Supply Chain Metrics that Matter. Cecere Lora M.

revenue per employee. The adoption of processes and technologies has been slower in mid-market companies with less than $1 billion in revenue. Whew…” I said, as I leaned my hand against the wall at the top of the stairs to get my breath.

      Joe laughed and said, “Sorry, I get carried away. I am so used to the stairs and taking them two at a time that I didn't mean to make you winded. I guess it's just easier for a tall guy to take these stairs fast. Let's take a moment to catch our breath. I appreciate you explaining this to me.” We stood on the stair landing for a couple of minutes and talked about his challenges.

      Moving Forward, Not Backward

      As we walked down the hall, we continued the dialogue. Joe's questions were getting more intense. As he peppered me with them, I stated, “Today, there are more challenges to managing metrics trade-offs while on a frontier than earlier in my career. The pace of change is rapid. Think about it. Today, businesses are larger and more global. Organizations are not aligned. As a result, there is a greater need for focus and conscious choice.”

      Joe agreed. “I cannot speak for everyone, but I know for us the past decade was turbulent. Demand and supply volatility increased. Markets became more competitive. Merger and acquisition (M&A) activity was rampant. To meet the expectations of financial markets, we pushed costs and elongated the cycles of suppliers. This improved our cash-to-cash cycle by lengthening payables, but is starting to impact margin.

      “It is easier to shift costs than improve internal operations,” Joe continued. “Over the past year, I had a lot of pressure from my finance team to lengthen payables. However, I keep telling them that it is a penny-wise and pound-foolish strategy, but this is hard for them to see. Pushing costs and waste backward to suppliers and lengthening payables will give short-term benefit; but, I am now seeing that it can cause longer-term issues.” The conversation had been as fast as our walk, and we were now back in Joe's office.

      Moving to the Next Level on the Effective Frontier

      “While this makes sense to me conceptually, it is difficult to orchestrate. As a leadership team, here, we are focused on functional metrics. The concept of the Effective Frontier is a new concept. How would you suggest that we go about adopting the methodology?” asked Joe.

      I thought hard and leaned back in my chair. I paused for a moment, and said, “Each organization that I work with has its own unique potential, and is operating on its own frontier. Within each organization, the functional areas also have their own unique potential. The goal is to first recognize it on a corporate level, and then on a functional level, and then define the frontier that best realizes corporate objectives at all levels. The second goal is to know when to move to the next level. This takes training.”

      “I think that I am getting it. I am trying to absorb the concepts, but it is like drinking from a fire hose,” Joe said.

      “I know. It's for this reason that most organizations are treading water. It's hard to get the attention of the leadership team. With the rise of complexity in the last decade, most organizations have made unconscious trade-offs,” I stated.

      “What do you mean?” asked Joe. “Tell me more about unconscious trade-offs.”

      “Sure, let me explain,” I continued. “As complexity increased – products proliferating and service expectations rising – the impact on the metrics portfolio and the potential of the organization is not known. While it can be modeled today using new technologies, most companies do not. It is not a conscious choice. The increase in complexity makes it harder to achieve the same level of operating margin and inventory turns,” I said while looking at my watch.

      “Why do companies not model it and drive the outcome to maximize potential?” asked Joe.

      I shrugged my shoulders and shook my head. “Isn't it ironic that companies design factories, and work for years on the development of those factories, but do not model corporate performance systems? I think that it is because it is a new way of thinking,” I stated and stood up and started to gather my papers and pack my briefcase.

      “In the face of this challenge, there is a need to drive conscious choice on metrics trade-offs. I can work with you and your team to help you understand how industry leaders that did not modify business processes and assets to drive strength and year-over-year improvement in performance have struggled to deliver a balanced portfolio with resiliency. Joe, do you think that this would be possible?” Joe nodded his head yes, and motioned for me to continue as he said, “I know that you only promised to stay an hour, but I would like you to continue. I am finding this discussion to be very helpful.”

      “Okay,” I said. “Let me make a phone call. Let's take a quick break, and we can work together for a couple of hours.”

      Getting Off the Plateau

      “Thanks for staying,” said Joe. “It's just that I don't get a lot of time to think strategically, and I am finding this helpful. Can we pick up where we stopped? Why are companies stuck?” asked Joe.

“The leader of operations knows that inventory cycles and costs need to be managed together. Each industry has a different set of rhythms and cycles. When complexity increases, these change. It is an industry-specific response. Over the past decade, the progress of industries has varied. Most companies are plateaued. Progress in corporate performance is stalled. Companies in the consumer electronics and consumer packaged-goods industries have made the most progress. Other industries, like apparel and automotive, are going backward and losing ground,” I said as I showed him Figure 1.4.

Figure 1.4 Performance Plateau

      Source: Supply Chain Insights Metrics That Matter Series (www.supplychaininsights.com).

      “It is easy to slip,” Joe said as he gazed into the parking lot. The sun shone brightly as the bus stopped to let children off onto the sidewalk across the street in front of his office. “One of our issues is alignment. Every meeting is like the first day in school where we're trying to find our place. We have similar tasks but we are competing with each other.”

      “Yes, I know,” I said following his gaze out the window. “To drive organizational alignment, companies need to understand the trade-offs, and what is possible, while defining the Effective Frontier and managing it as a complex system. It's like knowing what needs to be done to graduate to the next grade. They also need to choose the right metrics. It requires going back to school to rethink the basics of business.”

“These trade-offs cannot be determined just by setting up a spreadsheet. It requires the use of more advanced analytics. The use of modeling techniques allows companies to determine the appropriate targets in each metrics area to align against potential. To understand the concept of metrics balance, my research team has been evaluating the progress of each industry based on peer group metrics from each of the areas of the Effective Frontier,” I said, while pushing the sheet shown in Table 1.4 across his desk. “These are available from corporate balance sheets and income statements; but we find that there are few repositories of this data to enable analysis of multiple years of data and to capture the patterns, so we've put together a unique data repository of our own from our research.”

Table 1.4 Financial Ratios Analyzed to Understand the Effective Frontier

      Source: Supply Chain Insights LLC.

      “Yes,” Joe said. “I'm glad the metrics are available, but I'm too busy to try to sort out what's relevant to us. I'd like to take a look at what you've put together on this so we can do some benchmarking.” The discussion then turned to a review of the research and what we could do together with his leadership team to build a guiding coalition to support the company's expansion into Brazil. I gave him an excerpt from a new book I was writing about the Effective Frontier to read when he got a minute.

      Defining