In 2014, I wrote my first book on supply chain excellence. In chapter four, I wrote extensively on the need for the supply chain leader to shift their focus from saving money to driving value. In the peer review of the book, Keith Harrison, previously the Global Director of Product Supply for P&G told me, “You make a compelling argument on the shift from cost to value. I agree conceptually, but you do not define value. I don’t know the answer, but how should a supply chain leader define value and align with their peers within an organization to deliver against the right goals?”
When I read his feedback, I sighed. He was right. In the industry, there is no clear definition of supply chain excellence or metrics to deliver value.
The Response To Tough Love
To answer his question, I chartered a project with the Arizona State University statistics department to analyze which combination of metrics drove the highest value for market capitalization. The research project analyzed 1200 combinations of 180 metrics for four hundred companies for the period of 2006-2012. After six months of analysis, we decided the best fit was the combination of growth, inventory turns, operating margin, and Return on Invested Capital. My interest peaked when I started plotting the progress of these companies at the intersection of these metrics year-over-year in orbit charts.
In Figure 1, I share an example. Note that Schneider Electric for the period of 2010-2019 is below the industry sector average for inventory, and at the industry average for operating margin. However, Schneider is less resilient. (Larger swings in the pattern than the average of the industry sector).
Figure 1. Schneider Electric Orbit Chart and Performance Against Peer Group
Tracking Supply Chain Performance
Each year, in my research, I plot the orbit chart performance of publicly-held manufacturing companies. The goal is to track performance and improvement against the metrics of year-over-year growth, operating margin, inventory turns, and Return on Invested Capital (ROIC) for all publicly-held manufacturing and retail companies for the period of 2010-2019.
The supply chain is a complex and non-linear system, and these metrics have complex and interconnected relationships. Performance improvement is easy when you have a lot to lose, but as a company approaches the sector average improvement slows. In the analysis, as shown in Figure 2, only 22 companies beat their industry sector averages for the period of 2010-2019.
Figure 2. Supply Chains to Admire Award Winners
Characteristics Of Winners
When I finish the analysis, I interview the leadership teams to understand why they think they won. The answers are never centered on a technology implementation or a large consulting project. Instead, the results are the product of year-over-year focus by a leadership team. There are five characteristics:
- A Shift from Functional to Cross-Functional Metrics. Organizations that sub perform focus on functional optimization of make, source and deliver. In winning companies, the metric of Operational Efficiency (OEE) is replaced by Production Schedule Adherence, and functional costs are deemphasized to focus on cross-functional trade-offs to manage total costs. (Only 29% of companies easily access total cost data.)
- Consistency of Leadership Team Direction. The organization side-steps fads, shiny objects and financial re-engineering projects. Weekly and daily information focuses on customer service and sentiment. The organization is closely aligned with R&D and sales teams.
- Mission Clarity. The teams are clear on the goal and the culture to win. These leaders understand that it is not enough to say that employees need to be team players. There is a realization that culture needs to be defined by principle-based leadership and ongoing training.
- Definition of Supply Chain. In winning companies, the supply chain is defined as a process that starts with the customer and crosses over the organization market-to-market (sales to procurement). The supply chain is continually redesigned to maximize value. Lower performing companies define the supply chains as a function within a functional organization.
- Continual Process Innovation. These teams realize that the supply chain needs to constantly adapt to channel shifts and these programs are a part of doing business. The efforts of teams are never hamstrung by the focus to minimize cost. Leading companies understand that the supply chain is a growth engine, and they constantly test and learn to drive innovation.
I hope that this analysis helps you and your teams. These lessons are even more essential in this pandemic. Look for the company case studies in subsequent articles.