Excellent supply chains have better leaders, not better technology

Supply chains are under scrutiny due to COVID-19. Now more than ever, the question is what sets excellent supply chains apart from the rest, and whether the excellent supply chains of the past will also be the excellent supply chains of the future. Lora Cecere and Janet Godsell, two leading supply chain experts, addressed these questions during the 2020 inNOWvate Supply Chain Event on October 13. According to Cecere, 85% of companies are not improvement-driven.

By Marcel te Lindert

Shortly before the awards ceremony for the most promising supply chain start-up in Europe – which was won by the French company Flowlity – Lora Cecere (pictured) issued a word of warning about the digitization of supply chains. “The worst thing we can do is boost an outdated way of working by making it faster and paperless. That will only help us to perform poorly faster,” the supply chain expert said as she addressed the offline and online audience.

A better supply chain requires more than an extra dose of digital technology. Cecere advocated an outside-in approach with an unconditional focus on customer value. She referred to her ‘Supply Chains to Admire’ list of 22 companies that are achieving exceptional supply chain management performance. Cosmetics manufacturer L’Oréal has made it onto that list for the sixth consecutive year: “What they actually sell is not lipstick and eyeliner, but beauty and hope.”

Four factors for excellent supply chains

Cecere has dedicated her career to analysing supply chains. What makes a supply chain excellent? How can you achieve that? And how do you stay excellent? To answer these questions, Cecere has analysed data relating to 180 different factors in publicly available annual reports. She has found that market capitalization – or in other words company value – shows the strongest correlation with a combination of four factors: growth, operating margin, inventory turns and return on invested capital (ROIC).

A factor such as working capital does not belong in that combination, Cecere emphasized. “Working capital is made up of other factors. Many people hide the fact that they are not making progress on inventory by pointing to cash flow. They are satisfied with their inventory levels when they shouldn’t be.”

Every year, Cecere analyses the data from the annual reports of 440 listed companies around the world. It still surprises her how few companies consciously aim to improve their performance across that combination of four factors. “In fact, 85% of companies are not striving to improve that. The problem is that they focus on just one factor. Mondelez only focuses on the cash-to-cash cycle. Kraft Heinz only focuses on costs. As a result, their supply chains get out of balance.”

Stable course

The businesses that are aiming to improve their performance in terms of growth, operating margin, inventory turns and return on invested capital are all companies with a long-term vision and a strong focus on customer value. They have consistent policies, as shown by Cecere’s matrices for each company plotting the inventory turns against the operating margin. Adding a new dot to these matrices each year slowly reveals a pattern. For companies like HP and Kimberly Clark, for example, the pattern is haphazard, while L’Oréal appears to be on a fairly stable course towards the top right quadrant of the matrix.

So what obstacles are preventing other companies from building an excellent supply chain like L’Oréal’s? According to Cecere’s ranking, the biggest problem is a lack of visibility. Many supply chains still have a large number of blind spots that prevent them from increasing value for customers. “As long as there is insufficient visibility on inbound transport, it remains difficult to optimize outbound transport,” she stated as an example. Other problems include the silo-based structure within organizations, large product ranges and supply and demand.

Lack of insight

The fifth problem discussed was the senior management’s lack of insight into the supply chain. “Most financial directors only get to see a spreadsheet of the supply chain. They see that they can do something about costs, but they don’t understand what the impact of that will be on inventory strategy, for example. They don’t realize how tightly all these different factors are intertwined, and that they can’t be represented in a simple spreadsheet. That lack of insight at the very top of organizations is my main motivation for doing this research.”

The most important success factor is leadership. Cecere mentioned Procter & Gamble, which first started setting up cross-functional processes aimed at increasing customer value back in 1982, and also highlighted L’Oréal and its strong focus on customer value. “When we look at supply chain performance, we see that the deployment of technology hardly makes any difference. All the stories about it are simply not true. It’s actually all about leadership and a consistent focus on improving performance and customer value.”

Relying on buffers

Cecere did not discuss the impact of the current pandemic in her presentation, so it is unclear how the 22 Supply Chains to Admire are coping with this ultimate stress test. Janet Godsell, professor of operations & supply chain strategy at the University of Warwick, did provide some insights on this topic based on her survey of 250 senior supply chain managers about the consequences of COVID-19. The results showed that 58% of companies were still struggling with a decline in demand three months after the lockdown in Europe. “The most popular strategy to arm themselves against disruption was to create buffers in the form of additional inventory. Stock is indeed a great buffer, but only when demand increases. It’s not such a good buffer if the demand falls away overnight. In that case, the stock puts huge pressure on working capital – at the expense of the cash flow, which is especially important at that time.”

The opposing strategy is to use agile, flexible suppliers. “Only 32% of companies have used that strategy. In other words, we are still relying on traditional solutions such as inventory buffers, and we’re underusing new, creative solutions that are possible today.”

The blue pill or the red one?

Godsell encouraged the supply chain professionals to learn from COVID-19 and improve their supply chain set-ups, which she called ‘building back better’. “Then it becomes a matter of where to produce something. There has been a lot of discussion about reshoring, but what it’s really about is rightshoring: putting the right supply chain processes and components in the best-performing locations in terms of cost and efficiency.”

Godsell also stressed the importance of sustainable, circular supply chains, and the COVID-19 outbreak has shown that carbon footprints can indeed be reduced: “In addition to the flow of goods, cash and information, CO₂ emissions are the fourth flow we need to include in our models.”

Godsell referred to the film The Matrix in which the lead character faces a choice. Should he take the blue pill that offers the easy way out, based on ignorance, or should he choose the red pill that will show him the uncomfortable reality and force him to take action? “Blue represents the business models and the consumption and production levels from before COVID-19. Red represents the present and the future. Will we carry on as before, or will we seize this opportunity to build better supply chains?”