It goes without saying that the downturn has posed critical challenges for CEOs. However, while the past few years have clearly been painful, they also offer important learning opportunities. Many firms lost ground in the last few years, but a few have gained. Why? Researchers at TCU’s Supply and Value Chain Center (SVCC) have found that the abilities of firms to weather economic downturns, deal with volatility, and manage costs under shrinking demands are in large part dependent on the resilience of their supply chains. The results of the study begin to shed light on some of the important differences in the leading firms’ policies and performance, especially those that have made them more resilient.
At a recent conference put on by the TCU SVCC and sponsored by Texas CEO Magazine, supply chain executives and TCU professors addressed the question of whether supply chain resilience can be a key differentiator, enabling some firms to weather turbulence far better than their competitors.
In these days of continuing economic uncertainties and commodity price volatilities, such resilience is to be highly prized. Resilient firms are not only able to ride out tough times; they are also usually better positioned for the economic growth that typically follows a recession like the one we have recently experienced.
Performance of Supply Chain Leaders
To identify leaders in supply chain excellence, we compiled a list of top supply chain management companies identified in multiple studies done over the 2004-2007 period by AMR/Gartner, Supply Chain Digest, and Michigan State University. We picked 38 companies that were consistently highly ranked across multiple years and studies. We then compared the financial performance of these top companies to their closest industry competitors across two periods: 2004 – 2007, representing the “good times,” and then again in the downturn of 2008 – 2010. In the good times (2004-2007), the top supply chain leaders outperformed their rivals in multiple categories, including 58 percent higher return on assets, 31 percent higher return on sales, 41 percent higher return on equity, and 45 percent greater market value. Surprisingly, however, the leaders did not exhibit higher sales growth or better gross margins than their competitors on average. Instead, much of the difference in the leaders’ profitability is attributable to better management of supply chain factors, including inventories, cash, overheads, and SG&A costs.
A closer examination of the differences in underlying financials reveals what the leading companies managed well, and how this better positioned them to weather the impending economic downturn. In the period 2004-2007, supply chain leaders held 24 percent less inventory than their competition, with 26 percent more inventory being held as raw material rather than as finished product. These numbers suggest that materials were moving faster through the leading firms. Evidence of faster operations showed up in other financials as well. In the 2004-2007 time frame, leaders typically got paid faster by their customers, and in turn they paid their suppliers faster. The net result was better cash flow management, with a need for 27 percent less working capital than competitors on average. Leading firms also spent ten percent less on sales and general administrative expenses, and demonstrated greater employee productivity, with 12 percent higher sales per employee. Better asset utilization resulted in a 15 percent higher sales to asset ratio, a 21percent lower asset to employee ratio, and 15 percent less depreciation. Interestingly, the leaders had significantly lower asset intensities (plant, property and equipment / sales), and significantly higher labor intensities than their competitors. Finally, the leaders spent less on R&D, even though they maintained comparable levels of sales growth with their competitors.
How Were the Leaders Better Positioned for the Downturn?
The 2004-2007 financial comparisons of supply chain leaders versus their competitors provide some interesting clues as to how they might have been better positioned for the downturn in 2008. First, the inventory differences suggest that leaders were more ardent pursuers of postponement strategies. The leading firms were more likely to have the fast lead time processes in place to allow them to perform more final assembly and delivery operations at times that were closer to occurrences of actual customer orders. In doing so, they postponed making commitments to final product configurations and to stocking locations. This approach gave them more flexibility by holding less inventory overall, and by creating greater abilities to adjust to changing customer demands. The leaders had fewer finished goods in the system that needed to be written off when sales began to decline.
Second, the leaders’ more variable cost structures, achieved through greater labor intensity, also likely provided more flexibility in shedding costs in the economic downturn. In looking at the 2008-2010 data, it is clear that leaders reduced labor at significantly higher rates than their competitors, whereas the competitors shed more assets. Laying-off employees is certainly painful, but from a financial standpoint, it is often preferable and easier than shedding assets. The leaders had presumably already shed many of their less productive assets, and perhaps outsourced their more asset intensive processes. By creating a more variable cost structure, they built in more flexibility to react to declining market conditions.
Our findings also strongly suggest that the leaders had better control over their internal processes. By having less operational wastes in the system, leaders were better positioned to absorb declining sales. Similarly, by maintaining stronger and more efficient relationships with customers and suppliers, the leaders were better enabled to work together with their partners to quickly lower inventories, transaction costs, and R&D expenses during difficult times.
How Did the Supply Chain Leaders Do in the Downturn?
A comparison of the supply chain leaders’ performances against their rivals in the 2008-2010 period provides a dramatic picture of the value of supply chain excellence. Exhibit 1 highlights the supply chain leaders’ performance advantages in 2004-2007 versus 2008-2010. The results argue that leading supply chain firms are indeed strategically resilient, and were far better positioned to weather the storm.
Like all firms, the supply chain leaders suffered lower sales growth, disruptions, and other problems through the economic downturn. However, they not only outperformed the competition as in earlier years, they demonstrated even stronger relative performance through this time period. During the downturn, sales growth of the leaders was higher, though only by nine percent. However, return on assets was an astonishing 98 percent higher among top companies, significantly better than the 58 percent advantage exhibited in the 2004-2007 timeframe. Return on sales was 57 percent higher versus 31 percent in the previous period, and return on equity 100 percent higher versus 41percent in the previous period. Clearly the top firms were positioned to respond to the challenges of a severe economic downturn far better than their competitors.
All companies included in the research made changes in their supply chains in response to the economic downturn. All companies cut expenses to cope with declining sales. All companies cut inventories, used cash reserves, and downsized their workforce. Surprisingly, all companies also paid suppliers a little faster. This finding was unexpected, but perhaps companies reduced their risk by ensuring the financial viability of their supply base, or they felt the need to strengthen supplier relationships to enable collaboration in other areas. Competitor firms included in the study also asked their customers to pay faster and, as noted earlier, shed assets to cope with the downturn. Supply chain leaders also shed assets, but at a lower rate than their competitors. Interestingly, leaders increased their levels of postponement in the 2008-2010 period; they held even more inventory in raw material state. Overall, the leaner, more flexible leading firms were more successful in changing their cost structures and internal processes to cope with decreased demands.
How do you Become a Strategically Resilient Leader in Supply Chain Management?
The forgoing financial analysis paints a fairly clear picture of what it means to be a strategically resilient firm, and many of the leaders’ characteristics point to supply chain excellence as a key driver. Resilient firms are more likely to have attacked wastes in their internal processes and in their transactions with suppliers and customers. They are likely to be more responsive in order processing, and more variable in cost structure. Resilient firms have typically outsourced many of their more asset-intensive, non-core processes, and they have built relationships that enable them to leverage the assets of their partners.
Most of the leading firms we studied are large, global companies. Do you have to be a big company to be resilient? It probably helps, since larger companies typically have more resources and options available to them. But in our research we have also found that smaller firms are often more responsive, adaptive, and flexible. In doing some statistical comparisons, we found no consistent evidence that size mattered as a predictor of resilience. Some of the supply chain competencies we have described might come from technology investments that bigger firms are better equipped to make, but many improvements can be had through simple process improvements.
So how should a company get started on the road to resilience? Our study points to several key steps. First, benchmark your supply chain financials against your rivals. Where are the biggest differences? Are these differences due to differences in strategy and competitive positioning, or are they actually due to poor processes and bad partnerships? Armed with this information, look for opportunities to build those key relationships with customers and suppliers. Drive out waste through process improvements. It’s important to view these improvement efforts as return-on-investment (ROI) initiatives, where both invested capital and project outcomes are closely monitored.
In the longer term, real improvements are either driven or hampered by the quality of the supply chain management talent represented in your company. A critical underpinning of the supply chain leadership shown by top companies is their ability to attract, retain, and develop such talent. Long-time supply chain managers often have great experience and depth of knowledge about their particular supply chain function. However, to position for the future, firms are increasingly looking for a global supply chain perspective, strong technology and analytic skills, and communication and leadership skills required to work across functions and firms. We believe that this is a crucial component in building a competitive advantage through supply chain capability.
Our comparison of supply chain leaders against their competitors indicates that supply chain excellence is a key to building strategic resilience. Such resilience can lead to significant advantages in financial performance and a greater ability to cope with the turbulent environments that seem to have become the norm in business today. On the whole, supply chain leaders have weathered the storm and are well positioned for the growth that we all hope to be on the near horizon. We encourage looking for lessons to take from the best supply chain management firms in your own industry, and use them to build the resilience needed to prosper in both good times and bad.
Dr. Morgan Swink is a Professor at TCU, and the Eunice and James L. West Chair of Supply Chain Management. Dr. Swink is also the Executive Director of the Supply and Value Chain Center at TCU’s Neeley School of Business in Fort Worth. firstname.lastname@example.org
Dr. Nancy Nix is a Professor, Supply Chain Practice, at TCU’s Neeley School of Business. Dr. Nix is also the Executive Director of TCU’s Executive MBA Program. email@example.com
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