Five Supply Chain Definitions Every Industry Professional Should Know (Part 2)

Published August 7th, 2013 by Lori Smith 1 Comment

As we said in yesterday’s blog, here at Kinaxis we love our lists … so when Lora agreed to do a Q&A post with us, it was natural for it to take the form of a list.  Lora has some key concepts that will bring supply chain practices forward.  Here is part two of our conversation with her and the distinguishing themes we’ve asked her to define in question 4 and 5 of Five Supply Chain Definitions Every Industry Professional Should Know Part 2.

Supply Chain Definition #4. Supply Chain Alignment – I think alignment is a hard concept. I think it’s easy to understand the end goal, but it’s very difficult to understand how to get there.  For example, keeping on the topic of trade-offs; can you make effective trade-offs if you haven’t already established some alignment, or do you make trade-offs to get alignment?

For years, as an industry analyst, I have written  the statement that “IT and line-of-business teams need to be aligned.”  As I finished the report on organizational alignment, I felt a bit silly ever writing this statement. Why?  The statement is hogwash. The functions within the line-of-business teams are so misaligned that I cannot imagine that IT could ever align to all of them. In fact, as the research shows, alignment happens through leadership in horizontal processes.

Last month, we finished a study of organizational alignment with over 200 respondents. We asked the IT, finance and supply chain teams to self-assess their views of organizational alignment. The supply chain view is listed in figure 1. As we tabulated the data for the report, what fascinated me was how differently each of these organizations view functional alignment.  For the supply chain team, the largest area of misalignment is between the supply chain and the sales group. I find it interesting that the supply chain teams perceive greater gaps between functions than their counterparts in the finance or IT teams. 

 Supply Chain Alignment
 

Why Does It Matter?

Today, for most organizations, things are not going well. Demand volatility is escalating, product portfolios are more complex, and supplier networks are harder to manage. Supply teams are being pressured to reduce costs while demand groups are feeling the squeeze to get the “demand plan right.” The technology investments from the last decade are not meeting expectations. Supply chains are not agile enough. Finger pointing abounds. Understanding and problem solving often falls short. What is an executive team to do?

Supply Chains are complex systems, and are often not well-understood in the organization. In prior studies, the lack of understanding by the executive team is a major barrier.  As a result, it is incumbent upon supply chain leaders to talk the language of business, hold themselves accountable for corporate performance (versus functional performance) and learn to serve. To align, we have to give up our supply chain geek-speak, stop our three- and four-letter acronym descriptions, and help the organization to better understand the supply chain. In the report, we outline three actions that a team can take today to deploy these skills.

What Do We Do About It?

1) Define a Supply Chain Strategy and focus on Agility and Orchestration. In this process, be sure that the team members understand that the supply chain is a complex system that must be managed in totality, and that the most efficient supply chain is usually not the most effective supply chain. Use tools like network design optimization and simulation modeling to help people model trade-offs. Force finance and sales teams off of spreadsheets that cannot model the complex relationships of trade-offs. Advance their thinking to use more advanced supply chain modeling tools.

Define what agility is, what it can do for your organization, and show why it matters. Do not talk in abstract terms. Make it real. It is not short cycles. It is more than that. It is the ability to have the same cost, quality and customer service given a level of demand and supply volatility. Design the supply chain to perform at these levels of volatility. Focus the organization on understanding the “probability and patterns of demand” and how to design push/pull decoupling points, supplier networks and inventory buffers to improve agility (focusing on form and function of inventory in the supply chain). Use modeling tools to help teams to visualize these concepts.

2) Build Strong Horizontal Processes like S&OP. We have completed two studies now that show Sales and Operations planning improves both agility and alignment. The impacts are profound. Find a champion within the organization and start working the process. Focus on improving corporate performance—profitability, cycles, revenue growth, customer service and forecast accuracy—against the supply chain strategy.

3) Build an Effective Supply Chain Center of Excellence. Unfortunately, only 1-in-2 supply chain centers of excellence are self-assessed in surveys as meeting expectations. The issues abound, but we cannot let the problems with execution blind us. The value proposition still holds. Supply chain centers of excellence help with metrics alignment, and product portfolio alignment, between finance and the supply chain team, and the supply chain team and marketing. We can see the impact of an effective center of excellence in this report. Too many companies have let their centers of excellence lose relevancy and become academic. The best supply chain centers of excellence serve the business.

 

Supply Chain Definition #5. Supply Chain Index – Ultimately, making the right tradeoffs and establishing alignment would mean financial success.  You’ve been doing a lot of work on what you call the Supply Chain Index.  What are the performance measures that the index seeks to bring forth and how do you translate that to supply chain excellence? Does the index show the correlation and/or cause-effect relationship between corporate performance and supply chain performance? How so?

I believed that there was a strong tie between supply chain excellence and corporate performance.  I wanted to find out more. It has turned into a twelve-month research project. It has not been easy. We will share our final results at our upcoming Global Summit on September 11th and 12th at the Phoenician in Scottsdale, AZ.

The Building of the Index

We started with mining the data on supply chain financial ratios within industry groups. This research was the backbone of the Supply Chain Metrics that Matter series of reports.

As we did this analysis, I was amazed. Very few companies had made progress on what I came to term the Supply Chain Effective Frontier (orchestrating the trade-offs between growth, profitability, cycles and complexity).  Managing the supply chain as a complex system with finite trade-offs was something that few had mastered. Many companies, to my surprise, were going backwards.

While billboards tout that companies can improve performance by implementing software XZA and consultants claim that best practices result in improved performance of QRP, I found out that most companies were stuck. The pretty world described by technology and consulting companies is not today’s reality.  The unfortunate truth is that many companies are unable to power forward and make the trade-offs between profitability, complexity and supply chain cycles.  The missing link is often leadership.

As we published more and more industry data, I wanted to better define industry leaders. I yearned to know who had done it the best.  It was then, that I started the research effort to correlate financial ratios to six years of market capitalization data by Morningstar sector. We currently have two full-time researchers working on this project augmented by a summer intern. The question is simple but the answer is not.

I find that when I share the results with supply chain teams, that most companies have not held themselves accountable to balance sheet results. Instead, they have measured functional metrics or focused on projects. And, while the projects have achieved returns, or while a function had driven improvements, these business results have not translated into improvements on the balance sheet.

In the future, it is our goal to start to tie insights from this research to our quantitative maturity models. We will begin this work following the launch of the Supply Chain Index and the sharing of the industry results at our Global Summit.   Here I share my insights.

What can we Learn from the Index?

The work has been harder and more difficult than I originally thought. We are sharing insights on the work through monthly webinars.  Check them out!

Here are the questions that I normally get:

Where is Customer Service in the Analysis? I believe that customer service is a critical metric and a key element of managing a complex supply chain system. The unfortunate thing is that there is not good data in the market for customer service.  As a result, I could not use it in the development of the Index.

What do I mean?  When I was an analyst at AMR Research, I worked with Debra Hoffman to benchmark over ninety companies. The first thing that we learned is NEVER depend on self-reported customer service forecast accuracy data.  Why? There is no consistent methodology for reporting and companies invariably introduce a positive bias. Companies overreport (embellish) the results. I found that it is a lot like a woman reporting her weight on her driver’s license.

As a result, I never use the APQC data in my research, and I discount the popular consulting reports (Accenture, AT Kearney, PWC and SAP reports) that use self-reported data.

So, while I would like to have customer service in the index, there was no good source of data.  As a result, I built the Index based solely on balance sheet and income statement data.

Why Morningstar sectors versus SIC codes? The market capitalization data is grouped by Morningstar sectors and we wanted to build something that would enable supply chain discussions to finance groups in a more meaningful way. Unfortunately, many companies do not easily associate that the other companies in their Morningstar peer groups are their natural competitors. The association requires some education.

However, when we share the methodology, all agree that it is better than throwing all industries into one spreadsheet and shaking them up.

 

Why look at so many industries? Don’t the patterns in the industries mirror each other? The differences between industries surprises even an old supply chain gal like me. For example, in figure 1, contrast the difference in rankings between R^2 (the degree of correlation) and the Y-intercept of the models. The smaller the Y-intercept the greater the impact of supply chain on market capitalization and the larger the R^2 value the better the fit of the model.  The largest impact on market capitalization through supply chain excellence is Household Products. The more that companies are driven by product innovation, the lower correlation with supply chain financial ratios and the greater the need to integrate supply chain processes with the stage gate evolution in product development.

There are many drivers of market capitalization other than supply chain. Why are you using it as an objective function? We know that there are many factors that drive market capitalization. We are surprised to find that the impact is as great as it is. If there was a better objective value, we would have used it.

I also understand that the goal of a supply chain team may not be to maximize market capitalization. My goal is to help them to better make a conscious choice. I want supply chain teams everywhere to understand the metrics that matter to market capitalization. I also want to share the understanding of the impact of performance from individual metrics and the need to manage the metrics as a balanced portfolio.

Who has done it best? To get this answer, you will need to come to our conference. We hope to see you there! Check out my recent post on the Supply Chain Insights blog to understand the seven reasons that you should attend.

 

Of course, I have to ask… What’s technology’s role in advancing these concepts?

Lori, we cannot get there without technology. We built supply chain architectures in the 1990s focused on minimizing manufacturing constraints. There was an assumption that demand could be forecasted and translated by simple rules and that an order represents “true demand.” These architectures were then tightly coupled with Enterprise Resource Planning.  And, things today are a bit of a mess.

  • Agility.  In our research, we find that companies want more flexible systems, yet only 11% of companies feel that they have sufficient what if capabilities to understand the probability of demand and supply, and only 23% of companies can sufficiently model profitability.
  • New Forms of Analytics. The traditional supply chain planning footprints were designed when the world was still talking about 32 bit architectures and $.75 gasoline. Today, there are new forms of visualization and optimization that enable quicker and more robust supply chain planning, but to use them, you have to throw away the traditional view of Advanced Planning. Software as a Service, In-memory Analytics and better Visualization are helping us to better solve complex supply chain problems.

 

And lastly, all these themes will undoubtedly be interwoven throughout your upcoming Supply Chain Insights Summit.  Why another supply chain event?

The Supply Chain Insights Global Summit will be held at the Phoenician in Scottsdale, AZ on September 11th and 12th. In this blog, Five reasons why you as a supply chain leader should attend:

  1. Launch of the Supply Chain Index. Confused on which metrics matter and which industries have made the most progress over the course of the last decade?  Gain these insights at the Supply Chain Insights Global Summit. Five supply chain leaders will be presenting on their progress on improving corporate performance through a balanced portfolio of supply chain ratios and progress on the Supply Chain Index. All keynote presentations will be grounded in a discussion of supply chain financial ratios over the past six years.
  2. Winning Supply Chains. Race for Supply Chain 2020. Supply chain management is now thirty years old. A new decade lies ahead of us. One thing is clear to all:  the next decade will be very different. There will be many shifts at once. These include the lack of supply chain talent, the emerging opportunities with Big Data and new forms of analytics, and the evolution of Corporate Social Responsibility programs. How will this coalesce into future supply chain strategies?  Be there are hear the discussions first hand to put the insights into action.
  3. Research-based Program. The program is based on a year of Research. In preparation for the event, we have written thirty-five research reports, completed fifteen quantitative studies and focused a year of work on harvesting insights from financial ratios. The research is independent and actionable. To make this impactful, we have built a series of infographics. This will allow you to easily share key insights of the research with your team. We want to help you to translate the insights into action.
  4. Networking. The event, with attendance at 150 people, is designed to be small enough to enable networking and large enough to include supply chain leaders from all industries and continents. The program is built to maximize networking opportunities. It is limited to 35% technology providers. There are no booths or paid speaking opportunities.  And, business leaders do not have to worry about being bombarded by technology providers. So, whether you attend the Shaman’s Circle for an exclusive experience with other supply chain leaders or engage the concierge service at the event, it is our goal to easily connect you to other supply chain leaders to get the answers that you need to make things happen in your organization.
  5. Interactive. As a Supply Chain Leader, Let Your Voice Be Heard. Use the event to influence the market. The event will be interactive. Participants will be able to watch a visual facilitator capture critical insights and the audience will share their opinions with presenters on main stage through audience response systems. It will be videotaped and broadcast to a wider audience. Press and financial analysts will be at the conference. The presentations and dialogue will be captured in the new book Metrics That Matter.

Global Supply Chain Insights Summit

Follow comments on this blog post via RSS

One Response to “Five Supply Chain Definitions Every Industry Professional Should Know (Part 2)”

  1. Best Supply Chain Blogs of 2014 | A Listly List

    [...] 5 Supply Chain Definitions Every Industry Professional Should Know Pt. 2 [...]

Leave a Reply