The supply chain organization directly controls 70-85% of the costs of a manufacturing organization. They wear the cost improvement agenda like a preacher wears vestments. It is omnipresent. Central to all process discussions, cost management and supply chain are tightly coupled. With rising commodity and transportation costs, historically, labor productivity was a central focus. However, as shown in Table 1, seven of the nine industries have improved labor productivity, but it translated into operating margin improvement in only two industry sub-groups. (The industries are divided by NAICS codes in this chart. The first line is the average value for the period of 2006-2015 while the figures on the second line represent the percentage difference when the full year values of 2015 are compared to 2006.)
Table 1. Consumer Value Chain Supply Chain Metrics
As growth slows to the rate of GDP, companies are asking for more. They want the supply chain leader to not only drive cost improvement, but to also improve the value of the firm. For many supply chain leaders this is new. It is awkward: like walking in new shoes. Supply chain leaders ask us, “What defines value in the supply chain strategy? Is it improvement in market capitalization? Price to book? Price to Tangible Book Value?” In our research, we use Price to Tangible Book Value (PTBV). We believe that the supply chain leader directly controls tangible book value.
To help the supply chain leader, we analyzed the data collected in 28 quantitative studies over the past four years (2012-2015). This included 2147 respondents from manufacturing, retailing, distribution and third-party logistics companies. We tested 61 factors and found four correlations. (These are shown in Figure 1.) Companies with an effective center of supply chain excellence and strong Sales and Operations Planning processes outperform their industry peer group on Market Price to Tangible Book. In addition, companies with lower levels of business pain on supplier reliability and higher performance on supply chain visibility with second and third tier suppliers also perform better. In contrast, we did not find a correlation to specific technology choices—number of ERP instances or technology selection.
Figure 1. Correlations to Price to Tangible Book Value
So, how do companies get started? The first goal is defining supply chain excellence. This is easier said than done. A balanced portfolio across source, make and deliver out-performs a functional approach. (When companies allow the functions of transportation, manufacturing and procurement to set their own targets, they will sub-optimize the whole. The reason? Today, only 12% of companies can quickly analyze alternatives cross-functionally to understand the lowest total cost alternatives.)
The second step is to get good at Sales and Operations Planning (S&OP). The processes of S&OP are more successful when the team reports to a profit center manager, and when the company builds planning capabilities to examine alternatives and align on market options. Less than 20% of companies have this capability today. Unfortunately, the supply chain planning processes are too rigid without planning workbench capabilities to evaluate alternatives through what-if optimization.
Similarly, supplier strategies and supplier development reduce supplier issues and improve supplier reliability. When we look at the building of horizontal processes, companies are stronger in the areas of new product launch, but weaker in supplier development and revenue management. The center of the supply chain is stronger than the ends. The key is alignment of all of the horizontal processes to deliver on end-to-end supply chain strategies.
Figure 2. Horizontal Supply Chain Processes
So, how does a supply chain leader build value? We think by taking five actions:
- Focus on building a balanced portfolio of metrics across the functions of source, make and deliver.
- Clearly define supply chain excellence and operating targets.
- Connect and balance the functions to buy and sell-side markets through cross-functional processes.
- Use supplier development practices to improve supplier reliability and improve supplier visibility through the use of B2B connectivity.
- Build supply chain talent with a value chain focus. Teach the teams that supply chain is the language of business while improving alignment with finance and commercial teams.
We hope that this helps! Let us know your comments.