LET THE QS BEGIN

by LORA CECERE on SEPTEMBER 17, 2014 · 0 COMMENTS

Last week was the Supply Chain Insights Global Summit. It was great to see old faces at the kick-off. 110 supply chain leaders attended.  I smiled on the week following the conference as the accolades piled up in my inbox.

In preparation for the summit, we readied the final report of the work on translating balance sheet results into a methodology to judge Supply Chain Excellence. This report, Supply Chains to Admire, compares the progress of 200 companies within their respective peer groups on both performance and improvement. Supply Chain Improvement is based on the work that we completed with an Arizona State University Operations Research team to determine the Supply Chain Index. While the performance rankings were based on comparisons of inventory turns, operating margin and Return on Invested Capital (ROIC) for the periods of 2006-2013 and 2009-2013, the concept is that to be a supply chain leader you must outperform and drive improvement. We find that this is true of too few companies.

Attending the conference was Alexia Howard, Senior Research Analyst – US Foods for Sanford C. Bernstein & Co., LLC.  Following the conference, Alexia asked for me to share the methodology with over 150 financial analysts. The script will be distributed to CFOs of apparel, consumer packaged goods, and food/beverage companies next week. So, I wanted to give you a heads-up on their questions, and my answers. My goal in this post is not to surprise you…

The opening statement was:

“Growth is slowed, and supply chain is more important to success. However, we are horrible at figuring out what adds value. Can you help us with what you see in the data?”

Yes, I said. We see that nine out of ten companies are stuck. There are three reasons why:

1. Vertical excellence—having the best manufacturing, procurement or transportation function—has not worked.
2. A project focus where each project has to meet a threshold ROI has not worked. (Most companies just have too many disconnected projects.)
3. A big bang technology focus has not worked. In fact, many companies move backwards—like Campbell’s Soup or Kellogg—when they try to implement a large project with too few resources too fast.

There are seven characteristics of the companies that did it best. This is what I think works:

1. Leadership. Enlightened leadership that focuses on the management of the supply chain as a complex system.
2. Outside-in Processes. The use of channel data into advanced analytics to sense demand.
3. Mature Horizontal Processes. Building strong horizontal processes like revenue management, Sales and Operations Planning, Supplier Development and Corporate Social Responsibility.
4. The right stuff in the organization. Companies with the strongest performance had more advanced supply chain human resource departments, a well-integrated supply chain finance team, and a supply chain center of excellence.
5. Supply Chain Design. Active, and intentional, design of the supply chain.
6. Aligned Metrics. To ensure the management of the complex system, the metrics of operating margin, inventory turns, ROIC, customer service, revenue, and forecast accuracy need to be managed together as a non-linear system.
7. Strong Planning Capabilities. Companies with better planning capabilities score higher on the methodology.

I then finished a forty-minute presentation, and prepared for questions. I was not sure of what would be asked so I share them so that you are prepared for when your CFO reads the script.

What percentage of retail out-of-stocks could be prevented by the manufacturer in these industries? This is an unknown, but in my opinion, 65% of the solution is in the hands of the manufacturer. However, it requires the use of retail data and the redesign of analytics to sense, shape and translate demand. Since most companies struggle with competency in the demand organization—and are working with disconnects in sales, marketing and supply chain processes—very few companies do this well. 

Who does this well? I like the work at Kimberly-Clark and PepsiCo. It is stronger than the work you will see at most companies. 

What does an investment in SAP mean for a company? What should we watch for? SAP means many different things for different people. An investment in SAP ERP improves transactional effectiveness in order-to-cash and procure-t0-pay. A successful implementation greatly improves a company’s abilities to manage the firm. However, the investment in SAP planning, a product termed APO, can often take a company backwards. While it is the best system of record in the industry, the optimizer and the planning software overall is not equal to best-of-breed solutions. Nine out of ten companies regret their decision to implement SAP APO, and Oracle planning is not much better. 

What investments in technology do you believe add value? I am a firm believer in new forms of analytics:  this includes test and learn, cognitive computing, demand sensing, visualization, advanced optimization, and simulation. I believe the world is too complex to run your supply chain on an Excel spreadsheet. 

Do I believe that the board of Heinz will be able to drive new levels of value? Yes, by breaking down the walls between the silos and focusing on building strong horizontal processes. This is an opportunity for most companies; but unfortunately, they are pushing the wrong levers.

What are the barriers? Companies with extreme levels of IT outsourcing and a focus on project implementation after project implementation have done more poorly.  Companies that have done it well have implemented systems once and stabilized implementations. Take General Mills and Kellogg an example. General Mills implemented SAP once and well, while Kellogg had multiple and difficult ERP implementations. 

What insights can you give us on the management of complexity? Complexity comes in many forms—price increases, product portfolio expansion, shelf-ready packaging, packaging-specific artwork, promotions, in-store displays. The secret is to tackle all complexity and decrease the complexity that adds cost but does not drive off-setting value. The difficulty is most companies are so tied up in being marketing-driven, adding products and promotions willy-nilly, that there is no analysis of good and bad complexity.

What should I ask the business leaders at the companies that I follow? I encouraged the financial analysts to ask:

1. Are you using channel data to sense in your supply chain operations?
2. Do you actively design networks with a focus on form and function of inventory?
3. How do you balance the trade-offs between source, make and deliver?
4. Are you actively building supply chain talent?
5. How do you make trade-offs between marketing programs and good/bad complexity?