Supply Chains Are Stuck. How Can You Help?
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Supply Chains Are Stuck. How Can You Help?

As I sit and write the Supply Chains to Admire report for 2024, and I look at the data from the prior reports written annually from 2104 to 2023, I am struck by how few publicly traded manufacturing/retail companies are beating their peer groups at the intersection of growth, operating margin, and inventory. Not only are they not beating their peer groups, but they need to be driving improvement. The larger the company-- in both revenue and number of employees-- the more significant the issue. We need to achieve economy of scale in building supply chain organizations. Smaller, regional players outperform global multinationals.

For example, let's look at the progress of CCL Industries. CCL operates in the containers and packaging industry. Note from 2014 to 2023 that the industry average is 17% operating margin and 7.44 inventory turns. CCL's operating margin is below the industry peer group, while the inventory turns are parity. However, please keep in mind the backward performance trend post-pandemic. The size of the CCL pattern is also more significant than the industry: this indicates a lack of resilience. (Resilience is the ability of a company to outperform the peer group given demand and supply variability. The larger the orbit chart pattern, the less resilient it is.)

CCL Performance/Orbit Chart as Compared to Peer Group


CCL's performance is very characteristic of 80-85% of the patterns I see in writing the report. Supply chain leaders are circling the drain. Companies are spending on IT and consulting but not driving improvement.

The reason? There are many, but here is an observation: Each company is driving improvement projects within its functions. Still, continuous improvement needs to be aligned with a balanced scorecard, and functional cost reductions do not translate to operating margin improvements. (The research shows that an average company has more than 1000 projects moving simultaneously without a clear definition of alignment of the projects to value.)

Why is this important? In regression analysis, operating margin and inventory turns can predict 46-61% of market capitalization/employee, while a focus on the cost of goods sold prediction is 17-36%. (This is based on work we are doing with the Georgia Tech statistics team using industry data from 1982 to 2023.) While no metric is perfect, market capitalization/employee is the best metric we have found for value.

The old saying, "You cannot save your way to value is true." Managing the business and supply chain based on a balanced scorecard shifting from a focus on efficiency and cost is essential to maximize value. (For more on this analysis, check out our presentation at Informs.)

Regression analysis of operating margin/inventory turns to market capitalization and comparison to a similar study using cost of goods sold.

The supply chain is a complex, non-linear system. Improvements in one function can throw another out of balance. For example, reducing demand error can have a 2-3X impact on inventory.

However, as the world becomes more fragile, items will be less forecastable. Metrics alignment is essential. Companies measuring forecast accuracy by MAPE or WAPE or driving manufacturing performance based on OEE are throwing the supply chain out of balance, decreasing value. Instead, companies should focus on building value streams based on forecastability (COV and pattern analysis)/Volume) and improvement in Forecast Value Added analysis. In the qualitative research study that I am currently working on, I interviewed fifteen companies, and no company is managing its operating margin. Nor are they driving reliability by measuring forecastability, schedule adherence, or forecast value added (FVA).

To close the gap, companies need to start with a clear definition of value and then build a balanced scorecard to maximize value. The functions then align with the balanced scorecard, with a focus on improving reliability within each function, as shown in the hierarchy of metrics developed in the work on outside-in planning.


Hierarchy of Metrics to Drive Value

So, how can you help to improve value in the supply chain?

Events: If you are an event organizer, don't just put people on stage because they have a supply chain title. Measure performance and ask speakers to address how they have driven value. Encourage speakers to share failure. We learn more from stories of failure than stories of supposed success.

Influencers: Only write case studies and share stories with referencing value. It is less important to know what a company did than to understand how the action drove value. Avoid hyping the market with shiny objects.

Technologist: If you are a technologist, build the balanced scorecard into your product. Measure FVA, forecastability, form, and function of inventory, and focus on helping the business leadership team understand that the efficient supply chain may reduce cost but not drive value. Measure demand streams and align supply strategies based on the management of FVA, cycle management (lead time and conversion), and inventory strategies. Train teams on the basics of planning. Please don't assume that they are clear. Could you define a good plan and focus on improving outcomes?

Product Marketing at a Technologist: Focus on lead generation in collaboration with driving customer value. Most technology companies take their customers for granted, believing that the installed technologies deliver value. The focus on producing vacuous content to generate leads is a drag on the market, creating noise but failing to deliver value. Instead, help the technology company provide value for customers. Measure value-based delivery and market on insights.

Consultant: If you are a consultant, don't focus on a standard implementation and think your job is done. Installation alone does not drive value. Help companies use the output of supply chain planning to make better decisions. Ensure the feasibility of the plan. Then align the organization on defining a good decision and force teams to build a governance model. Define who should make which decision and at what frequency. Help the organization to define what good looks like.

Service Provider: If you are a service provider, focus on improving reliability. Share content and insights to help your customer better manage in a variable world.

Manufacturing Business Leader/Factory Manager: If you are a manufacturing leader, help manage source, make, and deliver together. Focus on improving schedule adherence, first-pass quality, and conversion reliability. Focus less on efficiency and drop the measurement of OEE. In most manufacturing cultures, teams reward firefighting. Build a culture of data-driven planning where exceptions are few and the focus is on sensing.

Transportation Leadership: Focus on customer service as "seen through the eyes" of the customer. Build a reliable transportation plan with a high acceptance rate of first-pass tender. Focus on being a good trading partner with the supply base. Drive reliability in transportation lead times and measure variability. Build a planning master data layer to feed actual lead times by routing with variability to the advanced planning systems (APS).

Finance: If you are a financial leader, understand demand streams. Using network design analysis in a digital twin learn which streams can be managed as efficient (lowest cost) and which need to be managed as an agile (designed for reliability based on demand and supply variability), or responsive supply chain (short cycles). Define the role of the budget as it ties to strategy. Do not constrain the S&OP cycle to the budget. Instead, use it as an indicator and an input to understand how to drive the best plan. Also, partner in managing inventory. Gain an understanding of the form & function of inventory and work with the team to reduce waste or unnecessary inventory.

Information Technology Leader: Focus on driving value and usability. The gaps between operations and IT have grown over the last decade. Don't buy based on RFPs. Instead, focus on understanding capabilities and defining desired outcomes. Sidestep shiny object discussions and avoid vague terms like digital transformation, the autonomous supply chain, and AI.

These are my thoughts as the heat of the summer beats down on me. I hope that it helps. Meanwhile, I will keep typing on my report and give thanks for the air conditioning. Be safe and enjoy your time in the sun.

Best of luck to you and your team in driving value.

Usama Jahangeer

Supply Chain Logistics and Compliance Expert | Certified Six Sigma Black Belt (CSSBB) | Certified Supply Chain Manager (CSCM) | MBA

2mo

Well written and elaborated Lora Cecere

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Mattia Costa

AI Prompt Engineering for Supply Chain Management | Driving E2E Supply Chain Value | Lean Six Sigma

3mo

Insightful article, Lora Cecere. The idea that many supply chains are stuck in outdated models is a crucial point. It's clear that adopting new technologies and strategies is essential, but the challenge lies in navigating the transition while maintaining operational stability. In your experience, do you feel there is anything else it's worth sharing that can help companies start modernizing their supply chains without disrupting their current operations?

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Tom Bakkabulindi

Logistics and Operations Specialist | Expert in Streamlining Processes and Enhancing Community Services | Passionate about Operational Efficiency and Social Impact

4mo

Great insights, Lora! Your emphasis on aligning improvement projects with a balanced scorecard to drive true value in the supply chain is spot on. The practical recommendations for different roles are very helpful. As someone seeking opportunities in this field, I find your analysis both informative and inspiring. Thanks for sharing!

Tessa (Milofsky) McLure MS, CSCP, CSSBB, CCMP

Agile Supply Chain Leader with 15+ years shaping strategic direction and operational excellence in biotech and medtech, consistently implementing best practices from raw material sourcing to end product delivery.

4mo

This post offers many great insights for Supply Chain improvement. The clear link between Operating Margin and Supply Chain performance is missing in many companies. I will be thinking about how to incorporate more pieces of the Balanced Scorecard into S&OP meetings. What other forums are people using to review the Balanced Scorecard?

In essence, you would think that with the knowledge, capabilities, and technologies out there today, every global manufacturing/retail company will show growth and outperform its previous year's SCM scores. But in reality, that is many times not the case! I see two main reasons for it: 1. 'C' level lack of commitment - Top management needs to provide guidelines and emphasize it is what they are looking to get from their SCM teams. and Also support them in the process. 2. Lack of Mentoring - the fact that the right tools are been installed, does not mean they will be used correctly. Use a mentor to ensure overall users are utilizing the process/solutions correctly and collaboratively.

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