Lora Cecere, the founder of Supply Chain Insights, is a CPG industry specialist from the beginning, and she (and her team) are trying to come up with a better way to assessing the company value impact of well-performing supply chains. For this purpose, she has developed a Supply Chain Index, which is built on this premise:
“The Supply Chain Index™ is designed to be used as a ranking system and benchmarking tool. It enables companies to better understand the relationship between supply chain and financial (market capitalization) performance and to define what metrics correlate strongly with market capitalization growth. In addition, the Index enables us to identify if there are metrics that matter to a supply chain but not to a market capitalization perspective. Can supply chain performance in one year help to predict market capitalization trends in the future?
The Supply Chain Index is our effort to rank the best supply chains in the world. Unlike other ranking systems, this ranking system is based solely on quantitative data and corporate financial performance removing subjectivity from the decision process. We compare performance on financial supply chain metrics with stock market performance (market capitalization) to identify top performers. In addition, because supply chains come in all shapes and sizes, our Index is built upon peer groups operating in the same industries with similar challenges and opportunities present within the business environment. We simply do not believe that McDonalds, Apple and Walmart provide an appropriate comparison as best practices in one industry rarely translate apples to apples across industry lines. Finally, the Index is based upon financial performance of companies from 2006 forward. Building a great supply chain is not something that can be done with a short-term project approach and excellence comes in small steps over a sustained long-term period.”
This is a commendable effort – and probably something that many outside of procurement would love to see, as it has significant stock picking investment strategy potential; note the portion above that I have bold-faced.
However, just as Wall Street has a hard time coming up with a successful recipe that works over time to determine future success, the Supply Chain Index is unlikely to be any more successful than the financial analysts have been. Lora and her team are publishing the math behind their approach – which is a great approach – and something I point out for anyone who’d like to weigh in on this. Supply Chain Insights are actively looking for feedback and thoughts on how to make this better.
So, why am I such a Debbie Downer skeptic? Metaphorically speaking, it comes down to whether or not you can determine the direction the fish was swimming in when it was caught based on the taste of the fish soup. Additionally, anyone who claims to be able to outsmart the financial gurus on Wall Street at their own game, well, I find that difficult to swallow. Here are other thoughts:
Are the definitions for metrics the same across companies – the inventory turns for example are reverse-engineered out of financial numbers that in turn have been aggregated across business units, product lines, even regions and countries? In the major Global 2000 firms that we are looking at – those are numerous supply chains, not just one. Businesses are bought and sold – some units might be run incompetently, others in a great way.
Continuing this line of thought – considering the high degree of outsourcing going on in most companies – whose supply chain is being measured here? If a tech company picks Huawei or Flextronics or someone else – and all they do is manage the marketing and distribution, do they really have a supply chain to admire? Not that managing an outsourcing relationship doesn’t take skills – it does – but doesn’t a company that does everything internally have more of a supply chain? Certainly the link between the supply chain’s performance and the company’s market cap seems more directly linked in this case.
However, since we’re talking market caps – if your company is built on a slick high-margin product (think Apple and the original iPhone) versus a staid, mature, even end-of-life product (think Eastman Kodak), how can you say Apple of that era had a better supply chain than Kodak had? I worked with Kodak, and I seem to recall them running a tight ship – but probably so did many horse buggy builders 100 years ago. You have to have a product that is in demand.
Many companies are also highly diversified – with a handful or more areas that are fairly unrelated. Think about Kodak, Xerox, IBM, GE - how can you generalize them as companies? It's important to figure things out quantitatively, but with the huge qualitative differences, how to generalize? Public companies rarely break down their activities products, regions etc. so how can you get to actionable numbers?
As I understand it, the Supply Chain Insights team is tossing out conglomerates because of this issue – and instead focused on “pure plays” because of this reason. But how realistic is this?
Some companies and industries have substantial operational penalties and incentives that impact their financials – think about GM and their tax-payer “funding,” Tesla and the tax credits and (more importantly to their market cap) the tradable carbon credits that come with the cars. Others have lengthy cycles that distort the accounting – think about pharmaceuticals and life sciences with perhaps many years of no revenues and then a successful product that overnight balloons the market cap by billions. Then we have companies with high expectations but little at the moment (Facebook) or other new economy firms like Google that also have hardware and a supply chain, albeit small in comparison to the company’s street valuation.
Regarding the Supply Chain Index, it will be really interesting to see how Lora and her team can work around the challenges that I have curmudgeonly pointed out. Just because it looks challenging doesn’t mean that it shouldn’t be looked at. It could be that the outcome will be a highly granular set of numbers that cluster around narrowly tailored sets of companies – or maybe even generic profiles of companies. The latter approach might lend itself better to bringing in proprietary financials and other numbers from participating companies, and then aggregate them to a level of anonymity but still with better detail. That could remove much of the stock-picking angle, which I think is futile anyway for reasons stated earlier, but should help procurement professionals (who presumably know how their firm’s number stack up) work on their supply chain in order to deliver market cap impact. And that would make CPOs shine in the eyes of CFOs and CEOs.