I would like to expand on a couple of these points, focusing on optimizing the supply chain through the use of collaboration, simulation, and scenario comparison utilizing modeling tools.

The supply chain network is composed of many different components acting in concert to deliver the required goods and services at the right time. The better these interdependent relationships are understood, the better the supply chain can be optimized. This raises the question how best to optimize such a complex set of data points.

In order to get an accurate simulation, you must be able to obtain accurate data about each node in the network, and then utilize software to model it. These nodes can include, but are not limited to:

• manufacturing plants,
• supplier plants,
• sub contractor plants,
• warehouses, and
• transportation routes.

This requirement would suggest that any simulation model must be able to incorporate multiple disparate data sources in a relatively easy and timely manner. Important data to obtain would be:

• lead times,
• inventory levels,
• in transit times,
• associated costs,
• quality levels, and
• service levels.

There are many others that could also be included to give a more accurate picture of the network.

Once this data has been obtained (which may require some effort, especially with off shore suppliers), the next question then becomes, what do we do with the data? This is where the requirement for multiple scenarios becomes critical.

Because these networks can be extremely complex with many factors influencing outcomes, we must have the ability to compare many different scenarios in order to determine a path forward. One scenario may give us a lower overall cost, but poorer customer service. Another may result in cheaper raw material costs, but lower quality levels and increased transportation costs. All these outcomes must be weighted in order to determine the most optimal design, -this requires some way to be able to compare multiple scenarios in a clear and efficient manner.

The next step would then be to examine each scenario, and determine if the best parts of each can be combined into one ‘super’ scenario. As an example, one scenario may have a supplier with lower cost, but higher transportation costs. What if sourcing is split between a low cost/high transportation supplier and a higher cost/low transportation supplier? By managing the sourcing between the 2, an optimal outcome may be achieved (happy medium). This can only be determined by developing a complex model with multi-sourcing.

If you take this case and apply it across the network, the number and complexity of the inter-relationships can soon become mind boggling. This is why a multi scenario engine which can rapidly calculate the various outputs of the model from its inputs is so vital. In order to implement the optimal supply chain network, it must first be designed as a whole to deliver the optimal results.

Once the supply chain network has been successfully modeled, a powerful tool is now available for what if analysis. The maximal use of this tool can be realized by incorporating continuous improvement into the business development cycle and optimizing the network on a regular basis. But in order to make this an effective tool for continuous improvement, a plan must be generated quickly and easily analyzed, as time and resource constraints limit the amount of time to turn around the results and push improvements to the network. This is why speed and performance matter when implementing complex modeling solutions.

Because the only way to realize the benefits of an optimal network model is to implement it, collaboration among all the players in the network (inside and outside the enterprise), is vital. This leads us to another key criteria for a simulation system - the ability of many users to access and collaborate on the development of the network model.

Once the simulation, model, and collaboration pieces are in place, it raises the question: Can this environment be used to model other complex systems as well as the supply chain? What about the ‘sales chain’, the complex relationship between you and your customers? What about the complex network of relationships that exist between an enterprise’s internal resources (employees) and the enterprise? Financial models? As can be seen, there are a myriad number of networks in the modern world that can be modeled for the purposes of increasing efficiency, and thereby reducing costs or improving service levels.

There is always a flurry of activity after the announcement commenting both on the list and short-comings of the process. But what gave me pause was Kevin O’Marah’s statement about his motivation for creating the Top 25 list while at AMR Research. Kevin said that it was to raise awareness of the practice of supply chain management and to reward those who are doing well. I am sure that there were some less pure motivational elements too, but before we cast the first stone, let us remember that we all have to earn a living. I do not know Kevin well, but I know him well enough to accept that his primary motivation was true. Supposedly Henry Ford once said “Look after the customers and everything else will take care of itself.” And all the comments about the list itself and the short-comings of the process of developing the list is testament to the fact that Kevin’s primary goal was achieved. As I commented in my first blog on the Gartner conference, perhaps the most interesting presentation in this context was the one about Howard Schultz, CEO of Starbucks, writing a companywide email congratulating everyone for being recognized for their supply chain transformation which got them onto the list, albeit at position 22.

And yet I do have some issues with the list. Several of them commented on by others. Bob Ferrari on his Supply Chain Matters blog comments that:

The overall list itself has many familiar names and global brands. It would be nice for one year to have a small or mid-market company make the listing. Outsourcing the major portions of your supply chain provides a high ROA, and that can get your company a good shot for making it on the list. Speaking of effects outsourcing, once again, there is no presence from major process manufacturers (BASF, Dupont, Dow Chemical) and that remains a disappointment. A lack of recognition of any major global contract manufacturer, those that own the majority of production and in some cases process design assets (Foxconn, Fextronics, Jabil) also remains disappointing. While the overall list has some non-U.S. names such as Samsung and Inditex, it should include other capable names as well.

In reply to a fairly negative comment on my 1st blog about this year’s Gartner Supply Chain Executive Conference that implied deliberate bias toward their clients by Gartner I wrote (with some editing here) that:

There is no doubt that the center of gravity has shifted [away from the US] since AMR (now Gartner) first started the rankings 7 years ago. At that time, AMR had hardly any presence outside of the US. Although Gartner has a wider reach, it is still very Western economy focused and also [Gartner’s] supply chain practice was much smaller than [AMR’s]. The senior people at Gartner are aware of these short comings.

Kevin O’Marah, who started the ranking, will be the first to admit that there is a lot of subjectivity to the rankings. Also companies have to apply to be included and there is a lot of work, on the part of the company that goes into the being evaluated. So if a company does not apply (and yes, it is far more likely that a Garner customer will apply than a non-Gartner customer) it won’t even be considered. In other words, if Apple didn’t apply [to be included in the ranking] it wouldn’t be #1. I have a bit of a problem with this approach.

As importantly, 50% of the overall score is based on financial metrics, 25% on “peer” opinion, and 25% on Gartner analyst opinion. When many of the companies in China and India are private and reporting is less rigorous this poses a bit of a problem. In addition, when few people in the West have heard of Haier and Huawei it is unlikely that they will get many peer votes. And as you state, do the Gartner analysts really know the companies in Asia? Especially if they are not customers.

But I ask myself if I would rather have had the Top 25, with all the flaws we have all identified, over the past 7 years or not, and my immediate response is that we – practitioners, analysts, bloggers, and vendors – are all better off for having had the Top 25. But I would like to encourage Gartner to make 2 changes:

1. Include more financial and operational metrics
2. Be proactive in including companies that are not within the client base by comparing a wider set of metrics. (Of course this still poses a problem in China and India where many of the companies are still private and therefore do not report financials on a regular basis, if at all.)

Here are some suggestions for metrics. (These can be viewed in our free benchmarking service on the Kinaxis Supply Chain Expert Community. (Registration is required, but there is no fee.)

1. RONA rather than ROA, so that industries that have long lead times are not penalized, but this still leaves industries with heavy asset needs, such as semiconductor fabs, being penalized.
2. Free cash flow as a percent of revenue which, after all, is a better measure of the overall effectiveness of the management than cash-to-cash.
3. Modify cash-to-cash to penalize those companies that use DPO as a financial instrument and take more than 30 days to pay suppliers and those companies that use DSO to hide dealer stock by transfering ownership to dealers and then giving them long payments terms. My suggestion is to use (DSO-30) + DOI – (DPO-30) as a modified cash-to-cash calculation, although I admit this would have an unintended consequence for retailers who typically collect payment a lot faster than B2B companies. (Of course algebraically the C2C values will be the same so I may need to rethink this approach.)

Let’s see how this year’s Top 10 fair. One note is that not all industries are included in the benchmarking service so McDonalds will not appear in the analyses below.

This graph attempts to show how companies balance different metrics. This graph also illustrates why RONA is better than ROA because inventory efficiency is already captured in the inventory turns KPI. The other element captured in this graph is cash-to-cash in the form of DPO/DSO which determines the bubble size. The DPO/DSO ratio is used instead of cash-to-cash because inventory is already accounted for in the inventory turns KPI. In a B2B environment I would consider a DPO/DSO ratio of 1 good. From this graph we can see why P&G, Apple and Dell are ranked so high in the Top 25 list, but we can also see that P&G has focused on net assets whereas Apple and Dell have focused more on inventory turns. My interpretation is that P&G stands out again because of the DPO/DSO ration of close to 1.2, which can be seen in the legend. Amazon and Wal-Mart have large DPO/DSO ratios because of being retailers, but also because of long DPO.

We can also look at how free cash flow as a ratio of revenue has trended over the years.

Note that Samsung is missing from this graph because it does not provide the necessary financial information. However it also indicates why Cisco, despite its recent issues, has had a high rank over a number of years both because of their consistency and their cash generation. On the other hand, Apple’s performance over the last few years is clear as are RIM’s challenges. P&G has been both consistent and near the tops for a number of years.

Another graph I like to look at is revenue/employee, more so to see the trend rather than the absolute value, thought he absolute value is pretty interesting too, but has an industry bias. For example retailers will always have a higher ratio of employees.

But my favorite is to get an overview based upon a number of metrics such as below.

Note that the Best-in-Class and Worst-in-Class are the maximum and/or minimum of the entire data set rather than for the values displayed in the table. For example for inventory turns 58 is the best value achieved over the past 3 years whereas the Dell achieves the best average performance over the past 3 years of 46 days.

Note that there is a preponderance of green toward the top of the list perhaps indicating that the Gartner rankings, amongst the companies included in the analysis, are correct after all.

Please try out the benchmarking service. It is free. When registering you can select your company. If you are a private company you can enter your own ratios. (No-one else will be able to see the information you entered.) Of course this is also useful for divisions of larger companies that may want to compare themselves against both the corporate entity and other companies closer to them in terms of industry. There are also standard lists such as the top 10 from the Gartner Top 25 over the past few years and industry specific Top 10 lists based upon revenue. Separate groups can be created for customers and suppliers.

In summary, I’d just like to say congratulations to all the companies in the Gartner Top 25, it is a great achievement. I would also like to thank and congratulate Gartner on their excellent efforts in compiling the list, warts and all.

Please try out our benchmarking service and let me know what you think.

I wrote a blog post recently about how to use supply chain KPI’s to assess, diagnose, and correct supply chain performance, and the importance of benchmarking against your competitors.  In my blog I referred to a post by John Westerveld in which he comments on visibility titled “Visibility in the supply chain: What you can’t see can hurt you”, making the point that visibility and performance management are tightly linked.

It is always good to get validation of one’s ideas.  Well, I listened to a webinar hosted by Supply Chain Standard in which the registrants were asked what visibility means to their organization.  Most of the respondents replied that it was to obtain “End-to-End supply chain performance against key performance indicators”.  A point made by Mawgan Wilkins of Cisco (Cisco is one of our customers) is that in today’s supply chain in which outsourced manufacturing is prevalent, most of this information does not exist in the organization, but rather external to the organization.  Yet so much of your supply chain performance is dependent on how your contract manufacturers perform.If you don’t measure it you can’t manage it.

Measuring performance is valuable in and of itself, but knowing how your performance compares with your competitors is crucial to determining where improvements are required.  Not knowing how you compare against your competition is a “fool’s paradise”.  There is no way to assess the health of your supply chain without knowing how you are doing against your competitors.  Being able to track the KPI’s over time and see how they are trending against your competitors is crucial to both determining when negative or positive trends are developing, and in being able to drill to more detailed metrics in order to diagnose the cause.

Correcting the issue requires an even deeper dive into operational KPI’s.  What I find interesting about the graph above is that the more operational aspects of visibility are given a lower priority.  I think this an issue of supply chain process maturity.  What I mean is that of course performance management is the most important aspect of visibility when you don’t have any visibility.  However, I contend that once companies are able to measure supply chain performance, their instinct is to improve, or correct, their performance, which is where the other elements of the survey become more important: global view of inventory, consolidated view of demand, etc.

We are proud to announce that we have developed a free benchmarking service that uses publically available data extracted from the submission of financial statements.  Clearly the KPI’s that we can generate based on the financial statements are focused on the “Assess” and “Diagnose” levels.  The operational KPI’s required at the “Correct” level typically use data that is not available from financial statements.

Since we focus on manufacturing industries, there is a graph available in the benchmarking service that compares companies on the elements of cash-to-cash (C2C) – days of sales outstanding (DSO), days of inventory (DOI), and days of purchasing outstanding (DPO) – and return on net assets (RONA).    The C2C elements are represented by inventory turns and the ratio of DPO/DSO.  Even though many companies have outsourced manufacturing RONA is still a good way of comparing companies on the presumption that a company that outsources a lot should have a higher RONA.  In the graph below we are averaging these value over the past 4 quarters.  As is usual with these types of graphs, top right is “good”, bottom left is “bad”, and big is better.

What is interesting is to compare how this changes over time.  The graph below shows the values for the previous quarter.

To view how these values have changed over longer periods, a different graph can be used.

Yet a different graph can be used to drill down in to the C2C components in order to start the Diagnose phase.  If we look at Eli Lilly as an example, clearly they should focus on inventory in order to reduce C2C.  On the other hand it is quite clear that GlaxoSmithKline has been able to negotiate much more advantageous payment terms with their suppliers giving GSK a clear competitive advantage.

We would really appreciate your feedback, so please go to our supply chain expert community to try it out.

In order to use the free benchmarking service, you will need to register as a community member.

Once you have registered, click on “Benchmark my Company” from the menu bar on the left.

When you click on the benchmarking service, you will be taken through the configuration of the benchmark groups of interest to you – Peers, Customers, and Suppliers are created for you by default – and select from the 30-odd KPI’s that are of specific interest to you.

At the AMR Supply Chain Executive Conference in 2008, Jane Barrett and Deborah Hoffman’s presentation “Benchmarking Your Own Supply Chain” included the  the following slide:

What I find most interesting in the diagram is the implicit approach to using the supply chain KPI’s of Assess, Diagnose, Correct.  First of all, assess if your supply chain is healthy,  then find out where the problem lies, and finally correct the problem.  I agree with this approach, but I would put cash-to-cash at the top of the pyramid.  I can only assume that AMR placed the demand forecast at the top to promote their concept of a demand driven supply chain.  What is most interesting when comparing the AMR hierarchy with the LinkedIn discussion is that almost all of the metrics proposed in the LinkedIn discussion are at the bottom of the hierarchy, at the “Correct” stage of using the KPI’s.  Clearly we supply chain need to up our game to become relevant to senior management.

There can be no greater measure of a supply chain than the efficiency with which purchased raw material is converted to cash, which is why I suggest you use cash-to-cash to assess the health of your supply chain.  The usual objection I have heard regarding cash-to-cash is that much of accounts receivable and accounts payable is outside the control of the supply chain organization.  This is a fair point except that the supply chain should be managed in a manner consistent with the payments terms agreed with customers and suppliers.  For example, if short payment terms have been agreed with suppliers, there should be a strong focus in the supply chain organization to reduce raw material inventories because of the associated risk of excess and obsolete inventory is increased.  The company will have paid for the inventory earlier so the financial cost of holding the inventory will be greater than in companies with longer payment terms.  I need to state that reducing inventory levels is always a good idea.  I am only trying to illustrate that cash-to-cash is a very good measure of the overall efficiency of the supply chain.

Next on my list, at the Diagnose level, would be a number of margin calculations, starting with gross margin, though I would also include what I call SG&A margin and R&D margin, both of which are of course values included in the calculation of operating margin.  These are calculated in the same way as gross margin.  That is I calculate SG&A margin as (revenue – SG&A)/ revenue, and R&D margin as (revenue – R&D)/revenue.  As with cash-to-cash, many of the influences of these margin KPI’s are outside of the direct control of the supply chain organization, but they do give a lot of insight into the relative importance of building the products versus selling the products and developing the products.  This comparison also allows a company to understand where they can get “the biggest bang for their bucks” by implementing change.  Given that this blog is focussed on supply chain management, I would also bring in inventory measures as this level, such as inventory turns and days of raw material, work in progress and finished goods.  These give you some indication of where the problem lies.  For example, I know of one company whose WIP inventory exceeds their RM and FG inventories combined by a 5:1 ratio.  No prizes for guessing where I would start.

Lastly these metrics only have relevance when compared and over time.   In other words, it is very important to benchmark your supply chain against your competitors to get a good understanding where your company is competitive.  Understanding how you are comparing over time is a good way of understanding if your company is losing or gaining on your competition.  A snapshot cannot provide this insight.  And why not also benchmark your customers and suppliers?  Imagine the value of discovering that your company is a about to enter into a long term supply agreement with a customer whose gross margin has been steadily decreasing over the past 3 years.

Without a doubt detailed operational metrics are important, but only in the context of where your company wants to compete and how your company compares over time to your competition.  As AMR promotes, first assess your supply chain, then diagnose what are the biggest issues, before drilling to the details.

As always, let me know what you think.

The article mainly focuses on what the CFO’s perspective is and what actions they will be taking given these uncertainties.  But, what does this mean for supply chain management professionals?  Clearly, there is a linkage in that the CFO often defines the macro-conditions and key performance indicators (KPIs) for the entire company, including operations performance metrics managed by supply chain management.

As a result, most supply chain management professionals today are very focused on cost reductions, and these most directly tie to inventory reductions throughout the supply chain (by the way, if you’re interested, we just released a white paper on this topic entitled “Inventory rationalization and right sizing strategies“).  Fundamentally the challenge is one of regaining alignment between supply and demand in an environment where demand is very unpredictable and supply may be disrupted.

There  are some key things companies are doing to try to address these challenges, to name a few:

• Ensuring supply chain visibility into multi-enterprise, multi-tier supply chains since inventory control and responding to unplanned events is very much a function of knowing what is where and what state your supply chain is in at any moment (and making sure everyone has that same set of facts)
• Becoming exception-driven by ensuring that front line decision makers can define alerts and thresholds to proactively notify them of exceptions that could negatively impact the business.  Shortening the time to know about a problem drives faster response and reduces the magnitude of impact.
  
• Enhancing collaboration with both customers and suppliers to reduce latency of information and decision-making.  Co-planning and response management at both ends of the supply chain help to mitigate the ripple effect of unplanned events that are increasingly common.
• Knocking down silos internally to ensure that demand and supply are looked at together – by everyone.  For years organizations have been created with separate demand planning and supply chain planning teams with tools designed for each of their needs.  The new need is to integrate these efforts more closely together to ensure that everyone sees the immediate impact of demand on supply and vice versa.
• Aligning supply chain management decisions with the financial metrics of the company.  In the midst of constant change, decisions must be made “in the trenches” quickly throughout the day with insight into their impact on key performance indicators.
  

The CFO has an excellent overall view into the business.  They also inherently know what the impact of demand uncertainty will have on the business.  Where many companies struggle is to tie financial planning metrics down to the operational level, where day-to-day decisions are often made that impact these metrics but also must take into account a host of other issues (such as customer satisfaction, which finance doesn’t focus on).  The key challenge for organizations is to translate these financial metrics into their day-to-day supply chain management decision-making.

For a long time there has been a focus on the “perfect” order in the supply chain.  In the current economic climate the instinct is to capture all demand at any cost.   Amongst other things this article highlights the need to focus on a “profitable” order.  This can only be done by having all the data at hand and being able to compare and contrast different alternatives methods of satisfying the demand in a fast an effective manner.  In today’s multi-tier supply chains, this means having operational data – routings, bills of material, inventories, lead times, … – and costs – purchase price, transportations costs, inventory holding costs, … – available in a single system so that the full consequences of decisions made somewhere in the supply chain can be evaluated throughout the supply chain in a fast and effective manner.  The consequences need to be measured in the form of both operational and financial key performance indicators (KPI’s).  Operational KPI’s such as inventory turns, capacity utilization, customer service.  Financial KPI’s such as revenue, gross margin, cash-to-cash cycle.  Of these gross margin is the most reliable measure of profit, whereas cash-to-cash cycle is the most reliable measure of cash flow.  There are many other financial factors, which are out of the control of supply chain practitioners, that determine whether these two KPI’s indeed lead to profit and effective cash management.

Cash-to-Cash (C2C) is a key performance indicator that is usually ignored in supply chain management applications largely because two of the variables used to calculate C2C, days of sales outstanding (DSO) and days of payables outstanding (DPO), are typically the responsibility of Finance and out of the control of the supply chain.  The focus in the supply chain is usually on inventory, the 3rd variable in the C2C calculation.  This is a pity because the payment history or payment terms with certain customers can have a great effect on the C2C cycle.  In my experience the customers that provide the most revenue often do so at the lowest margins and with the longest payment periods.  By importing the payments terms or payment history for each customer and supplier, we could evaluate the effect on C2C of satisfying one demand stream/order over another.  This allows us to project DSO and DPO (admittedly assuming that payment history or payment terms will not change) based upon to whom we sell, and from whom we buy..  Of course we also need to evaluate the effect of decisions on gross margin and other financial KPI’s so that we are able to balance C2C with gross margin, and, for that matter, with revenue

Having the ability to compare and contrast revenue, gross margin, and C2C (along with operational KPI’s) would allow supply chain practitioners to reach the compromises necessary in day-to-day operations to meet corporate goals in a rational and effective manner.  As importantly, it doing so would also provide a mechanism for communicating the compromises to senior management in terms used by senior management.

I think in many companies supply chain management is that essential component of the machinery that makes a company function that is frequently overlooked.  A case in point is Apple.  Apple is justifiably renowned for it’s product innovation/design and marketing prowess.  But, Apple wouldn’t be Apple without excelling at supply chain management.  Yet, nobody talks about that…unless something goes wrong.  In a rare behind-the-scenes look, there was just recently an article published talking about the “operations wonk” that is second in command at Apple and responsible for their supply chain excellence (see Supply chain excellence at Apple).  I’m sure nobody outside of Apple and his direct family knows that Tim Cook is that person.

As more and more companies compete on a global basis and have supply chains that span the globe, your competitive position in the market increasingly does depend on your supply chain management prowess.  Excellence in supply chain management dictates significant aspect of customer satisfaction, operating performance (margin, inventory, etc.) and many other key performance indicators (KPIs) that determine the health of your company.  And these are critically important because they determine the amount of available cash and investments you can make in launching new products, opening new markets, etc.

It’s unfortunate that supply chain management too frequently gets viewed in a tactical way at the most senior levels of many companies.  I think the key to raising the awareness level of the contribution that excellence in supply chain management can deliver is to tie the impact directly to the key performance indicators that the top executives monitor and care about the most.  This is actually a part of the methodology AMR Research uses in determining their annual Supply Chain Top 25 list and they’ve been able to demonstrate the direct correlation between supply chain excellence and these KPIs in both good times and bad.