses also
included the immediate recognition of the remaining costs of $53 million necessary to cover the
termination of the ocrelizumab rheumatoid arthritis development program and the payment received
from Novartis for opting in the Lucentis study on the treatment of macular edema following retina/vein
occlusion. The majority of the costs that were recorded as part of the Operational Excellence program
4 AstraZeneca, 2010 Annual Report, March 2011, p.44, https://www.astrazeneca.com/content/dam/az/our-
company/investor-relations/presentations-and-webcast/Annual-Reports/2010-Annual-Report.pdf, accused April
1, 2016.
30. Page 30
relate to research and development.5
AstraZeneca 2011: In October, we launched an online Supply Chain Academy, providing ongoing
internal training to drive further improvements across our end-to-end supply chain. Alongside this we
ran an internal leadership program to reinforce the cultural aspects of more efficient supply chain
processes. In October, we announced an investment of $200 million to build a manufacturing facility
in China Medical City in Taizhou, Jiangsu province, China to meet growing local demand for our
products and expand availability of our products to people in urban and rural communities. This will
be our first manufacturing site to be built using Lean principles from the outset. These principles are
being applied from the planning stage to the whole facility, including operators, products, components
and equipment. We are designing equipment to meet varying demand, enabling fast, reliable
changeover. We also seek to identify where processes could fail, designing systems to minimize
these risks.6
Capital expenditure on supply and manufacturing facilities totaled approximately $388 million in 2011
(2010: $333 million; 2009: $360 million). As part of our overall risk management, we carefully
consider the timing of investment to ensure that secure supply chains are in place for our products.
We also have a program in place to provide appropriate supply capabilities for our new products. At
the end of 2011, approximately 9,600 people at 23 sites in 16 countries were working on the
manufacturing and supply of our products.
GlaxoSmithKline 2011: In 2011 the FDA approved the highest number of new molecular entities
since 2004, and nearly a third of these approvals were for therapies to treat rare diseases. This is in
line with the FDA’s priority to address the public health needs of special populations. Enforcement
and compliance activity increased in the manufacturing and global supply chain, as well as in drug
advertising and promotion. The FDA developed its goals for the renewal in 2012 of the Prescription
Drug User Fee Act (PDUFA) with a focus on enhancing the science of drug development, improving
the quality of evidence in applications, providing a more efficient and predictable review process, and
maintaining public confidence.7
Our record demonstrates the success of this approach. Although reported turnover fell 3% in 2011,
we have delivered underlying sales growth of 4% in each of the past two years. We anticipate that
5 Roche Holdings AG, 2010 Annual Report, March 2011, p. 3, http://www.roche.com/rhi_ar_2010.pdf,
accessed April 1, 2016.
6
AstraZeneca, 2011 Annual Report, March 2012, p.38, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/2011-Annual-report.pdf, accessed April 4, 2016.
7
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.14, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
31. Page 31
underlying sales growth will translate into reported sales growth in 2012. (For details of underlying
growth see page 27). In addition, 38% of Group turnover is now generated outside the USA and
Europe.
The shift in sales away from a reliance on ‘white pills in Western markets’ to a broader base including
Emerging Markets, Vaccines and Consumer Healthcare is clear.8
Despite a 5% fall in reported sales, our US operating profit increased by 1% as our efforts to simplify
and standardize work processes produced efficiencies that helped control costs and offset the decline
in sales of certain products combined with higher asset disposal income. In our Pharmaceuticals
business, reported turnover declined by 6% and underlying turnover declined by 1%. Sales of our
largest product, Advair, declined 1%. This follows the drop in the US market for ICS/ LABA
combination products following the revised class labeling implemented by the Food and Drug
Administration (FDA) in 2010. Hycamtin sales declined 92% due to generic competition and Zovirax
sales declined 79% following the divestment of the brand in January 2011.9
The first implementation of GSK’s new global standard Enterprise Resource Planning system,
designed to standardize and improve financial and commercial processes, was completed
successfully in Germany, and the deployment of our new European supply chain continues.10
Reported turnover growth in the year was 6%, but underlying growth of 15% outpaced growth in the
market for the third consecutive year. The underlying growth was driven by relatively consistent
pharmaceuticals growth during the year, of 14%. Operating profit fell 3%, reflecting the loss of sales
of pandemic products, Avandia and Valtrex.11
In 2011, we announced our intention to build a new manufacturing facility in the UK for the supply of
biopharmaceutical products. Subject to the introduction of ‘patent box’ legislation by the UK
Government in 2012, this facility could be built at one of four existing GSK sites – Barnard Castle or
Ulverston in the north of England, or Irvine or Montrose in Scotland – representing an investment of
several hundred million pounds.
Standardization should increase productivity, as our businesses will have more time to focus on their
8
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.16, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
9
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.18, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
10
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.20, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
11
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.21, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
32. Page 32
operations and performance rather than coordinating internal processes. Standardization of data and
systems should provide better decision-making information. A key enabler for the delivery of benefits
from CBS will be the enterprise-wide Enterprise Resource Planning (ERP) system.
The significant investment we are making in the Global ERP program over the next five years will
enable CBS to
• create standard business processes, systems and data to support the growth and
• change agenda across multiple businesses. As part of the ERP program we are
• converting country-based commercial IT systems to a single SAP IT system and
• replacing numerous fragmented and non-standardized applications. In 2011 the system went
live in Germany, marking the start of ERP deployment across the whole of GSK.
In 2011, we implemented changes to our supply chain processes. To help supply chain efficiency we
have significantly simplified our product portfolio by reducing the number of packs or ‘SKUs’ by 25%
in Europe, 15% in Japan and up to 24% in Emerging Markets. We are now focused on standardizing
the remaining pack formats to improve packaging efficiency and costs. In addition, our manufacturing
organization is actively seeking to improve procurement processes and in particular our purchasing of
active ingredients, chemical intermediates, packaging components and part-finished and finished
products. This is releasing further cost efficiencies and allowing us to reduce working capital.
In our Consumer Healthcare business, we are redesigning our supply chain to form an integrated,
end-to-end process that is more aligned with our customers and the commercial operations of the
business. This process is also being configured to support the high-growth regions of emerging
markets. These changes are expected to reduce cost and free-up working capital. Our European
pharmaceuticals and vaccines supply chain has also been redesigned to simplify operations and
consolidate distribution locations to reduce inventory, increase service levels and cut operating
costs.12
Our long-term vision is for our entire value chain to be carbon neutral by 2050. Around 40% of our
carbon footprint results from our supply chain and a further 40% from propellants released from our
inhalers. Less than a fifth of our total impact comes directly from our operations, so while we continue
to increase energy efficiency and the use of renewable energy at our sites, we are also focusing on
our supply chain and the use of products, especially inhalers.
In 2011 we began foot-printing key products to identify the priorities, and have developed site-based
12
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.41, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
33. Page 33
events to analyze local carbon reduction potential and act on the opportunities. In 2011 we reduced
energy consumption from our operations by 5.2%. Greenhouse gas emissions from the use of
inhalers rose by 2.9%.13
Inventory of £3,873 million has increased by £36 million during the year. The increase reflects higher
Vaccine stocks, principally Cervarix for the national HPV program in Japan, partly offset by initiatives
to reduce manufacturing cycle times and reduce stockholding days through more efficient use of
inventory throughout the supply chain.14
Roches Holdings AG 2011: The manufacturing organization’s primary objectives in 2011 were to
support Roche’s growing R&D pipeline and improve our manufacturing network and processes, while
maintaining a strong focus on supply chain reliability and product quality. We continued to foster a
culture of continuous improvement and share best practices across sites. Improvements introduced in
2011 include additional common standards for producing small molecules, which will help make site
performance more transparent, and establishing best practices for materials flows and productive
maintenance. In biologics production, we improved scrap-handling practices, resulting in lower
manufacturing costs, Manufacturing sites higher yields and improved manufacturing processes for
products such as Pulmozyme and Nutropin.15
The agility and resilience of our global supply chain was tested in March, when the disastrous
earthquake in Japan interrupted Chugai’s Utsunomiya operations, and again in September, when a
fire damaged our site in Segrate. In response, Roche and Chugai immediately set up supply chain
taskforces that worked in close cooperation with health authorities to ensure continued product supply
and regulatory compliance. Both sites have fully recovered from these incidents and resumed
production.
As part of the Operational Excellence program, announced in late 2010, and the ongoing evaluation
of our manufacturing network, we divested technical development and small molecule manufacturing
operations located in Boulder, USA, to Corden Pharma. Corden will continue to supply us with
commercial-scale peptides and chemical active ingredients for important medicines. We also sold our
clinical plant in Oceanside, USA, to Gilead Sciences in our ongoing program to consolidate clinical
and process development operations. These divestments, along with other measures, lowered the
13
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.49, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
14
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.61, https://www.GlaxoSmithKline.com/media/325141/annual-report-
2011.pdf, accessed April 4, 2016.
15
Roche Holdings AG, 2011 Annual Report, March 2012, p.55, http://www.roche.com/gb11e.pdf, accessed April 4, 2016.
34. Page 34
number of people employed in pharmaceutical operations in the US by 15%.
We reorganized operations across the Diagnostics Division in 2010 to establish a single, integrated
function for driving excellence in manufacturing, supply chain management and procurement. Since
then, we have pursued an agenda of delivering cost savings while building capabilities for sustainable
high performance in quality, cost and supply reliability. In 2011 we again realized an aggressive cost-
saving target, which contributed to the division’s overall improvement in profitability. We also
advanced three performance initiatives:
Asset management: We invested in facilities to expand capacity, alleviate bottlenecks and mitigate
supply risks, and we transferred product manufacturing to consolidate capacity, increase utilization
and reduce costs. We also consolidated our supplier base to ensure optimal alignment between
external suppliers and internal capacities.
Right-first-time manufacturing: We introduced a system-wide program to improve performance by
systematically eliminating errors, driving improvements in right-first-time rates, quality and cost at all
sites. The program also served as a forum for sharing best practices across the network.
Design for quality and manufacturability: We developed tools and methodologies to ensure the
establishment of robust production processes and applied them to product development projects
across the division. We expect these changes to pay dividends in the form of improved quality and
manufacturability as new products are brought to market.16
Abbot Laboratories 2012: Geographically, we are now one of the most truly globalized of healthcare
companies, with only 30 percent of our revenue coming from the United States, a remarkable reversal
from just 10 years ago. Another 30 percent of our sales come from established international markets,
while 40 percent now come from the world’s fastest-growing international markets, including India, in
which we are the largest pharmaceutical company. We expect this to grow to 50 percent over the
next several years.17
AstraZeneca 2012: Since 2007, we have undertaken significant efforts to restructure and reshape
our business to improve long-term competitiveness. The first phase was completed in 2009. The
second phase, which featured a significant change program in R&D, began in 2010. The restructuring
actions for this phase of the program were completed in 2011, at a total program cost of $2.1 billion.
16
Roche Holdings AG, 2011 Annual Report, March 2012, p.57, http://www.roche.com/gb11e.pdf, accessed April 4, 2016.
17
Abbot Laboratories, Annual Report, March 2013, p.2, file:///Users/howardking/Downloads/2012%20Annual%20Report.pdf,
accessed April 5, 2016
35. Page 35
Headcount changes associated with this phase, involving an estimated 9,000 positions, were also
completed. Total annual benefits of $1.9 billion were to be delivered by the end of 2014 in connection
with this phase of the program, of which $1.5 billion had been achieved by the end of 2012.
We are committed to delivering product quality that underpins the safety and efficacy of our
medicines. We have a comprehensive quality management system in place designed to assure the
quality of our products in compliance with relevant regulations. Notwithstanding our efforts, during
2012 we experienced disruptions to our supply chain resulting from the implementation in February
2012 of an enterprise resource planning IT system in our facilities in Sweden (Södertälje and
Gärtuna). This change was necessary, due to the legacy systems reaching the end of their life-cycle.
At launch the implementation encountered some unexpected difficulties and we put in place a team
with representatives from different parts of the organization to manage the situation so that impact on
patients would be minimized and markets were kept informed. The underlying problems have now
been resolved and production levels returned to normal in September. We estimate that the negative
revenue impact for the year resulting from this disruption was approximately 1%. Supply from our site
in India (Bangalore) was also disrupted for a period of time following a voluntary recall of products
that we determined did not meet our global quality standards. Remediation actions have been
implemented.
Lessons learned from the supply chain disruptions in 2012 have been shared across the Group as
part of our continuous improvement program. This program allows us to improve our systems and
minimize the impact of our activities on the environment. We focus on what adds value to our
customers and patients, as well as waste elimination. The program has delivered significant benefits
in recent years, including reduced manufacturing lead times and lower average stock levels, both of
which improve our ability to respond to customer needs and reduce inventory costs. All improvements
are designed to ensure we maintain product quality, safety and customer service.18
We have applied Lean production business improvement tools and ways of working to improve the
efficiency of our manufacturing plants for a number of years and, in recent years, have applied them
to the whole of our supply chain. This has led to improvements in quality, lead times and overall
equipment effectiveness. In 2012, we continued to establish more efficient processes, with experts
from our global supply chain organization providing cross-functional support throughout the
18
AstraZeneca, 2012 Annual Report, March 2013, p.40, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/2012-Annual-report.pdf, accessed April 5, 2016.
36. Page 36
business.19
We categorize suppliers as high, medium or low risk. We focus our auditing efforts on high and
medium risk rated suppliers but we also audit some suppliers that we consider to be lower risk, to
confirm our performance expectations across all suppliers we do business with. In 2012, we
continued our audit activity with 482 audits across 52 countries (751 audits in 2011) as set out in the
table on the previous page. Forty-three percent of suppliers audited demonstrated standards that met
our expectations, with a further 53% implementing improvements to address minor noncompliance.
We monitor progress across all corrective actions and 4% of suppliers audited this year will require
significant follow up to confirm they will make the improvements we require. We will not use suppliers
who are unable or unwilling to meet our expectations in a timely way. During 2012, we removed eight
suppliers from our supply chain.20
GlaxoSmithKline 2012: We continue to make changes to simplify our operating model. Our
Operational Excellence program has now delivered annual savings of £2.5 billion and remains on
track to hit the target we set of £2.8 billion of annual savings by 2014. In February 2013 we
announced a new major change program, which we expect to produce incremental annual cost
savings of at least £1 billion by 2016. This program will include a series of technological advances
and opportunities to eliminate complexity, which we believe can transform our long-term cost
competitiveness in both manufacturing and R&D. The program will help us simplify our supply chain
processes, shorten cycle times, lower inventory levels and reduce our carbon footprint.21
Despite reducing our carbon footprint from energy use by 15% since 2010, our total carbon footprint
(excluding that from raw materials) increased by 7% compared to 2010 driven by higher inhaler sales.
However, current carbon reduction projects should enable us to reach our interim target to cut our
value chain carbon footprint by 10% to 13.5 million tons of CO2 equivalent by 2015.22
The transformation of our operating model and processes has been a key business strategy, enabling
us to standardize and streamline important aspects of our business, including our supply chain. We
have been implementing a restructuring program to deliver significant savings to support investment
19
AstraZeneca, 2012 Annual Report, March 2013, p.41, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/2012-Annual-report.pdf, accessed April 5, 2016.
20
AstraZeneca, 2012 Annual Report, March 2013, p.42, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/2012-Annual-report.pdf, accessed April 5, 2016
21
GLAXOSMITHKLINE, 2012 Annual Report, March 2013, p.3, https://www.GlaxoSmithKline.com/media/279963/annual-report-
2012.pdf, accessed April 5, 2016.
22
GLAXOSMITHKLINE, 2012 Annual Report, March 2013, p.43, https://www.GlaxoSmithKline.com/media/279963/annual-report-
2012.pdf, accessed April 5, 2016.
37. Page 37
in our priority growth businesses as well as offset pressures on the Group’s margin resulting from
changes in the shape and mix of our business.
The existing Operational Excellence program is coming to a close and will be superseded by a new
major change program. This will focus on opportunities to simplify our supply chain processes, as
previously announced in 2012 and on building the Group’s capabilities in manufacturing and R&D, as
well as restructuring our European business. 2012 also saw £165 million of restructuring charges
relating to the acquisition of Human Genome Sciences (HGS). Total restructuring charges related to
HGS are expected to be approximately £204 million, of which most is expected to be a cash cost. The
majority of the remaining HGS restructuring charges will be booked in 2013.23
Roche Holdings AG 2012: Manufacturing, procurement and supply functions bring innovative
medicines and diagnostics from the R&D pipeline to patients and healthcare professionals worldwide.
At all stages of our global supply chain, from suppliers to manufacturers, warehousing and
transportation, we require and apply rigorous safety, quality, ethics, labor, health and environmental
standards. State-of-the-art processes and facilities ensure that these standards are fully met and that
products are made available reliably.24
Pharmaceutical manufacturing played a decisive role in the rapid launch in the US of breast cancer
medicine Perjeta — available to patients one day following FDA approval — and skin cancer
medicine Erivedge — in distribution three days after approval. In collaboration with R&D, we
supported 108 development projects for new medicines, including manufacturing investigational
products for approximately 600 global clinical trials that involved tens of thousands of patients. During
the year we took active steps to safeguard operational reliability. Throughout the organization, we
increased inventory ‘safety stock’ levels, to ensure continuity of product supply in response to
unforeseen increases in demand, especially for new product launches. This contributed to a total
inventory increase of 18% in the division. We also increased oversight across the supply chain
including suppliers and CMOs. To ensure an effective response in case of unexpected events, a new
business continuity process for our manufacturing operations was put into effect.25
Throughout 2012 we continued to pursue several long-term initiatives aimed at sustainable high
performance:
23
GLAXOSMITHKLINE, 2012 Annual Report, March 2013, p.44, https://www.GlaxoSmithKline.com/media/279963/annual-report-
2012.pdf, accessed April 5, 2016.
24
Roche Holdings, 2012 Annual Report, March 2013, p.62, http://www.roche.com/gb12e.pdf, accessed April 5, 2016.
25
Roche Holdings, 2012 Annual Report, March 2013, p.64, http://www.roche.com/gb12e.pdf, accessed April 5, 2016.
38. Page 38
We established a continuous improvement culture and metrics in manufacturing quality performance
(‘right first time’) and put methodologies and tools in place to ensure more robust production
processes (‘design for quality and manufacturability’), with first positive trends.
We continued to optimize manufacturing capacity (‘asset management’), and initiated a major capital
investment project at our site in Penzberg, Germany.
We started two new initiatives that are expected to generate significant savings over the next years: a
supply chain excellence initiative to enhance the reliable and cost-effective supply of our products
and to optimize inventory levels, and a procurement excellence initiative to ensure more strategic
sourcing and improved supplier management, including a new supplier performance measurement
tool.26
Abbot Laboratories 2014: In a highly innovative move, we also agreed to co-develop a dairy-farm
hub in China, which will deepen our roots in the country and strengthen our supply chain. These
investments are a reflection of the strong underlying demand for high-quality adult and pediatric
nutrition products. Our intent is to design and manufacture products around the world to ensure that
they’re geared to local needs and preferences, that we can produce them efficiently, and that we build
our presence and strengthen our relationships with key stakeholders in every country in which we do
business.27
In Abbott’s worldwide diagnostics business, margin improvement continued to be a key focus in 2014.
Operating margins increased from 19.2 percent of sales in 2012 to 22.9 percent in 2014 as the
business continued to execute on efficiency initiatives in the manufacturing and supply chain
functions. In addition to continued margin improvement, unit growth across geographical regions
positively impacted worldwide diagnostic sales. Worldwide sales for this business increased 6.4
percent in 2014 and 8.3 percent in 2013, excluding foreign exchange. In the Established
Pharmaceutical Products segment, Abbott announced in July 2014 that it will sell its developed
markets branded generics pharmaceuticals business to Mylan Inc. As a result, the current and prior
year operating results of the developed markets branded generics business are reported as part of
discontinued operations. Following the close of this transaction, the Established Pharmaceuticals
business will operate entirely in emerging markets. On September 26, 2014, Abbott completed its
acquisition of a controlling interest in CFR Pharmaceuticals S.A. (CFR). The acquisition of CFR more
26
Roche Holdings, 2012 Annual Report, March 2013, p.66, http://www.roche.com/gb12e.pdf, accessed April 5, 2016.
27
Abbott Laboratories, 2014 Annual Report, March 2015, p. 2, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
39. Page 39
than doubles Abbott’s branded generics pharmaceutical presence in Latin America and further
expands its presence in emerging markets. On December 12, 2014, Abbott acquired control of
Veropharm, a leading Russian pharmaceutical company. Through this acquisition, Abbott establishes
a manufacturing footprint in Russia and obtains a portfolio of medicines that is well aligned with
Abbott’s current pharmaceutical therapeutic areas of focus.28
A supplier’s recall of product in August 2013 in certain international markets negatively impacted
International Pediatric Nutritional sales in the third and fourth quarters of 2013, as well as the first two
quarters of 2014. While there were no health issues associated with this supplier recall and the
supplier subsequently determined that the product had been safe for consumption, this event created
significant disruption in these markets. The decline in 2014 U.S. Pediatric Nutritional sales primarily
reflects lower infant formula revenue. U.S. Pediatric sales were flat in 2013 due to lower formula
share, partially offset by higher sales of toddler products.29
In 2014, Abbott management approved plans to streamline operations in order to reduce costs and
improve efficiencies in various Abbott businesses including nutritional and established
pharmaceuticals businesses. Abbott recorded employee related severance and other charges of
approximately $164 million in 2014. Approximately $20 million is recognized in Cost of products sold,
$53 million is recognized in Research and development and approximately $91 million is recognized
in Selling, general and administrative expense. Additional charges of approximately $39 million in
2014 were also recorded primarily for accelerated depreciation. In 2014 and 2013, Abbott
management approved plans to reduce costs and improve efficiencies across various functional
areas as well as a plan to streamline certain manufacturing operations in order to reduce costs and
improve efficiencies in Abbott’s established pharmaceuticals business.30
AstraZeneca 2012: We are committed to high product quality, which underpins the safety and
efficacy of our medicines. To help assure compliance and quality, we maintain a comprehensive
quality management system. Our continuous improvement program allows us to upgrade our systems
and minimize environmental impact. By focusing on increasing efficiency and cutting waste, we have
reduced manufacturing lead times, average stock levels and inventory costs. We have also improved
customer responsiveness. We apply Lean production business improvement tools and methods to
28
Abbott Laboratories, 2014 Annual Report, March 2015, p. 61, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
29
Abbott Laboratories, 2014 Annual Report, March 2015, p. 63, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
30
Abbott Laboratories, 2014 Annual Report, March 2015, p. 66, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
40. Page 40
our manufacturing plants and entire supply chain to improve efficiency, quality, lead times and overall
equipment compliance responsibility and supported by dedicated compliance teams. Our Internal
Audit Services (IA) function provides independent assurance.
Due to our strategy to outsource most API manufacturing, we need an uninterrupted supply of high
quality raw materials. As such, we place great importance on our global procurement policies and
integrated risk management processes. We purchase materials from a wide range of suppliers and
work to mitigate supply risks, such as disasters that disrupt supply chains or the unavailability of raw
materials. Contingency plans include using dual or multiple suppliers where appropriate, maintaining
adequate stock levels and working to mitigate the effect of pricing fluctuations in raw materials.
In 2014, we implemented a new process for third party risk management. This process, which
consists of four steps and applies to all our suppliers, downstream supply chain partners and local
business development partners, assesses risk based upon defined criteria, including that related to
anti-bribery and anti-corruption, data privacy, the environment and wages. Each step of the process
provides an additional level of assessment, and we conduct more detailed assessments on those
relationships identified as higher risk. Through this process we seek to better understand the
partner’s risk approach, ensure the partner understands and can meet our standards and mitigate
risk.
To help secure our future, we are identifying and recruiting emerging talent and investing in
internships and recruitment opportunities globally. For example, we conduct a global program to hire
recent graduates for our procurement, quality, engineering, IT and supply chain functions. We also
have a graduate program for IMED, which complements our established IMED Post Doctorate
Program for researcher recruitment.
GlaxoSmithKline 2012: Our end-to-end supply chain program, which began in 2013, is designed to
reform and simplify our supply chain. In 2014, we introduced processes to improve coordination
across each stage of production from sourcing and manufacturing to more efficient delivery of our
products to patients and consumers
In 2014, we introduced the GSK Production System (GPS) across our Pharmaceutical manufacturing
sites. The GPS is a standard way of working to identify and eliminate the root causes of accidents,
defects and waste. This standardized way of working will improve our processes and performance.
For example, at our site in Cairo, Egypt, deployment of the program has resulted in a 26% increase in
production with a decrease in manufacturing interruptions of more than 40%.
41. Page 41
Consolidation of our supply base also helps to simplify our Pharmaceutical manufacturing and supply
chain operations and during 2014 we reduced the number of third-party suppliers who manufacture
medicines on behalf of GSK, by a further 8%, compared with 2013. We have also continued to reduce
complexity in our supply base by standardizing specifications for goods and materials that we buy
and pursuing integrated sourcing processes.
We continued our initiative to reduce the complexity of our Pharmaceutical product portfolio, which
allows us to simplify both supply chain and commercial operations and reduce risk and complexity
while increasing service levels. In 2014, we achieved a 19% reduction (against our 2012 baseline)
which equates to more than 4,000 discontinued packs.31
We have faced challenges during the year with several of our Consumer Healthcare manufacturing
sites primarily in North America. However, affected supply lines are now fully operational and we
expect to see increasing benefit from resumption
in supply during 2015. We have undertaken a comprehensive operational review of our supply
network and are investing heavily in a multi-year program to ensure future sustainable supply
including improvements in systems and capacity, more training for our people and addition of new
roles, particularly in key areas such as quality and engineering. We are also working to reduce our
exposure to single source supply. In 2014, we continued to roll-out GSK’s commercial Enterprise
Resource Planning (ERP) system across the Consumer Healthcare business. This new platform
allows us to make better commercial decisions and drive financial efficiencies as we standardize and
consolidate data, forecast and plan on the same system, save time and money on system
maintenance and upgrades, and become more efficient in how we do business with our customers.
With 11 Consumer Healthcare markets added in 2014, 26% of global consumer healthcare revenue is
now on the system and we expect to fully complete the roll-out by 2020.32
In 2014, we introduced Fingerprint, an end-to-end supply chain serialization program that will apply
unique serial fingerprints on many of our products. The unique identifiers will be recorded in a
database so the product can then be scanned and verified against the database at any point in the
supply chain. By the end of 2014, 48 packaging lines at 14 of our sites had serialization capability.33
31
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.30, https://www.gsk.com/media/603031/annual-report-2014.pdf,
accessed April 11, 2016.
32
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.35, https://www.gsk.com/media/603031/annual-report-2014.pdf,
accessed April 11, 2016.
33
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.42, https://www.gsk.com/media/603031/annual-report-2014.pdf,
accessed April 11, 2016.
42. Page 42
We have been establishing Core Business Services (CBS) to bring together our support functions in
order to streamline and standardize functional support to the business. Six CBS regional business
centers already support 93 markets, representing 65% of GSK sales. Further, the enterprise resource
planning (ERP) platform that we are implementing is replacing a large number of separate outdated
IT systems across the company, giving us common databases and standard business processes that
will help us simplify our operations, drive efficiencies and give us detailed analytics to improve our
day-to-day operations and decision making.34
Inventory of £4,231 million increased by £331 million during the year. The increase primarily reflected
the impact of stock building for new product launches and remediation of the Consumer Healthcare
supply chain, partly offset by a favorable exchange impact.35
Roche Holdings AG 2014: In order to manage our supply chain more effectively on an end-to-end
basis, an enhanced technical product management approach was implemented and significant
progress was made in 2014. This includes clearer governance for sourcing decisions and better
defined strategic supply plans over the product lifecycle.
Roche has established a dedicated Supplier Relationship Centre (SRC) in order to work more closely
with key suppliers on innovation. In 2014, Roche increased the scope of the SRC to form an
Innovation Centre of Excellence to include more external partners and drive innovative strategies. We
introduced a new fast-track process to deliver more ideas and value in shorter time. To date, 45
innovative business cases have been approved and 32 are in progress or have been implemented.36
Through partnerships with governments and other stakeholders, we aim to build disease solutions
which support infrastructure development, support training and education and improve supply chain.
We also plan to work with private insurers to create policies that cover treatment for cancer and that
have regional, rather than a local risk pool. We also have plans to develop centers of excellence, as
well as create a pan-African platform for healthcare professional education to train specialists. There
is enormous scope to make a difference to patients in this part of the world.37
Counterfeiting of medical products is a serious and growing global problem. The World Health
Organization (WHO) defines a counterfeit medicine as ‘one which is deliberately and fraudulently
mislabeled with respect to identity and/or source.’ It estimates that counterfeiting, substandard
34
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.51, https://www.gsk.com/media/603031/annual-report-2014.pdf,
accessed April 11, 2016.
35
GLAXOSMITHKLINE, 2011 Annual Report, March 2012, p.66, https://www.gsk.com/media/603031/annual-report-2014.pdf,
accessed April 11, 2016.
36
Roche Holdings AG, 2014 Annual Report, March 2015, p. 69, http://www.roche.com/gb14e.pdf, accessed April 11, 2016.
37
Roche Holdings AG, 2014 Annual Report, March 2015, p. 86, http://www.roche.com/gb14e.pdf, accessed April 11, 2016.
43. Page 43
formulation, contamination, fakery, and active ingredient substitution constitute a 431 billion US dollar
market.1 Illegally imported medicines may also not have been stored or handled properly and could
be contaminated, damaged or degraded. Patients are the ultimate victims of this criminal activity. In
answer to increasing global supply chain challenges and international criminal activities, in 2010,
Roche initiated a ten-year program to increase security in our supply chain. We are implementing a
number of new technologies including overt and covert anti-counterfeiting features, 2D barcoding,
mass serialization techniques, tamper-evident packaging as well as tracking and tracing systems.
In 2014, we increased supply of serialized products significantly, particularly those for China and the
US. On completion of the program, which is anticipated by 2018, every Roche product, folding box,
case and pallet will have a unique identification. With the cooperation of health authorities and other
trading partners, this will ultimately enable tracking and tracing from our manufacturing facilities,
through all global distribution channels and, then, to the patient.
We are also working with international trade organizations in support of industry-wide efforts to
improve the safety and security of the pharmaceutical supply chain. In addition, we collaborate with
health authorities, law enforcement bodies and other government agencies in the countries where our
products are sold on traceability guidelines and regulations.
Roche is committed to conserving eco-system services and biodiversity. In order to provide us with
an overarching metric which assesses and compares our risks and opportunities across operations,
products and supply chains we are exploring the idea of natural capital evaluation. This is a means of
placing a monetary value on environmental impacts along the entire supply chain of our business.
Roche is, however, faced with a number of challenges associated with natural capital evaluation such
as the lack of a harmonized framework and difficulties to gain access to data if the impact analysed
lies beyond the company premises. In general, putting the impacts into a regional context and to find
data with adequate quality are also great challenges. We are now investigating the best way
forward.38
One focus in 2014 was the launch of the Global Logistics Security Program in the Pharmaceuticals
Division. The goal is to improve, systematically, the protection of our products from theft or
manipulation during transportation or storage in own or third-party warehouses. A small team led by
Global Pharma Supply Chain and comprising security and logistics experts from different regions,
performed training sessions and delivered guidance on risk assessment and auditing for the local
38
Roche Holdings AG, 2014 Annual Report, March 2015, p. 126, http://www.roche.com/gb14e.pdf, accessed April 11, 2016.
44. Page 44
logistics security officers.39
Abbot Laboratories 2015: In recent years, we’ve built our presence in the region through targeted
investments in manufacturing, supply chain and research-and-development facilities. In 2015, we
opened a new research-and-development pilot plant in Singapore that will allow us to more rapidly
pair nutrition science innovation with local taste and texture preferences.40
In 2015 and 2014, Abbott management approved plans to stream‑line operations in order to reduce
costs and improve efficiencies in various Abbott businesses including the nutritional, established
pharmaceuticals and vascular businesses. Abbott recorded employee-related severance and other
charges of approximately $95 million in 2015 and $164 million in 2014. Approximately $18 million in
2015 and $20 million in 2014 are recorded in Cost of products sold, approximately $34 million in 2015
and $53 million in 2014 are recorded in Research and development and approximately $43 million in
2015 and $91 million in 2014 are recorded in Selling, general and administrative expense. Additional
charges of approximately $45 million in 2015 and $39 million in 2014 were recorded primarily for
accelerated depreciation. From 2013 to 2015, Abbott management approved various plans to reduce
costs and improve efficiencies across various functional areas. In 2013, Abbott management also
approved plans to stream‑ line certain manufacturing operations in order to reduce costs and improve
efficiencies in Abbott’s established pharmaceuticals business.41
AstraZeneca 2015: Following the successful introduction of our Taizhou facility in China at the end of
2014, regulatory validation work continues at our Vorsino facility in Russia, which opened in 2015.
This marks the largest foreign investment in the construction of a new pharmaceutical plant in Russia.
First commercial production is scheduled to commence in early 2016, improving our ability to supply
local markets. Also during 2015, we announced major investment plans to develop our capability in
biologics, including the acquisition of Amgen’s facility in Boulder, Colorado in the US, as well as a
$285 million investment in a new manufacturing facility in Södertälje, Sweden. These projects, in
addition to a previously announced expansion plan at Frederick, Maryland US, will increase
production capacity to support the growing demand for biologics, which represents half of our
development pipeline.42
39
Roche Holdings AG, 2014 Annual Report, March 2015, p. 132, http://www.roche.com/gb14e.pdf, accessed April 11, 2016.
40
Abbott Laboratories, 2015 Annual Report, March 2016, p.17, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
41
Abbott Laboratories, 2015 Annual Report, March 2016, p.67, http://www.abbottinvestor.com/phoenix.zhtml?c=94004&p=irol-
proxy, accessed April 11, 2016.
42
AstraZeneca, 2015 Annual Report, March 2016, p. 46, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/AZ_Annual_Report_2015.pdf, accessed April 11, 2016.
45. Page 45
Our continuous improvement program allows us to upgrade our systems and minimize environmental
impact. By applying Lean methodology to our manufacturing plants and supply chain, we have been
successful in reducing waste and inventory costs. We have also improved efficiency, quality, lead
times, equipment effectiveness and overall customer responsiveness.
We are continuing to establish more efficient processes, with global supply chain experts providing
support throughout the organization.
With most of our API manufacturing outsourced, we need an uninterrupted supply of high-quality raw
materials. We therefore place great importance on our global procurement policies and integrated risk
management processes. We purchase materials from a wide range of suppliers and work to mitigate
supply risks, such as natural or man-made disasters that disrupt supply chains or the unavailability of
raw materials. Contingency plans include using dual or multiple suppliers where appropriate,
maintaining adequate stock levels and working to mitigate the effect of pricing fluctuations in raw
materials.43
GlaxoSmithKline 2015: In 2015, we significantly reshaped our Pharmaceuticals business, and
continued to reduce supply chain complexity, while retaining our commitment to quality. We have
rescaled the commercial operations, global support functions, R&D and manufacturing that support
this business. Our supply chain improvement programme aims to deliver industry-leading levels of
performance. Since 2012, this programme has delivered significant savings through procurement
excellence (how and what we buy), logistics (distribution), portfolio optimization – reducing the
number of pharmaceutical pack variants by 27% (against the 2012 baseline), and streamlining our
external supply network by 35%. We have strengthened our logistics operations by establishing five
regional supply and demand hubs, enabling more efficient use of our warehouses and transport
reducing ‘cost to serve’ by £136 million. The ongoing roll-out of our Enterprise Resource Planning
(ERP) system across our commercial markets and manufacturing sites is a critical part of our
transformation. Coupled with new planning capabilities, this increases end-to-end visibility and
control, helping ensure supply and demand are robust and aligned. These changes will help improve
service to our patients and consumers. Cost savings generated from Pharmaceuticals restructuring
will support delivery of £3 billion annual savings for the Group by the end of 2017.44
43
AstraZeneca, 2015 Annual Report, March 2016, p. 47, https://www.astrazeneca.com/content/dam/az/our-company/investor-
relations/presentations-and-webcast/Annual-Reports/AZ_Annual_Report_2015.pdf, accessed April 11, 2016.
44
GlaxoSmithKline, 2015 Annual Report, March 2016, p.25, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf,
46. Page 46
We strive to minimize the risk of counterfeit medicines. In 2015, we extended our end-to-end supply
chain serialization program, Fingerprint, across 86 packaging lines in more than 18 manufacturing
sites. The program applies unique serial ‘fingerprints’ on products and logs them into a government-
managed database, which they can be verified against at any point in the supply chain.45
Cost of sales as a percentage of turnover was 31.4%, 3.0 percentage points higher than in 2014. On
a pro-forma basis, the cost of sales percentage increased 0.8 percentage points and 1.0 percentage
points on a CER basis. This reflected adverse price movements, particularly in US Pharmaceuticals,
and increased investments in Vaccines to improve the reliability and capacity of the supply chain.
This was partly offset by an improved product mix, particularly as a result of the growth in HIV sales,
and the benefits of our ongoing cost reduction programs.46
In addition, the Committee has continued to monitor the Group’s key ongoing transformation and
simplification programs including, in particular, those in our Global Support Functions where we are
continuing to simplify our operating model through programs such as Finance Transformation as well
as undertaking major upgrades to the Group’s systems and global processes, including core ERP,
HR and supply chain platforms. The Committee has also regularly reviewed the Group’s cyber
security and the progress of our Infoprotect program which is designed to address this risk
specifically.47
The Committee has continued to review regularly the multi-year programs underway to simplify our
support functions and standardize our operating model around new and upgraded platforms. These
programs are now well established but are at a peak of activity currently as the new platforms and
processes are rolled out across the Group, compounded by the additional requirements to integrate
the former Novartis businesses into the Group’s operating and reporting infrastructure. Significant
progress has been reported with the completion of new global HR and supply chain forecasting
systems and multiple cut overs of local operating companies onto the new ERP platform delivered
during the year with targeted control levels maintained throughout. The Committee has also paid
particular attention to the parallel transformation programs underway in a number of the support
functions, especially the Finance Transformation initiative, to ensure that controls and reporting
accessed April 11, 2016.
45
GlaxoSmithKline, 2015 Annual Report, March 2016, p.44, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf,
accessed April 11, 2016.
46
GlaxoSmithKline, 2015 Annual Report, March 2016, p.63, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf,
accessed April 11, 2016.
47
GlaxoSmithKline, 2015 Annual Report, March 2016, p.88, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf,
accessed April 11, 2016.
47. Page 47
requirements are not affected.48
Roche Holdings AG 2015: We also launched the VENTANA HE 600 system globally. A fully
automated hematoxylin and eosin (H&E) tissue staining system, it enhances patient safety by
avoiding cross-contamination, and produces exceptional staining quality. This system improves
workflow by eliminating the need to manually mix reagents. In a global test Doubling the already
market-leading throughput of our current instrument from 200 to 400 results per hour is a key feature
of the cobas c 513. This new instrument is used in laboratories for the analysis of HbA1c levels in
blood samples from people with diabetes. The cobas c 513 is an essential tool for healthcare
providers coping with the ever-increasing number of people with this condition. Another key milestone
in 2015, the FDA approved the cobas 6800 and cobas 8800 systems and the cobas HBV, cobas HCV
and cobas HIV viral load tests. The fully automated systems offer the fastest time to results, the
highest throughput and the longest walkaway time available among automated molecular platforms,
providing laboratories both improved operating efficiency and flexibility to adapt to changing testing
needs. The new tests are the next generation of our viral load tests, which clinicians use to manage
the treatment of people with hepatitis B or hepatitis C virus as well as HIV. The US approval follows
the 2014 launch of these systems and tests in countries accepting the CE mark.** conducted in 2015,
more than 4,000 slides from laboratories in 12 countries were stained on the VENTANA HE 600
system and reviewed by 67 pathologists, with excellent results.49
The African continent is developing quickly, with the GDP expected to increase by 5% in 2016.6
Significant strides have been made in improving health outcomes in many countries. However, major
challenges remain, particularly in sub-Saharan Africa. Poor outcomes persist in sub-Saharan Africa
for a multitude of reasons, including low disease awareness, late presentation of patients with
disease, limited quantity and poor quality of healthcare institutions, lack of medical specialists,
uncertain supply chain quality, low government priority, little to no local prevalence data and limited
funding.50
In 2010, we initiated a program at Roche to increase security in our supply chain. We are
implementing a number of new technologies, including overt and covert anti-counterfeiting features,
2D barcoding, mass serialization techniques and tamper-evident packaging. On completion of the
program, slated for 2018, every Roche product, folding box, case and pallet will have a unique
48
GlaxoSmithKline, 2015 Annual Report, March 2016, p.89, http://annualreport.gsk.com/downloads/GSK_Annual_Report_2015.pdf,
accessed April 11, 2016.
49
Roche Holdings AG, 2015 Annual Report, March 2016, p.35, http://www.roche.com/gb15e.pdf, accessed April 11, 2016.
50
Roche Holdings AG, 2015 Annual Report, March 2016, p.84, http://www.roche.com/gb15e.pdf, accessed April 11, 2016.
48. Page 48
identification.51
Another initiative to reduce GHG emissions is reducing our use of halogenated substances that are
used for refrigeration and/or fire suppression and can remain in the atmosphere for a long period of
time. We planned to reduce halogenated substances by 90% (from 2002 baseline) at all Roche
legacy sites by 2015. This excludes acquisitions (including Genentech and Ventana), which are
working towards their own timelines (2018/2022). With great efforts we managed to achieve an 89.8%
reduction and we have now set a new goal to further reduce halogenated substances by 20% at
Roche legacy sites over the next five years. We continue to examine alternatives and work with
refrigeration and fire suppression suppliers to achieve these reductions.52
51
Roche Holdings AG, 2015 Annual Report, March 2016, p.102, http://www.roche.com/gb15e.pdf, accessed April 11, 2016.
52
Roche Holdings AG, 2015 Annual Report, March 2016, p.127, http://www.roche.com/gb15e.pdf, accessed April 11, 2016.