In 2014, I wrote my first book on supply chain excellence. In chapter four of the book, 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, the prior leader of Global Supply at P&G, said, ” In your article, you write on shifting the focus in the supply chain 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 peers within the business 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, and in my zest to finish the book, I had not provided a definition. Answering his question became a seven-year research project titled the Supply Chains to Admire analysis.
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 market capitalization. The research project analyzed 1200 combinations of 180 metrics for four hundred companies for the period of 2010-2012. 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, in this nine-year period, 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
To understand supply chain excellence, 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. Winners of the Supply Chains to Admire Analysis for 2020
In 2020, twenty-two companies meet the criteria to be a Supply Chains to Admire Award Winners. The list of winners includes AbbVie Inc., Assa Abloy AB, BorgWarner Inc., Broadcom, Dollar Tree Stores, Ecolab Inc., iRobot Corporation, Lockheed Martin Corporation, Koninklijke Ahold N.V. (Ahold), L’Oréal S.A, Monster Beverage Company, PACCAR Inc, Reckitt Benckiser Group plc, ResMed, Rockwell Automation, Samsung, Sleep Number, Taiwan Semiconductor Manufacturing (TSMC) Company, The Toro Company, TJX Companies, United Tractors, and V.F. Corporation.
While the companies of Becton, Dickinson, and Company (B.D.), Schneider Electric, and Urban Outfitters did not qualify as sector winners, in the analysis, each company shows marked improvement and notable achievement; and as a result, is worth a mention.
The list of Supply Chain to Admire Award Winners is a stark difference from the perception of industry leaders. While the performance of some like L’Oreal and Samsung are commonly accepted as supply chain leaders, the performance and recognition of other companies on the list are not as well known. Since the Supply Chains to Admire is a data-driven analysis, it is less subject to industry bias. As a result, the Supply Chains to Admire methodology is a useful assessment tool for companies of all sizes globally.
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 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 underperform focus on functional optimization of make, source, and deliver processes without clarity on total cost or the reason for shorting customer orders. In winning companies, the metric of Operational Efficiency (OEE) is replaced by Production Schedule Adherence, and functional costs are de-emphasized to focus on cross-functional trade-offs to manage total costs. (Only 29% of companies can easily access total cost data.)
- Consistency of Leadership Team Direction. The organization side-steps fads, shiny objects, and financial reengineering projects. Weekly and daily information flow to focus on understanding 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. 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 makes these programs a part of doing business. The efforts of teams are never hamstrung by financial hurdles to minimize cost. The supply chain is recognized as an engine of growth. The leaders constantly test and learn to drive innovation.
In summary, I summarize the characteristics of winners and laggards in Table 1.
Table 1. Qualitative Observations of Supply Chains to Admire Winners and Laggards
I hope that this analysis helps you and your teams. Look for the company case studies of the leaders in subsequent articles. Access the full report and supporting presentation materials on slideshare.