What we can learn from the 2016 Supply Chains to Admire study

Five months of analysis. Many heated debates. It is now over. Last month our research firm, Supply Chain Insights, finished its annual analysis of supply chain excellence, the "2016 Supply Chains to Admire," listing 16 companies as winners and 21 companies as finalists. The research starts in April and stretches over 15 weeks as we analyze the different elements and understand the patterns of each industry.

Why do we do it? Selfishly, we need a good, standard definition of supply chain excellence for our research, but we also want to help supply chain leaders improve and benchmark their operations. Currently there is no widely accepted standard for supply chain excellence; leaders agree that supply chain excellence is easier to say than define. Progress, however, is not possible without a clear goal. The answer? We think deep research, such as the Supply Chains to Admire study, can help companies determine benchmarks and set these goals.

The Supply Chains to Admire analysis is now in its third year. It is data-driven research: a deep analysis of performance, improvement, and value of 320 companies across 31 industries for the period 2009-2015. The source data for the analysis is public reporting of balance-sheet and income statements.

To determine the winners, we compared the relative effectiveness of each company against average performance within an industry-specific peer group. The analysis identified which companies have driven higher levels of improvement (based on Supply Chain Index calculations) and shareholder value (as defined by "price to tangible book value," a valuation ratio expressing the price of a security compared to its hard, or tangible, book value as reported in the company's balance sheet) while also outperforming their peer group on the performance metrics of growth, operating margin, inventory turns, and return on invested capital (ROIC). This methodology is shown in Figure 1.

In the analysis, we divide companies into three groups: winners, finalists, and underperformers.

• Winners. The winners of this analysis meet all of the criteria of improvement, value, and performance when compared to a like industry peer group. Sixteen companies qualify for this category (see Figure 2). This high-performing group represents 5 percent of public companies studied.
• Finalists. Finalists, like winners, showed higher levels of improvement and value than their peer group. They were also within 10 percent of the industry average on three out of four of the performance factors (growth, operating margins, inventory turns, and ROIC) while being no more than 25 percent below the mean on any of these four factors. Twenty-one companies meet these criteria (see Figure 2). In this analysis, 7 percent of companies studied are finalists. The combination of finalists and winners equals 12 percent of companies studied.
• Underperformers. The winners and finalists are an elite group; 88 percent of companies do not meet the three criteria of improvement, value, and performance. Unfortunately, we find most companies are moving backwards on the Supply Chain Metrics That Matter (growth, operating margins, inventory turns, and ROIC) or are making progress on singular metrics instead of driving performance improvement on a balanced portfolio of supply chain metrics that correlate to market capitalization. This includes industry icons that are often referenced as best-in-class supply chains.

It is notable that there are no winners or finalists in the following industries: aerospace and defense, automotive, automotive suppliers, conglomerates, consumer durables, e-commerce retail, hospitals, over-the-counter drugs, packaging, pharmaceutical, third-party logistics, or toys. Similarly, industries like beverages, contract manufacturing, food, oil and gas, restaurants and fast food, and retail apparel have finalists, but no winners. We find it interesting that the industries with the greatest challenges—high-tech and electronics—post the greatest progress, while industries with slower market shifts—household products, food, and beverage—are regressing. Furthermore there is more progress in retail and discrete sectors than process-intensive industries.

The Supply Chains to Admire list allows us to identify high-performing supply chains based on hard data (rather than on personal opinion). With this analysis, we can then look at the companies on a vetted list and see if top performers have any traits or practices in common.

When we interviewed companies that made the Supply Chains to Admire list, we did find commonalities and similar patterns as well as commonalities among the laggards. (See Figure 3.)

One thing the leaders have in common is longer tenure of their leadership teams and a focus on long-term outcomes. This provides consistency in direction. The teams sidestep fads to maintain a dogged focus on supply chain excellence. In our analysis, we also found that winners are more focused on the management of complexity through the adoption of customer segmentation, cost-to-serve analysis, and item rationalization. They are better at horizontal processes, supply chain planning, and network design (with a clear definition of form/function of inventory).

As a part of this analysis, we also wanted to identify for supply chain leaders the factors that drive value. To do this, we worked in parallel with the Supply Chains to Admire research, mining our quantitative data to answer this question: "What steps should companies take to improve price to tangible book value (PTBV)?"

In the Supply Chains to Admire analysis, we use PTBV as a proxy metric of value. In our early research, we only used market capitalization, but in this more recent analysis, we substitute PTBV for market capitalization. Why? There is less volatility. The definition of PTBV we use is:

Price to Tangible Book Value = Market Share Price / Tangible Book Value per Shares Outstanding

We believe that improving the value of shares outstanding in relationship to assets and tangible book value is within the control of the supply chain leader. The supply chain leader has direct input into asset strategies and inventory decisions and drives supply chain strategies. These are major contributors to PTBV results.

To help supply chain leaders, we wanted to use our survey database to understand the relationship between supply chain strategies/process options and improving PTBV. Through this analysis, we find that companies that have a successful supply chain center of excellence, an effective sales and operation planning (S&OP) process, and better supplier visibility and less business pain associated with supplier reliability have greater PTBV performance. In Figure 4, we include the correlations of these factors to PTBV. (The full report also includes factors that we considered but found had a correlation of less than r=0.30 and greater than -0.30. We found that many commonly held best practices, like having a single instance of enterprise resource planning (ERP), do not show a pattern of correlation to PTBV.)

It's easy for industry consultants to speak of a top-performing supply chain, and it is right to be skeptical of claims that cannot be verified. It is for this reason that we are open and share our calculations and our methodologies.

To use the research, we recommend that you check out the supply chain's performance by plotting year-over-year metrics at the intersection of two ratios and look at the patterns. This is an "orbit" chart. We find the patterns and the intersection of inventory turns and operating margin and the patterns and intersection of growth and return on invested capital to be insightful. (These patterns are visually represented in the "orbit" charts by industry. The patterns tell stories. To understand the patterns, check out the portfolio of the winners here.) We believe that the "Supply Chains to Admire" report, by looking closely at these patterns, provides the verification you need. We hope that it helps you benchmark supply chain performance and guide your efforts. Check out the full report at supplychaininsights.com/2016-supply-chains-to-admire/.