What Drives Supply Chain Excellence? A Look Back and a Look Forward

What Drives Supply Chain Excellence?

A Look Back and a Look Forward

A Closer Look at Supply Chain Excellence

and Progress Over the Last Decade

2/15/2013

By Lora Cecere and Abby Mayer

Supply Chain Insights LLC

Copyright © 2013 Supply Chain Insights LLC Page 2

Contents Research ........................................................................................................................................................... 3

Disclosure.......................................................................................................................................................... 3

Research Methodology ...................................................................................................................................... 3

Executive Overview ........................................................................................................................................... 4

Facing the Supply Chain Plateau ....................................................................................................................... 6

What Is Supply Chain Excellence? .................................................................................................................. 11

A Closer Look at Supply Chain Resilience by Industry ..................................................................................... 17

High-tech and Electronics ......................................................................................................................... 18

Consumer Packaged Goods ..................................................................................................................... 19

Food ......................................................................................................................................................... 20

Chemical .................................................................................................................................................. 21

Industrial ................................................................................................................................................... 22

Pharmaceutical ......................................................................................................................................... 23

Recommendations ........................................................................................................................................... 24

Conclusion....................................................................................................................................................... 26

Appendix ......................................................................................................................................................... 27

Demographics .............................................................................................................................................. 27

Company Profiles ......................................................................................................................................... 30

Metric Equations .......................................................................................................................................... 33

Detailed Metrics Reports You Will Find Useful:............................................................................................. 33

About Supply Chain Insights LLC .................................................................................................................... 34

About Lora Cecere .......................................................................................................................................... 34

About Abby Mayer ........................................................................................................................................... 34


Research This report is based on data collected from financial balance sheets and income statements during the period

of 2000-2011.This report is augmented by data from quantitative research studies done on supply chain

excellence during the period of March-December 2012.

Within the world of Supply Chain Management (SCM), each industry is unique. We believe that it is dangerous

to list all industries in a spreadsheet and declare a single supply chain leader. Instead, we believe that

industries need to be measured over time by peer group.

In this report, we take a closer look at the chemical, consumer packaged goods (CPG), food, high-tech and

electronics, industrial and pharmaceutical industries and their progress over the last decade.

Disclosure Your trust is important to us. This independent research is 100% funded by Supply Chain Insights. As a

research analyst firm, we are open and transparent about our financial relationships and our research

processes.

These reports are intended for you to read, share and use to improve your supply chain decisions. Please

share this data freely within your company and across your industry. As you do this, all we ask for in return is

proper attribution when you use the materials.

We publish our Open Content research under a Creative Commons License, i.e. Attribution-NonCommercial-

ShareAlike 3.0 United States; and, you will find our citation and attribution policy on this page at our Supply

Chain Insights website.

Research Methodology The source of financial information used in this report is publicly available from corporate annual reports and

income statements covering the period of 2000 through 2011. To help us better understand supply chain

excellence, we have invested in building a database of 21 supply chain financial ratios for publically held

companies. The use of financial ratios helps us to better analyze companies across geographies and of

different sizes. We share this data freely with members of the Supply Chain Insights Community. The

quantitative data were primarily collected across seven online surveys, among 368 respondents

(manufacturers, retailers and distributors), from March through December 2012.

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Executive Overview Supply chain processes are now three decades old. They are maturing. Our understanding of supply chain

excellence is evolving.

Most companies feel that they have made great results in driving growth, reducing costs, improving inventories

and managing complexity; however, data from the financial balance sheets and income statements show

otherwise. The financial results support that while all industries have made progress on improving performance

as measured by revenue per employee through the use of technology, substantial progress on costs and

inventory management has only happened in the high-tech and electronics industry. For everyone else,

progress has stalled. The worst results are in the pharmaceutical and industrial peer groups. In general, low-

margin businesses, or industries facing major inflections in market downturns, tend to move the fastest in

maturing supply chain processes.

We find that most industries are at a plateau on the journey of managing supply chain excellence. Growth has

stalled, costs are rising, inventory levels are increasing and complexity reigns. We previously examined these

challenges in the September 2012 Supply Chain Insights Report, Conquering the Supply Chain Effective

Frontier. Companies are frustrated. They have invested in systems, people and processes; but yet, the

progress is elusive.

Figure 1. Current Issues for the Supply Chain Professional

http://www.slideshare.net/loracecere/conquering-the-supply-chain-effective-frontier

http://www.slideshare.net/loracecere/conquering-the-supply-chain-effective-frontier


As frustration rises in the boardroom, the tendency is to have a knee-jerk reaction and try to reduce singular

metrics without understanding the impact on the supply chain as a holistic system. As shown in figure 1, supply

chain team frustration with executive level decisions is mounting. We find too few companies really

understand the role of the supply chain in driving business excellence.

The biggest opportunity to improve these business results lies deep within the organization. It comes from

leadership and clear articulation of a supply chain strategy. It takes discipline and patience. Results on the

supply chain Effective Frontier (the management of growth, costs, complexity and cycles) does not happen

quickly: these results take three to five years at a minimum. To make progress, companies need to: educate

and align on the principles, evolve the organization’s understanding of supply chain processes, and learn from

the industries that have done it well.

Bottom line, we believe that excellence in supply chain matters. The companies that have made the most

progress have managed the supply chain as a complex system. While information technology companies tout

that IT systems made the difference, we believe that the results in this report are all about leadership and

talent development. The greatest issue for the supply chain department is the lack of clear understanding of

supply chain excellence by the executive team. The goal of this report is to help close this gap.


Facing the Supply Chain Plateau The definition of supply chain processes started within the company’s processes of manufacturing or

distribution. Today, the center is stronger than the ends. The vertical processes are stronger than the

horizontal. Unfortunately, the term supply chain can often be construed as the supply chain department; not as

a better way of doing business for the company. We believe that supply chain excellence is essential for the

delivery of business results.

The original goal of the use of supply chain processes to connect from the customers’ customer to the

suppliers’ supplier has gotten bogged down in functional processes, siloed metrics and a myriad of IT projects.

Less than 1% of companies have focused on end-to-end processes and most have learned from failure versus

success. Overall, progress against the goals of improving customer service, propelling growth, reducing

inventories and reducing costs have stalled.

Supply chain excellence is about balance and discipline over a multiyear journey. The best companies manage

the supply chain as a system, understanding the relationships between growth, costs, cycles and complexity.

Supply chain leaders recognize that they have more than one supply chain, each with its own potential.

As we look back over the last decade, we find that most industries are stuck. They are currently experiencing a

supply chain performance plateau. The high-tech industry is the only peer group that we can find that has used

supply chain processes to propel growth, improve operating margin, and better manage supply chain cycles.

Consider these results supported by tables 1-4.

• High-tech Industry: Companies within the high-tech and electronics industry grew at a rate of 19%,

while reducing inventories by 40%, and improving cost of goods sold by 12%. As an industry sector, the

companies have done the best in navigating the Supply Chain Effective Frontier. They were the first to

embrace supply chain planning, network design, the use of channel data, and the building of extended

value networks with suppliers and contract manufacturers.

• Consumer Packaged Goods (CPG): While many think of CPG as a leader within supply chain

management, over the course of the last decade, progress has stalled. The companies with the CPG

peer group grew topline revenue by 7%, increased the number of days of inventory by 3%, and fought

an uphill and then a downhill battle to manage operating margins. The efforts towards supply chain

excellence have been more project-based than systemic, and the industry has been slow to manage

the end-to-end value chain. Barriers exist to design supply chains across sales and marketing to

improve the end-to-end flows, and costs and waste are being pushed backwards in the chain towards

suppliers. These companies tend to be more sales-driven (opportunistic) or marketing-driven (focused

on share) than driving long-term value. CPG companies will have to adopt market-driven practices like

demand sensing, test and learn practices, and demand orchestration in order to drive themselves off of

the current supply chain plateau.


• Chemical Companies: The average chemical company grew 7%, decreased inventories by 22%, but

lost ground on costs over the last decade. The segment has survived numerous mergers and

acquisitions (M&A) and successfully built global supply chain teams. While operating margins improved

from 2000 to 2007, this improvement could not be sustained in the Great Recession. Conversely, the

impact of the 2007-2009 recession was less than the impact of the 2000-2002 downturn. Only through

diligence in supply chain management has the sector been able to return to prerecession operating

margins. In the peer group, there is no SINGLE leader. Overall, the industry has done a good job in

attempting to build supply chain talent through Centers of Excellence and the building of global teams.

In the face of global corporate social responsibility initiatives, the chemical industry will be forced to

think more holistically and end-to-end.

• Food: The average food manufacturing company grew 7% with slight improvement in the number of

days of inventory. Costs rose with a 4% increase in cost of goods sold as a percentage of revenue.

Overall, the industry made some progress; but, the leaders are battling rising commodity volatility and

bracing for escalating costs. The concepts of market-driven value networks are the most critical in the

face of market volatility. The industry lags the chemical and consumer products sectors in their

understanding of supply chain excellence. With the rising costs of materials, and the shortage of food in

the global supply chain, this peer group will be pressured to step-up their practices quickly.

• Industrial Companies: In the last decade, the industrial companies grew at a rate of 4%, inventories

increased at a rate of 10%, and the industry made no progress in improving operating margins. This

sector has been slow to adopt new practices and there is no one in the sector that we can point to as

an industry leader. While the industry Leaned-out the enterprise, they pushed costs and wastes

downstream onto their suppliers with adverse implications through the downturn of the 2007 recession.

There is a great need to retool the thinking of the industrial sector to better compete in the next decade.

• Pharmaceutical Companies: The average pharmaceutical company has three times the levels of

inventory of any other process industry with only slight improvements in inventory levels since 2003.

Growth over the last decade averaged 9% and operating costs increased 22%. As an industry, the

companies in the peer group shown have one of the lowest levels of understanding of supply chain

fundamentals. Due to high margins and a focus on new product launch, the industry has been slow to

adopt supply chain practices. As the rate of new products slow and the number of new drugs protected

by patents decrease, supply chain excellence will matter more than ever to the industry, but each

company will struggle to build talent and build winning processes. These processes need an overhaul.

As shown in tables1-4, the rate of progress on the supply chain Effective Frontier was the best by companies

with the tightest margins and a focus on supply chain excellence. Over the last decade, the high-tech and

electronics industry outperformed all other industry segments.


The Tech Wreck of 2000-2001 was a rallying cry for the industry segment to redefine processes and better

manage supply chain cycles. During that time, high-tech companies faced negative earnings, escalating costs,

shortening life cycles and a low return on assets (ROA). The industry used supply chain practices to return the

sector to health. This industry has the best adoption of supply chain planning processes, the most zealous

processes for inventory management, and the most enlightened leadership on why supply chain excellence

matters. As an industry, they focused on accelerating new product launch by insourcing new products and

redefining the role of manufacturing to accelerate the time to market for new innovation. They were also

successful in the use of contract manufacturing and the building of end-to-end supply chain visibility systems.

Table 1. Changes in Year-over-Year Sales Growth Over the Period of 2000-2011

Year-over-year sales growth values vary greatly amongst the different industries and different time periods. As

seen above in table 1, overwhelmingly, most industries have seen slowing or stagnant sales growth over the

past decade.


Table 2: Changes in Operating Margin over the Period of 2000-2011

Operating margin has remained relatively stagnant as companies struggle to move off of the supply chain

plateau, with the notable exception of high-tech & electronics manufacturers who saw a significant increase in

operating margins over the time period.

Table 3: Changes in Cost of Goods Sold/Revenue for the Period of 2000-2011


Some of these critical trends on costs can be seen in the cost of goods sold ratios to revenue, as shown in

table 3. The rising pressures of commodity prices have had an adverse effect on most industries.

Table 4: Changes in Days of Inventory for the Period of 2000-2011

While most companies have “talked” about reducing inventories, the greatest impact on the reduction of

inventories happened in the high-tech and electronics industry. In looking at company-specific data, we find

that there has been little impact on bottom-line results by companies adopting new inventory optimization

technologies. The problem is that most companies have adopted these as projects, not as a systemic way of

doing business.

The organizations look slightly different by design. As shown in table 5, with the highest cost of raw materials,

the high-tech groups are more likely to have the procurement organization directly reporting to the supply chain

function. This industry has the most mature processes for the management of outsourced manufacturing, and

commodity councils and buying strategies for direct materials. They are also the best in the use of supply chain

planning technologies and are less likely to see the supply chain as “a functional department.” For them, it is a

way of doing business.


Figure 2. Supply Chain Reporting Relationships

In this report, we contrast the progress of these industries and take a look at where we are in the definition of

supply chain excellence.

What Is Supply Chain Excellence? Ironically, the need to move the supply chain forward faster has never been greater. The metronome, or pace,

of the supply chain process has increased. Data has proliferated and the frequency of market inputs has never

been higher. Yet, many companies are stuck on a performance plateau.

The question seems simple, but the definition of supply chain excellence is not. As shown in figure 3, the steps

to deliver supply chain excellence are progressive with each step building and encompassing the prior.

Companies cannot move along this framework, from bottom-left to upper-right, without achieving mastery in

the preceding phase. Progress on this path requires disciplined leadership to build cross-functional teams in a

multiyear journey. It also requires the support and understanding of the executive leadership team.


Figure 3. Market-driven Value Network Maturity Model

First Stage Processes Definition: The Efficient Supply Chain. In the beginning, supply chain excellence

was defined as the lowest manufactured cost. The belief was that supply chain excellence could be achieved

by “sweating the assets.” This set of beliefs formed the foundation for the efficient supply chain. Through the

evolution of supply chain processes, costs were reduced, inventory levels lowered and waste eliminated; but

each company reached a point where they could no longer just cut costs without trading off customer service

to customers. They had reached their effective frontier. The effective frontier is the capability of each supply

chain within each company to balance the results for growth, profitability, complexity and cycles.

The supply chain is a complex system that has increasing complexity. It can only be managed effectively by

managing it as a system. Companies that try to manage “pieces of the supply chain” in isolation to the whole

system will throw the supply chain out of balance.

As shown in figure 4, 7% of companies are at this level of maturity, defining supply chain excellence as “The

Efficient Supply Chain. Lowest cost per unit.” Many pharmaceutical and industrial companies’ supply chain

teams are at the first stage of the Market-driven Value Network Maturity Model shown in figure 3. They are

stuck at the lowest level running only an “efficient” supply chain.


Figure 4. Levels of Supply Chain Maturity in 2012

The Second Stage in Supply Chain Processes: The Evolution of the Reliable Supply Chain. The lack of

reliability to deliver customer service was the efficient supply chains’ Achilles heel. This realization gave rise to

the concepts of the reliable supply chain. With this shift, the focus changed to how companies could balance

costs and also achieve reliability in customer service and working capital management. The goal of this supply

chain evolution was the right product, at the right place, at the right time, at the right cost. At this level of

maturity, companies focused on improving the decision-support systems to increase the potential, or the

effective frontier, of the supply chain.

For many companies there was a detour. There was a general belief that the best supply chain was a tightly

integrated supply chain. As companies worked on the implementation of processes to become more reliable,

they found tight integration was not always beneficial. Instead, they found that the supply chain needed

synchronization of processes through the building of strong horizontal processes (for more on this reference

the Supply Chain Insights report The Art of the Possible: Actionable Analytics for Value Networks ). These

horizontal processes are revenue management, Sales and Operations Planning (S&OP), supplier development

and corporate social responsibility. As a result, planning grew in importance and there was a need to focus on

“what-if” analysis and simulations to test for reliability. Each planner needed their own workbench to test the

feasibility of solutions and these solutions required a different technology configuration.

http://supplychaininsights.com/the-art-of-the-possible-actionable-analytics-for-value-networks/


As shown in figure 4, 47% of companies are currently at this level of maturity, defining supply chain excellence

as “Right product, right place, right time at the right cost.” Redesigning the supply chain to improve resiliency is

essential for food and consumer packaged goods companies. Without designing the supply chain to buffer

market variations, companies will not be able to move off of the supply chain plateau.

Third Stage in Supply Chain Processes: Building the Resilient Supply Chain. During the Great Recession

of 2007-2009, companies quickly learned that they had to build supply chains that could withstand the winds of

demand volatility or the pressure of supply disruption. These supply chains were built to sense outside-in and

change the supply chain response based on market conditions. Supply chain leaders that built resilient supply

chains, and decreased the latency of—or time to sense—demand and supply changes, adapted the quickest to

market changes. Based on a qualitative survey of sixty Fortune 500 manufacturing companies that were

interviewed on the impacts of the Great Recession, that started in December 2007 and stretched over twenty

months, we found the companies that were better at demand sensing aligned their supply chains five times

faster. As shown in figure 4, 11% of companies are at this level of maturity, defining supply chain excellence as

“A resilient supply chain that can withstand the shocks of demand and supply volatility.”

Fourth Stage in Supply Chain Processes: The Adaptive or Demand-Driven Supply Chain. In the adaptive, or demand-driven, supply chain, companies increased sensing capabilities and infused the

processes of source, make and deliver into the discussions with both buy- and sell-side trading partners.

These top-to-top meetings and relationships became more data driven. As a result, the metrics changed.

Procurement discussions focused on total landed costs, not just purchase costs. In addition, suppliers were

incented to contribute through innovation networks and alignment to Corporate Social Responsibility (CSR)

programs. Scorecards and performance management processes evolved. The emphasis evolved to focus on

building win-win partnerships through supplier development programs.

To build supply chain sensing capabilities in the downstream channel, the processes needed to be turned

outside-in. Demand planning processes changed from focusing on predicting what to ship from factories to

predicting what would be sold in the channel. For many companies, this made the investment that they had

made in the “integrated supply chain” and multiyear Enterprise Resource Planning (ERP) programs obsolete. It

was no longer sufficient to be tightly integrated to order and shipment processes. Instead, the company

needed to define the process of demand translation: the translation of market demands to supply operations

with minimal latency. These processes were built on channel data, not corporate history. Demand architectures

needed to be built to sense and then translate the meaning of channel or downstream data. The largest benefit

of a demand-driven value network is assessing and building the value network to meet upcoming demand.

In the adaptive, or demand-driven, supply chain, the processes first sense and then shape demand based on

revenue management practices. Demand shaping includes the active processes of new product launch, price

management, trade promotion management, marketing and advertising, and incenting sales against revenue


management processes. These processes are designed outside-in to evaluate “what really matters to

customers.” Companies that mature in this capability usually are also mature in the processes of determining

customer profitability through cost-to-serve analysis and looking at product profitability to decide upon the right

product portfolio. They actively manage complexity.

This stage of development requires tight integration of the research and development efforts (R&D) to the

supply chain processes. Since 60-80% of the costs of a product are defined in new product launch and many

supply chain networks are defined at the time of launch, in the maturation of these processes, companies need

to carefully define the coupling of cross-functional, horizontal processes. This includes the integration of the

processes of Sales and Operations Planning (S&OP) with R&D Stage Gate Planning and Corporate Social

Responsibility (CSR) with Supplier Development programs. This is even more critical in heavily regulated

industries like pharmaceutical, agro sciences, and aerospace and defense supply chains. If these companies

do not get it right on the product launch, they have a very difficult time amending the process later.

In this stage of supply chain development, one of the toughest change management issues is the role of

“sales” in driving a profitable demand response. Since most sales organizations are incented on volume, not

profitability, there is a strong resistance to shape demand unless the incentives are aligned to focus on selling

a profitable unit. This is a change management issue worth fighting. As the adaptive supply chain evolves,

leaders find that one of the largest impacts is improved customer service and the reduction of the cost of sales

as a percentage of revenue. Customer satisfaction improves and the dialogue is now focused more on what

the customer values versus internal, self-serving metrics.

Supply chain design and the architecture of supply chain strategy increases in importance. This changed from

an ad hoc or annual process to be an integral part of the monthly S&OP process. Companies also learn that

forecasting is more important than ever, but that the focus needs to change. It is no longer about the accuracy

and tight integration of numbers; instead, it is a focus on sensing market drivers, aligning on assumptions, and

planning the network based on the predicted level of demand volatility.

Today, this stage of maturity is largely aspirational for most companies and not well understood. In the survey,

as shown in figure 4, only 16% of companies rated themselves as “A responsive supply chain that can adapt

as markets change.”

Fifth Stage of Supply Chain Process Evolution: Align the Supply Chain Market-to-Market. The market-

driven supply chain is future state aspiration for the supply chain leader. The concepts are based on building

advanced processes to test and learn. This definition is the most closely aligned with the work that is currently

happening in the high-tech and electronics industry.

These networks are termed Market-Driven Value Networks: Market-driven Value networks are adaptive

networks that can quickly align organizations market-to-market, focused on delivering a value-based outcome.


They sense and translate market changes (buy- and sell-side markets) bidirectionally with near real-time data

latency to align sell, deliver, make and sourcing operations. The focus is on horizontal process orchestration.

With the evolution of market-driven supply chains, companies can focus on delivering value-based outcomes

through complex networks.

High-tech companies have been the most aggressive in the adoption of new forms of analytics. With the

decrease in innovation in the supply chain planning market, many of these advancements are being built in-

house. They clearly know that the traditional supply chain could not sense; instead, it was a fixed response.

It was often wrong and late. Despite what was happening in the

market, the response remained the same. Likewise, supply

chains were not built to test and learn. With the evolution of

technologies for learning systems, supply chains can now

orchestrate demand across the organization market-to-market

while executing test-and-learn strategies.

The design of market-driven supply chains is dependent on the

building of value networks, strong horizontal processes, the

redesign of forecasting and supply, and a retraining of the

organization. It should not be confused with a marketing-driven

supply chain. In the marketing-driven supply chain, the focus is

on an internal signal from sales or marketing, not a market

signal from the channel. In addition, it does not adapt

horizontally market-to-market (buy-side to sell-side markets).

The market-driven supply chain stretches horizontally across the

Market-Driven Case Study: Cargill Beef is a market-driven leader. The company uses price

optimization tools to evaluate the market potential for beef. Before the company decides what to package

for the market, they first evaluate the market potential for each cut of beef and then optimize how they

harvest their inbound herds to maximize the opportunity and minimize the risk. There are 197 ways to cut

up beef cattle. Since each breed of cow has a different potential or finite mix of products—steaks, ground

beef, roast, etc.—Cargill uses the technology in Sales and Operations Planning to drive rancher insights

to define which breeds are best for customer demand. This process of being adaptable to trade-offs from

market-to-market based on the use of optimization technologies is termed demand orchestration. It is a

key capability requirement for market-driven leaders.

Market-driven supply chains are

adaptive networks that quickly align

across an organization to sense and

shape a market-to-market response.

These processes are focused on

delivering a value-based outcome.

When successfully implemented,

these supply chains sense and

translate market changes (buy- and

sell-side markets) bidirectionally

with near real-time data latency to

align sell, deliver, make and sourcing

operations to market conditions.


extended supply chain from market-to-market.

A Closer Look at Supply Chain Resilience by Industry A resilient supply chain is one that is able to push forward on the effective frontier to drive continuous

improvement in growth, cost, complexity and cycles despite market downturns and volatility. Over the last

decade, there were two recessions. The first recession was March through November, 2001 with a peak-to-

trough GDP decline of -.3%. The larger recession was December, 2007 through June, 2009, with a -5.1%

peak-to-trough GDP decline. With a closer look at the data, we can see that the high-tech and electronics

industry survived the second recession better than the first, but that the chemical, industrial and

pharmaceutical industries stumbled. In tables 5-12, take a closer look at the differences, the averages and the

standard deviations to understand the level of variation on these two key metrics of operating margins and

days of inventory.

To achieve supply chain resiliency, the company needs to manage the supply chain as a system while

balancing market impacts to drive progress on growth, profitability, supply chain cycles and complexity. In this

section, we take a closer look at the industries—high-tech and electronics, consumer packaged goods, food,

chemical, industrial and pharmaceutical companies—and their performance over the last decade to illustrate

the principles of supply chain resiliency.

Companies have to master this third level of supply chain excellence in order to move forward and become

demand-driven or market-driven. Today, the best results and the most advanced processes are in the high-

tech industry.


High-tech and Electronics The industry that has shown the greatest resilience in managing the Supply Chain Effective Frontier is high-

tech and electronics. Supply chain excellence is necessary to compete, and was a key factor in driving

revenue and inventory improvements. While Apple is always touted as the inventory leader, readers can

quickly see the continuous improvement by most of the companies in the high-tech and electronics peer group. At this point, Research in Motion and Motorola lag the peer group in managing the Effective Frontier.

Tables 5 & 6. Days of Inventory and Operating Margin (High-tech & Electronics)


Consumer Packaged Goods Companies within the CPG industry show greater resilience than companies in either the chemical or

pharmaceutical peer groups, with more reliable results in both operating margin and days of inventory. In the

CPG industry sector, Colgate Palmolive consistently outperforms its peers on operating margin.

The least resilient company in the peer group is Unilever. While many think of Unilever as a supply chain

leader, we do not. The company has grown slower than its peers, consistently posting lower margins, with

struggles to manage inventories. Unilever has consistently thrown the supply chain out of balance by the

management of project-based initiatives and metrics in functional silos. The company has also been less

successful in building supply chain talent with many layoffs in global regions, and a failure to rebuild supply

chain talent for continuity.

Tables 7 & 8. Days of Inventory and Operating Margin (Consumer Packaged Goods)


Food The food industry is stalled on the supply chain plateau. Operating margins have declined and inventory levels

have started to rise. There is no clear leader.

Tables 9 & 10. Days of Inventory and Operating Margin (Food)


Chemical The chemical industry has struggled to manage costs and generate consistency in operating margin through

the Great Recession of 2007-2009. The industry has recently rebounded on the back of higher energy prices.

Over the last decade, the chemical sector has decreased inventories by 22%. Next to the high-tech and

electronics industry, this sector has been one of the most diligent in the management of working capital.

The company showing the greatest improvement in the supply chain as a system is Eastman Chemical Company. The worst management of the supply chain as a system is by Akzo Nobel N.V.

Tables 11 & 12. Days of Inventory and Operating Margin (Chemical)


Industrial For industrial companies, the impact of supply chain excellence on operating margins and cost of goods sold

has been slow, and the impact on inventories has been slow. This industry has been slow to adopt leading

supply chain thinking. Instead, the industry has followed more predatory procurement policies that have

weakened the value network, making the value network less resilient through the downturn.

Tables 13 & 14. Days of Inventory and Operating Margin (Industrial)


Pharmaceutical The pharmaceutical industry struggled with both costs and inventory management over the last decade. With a

focus on stage 1 of the Market-Driven Supply Chain Excellence model shown in figure 3, the companies with

growing global supply chains struggled to manage inventories and manage consistency in operations to drive

reliability in operating margins. There is no clear leader.

As you look at the year-over-year results, you will see that the companies have had a serious decline in

operating margins, and a slight improvement in inventory levels, despite the fact that the levels of inventories

are 3 times those of process industry comparisons in the chemical and consumer packaged goods industries.

The pharmaceutical sector is a great example of why industries with consistently high margins have a tough

time getting serious about supply chain management.

Tables 15 & 16. Days of Inventory and Operating Margin (Pharmaceutical)


Recommendations At Supply Chain Insights, we have mapped financial ratios for over 75 companies in the Supply Chain Insights

Community and each time, when we share the data, we are surprised to find that the teams are unaware of

their own financial results. Without the accountability to the balance sheet results, the general belief is that

companies have made far more progress than they have. For companies to push themselves off of this supply

chain plateau, we offer these seven recommendations:

1. Redefine and Clarify Supply Chain Excellence. Use figure 3 (on page 12) to help your teams gain a

better understanding of supply chain excellence. Understand where your company is on the supply

chain plateau and use the discussion of supply chain excellence to help teams to cross-functionally

align for progress.

2. Put Someone in Charge of the Design of End-to-End Processes. The greatest opportunity in the

supply chain is in its “joints” or “links.” Take responsibility for the performance of your company end-to-

end. Pushing costs and waste to suppliers is a short-term strategy that causes long-term damage.

Focus on quality data sharing (forecasts and inventory) and strive to be the easiest to do business with

in your sector. Take out the hidden costs. By focusing someone on the end-to-end process flows,

companies can take advantage of the design of outside-in processes and the building of strong

horizontal processes. It works: one company that we are following returned $2 million to the bottom line

in one year by focusing on horizontal processes outside-in.

3. Don’t Harvest the Low-hanging Fruit. Shake the Whole Tree. We cannot count the number of times

that we have heard a well-intending consultant tell us to “harvest the low-hanging fruit.” We have spent

the last decade putting the fruit in the basket, but not delivering results. The practices that got us here

in supply chain management need to be rethought. We need to think more about supply chain

management as a system. The focus needs to be on the end-to-end value chain, and the processes

need to be mapped outside-in. Today, less than 1% of companies surveyed have a person responsible

for the end-to-end value chain and is focused on the enterprise outside-in. The outside-in

transformation to build the market-driven value network shakes the whole tree. Don’t stop with the low-

hanging fruit. Rethink the entire system.

4. Saving Pennies May Have Cost Dollars. Over the course of the last decade, we have worked with

many companies that moved manufacturing to countries with lower labor costs. This elongated their

supply chain and increased the replenishment cycle. It also increased working capital and

obsolescence. As we now look at these companies’ results, they were penny-wise and pound-foolish.

We can now see the impact of such decisions with the increase in operating margins, but an even

greater increase in cash-to-cash cycles. This happened because they got greedy and sought to take

advantage of lower labor costs without understanding the impact on the supply chain as a system.

http://www.supplychaininsightscommunity.com/community/educate/supply-chain-index

http://www.supplychaininsightscommunity.com/community/educate/supply-chain-index


Companies that redesigned the supply chain, understanding the impact on rhythms and cycles, did far

better.

5. Don’t Save Money in the Back Office to Finance the Front Office. Use the Back Office to Drive Growth. The folks in the back office are good at process and continuous improvement. As we look at

the increase in Selling, General & Administrative Expenses (SG&A) without the increase in growth, we

believe that we need more process discipline in the front office. We also think that the best supply chain

teams are using supply chain initiatives as a pathway forward to drive growth through new channels,

new business models and better response. Don’t cut your supply chain to the bone to fuel sales and

marketing initiatives without a seat at the table to discuss how to make it more effective.

Table 17. SG&A Margin as a Percentage of Revenue Over the Period of 2000-2011

6. The Supply Chain IS Business, Not a Department Within the Business. For us, this is the saddest

recommendation to give. For the last twenty years, supply chain professionals have fought to get a seat

at the table. Suddenly, the term supply chain is being used to describe a department within the

enterprise–often composed of distribution and logistics–and the concepts of supply chain management

as a better way to run businesses are largely forgotten. We strongly believe that the principles of great

supply chain management are key to driving business performance, but it cannot be driven by a

manager level in a functional department.

7. Project-based Initiatives Do Not Get Us There. We know that many readers have worked on

continuous improvement programs and multiyear IT programs. We have cut our teeth on these

initiatives. However, we do not see that these project-based initiatives have had the desired impact on

the bottom line. We believe that functionally-based projects, in isolation of a multiyear road map, have


done us more harm than good. Instead, the most effective results have happened when supply chain

enablement was a company initiative, not a functional initiative, and the projects were tied together in a

multiyear road map. For most companies, this is the exception, not the rule.

Conclusion Currently, we are at a supply chain plateau. To drive growth, and improve costs while better managing

inventories, we need to rethink practices and gain organizational alignment on a new definition of supply chain

excellence.


Appendix

Demographics The data from figures 1, 2 and 4 are based on quantitative studies fielded by Supply Chain Insights in the

calendar year of 2012. These surveys were conducted online. The respondents answered the surveys of their

own free will. The only offer made was to share the responses in the form of Open Content research.

The names of those that completed the surveys are held in strict confidence, but the demographics are shared

to help the readers of this report gain perspective on the respondents. The demographics supporting these

figures are found in figures A-C.


Figure A: Industry Demographics

Figure B: Company Demographics


Figure C: Position within the Supply Chain Organization


Company Profiles Listed below are some of the overall company characteristics of the industry peer groups which were profiled in

tables 1-17 of this report.




Metric Equations

Detailed Metrics Reports You Will Find Useful: Supply Chain Metrics That Matter: A Focus on Retail Published by Supply Chain Insights in August 2012. Supply Chain Metrics That Matter: A Focus on Consumer Products Published by Supply Chain Insights in September 2012. Supply Chain Metrics That Matter: A Focus on the Chemical Industry Published by Supply Chain Insights in November 2012 Supply Chain Metrics That Matter: The Cash-to-Cash Cycle Published by Supply Chain Insights in November 2012 Supply Chain Metrics That Matter: A Focus on the Pharmaceutical Industry Published by Supply Chain Insights in December 2012 Supply Chain Metrics That Matter: A Focus on Hospitals Published by Supply Chain Insights in January 2013 Supply Chain Metrics That Matter: Driving Reliability in Margins Published by Supply Chain Insights in January 2013

http://supplychaininsights.com/supply-chain-metrics-that-matter-focus-on-retail/

http://www.supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-consumer-products

http://supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-the-chemical-industry/

http://supplychaininsights.com/supply-chain-metrics-that-matter-the-cash-to-cash-cycle/

http://supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-the-pharmaceutical-industry/

http://supplychaininsights.com/supply-chain-metrics-that-matter-a-focus-on-hospitals/

http://supplychaininsights.com/supply-chain-metrics-that-matter-driving-reliability-in-margins/


About Supply Chain Insights LLC Supply Chain Insights LLC is a research and advisory firm focused on reinventing the analyst model. The

services of the company are designed to help supply chain teams improve value-based outcomes through

research-based Advisory Services, a dedicated Supply Chain Community and public training. Formed in

February 2012, the company is focused on delivering actionable and objective advice for supply chain leaders.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and author

of the popular enterprise software blog Supply Chain Shaman currently read by 5,000

supply chain professionals. Her book, Bricks Matter, (co-authored with Charlie Chase)

was published on December 26th, 2012.

With over nine years as a research analyst with AMR Research, Altimeter Group, and Gartner Group, and now as a Founder of Supply Chain Insights, Lora understands supply

chain. She has worked with over 600 companies on their supply chain strategy and speaks

at over 50 conferences a year on the evolution of supply chain processes and technologies. Her research is

designed for the early adopter seeking first mover advantage.

About Abby Mayer

Abby Mayer (twitter ID @indexgirl), Research Associate, is one of the original members of

the Supply Chain Insights LLC team. She is also the author of the newly-founded blog,

Supply Chain Index. Her supply chain interests include connecting financial performance

and supply chain excellence as well as talent management issues, emerging markets,

and improving risk management practices through the use of big data and analytical

analysis.

Abby has a B.A. in International Politics and Economics from Middlebury College and a

M.S. in International Supply Chain Management from Plymouth University in the United

Kingdom. She has also completed a thru-hike of Vermont’s 272 mile Long Trail, the oldest long distance hiking

trail in the United States. As part of the planning and food prep process, she became interested in supply chain

management when she was asked to predict hunger pangs for the entire three-week trip before departure. If

that isn’t advanced demand planning, what is?!?!

http://www.twitter.com/lcecere


http://www.supplychainshaman.com/

http://www.bricksmatter.com/reviews/

http://www.twitter.com/lcecere


http://www.supplychainindex.com/

What Drives Supply Chain Excellence? A Look Back and a Look Forward

Business

supply chain excellence

supply chain resilience

supply chain plateau

supply chain decisions

supply chain insights

supply chainexcellence

single supply chain

closer look