As downstream companies in industries such as consumer packaged goods and food/beverage have pushed costs backward in their supply chains, the chemical industry, which sits four or five levels back in the supply chain, feels the pain. With their tight margins and high levels of asset utilization, they are finding that supply chain excellence is an important determinant of their performance.
Supply chain excellence is not easy to define. In 2014, Supply Chain Insights developed the Supply Chain Index to quantify not just supply chain excellence, but also supply chain improvement in a meaningful and objective manner. We found that improvement (defined as the rate of change) when coupled with performance (current capabilities) and compared to a peer group was a good measurement of supply chain excellence.
To test the model, we studied balance sheet patterns for over 2,000 public companies and shared those results with over 150 executive teams. The metrics we selected are based on correlation to market capitalization: growth, inventory turns, operating margin, and return on invested capital (ROIC). (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.)
We believe supply chain excellence is based on the ability to improve the portfolio of metrics. In this article we apply the methodology to the chemical industry. In Figure 1, we list chemical peer-group companies in rank order based on improvement for the period of 2006-2014. As seen in most industries, companies with the greatest improvement are usually the worst performers. That's because as performance improves, further incremental improvement becomes tougher to achieve. The best performers that are still making improvement will normally be found mid-way in the improvement rankings.
With a focus on both performance and improvement, which company did best? In the chemical industry, Eastman Chemical has the best performance, followed by PPG Industries. As shown in Figure 2, Ecolab is achieving the greatest improvement.
What can we learn about the chemical industry? As downstream partners have lengthened payables and implemented cost-reduction initiatives, supply chain performance matters more than ever. Unfortunately, most supply chain leaders focus on more traditional processes, resulting in a flattening of results. The chemical industry's opportunity to improve market capitalization lies in managing the source, make, and deliver processes together, and in adopting new forms of analytics for channel and supplier sensing.