The pandemic highlighted a startling fact – some of the popular metrics we use to measure supply chain performance has shown a steady decline. During her research for “Supply Chains to Admire” Lora Cecere noticed this decline. We bring you her opinion on the reasons.
When a person suddenly hits or jams their toe, it hurts. It is one of those howling, bent over, moments of pain. A stubbed toe is often accompanied by words that you hope your children don’t hear.
Stubbed toes hurt a lot, even when the injury is not severe. The reason? There are many nerves in the toe, including two nerves on either side. There is little fat to cushion the toes, which can intensify the pain and increase the risk of injuries.
The analogy fits. We stubbed our toe in supply chain management at the beginning of the decade. The lack of fat intensified the impact of the pandemic.
Facing The Issues of Supply Chain Performance
As I work through this year’s Supply Chains to Admire, I cannot help but shake my head. The black veil of the pandemic is a supply chain wake-up call to build better. Here are the facts:
- Declining Balance and Resilience. Despite spending 1.1% of revenue on information technology (IT), only six percent of manufacturers drove performance at the intersection of growth and margin.
- Rise in Inventories. Less Effective at Inventory Management. Inventories grew twenty days over the decade. Yes, companies held more inventory (measured in days of inventory) in 2019 than at the start of the 2007 recession. Sadly, most of it is the wrong inventory.
- Results. Average performance in 2016-2019 across twenty-seven manufacturing sectors on inventory turns, Return on Invested Capital and operating margin was worse than in 2012-2015.
- Alignment Barriers. Commercial and operating teams in manufacturing organizations greater than 5B$ in annual revenue were more aligned in 2007, at the beginning of the recession, than in 2020, the start of the pandemic. Over the decade, the gaps grew.
- Unequal to the Demand Shifts in the Pandemic. During the pandemic, conventional planning systems were inadequate. Over 85% of companies turned their systems off, turning to spreadsheets and ad hoc manual analysis.
My quest is “why?”
Here is my list of what I believe were mistakes. I look forward to hearing from you:
Mistake #1. Focus on IT standardization.
The myopic focus on IT standardization resulted in the purchase of technology, but not value delivery. The singular focus to implement and shorten cycles for the “go-live date” reduced the focus to test and learn and build core competence.
The continued focus on functional metrics like Purchase Price Variance (PPV), manufacturing costs, Overall Equipment Efficiency (OEE), and transportation costs throws the supply chain out of balance
Mistake #2. Informational Technology groups reporting to the Chief Financial Officer.
Over the last decade, the CIO’s office reporting structure shifted to report to the CFO. The rise in power of the Chief Financial Officer and the lack of understanding of supply chain concepts sent organizations down many dead-end streets. This included one-number forecasting, Integrated Business Planning (with tight integration to the budget), labor arbitrage strategies (chasing low-cost labor with extended supply chains), and tax-efficient supply chain strategies.
Today, many companies operate based on a plan that is not feasible decreasing reliability. The greater the variability in product demand, manufacturing schedule adherence, lead times, and supplier reliability, the greater the need for viable models.
Even though a feasible plan is the most critical business user criterion for software selection, only one in two manufacturers surveyed believe they have the ability to model a feasible plan. The chasing of dead-end streets based on spreadsheet analysis—making infeasible decisions from cursory spreadsheet analysis– undermined corporate value.
Mistake #3. Focus on functional metrics without alignment to a balanced scorecard to drive value.
Over the last decade, in the building of global supply chains, organizations grew more political with gaming on metrics. The continued focus on functional metrics like Purchase Price Variance (PPV), manufacturing costs, Overall Equipment Efficiency (OEE), and transportation costs throws the supply chain out of balance. The last decade is a testimonial that functional excellence does not drive value.
Mistake #4. Lack of clarity in governance for decision-making.
Manufacturers’ frequent mistake is automating decision support processes without asking the question, “How should we make a decision?” And, “What makes a good decision?” This lack of definition limited the success of planning technologies.
Average performance in 2016-2019 across twenty-seven manufacturing sectors on inventory turns, Return on Invested Capital and operating margin was worse than in 2012-2015
Mistake #5. Belief inefficient procurement. Investment in indirect procurement hi-jacked investment in building value networks. Over the decade, procurement became more of an island. The combination of business process outsourcing and procurement networks drove procurement efficiency (management of terms and cash flow), but organizations became less able to share meaningful forecasts and collaborate to formulate and execute aggregate buying strategies. For example, the semiconductor shortage is a current issue. The problem is a direct result of a constrained industry (semiconductor fabrication) unable to get meaningful information from downstream trading partners.
Building Better Post Pandemic
As organizations attempt to build better post-pandemic, it is critical to learn from the last decade. A stubbed toe hurts. It is not something that one wants to repeat.