Why Benchmarking Matters
How do organizations know if their Supply Chain is outpacing or falling behind the competition? If they don’t know, what is the best standard to assess Supply Chain performance? Even more importantly, why should leaders care? While traditional benchmarking can be an effective comparative tool, Apex Performance Advisors goes beyond the comparison. We have developed a set of industry performance benchmarks that drive financial performance improvements through improving practice maturity. Apex Performance Advisors shifts supply chain benchmarking from a “nice to have” to a “must have” tool for organizational success.
All companies have a set of integrated operating capabilities that ideally align and enable a well-oiled supply chain. We have found that within a given industry, these operating capabilities are very consistent across all companies. If the capabilities are similar for every organization within an industry, the differentiator isn’t what capabilities an organization has. Rather, our experience shows that competitive advantage (or disadvantage) is driven by how a company chooses to execute its Supply Chain operating capability. This knowledge allows companies to focus on refining existing capability maturity rather than embarking on the search for that elusive new capability that might drive success.
Our primary research and corporate operating experiences confirm that companies can dramatically improve their financial success by increasing the maturity of specific strategic supply chain capabilities. Most importantly, our experience has proven that significant Economic Spread1 and Shareholder Value can be created through tightening the operational coordination, data integration and analytical execution of the company’s Demand, Supply and Strategic Financial Operations.
Further, Apex Performance Advisors’ benchmarking tool allows companies to size financial performance improvements that could result from this strategic capability maturity tuning before deploying process change, which helps guide leadership around which investments will deliver the most desirable impact.
Now that approach to benchmarking seems like something worth caring about.
Taking the Guesswork out of Benchmarking
Within a given industry, supply chain operating capabilities have well-defined “standard” practices that can be categorized into different levels of operating maturity. To gain clarity on how a practice is executed, we assess practice maturity along a continuum from least to most mature: lagging, common, progressive, leading.
A maturity pulse check should be taken at regular intervals to allow for the impact of developmental trends and the evolution of new leading practices. For example, the recent impact of digital Supply Chain updates resulting from Industry 4.0 / Internet of Things demonstrates that operating capabilities need to be evaluated regularly to stay ahead in a dynamic, changing world. Our experience has shown that organizations should assess their operating capability definitions and corresponding maturity levels at least once every seven years.
Figure 1 provides practice definitions for a general operating capability. Figure 1 also provides a comparative company index, illustrating where along the bell curve companies’ operating capability maturity tends to land.
Apex Performance Advisors built a database that applies is Lagging-to-Leading score to over 250 key operating capabilities that all companies within any given industry perform (whether they realize it or not).
We categorize the major Supply Chain operating capabilities into groups that generally align with the APICS Supply Chain Operations Reference (SCOR)2 definitions. Those core operating capability groups are:
Plan: Forecasting, Demand & Supply Planning, Master Planning
Source: Procurement and Supply Management, Inbound Materials Management
Make: Plant Planning & Scheduling, Materials Planning & Control, Production Control
Deliver: Order Management, Distribution Management, Transportation Management
To fully assess an organization’s level of practice maturity, Apex Performance Advisors takes the categorization a couple steps further. We consider the required integrations across the much broader set of end-to-end processes and activities. Below are five operating capability groups that are critical but not tied as closely to the base SCOR model:
Channel Strategy & Management: How the company approaches its market channels. Takes into consideration service levels and priorities, ability to manage product mix and approach to margin optimization.
Strategic Customer Management: How the company looks at relationships with specific customers. Takes into consideration agreed-upon service levels and priority, as well as the level of information flow with the customer. Integrated
Process / Product Design: How the company approaches product and service lifecycle. Takes into consideration the impact on the design and function of the Supply Chain.
Network Configuration: How the company analyzes and makes configuration decisions. Takes into consideration placement of operating locations and warehouses, inbound/outbound transport lanes, the leverage of contract manufacturing, etc.
Partner / Alliance Management: How the company manages its vendor/partner relationships, as well as the integration with vendors and partners.
A specific example illustrates how our database allows clients to identify maturity improvement targets. When evaluating Order Management Operating Capabilities, the ability to provide Real-Time Order Status is a standard requirement, and most companies can say that they have this capability. Our approach to assess the maturity of this practice is to ask customer service representatives in a division or business unit (or both) to evaluate the following practice and identify the level of maturity that best describes their day-to-day experience:
Figure 2 shows where an organization is in their current state (highlighted in teal) and their desired, target state (highlighted in gold). Our approach takes the “guesswork” out of benchmarking, allowing companies to accurately evaluate their level of practice maturity in comparison to their industry peers.
The strategic Role Criticality Plays
Operating capability maturity only tells part of the story. To fully understand how an organization can best improve its supply chain maturity, it’s vital to know which improvements will have the greatest impact.
When looking at operating capability, companies are often interested in comparing results of their internal business units and regions against one another. This internal comparison illuminates best practices that can be leveraged across businesses. While internal practice differences are often driven by external factors—customer or vendor-specific requirements, or even variations with internal talent capabilities—these variations in practice usually point to quick-wins for the company. But are they the most desirable wins for the company? This is where criticality comes into play.
We assign every operating capability a criticality score, ranging from Not Applied to Highly Critical. Where that capability falls on the continuum is driven by several factors: 1. The markets a company serves; 2. The capability’s position within the end-to-end supply chain; and 3. Its operating performance expectations and strategy3. Knowing that capability’s criticality score and its current practice maturity rating allows companies to identify the discrete actions that they should undertake to deliver mission-critical improvements.
In areas where overall criticality is high but maturity is common or lagging, company leaders should give serious consideration to initiating appropriate actions. Conversely, knowing where the degree of criticality is lower and capability maturity is progressive or leading allows leaders to shift their focus to areas where the improvements will be more significant.
Understanding both the maturity and criticality for each practice enables organizations to determine how far along the maturity curve the company wants to travel. For highly-critical practices, shifting one or more maturity levels may be the desired objective. For less-critical practices, the shift may be smaller or there may be no shift at all.
Figure 3 shows a company’s Capability Scorecard, which identifies which capabilities demonstrate an opportunity for significant improvement.
Setting the Targets: Creating Shareholder Value
With Capability Scorecard in hand, leaders know their organization’s capability maturity and criticality. In theory, they have all the information they need to set targets for future-state practice maturity. But there’s more to the method of setting the right targets. The reason any company wants to make practice changes in the first place is to drive overall shareholder value and generate Economic Spread. To get there, companies need to take a strategic approach.
Long-term shareholder value is created by healthy Economic Spread creation and growth, both historically and into the future. While companies often focus on growth, our experience shows that there is a better path to improved Economic Spread—one that is more effective and requires less investment. Improved Economic Spread involves two important actions:
Aligning Supply Chain Planning and Execution, which generates direct increases in Operating Margin; and
Right-sizing the use of Invested Capital.
With that in mind, what target-setting strategies have worked well in our experience?
Take only the top-five areas that drive the greatest impact on company Economic Spread, and prioritize these for the next fiscal year.
Establish an internal best-in-class level across the company. The company would evaluate which practices need to change in each region or business unit to drive consistent practice execution across all regions. This approach has two key benefits:
It drives clarity around what to change, specifically “from what” and “to what,” and
It provides the opportunity to develop standards that can be leveraged across the business.
Drive a step-change improvement in the areas that have the greatest number of critical processes and are not at a Progressive maturity level. Companies who have historically maintained an Economic Spread above their industry peers as well as a growth rate consistently at or above the industry average, tend to live in the Progressive maturity level space.
Sizing the Prize: Predicting the Impact
Once a company has set some base targets for change, the next step is to understand the expected impact of these practice maturity changes to the company’s bottom line. Organizations need to make critical decisions based on which of their targets should yield the best and most desired results before they act. To get this insight, we turn back to Economic Spread.
Why Economic Spread and not a few KPI’s or standard GAAP accounting valuation? The answer is revealing: for asset- intensive supply chains, benefits are often too easily recognized in some areas while the negative impacts in other areas go ignored. Therefore, Apex Performance Advisors uses a streamlined Economic Value Added (EVA) valuation approach as the basis of our financial assessment and benchmarking toolset. EVA turns items on the balance sheet into costs that can be evaluated like any other.
But the EVA valuation approach only tells part of the “size the prize” story. To allow our clients to confidently predict the economic benefit of proposed improvements, Apex Performance Advisors conducted a series of industry benchmarks to calculate the potential organizational impacts resulting from a change in practice maturity across the following three areas:
• Revenue: Increased sales or margin lift
• Operating Expense: Drives operating margin
• Invested Capital: Impacts capital efficiency
Apex Performance Advisors’ extensive industry benchmarking is the key to providing predictive insights. We calculate current Economic Spread, then run a series of scenarios which provide estimates of Economic Spread after the capability maturity reaches the proposed targets.
Figure 4 shows Apex Performance Advisors’ EVA valuation model. Notice that changes in both Operating Margin and Capital Efficiency directly tie back to a company’s Economic Spread. The benefit ranges are calculated by direct impacts to primary operating levers and the corresponding financial levers.
Realizing the Benefits: A Case Study
In the following case study, a chemicals company had revenues of $2.7B, with net earnings averaging $110M across a three-year period, yet it was still not generating a positive Economic Spread.
After a series of targeted initiatives which increased operating maturity in a number capability areas, our modeling and calculations suggested that these practice maturity improvements would result in:
A moderate, but important, increase in Revenue
Reduced variable cost; and
Optimized working capital.
Taking into consideration the cost of implementing the capability maturity changes, we predicted that the company would see a 2.8% uptick in its Economic Spread.
How well did they do? Even as the next fiscal year presented several new challenges, the process maturity changes helped the company maintain a positive Economic Spread over the cycle.
Figure 5 shows the company’s capability change model.
Putting it all Together
Scoping the requirements necessary to support a mature supply chain practice is what Apex Performance Advisors refers to as Integrated Outcomes. Integrated Outcomes provides a comprehensive approach to the delivery of outcomes across the following areas:
Revenue Growth
COGS and SG&A Alignment
Cash-Conversion-Cycle (DIO+DSO-DPO), and
Business Optimization –mix-margin, debottlenecking, etc.
Apex Performance Advisors has consolidated its industry, operating practice and performance improvement insights and experience within a benchmarking tool and approach we call the Integrated Outcome Assessment. The Integrated Outcomes Assessment helps organizations quickly identify the specific operating capabilities that must mature to maximize Economic Spread and improved Integrated Business Execution.
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