Lora Cecere: ‘‘We’ve made the disciplines more efficient, but unbalanced the organization’’

How can you optimize supply chain performance if you don’t know what it takes to do so? According to Lora Cecere, a leading supply chain analyst known for her thought-provoking views, most companies lack a clear definition of supply chain excellence. That’s one reason why many of them continue to struggle with sales & operations planning (S&OP). “Based on what’s happening with our inventories, we should be ashamed of ourselves.”

By Marcel te Lindert

One of the many lessons supply chain analyst Lora Cecere (photo, on the screen) had for the attendees of the S&OP Vendor Day was never to link sales & operations planning to the budget. “Why? Because budgets are out of date as soon as they are created – so they are not an accurate reflection of the market. And the goal of a company should not be to achieve its budget, but to create as much value as possible.”

Cecere illustrated this with an example of a company supplying glass to car manufacturers. When the pandemic broke out and production at many car manufacturers ground to a halt, the glass supplier decided to scale back its production. “And what do you think happened next? The demand for glass exploded and the supplier couldn’t scale up again fast enough. So the company achieved its budget based on the reduced production capacity, but lost market share. What would you rather have?”

‘We should be ashamed’

Cecere’s company Supply Chain Insights has been closely following developments related to S&OP for around a quarter of a century. It worries her that company performance has deteriorated over the past decade. Inventory levels in the supply chain paint a concerning picture; when the coronavirus crisis started, companies had an average of 21 days’ more stock than at the start of the previous crisis in 2007. “Based on what is happening with our inventories, we should be ashamed. Only 9% of companies are actively designing the goods flows through supply chains. We should be actively working on decoupling points and buffering strategies.”

She presented a table showing the number of days of inventory by industry. It has risen in almost every sector: by 51 days in pharmaceuticals and by as much as 76 days in beverages. “We don’t steer based on the form and function of our inventories, but we should actually do that every quarter. Where should stock be held? How high should stock levels be? Most companies only look at safety stock, but they also need to look at cycle stock, seasonal stock and stock in transit. Particularly the latter is important now, given the problems in container shipping. ‘Stock in transit’ has increased by 3%. Lead times are significantly longer.”

The gap is growing

When it comes to S&OP, one thing that often stands in the way of success is the lack of a clear definition of supply chain excellence. Cecere has worked with more than a thousand companies, but only a few have defined this effectively. “Most people tend to talk about performance within their own discipline, but that doesn’t do justice to the supply chain. For example, a company with the lowest transport costs and the lowest production costs isn’t necessarily the company with the best cost structure. Only 29% of companies have visibility into total costs. What we lack are systems that enable us to balance the supply chain.”

The gap between Sales and Supply Chain certainly doesn’t help that balance. “And that gap has actually continued to grow over the last ten years. Everyone performs optimally within their own role, partly thanks to the implementation of CRM systems in Sales. That has made the disciplines more efficient, but unbalanced the organization. So remember one thing: functional silos and functional KPIs have a negative impact on the ability to create value and to align Sales and Operations. An organization where Production is focused on maximum utilization of the production lines and where Purchasing is focused on price will struggle to reach mutual agreements.”

Politics

Cecere herself works with four key performance indicators (KPIs) that, according to her own research, have the greatest impact on value creation. Those KPIs are: growth, margin (as opposed to costs), turnover rate (as opposed to working capital) and return on invested capital (ROIC). Each discipline can have its own KPIs too but they must be focused on reliability, she said. “If companies succeed at this, it eliminates the politics from the S&OP process. If not, then performance related to supply chain excellence will decline. And if the S&OP process is also linked to the budget in that case, performance will decline even faster.”

Download the slides of Lora Cecere!