continue the sports analogy, in the fall of 2018, the only event in which cosmetics manufacturer Coty seemed to be excelling was poor planning. Camillo Pane, Coty's CEO, had to explain why various supply chain disruptions cost the company $60 million in its latest quarterly report. Much like a beleaguered baseball manager explains away a loss by pointing to the team's failure to execute on a late-inning play at home plate, so too did Coty find a convenient scapegoat: He blamed it on the supply chain.2
Specifically, Pane singled out the problems Coty had in realigning its distribution centers in the United States and Europe after acquiring several dozen brands from Procter & Gamble. He also cited unanticipated product shortages at key suppliers. He even resorted to the time-tested standby of blaming the weather—specifically, on production interruptions resulting from Hurricane Florence. The distribution centers couldn't match the pace of the orders coming in. Pane didn't dwell on his role in acquiring the P&G product lines or approving the go-live dates of the distribution centers, much as a baseball manager tends to gloss over whether he rushed a player to the big leagues before he was ready, but within a week of announcing the supply chain disruptions Pane resigned.
Simply put, Coty was having major league problems fulfilling its orders. And Wall Street responded promptly, as Coty's share price dropped 22% when the disruptions were announced.3
How to Prevent a Supply Chain Heart Attack
Now, here's an example of how sabermetrics-style supply chain analysis can frame Coty's problems as part of a trend that goes far beyond the cosmetics industry. Two researchers—Vinod Singhal of the Georgia Institute of Technology and Kevin Hendricks of the University of Western Ontario—looked at more than 800 announcements of supply chain problems from public companies over an eight-year period (1992–1999).4 These problems included things like inventory write-offs, parts shortages, shipping delays, and the like. The researchers then tracked the price of these companies' stocks one year before and two years after the announcement.
So what happened? After all the numbers were crunched, a clear trend emerged: Companies that experienced supply chain glitches over that time period saw their average operating income drop 107%, return on sales fall 114%, and return on assets decrease by 93%. And that's not all: These companies also typically saw 7% lower sales growth, 11% higher costs, and a 14% increase in inventories. Exacerbating that already dismal situation is the fact that it takes a long time to recover from these disruptions.
“The supply chain disruption lowers the level of operating performance for a company, and then firms continue to perform at that lower level for the next couple of years,” Singhal explains. He says a supply chain disruption can be compared to a heart attack because it cuts off the flow of information and supplies to a company, and it can have long-term—and sometimes fatal—effects on a company's health.
It doesn't really matter which industry the company is in, either, because any company reporting a supply chain glitch will see its shareholder value plummet. Process manufacturers (e.g., chemicals, food and beverage, textiles) tend to suffer the biggest hit to shareholder return, with a 51% drop. Retailers experience an average decrease of 42%, while high-tech manufacturers will see a 27% decline. Smaller companies are usually hit harder than large ones, although the drop in income is enormous for any size company—150% for small companies, 86% for large.
“When people talk about supply chain management, they may agree that it's important, but they're not investing in solutions,” Singhal points out. However, even when companies do spend on solutions, they're not necessarily spending wisely. “One reason supply chain problems occur is because there isn't enough slack in the system,” Singhal notes. “As companies try to make their supply chains more efficient, they take away slack because it's expensive.”
The answer, though, isn't to throw a lot of money at your supply chain problems. It's to get smarter at identifying and tracking key performance indicators that might signal potential glitches early on. That means developing better forecasts and plans, collaborating with suppliers and customers, ensuring real-time visibility, building flexibility into your supply chain, and other best practices.
It's been said that “the most neglected pathway to increasing shareholder value runs through the supply chain.” In the book The New Supply Chain Agenda, the authors state, “Supply chain excellence drives shareholder value because it controls the heartbeat of the firm—the fundamental flow of materials and information from suppliers through the firm to its customers.” The problem is, there are way too many companies whose supply chains are “crippled by the lack of a strategy, the absence of talent, a misapplication of technology, internal and external silos, and a basic lack of discipline in managing change.” So Coty is hardly alone when it comes to supply chain problems resulting in a severe hit to a company's market value.5
What Makes a Supply Chain Leader?
Here's the good news: Whereas the Singhal/Hendricks study exposes the vulnerability of poorly managed supply chains, another study conducted by Accenture (in partnership with INSEAD and Stanford University) reveals that companies identified as supply chain leaders have a market cap up to 26 percentage points higher than the industry average.6 That begs the question: So what makes a supply chain leader, anyway?
That's where the statistical approach comes in. If you can measure the performance of your supply chain, then you'll be able to determine how close you are to being best-in-class. But how do you know exactly who is the best at supply chain management? When Fortune magazine identifies the top-performing companies in a given industry, it uses the straightforward standard of annual sales. When it comes to identifying the top supply chains, though, merely counting up dollars and cents won't get the job done. After all, a supply chain that is truly best-in-class will encompass numerous operations and processes that don't necessarily show up on a profit-and-loss sheet, such as planning and forecasting, procurement, transportation and logistics, warehousing and distribution, customer service, and other key factors in the overall supply chain equation.
Since 2005, analyst firm Gartner has attempted to quantify the qualities that define “best-in-class” with its annual ranking of the top supply chains. Part of this list is based on a vote from a community of supply chain practitioners and experts, and like most popularity votes, nobody will ever agree with every choice.7 However, the list also factors in three financial metrics that Gartner believes best indicate the overall effectiveness of a company's supply chain: three-year return on assets (net income/total assets), inventory turnover (cost of goods sold/quarterly average inventory), and three-year revenue growth. In 2016, Gartner introduced a corporate social responsibility (CSR) metric as well, based on third-party data. The analyst firm assigns a score to the popular vote as well as to the metrics, and then comes up with a composite score for all the companies (mostly manufacturers and retailers) under consideration.
In the previous edition of this book, we remarked on how inventory turns were the best indicator of a world-class supply chain, at least based on the rankings of the Top 25 Supply Chains of 2009. In that year, three high-tech giants led the way with the most inventory turns: Dell had 46.2, Apple was close behind with 45.5, and IBM had 20.0 turns. Not coincidentally, Apple and Dell also finished at the top in the overall rankings, with IBM finishing in fourth (consumer packaged goods manufacturer Procter & Gamble claimed the third spot).
However, a decade later, the rankings look quite a bit different. Dell and IBM didn't even make the list, while Apple and P&G were moved to a separate list of what Gartner calls “Supply Chain Masters,” i.e., companies so consistently proficient