Launch of the Supply Chain Index webinar Slide Deck

Supply Chain Index

April 25, 2013

#sciwebinar

Supply Chain Insights LLC Copyright © 2013, p. 2

Supply Chain Insights is focused on delivering independent, actionable and objective advice for

supply chain leaders. A company dedicated to research, turn to us when you want the latest

insights on supply chain trends, technologies to know and metrics that matter.

About Us

#sciwebinar


Presenters

Abby MayerResearch Associate

Lora CecereFounder and CEO

#sciwebinar


18 Reports in 2012

#sciwebinar


Over 30 Reports Planned for 2013

#sciwebinar


This is the new bible for all supply chain executives. It provides an insider’s perspective that will prove incredibly valuable to even the most grizzled supply chain veteran. This is the next must-have business book.

--Bruce Richardson, Chief Enterprise Strategist, Salesforce.com

Today, the worlds of social business and supply chain management have many degrees of separation. I enjoyed working with Lora to understand what the future transformation of digital marketing to digital business could look like.

--Jeremiah Owyang, Research Director, Altimeter

Second Printing of Bricks Matter: 13 Five-Star Reviews on Amazon

#sciwebinar


Publishing Two eBooks in 2013 on Supply Chain Metrics That Matter

– Consumer Value Networks– Industrial Value Networks

2013 Publications

#sciwebinar


Supply Chain Metrics That Matter Readership

Focus of Report Date of Publication Readership (as of 4-15-2013)

Retail August 2012 1,420

Consumer Products September 2012 983

Chemical Industry November 2012 600

The Cash-to-Cash Cycle November 2012 1,620

Pharmaceutical Industry December 2012 1,095

Driving Reliability in Margins January 2013 1,180

Hospitals January 2013 657

Brick & Mortar Retail February 2013 366

Medical Device Manufacturers February 2013 458

Consumer Electronics April 2013 199

Supply Chain Metrics that Matter: Reports

#sciwebinar


Our Focus

2-DAY PUBLIC TRAINING

Dallas – May 6-7Princeton – June 24-25

Minneapolis – August 8-9$1500

GLOBAL SUMMIT

PODCASTS

www.supplychaininsights.com#sciwebinar


What Is Supply Chain Excellence?

Understanding the Supply Chain as a Complex System

Which Companies Have Maximized Market Valuation Through Supply Chain Excellence?

Using the Insights

Agenda

#sciwebinar


Perform better than peer group

Improve year-over-year results

Alignment in metrics

Delivery of performance against the business strategy

Consistency in results

Be a leader in managing trade-offs

What Is Best in Class?

#sciwebinar


What is Supply Chain Excellence?



Using the Insights

Agenda

#sciwebinar

#sciwebinar

A Supply Chain

is a Complex System

with Complex Processes

with Increasing Complexity


The Supply Chain Effective Frontier:First Representation

#sciwebinar


Mining 20 Years of Financial Ratio Data

Financial Metrics

Growth Profitability Cycle ComplexityCommon Shares Cash Cash-to-Cash Cycle Altman Z

Employee Growth Cash Change in Period Days of Finished Goods Capital Turnover

Employees Cash on Hand Days of Inventory Current Ratio

Market Capitalization Cash Ratio TTM Days of Payables Outstanding Quick Ratio

R&D Margin Cash Ratio Quarter Days of Raw Materials Return on Assets

R&D Ratio Cash Ratio Year Days of Sales Outstanding Return on Equity

R&D to COGS Ratio Cost of Goods Sold Days of Work in Progress Return on Invested Capital

Revenue EBITDA DPO/DSO Return on Net Assets

Revenue Growth Free Cash Flow Ratio Finished Goods Inventory Revenue per Employee

Revenue Growth TTM Gross Margin Inventory Working Capital Ratio

Revenue TTM Gross Profit Inventory Turns

SG&A Margin Net Profit Margin Receivables Turns

SG&A Ratio Operating Cash Flow Ratio Raw Materials Inventory

SG&A to COGS Ratio Operating Margin Work in Progress Inventory

OPEX Ratio

Pretax Margin

#sciwebinar


The Supply Chain Effective Frontier: Second Representation

#sciwebinar


• Supply Chain Index: A formulaic representation of supply chain financial ratios correlated to stock market capitalization valuation.

• Supply Chain Effective Frontier: The balance of growth, profitability, cycle and complexity metrics to deliver the supply chain strategy. It may or may not maximize the company’s market valuation.

• Supply Chain Excellence: The behavior of companies working to maximize value through the setting of targets for supply chain financial ratios and aligning metrics that matter (tied to value chain strategy).

Definitions

#sciwebinar


A Look at History: Progress in Productivity

#sciwebinar


Cross Industry View: (2000-2011)

#sciwebinar


Company Performance within an Industry Sector: (2000-2011)

#sciwebinar


Competitive Analysis: (2006-2011)

#sciwebinar


Peer Group Analysis: (2000-2012)

#sciwebinar


Healthcare Value Chain: Financial Metrics

#sciwebinar





Using the Insights

Agenda

#sciwebinar


Introducing the Supply Chain Index

A formulaic representation of how companies are trading off growth, profitability, cycle and

complexity performance on selected supply chain financial

metrics against market valuation.

#sciwebinar


1. To better understand which supply chain metrics matter to corporate balance sheet performance in public markets. We want to help leaders better align supply chain and financial performance.

2. To create an objective system for evaluating and ranking supply chains by industry peer group.

3. To connect financial performance with supply chain excellence as measured through quantitative surveys in an effort to better identify and define best practices across industry groups.

Why Did We Do This?

#sciwebinar


• What it is: A way to understand the impact of companies’ supply chain (relative to peers within an industry sector) to market capitalization based a set of preselected supply chain ratio metrics.

• What it is NOT: A way to evaluate overall company performance or compare the model results to actual market capitalization.

What It Is. What It Is Not.

#sciwebinar


• April 25th: introduction of the Index and the application to 3 Morningstar sectors

• May: release of results for additional industries and discussion in Supply Chain Insights Community

• May, June, July, August: monthly reports and publication of additional industries

• September 11-12th: 1st annual Global Summit with speakers selected based on Index performance

Now and Then

#sciwebinar


Step 1: Located data sources

Step 2: Selected core supply chain ratios from over 50 financial metrics

Step 3: Identified meaningful metrics per industry using regression analysis among selected ratios

Step 4: Constructed industry equation based on correlation of industry metrics to market capitalization values

Step 5: Determined company rankings within industry by applying 2012 company results to industry equation

Step 6: Analysis of peer group companies over the last decade

Step 7: Correlations to supply chain practices, technologies and organizational design

Supply Chain Index Methodology

#sciwebinar


– Market capitalization data of public companies (Ycharts.com)

– Industry peer groups defined by Morningstar Sector (36)

– Financial ratios built from balance sheet and income statement data collected from OneSource

– Analysis of quarterly data using R (frequency 2006Q1 to 2012Q4)

Step 1: Located Data Sources

#sciwebinar


Step 2: Selected 14 Core Supply Chain Ratios to Study

Financial Metrics

Growth Profitability Cycle ComplexityCommon Shares Cash Cash-to-Cash Cycle Altman Z

Employee Growth Cash Change in Period Days of Finished Goods Capital Turnover

Employees Cash on Hand Days of Inventory Current Ratio

Market Capitalization Cash Ratio TTM Days of Payables Outstanding Quick Ratio

R&D Margin Cash Ratio Quarter Days of Raw Materials Return on Assets

R&D Ratio Cash Ratio Year Days of Sales Outstanding Return on Equity

R&D to COGS Ratio Cost of Goods Sold Days of Work in Progress Return on Invested Capital

Revenue EBITDA DPO/DSO Return on Net Assets

Revenue Growth Free Cash Flow Ratio Finished Goods Inventory Revenue per Employee

Revenue Growth TTM Gross Margin Inventory Working Capital Ratio

Revenue TTM Gross Profit Inventory Turns

SG&A Margin Net Profit Margin Receivables Turns

SG&A Ratio Operating Cash Flow Ratio Raw Materials Inventory

SG&A to COGS Ratio Operating Margin Work in Progress Inventory

OPEX Ratio

Pretax Margin

Source: Supply Chain Insights LLC

#sciwebinar

Selected Ratios


Step 3: Identified Industry Metrics

#sciwebinar

Market Capitalization vs. Revenue Growth

Insight: For example, growth did not correlate for chemical companies.



Metrics That Matter by Industry

Mass Retail IndustryConsumer Packaged

Goods IndustryChemical Industry

Operating Margin Operating Margin Operating Margin

Days of Inventory Days of Inventory Days of Inventory

DPO/DSODays of Payables

OutstandingDays of Payables

Outstanding

Return on Invested Capital Return on Invested Capital Return on Assets

Working Capital Ratio Current Ratio

Free Cash Flow Ratio

SG&A to COGS Ratio

0.89 0.68

#sciwebinar



Step 4: Mass Retail Equation

#sciwebinar

Ln(market cap) = 10.41 + 52.67(OM) -34.72(WC) - 16.02(ROIC) – 0.09(DPODSO) + 0.02(DOI)

NOTE: Full equation is Ln(market capitalization) = 10.40934 + 52.66784(operating margin) -34.7248(working capital ratio) – 16.0211(return on invested capital) – 0.09183(dpo/dso) + 0.017478(days of inventory). We utilized adjusted which accounts for the occurrence of large p values. Outlier values were defined and excluded as those 5 times larger than IQR.

Correlation Strength

Mass Retail Industry Equation


Step 5: Determined Rankings by IndustryMass Retail Industry (2012)

#sciwebinar


Top Ranked Mass Retail Industry (2012)

#sciwebinar



#sciwebinar









Outstanding




SG&A to COGS Ratio

0.89 0.68


Step 4: Consumer Packaged Goods (CPG) Equation

#sciwebinar

Ln(market cap) = 3.37 + 2.11(OM) + 1.62(FCF) – 1.29(ROIC) – 1.17ln(CR) + 0.25(SGAC) + 0.02(DPO) – 0.01(DOI)

NOTE: Full equation is Ln(market capitalization) = 3.368152 + 2.107516(operating margin) + 1.624277(free cash flow ratio) – 1.2891(return on invested capital) – 1.16775*ln(current ratio) + 0.2455(sga to cogs ratio) + 0.016078(days of payables outstanding) – 0.00655(days of inventory). We utilized adjusted which accounts for the occurrence of large p values. Outlier values were defined and excluded as those 5 times larger than IQR.


CPG Industry Equation


Step 5: Determined Rankings by IndustryCPG Industry (2012)

#sciwebinar


Top Ranked CPG Industry (2012)

#sciwebinar



#sciwebinar









Outstanding




SG&A to COGS Ratio

0.89 0.68


Step 4: Chemical Industry Equation

#sciwebinar

Ln(market cap) = 7.85(OM) – 4.84(ROA) + 1.81ln(DPO) + 0.01(DOI)


NOTE: Full equation is Ln(market capitalization) = 7.850179(operating margin) – 4.83507(return on assets) + 1.806959* ln(days of payables outstanding) + 0.008524(days of inventory). We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 3 times larger than IQR.

Chemical Industry Equation


Step 5: Determined Rankings by IndustryChemical Industry (2012)

#sciwebinar


Top Ranked Chemical Industry (2012)

#sciwebinar


In ProgressFood Industry

#sciwebinar

Ln(market cap) = 5.57 +15.56(OM) – 7.50(ROIC) – 4.13(ROA) + 2.74(RONA) + 0.61(Z) + 0.04(DPO) – 0.04(DSO)


NOTE: Full equation is Ln(market capitalization) = 5.567785 + 15.56315(operating margin) -7.49664 (return on invested capital) – 4.12637(return on assets) + 2.743363(return on net assets) + 0.605805(altman z) + 0.040756(days of payables outstanding) – 0.03914(days of sales outstanding). We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Food Industry Equation



Understanding Supply Chain as a Complex System


Using the Insights

Agenda

#sciwebinar


Value Chain Relationships

Retail(Mass

Merchant)CPG Chemical

Equations:Ln(market cap) =

10.41 + 52.67(OM) -34.72(WC)

- 16.02(ROIC) -0.09(DPODSO)

+ 0.02(DOI)

3.37+ 2.11(OM) + 1.62(FCF) - 1.29(ROIC) - 1.17ln(CR) + 0.25(SGAC) + 0.02(DPO) – 0.01(DOI)

7.85(OM) - 4.84(ROA) + 1.81ln(DPO)

+ 0.01(DOI)

True collaboration only happens when there is a sustaining win-win value proposition.


Step 1: Located data sources

Step 2: Selected core supply chain ratios from over 50 financial metrics

Step 3: Identified meaningful metrics per industry using regression analysis among selected ratios

Step 4: Constructed industry equation based on correlation of industry metrics to market capitalization values

Step 5: Determined company rankings within industry by applying 2012 company results to industry equation

Step 6: Analysis of peer group companies over the last decade

Step 7: Correlations to supply chain practices, technologies and organizational design

Our Next Steps: Supply Chain Index Methodology

#sciwebinar


• What drives value in each industry is different.

• Public markets reward supply chain balance and alignment.

• The supply chain is a complex system. Supply chain excellence must be carefully defined.

• Trading relationships should recognize the differences between the definitions of value within an industry to define win-win relationships.

• There is no substitute for leadership.

• Supply chain excellence matters.

Summary

#sciwebinar


1. Join the Supply Chain Index Group in the Supply Chain Insights Community for Peer Review and Discussion: www.scicommunity.com

2. Gain Insights from Supply Chain Leaders at the Global Summit www.supplychaininsightsglobalsummit.com

3. Build the Next Generation of Supply Chain Research Using the Index

4. Leverage the Index to Connect Supply Chain Processes, People and Technology Decisions to Balance Sheet Results

What You Can Do

#sciwebinar

http://www.scicommunity.com/groups/supply-chain-index

http://www.supplychaininsightsglobalsummit.com/


PAST SUPPLY CHAIN INDEX WEBINARS:

AVAILABLE ON DEMAND• From September 24, 2012:

The Supply Chain Index, 20 Years in the Making: A Focus on Process Industries

• From October 26, 2012: The Supply Chain Index, 20 Years in the Making: A Focus on Discrete Industries

Webinars

www.supplychaininsights.com/upcoming-webinars

#sciwebinar

UPCOMING WEBINARS• May 9th: How Do We Heal the Healthcare Value

Chain? Part II

• June 13th: Sales and Operations Planning: State of the Union

• July 11th: Big Data Supply Chains and the Future of Analytics

• August 15th: State of Supply Chain Talent: Missing Link in the Supply Chain

• August 29th: Digital Manufacturing


Private Networking

Chief Supply Chain Officer Chief Information Officer

CIO’s Corner

#sciwebinar


Superheroes 2013:Coming Soon

#sciwebinar


Supply Chain Insights Community

#sciwebinar


Who Is Lora?

• Founder of Supply Chain Insights

• Partner at Altimeter Group (leader in open research)

• 7 years of Management Experience leading Analyst Teams at Gartner and AMR Research

• 8 years Experience in Marketing and Selling Supply Chain Software at Descartes Systems Group and Manugistics (now JDA)

• 15 Years Leading teams in Manufacturing and Distribution operations for Clorox, Kraft/General Foods, Nestle/Dreyers Grand Ice Cream and Procter & Gamble. #sciwebinar


Where Do You Find Lora?

Contact Information: [email protected]

Blog: www.supplychainshaman.com (4000 pageviews/month)

Twitter: lcecere 3850 followers. Rated as a top rated supply chain social network user.

LinkedIn: linkedin.com/pub/lora-cecere/0/196/573 (3750 in the network)

#sciwebinar


Where Do You Find Abby?

#sciwebinar

Contact Information: [email protected]

Blog: www.supplychainindex.com (2500 pageviews/month)

Twitter: @indexgirl

LinkedIn: www.linkedin.com/pub/abby-mayer/40/941/972

Launch of the Supply Chain Index webinar Slide Deck

Business

Transcript of Launch of the Supply Chain Index webinar Slide Deck