Supply chain leaders at industrial packaging companies navigate a difficult marketplace. Sitting two or three layers back in the supply chain, they struggle with increasing demand variability in a volatile world. They are under severe pressure from their customers, who are asking them to cut costs while improving customer service. Their lives would be easier if their downstream customers could improve demand-signal accuracy, but this has not been the reality.
Industrial packaging companies needed to improve agility in order to succeed in the face of these challenges. Yet the maturity of industrial packaging supply chains lags that of their upstream customers. In this industrial segment, companies are slow to adopt inventory and transportation systems. Historically, this industry has been a late adopter of technology and best practices. As a result, process evolution and supply chain improvement moves slowly.
Defining supply chain excellence in an uncertain world
While the concepts of supply chain excellence and improvement sound simple, it can be hard to define performance improvement and ascertain when a company is improving faster than a peer group. To help supply chain practitioners, like those in the industrial packaging segment, we created the Supply Chains to Admire methodology and our Supply Chain Index in 2014. Our methodology assesses both performance (rankings on revenue growth, operating margin, return on invested capital (ROIC), and inventory turns) against peer group and relative rates of improvement. The Supply Chain Index is a measure of improvement, while the Supply Chains to Admire methodology ranks companies both on improvement and performance within a peer group. (See the sidebar below for more detail about the Supply Chain Index and Supply Chains to Admire methodology.)
In Figure 1, we use the methodology to analyze companies in the packaging manufacturing industry for the period 2006-2014 while breaking out the trends for 2009-2014 (to assess the post-recession period) and 2011-2014 (to check for recent trends). Note that growth rates are increasing, but performance on operating margin and ROIC is flat. Industry performance on inventory turns is declining slightly. As you scan Figure 1, you will see that many of the companies perform better than the average on one or two metrics, but few companies perform better than the industry average on the entire, balanced portfolio of metrics. Amcor, CCL, and International Paper had the fastest rate of improvement on the four supply chain performance metrics when compared to the peer group. However, only CCL performed better than the industry averages (shown in the last line of the table) while also showing improvement. This is hard to accomplish. What makes it happen? Our research has found that companies are able to achieve this level of success when they focus on a balanced metric portfolio, a clear supply chain strategy, and conscious tradeoffs across the organization in cross-functional processes.
There are five traits of higher-performing companies in the packaging manufacturing industry: 1) implementation of innovative business models for packaging design and artwork management; 2) data sharing (of manufacturing line schedules) with customers; 3) vendor-managed inventory programs with strategic suppliers; 4) high standards for packaging quality; and 5) excellence in supply chain execution systems.
Companies performing well also have greater organizational alignment, and their commercial and operational teams work closely together. To accelerate sales, they have built supply chains for samples and small runs for test markets, and they work with their suppliers' research and development teams. In these organizations, the commercial teams understand that winning and keeping business from consumer products customers requires strong supply chain support. Note the patterns of the companies making progress in Figure 2 versus those not making progress in Figure 3.
Supply chain excellence requires discipline and focus. It is about balance and resiliency. The Supply Chain Index measures resiliency as the intersection of inventory turns and operating margin. A tighter pattern, such as those seen in Figure 2, indicates greater reliability and consistency in responding to market and economic conditions over time. One of the issues for the packaging supply chain leader is the difficulty of achieving resiliency in year-over-year results. Due to demand volatility, the swings in performance are greater than in other industries.
The supply chain is a complex system that needs to be managed through the use of a balanced scorecard. Gains happen in small increments over time, and progress happens over many years. Success does not happen by focusing on a single project, a series of projects, or functional metrics. Instead, the leadership team must take a long-term view, steering the helm to focus on year-over-year momentum while maintaining resiliency.
To build the Supply Chain Index and the Supply Chains to Admire methodology, we studied balance-sheet patterns for over 2,000 public companies and shared the results with more than 150 executive teams. The metrics we selected are based on correlation to market capitalization; we selected the metrics with the highest correlation, including a balanced scorecard of revenue growth, inventory turns, operating margin, and return on invested capital (ROIC). Based on this research, we believe supply chain excellence can be defined as the ability to improve across this entire portfolio of metrics. Success requires balance and alignment, not just superior performance on a single metric. (For more details about the Supply Chain Index and its associated metrics, see "The Supply Chain Index: A new way to measure value" in the Q3/2014 issue of CSCMP's Supply Chain Quarterly.)
As a part of this methodology, we analyze performance and improvement for three time periods: 2006-2014, 2009-2014, and 2011-2014. The choice of these time periods and the methodology are based on several principles.
1.Complete and accurate data. The analysis extends back to the first year where there is generally available public data for the industries studied. Prior to 2006, the data is too sparse to analyze.
2.Understanding post-recession trends. The period of 2007-2010 included a major economic downturn. We measure the entire period of 2006-2014, but our primary focus is on the post-recession performance of 2009-2014, which we believe is the time period that allows the most accurate comparisons. We also look at 2011-2014 to check for recent trends. However, the year-over-year analysis of the patterns within that period is limited due to the fact that it the analysis only covers three years. Supply chain excellence takes three to five years to see marked improvement compared to a peer group.
3.Analysis of a peer group. The data analysis is by industry sector based on North American Industry Classification System (NAICS) codes. We must have at least five companies in a peer group to make an assessment. While there have been many mergers and acquisitions, we want to derive as "clean" a peer group as possible, so we eliminate companies that have gone through major merger and acquisition activity during the period from our analysis.