June 15, 2012
Weathering the Storm: How to Achieve Strategic Resilience Through Supply Chain Excellence
The current economic downturn has posed critical challenges for CEOs. While the past few years have been difficult, the downturn offers important lessons.
Why have many firms lost ground while others have gained? Resilient supply chains.
Research by Neeley Supply Chain Professors Morgan Swink and Nancy Nix found that supply chain resilience is a key differentiator, enabling some firms to weather turbulence far better than their competitors.
“A firm’s ability to weather economic downturns, deal with volatility and manage costs under shrinking demands depends in large part on the resiliency of its supply chains,” Morgan Swink, Supply Chain Professor and the Eunice and James L. West Chair of Supply Chain Management, said.
“The results of our study shed light on important differences in the leading firms’ policies and performance, especially those that made them more resilient,”Nancy Nix, Supply Chain Professor and Executive Director of the TCU EMBA program, said.
Resilience is vital in continuing economic uncertainties and commodity price volatilities. Resilient firms are better able to ride out tough times and are better positioned for the economic growth that typically follows a recession.
Performance of Supply Chain Leaders
To identify leaders in supply chain excellence, Swink and Nix 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. They chose 38 companies that were consistently highly ranked across multiple years and studies. They then compared the financial performance of these top companies to their closest industry competitors across two periods: 2004 – 2007, representing the good times, and 2008 – 2010, during the downturn.
For 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. While the leaders did not exhibit higher sales growth or better gross margins than their competitors on average, 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 revealed exactly what the leading companies managed well and how this better positioned them to weather the impending economic downturn,” Swink said.
In the period 2004-2007, supply chain leaders held 24 percent less inventory than their competition, with 26 percent more inventory held as raw material rather than finished product.
“These numbers suggest that materials were moving faster through the leading firms,” Nix explained.
Evidence of faster operations showed up in other financials as well. In the 2004-2007 timeframe, leaders typically were paid faster by their customers and paid their suppliers faster. The net result was better cash flow management, with an average need for 27 percent less working capital than their competitors.
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 21 percent 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,” Swink said.
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?
First, the inventory differences suggest that the leaders pursued postponementstrategies. The leading firms had fast lead time processes in place to allow them to perform final assembly and delivery operations upon receiving customer orders. This allowed them to postpone the need for final product configurations and stocking locations, which 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, provided more flexibility in shedding costs in the economic downturn. In 2008-2010 timeframe, the 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,” Nix said. “The leaders had 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.”
Third, the leaders had better control over their internal processes. By having less operational wastes in the system, they were better positioned to absorb declining sales. Similarly, by maintaining stronger and more efficient relationships with customers and suppliers, the leaders were able 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 Perform in the Downturn?
A comparison of the supply chain leaders’ performances against their competitors in the 2008-2010 period provides a dramatic picture of the value of supply chain excellence, as seen on the chart below. The leading supply chain firms were strategically resilient and 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,” Swink said. “However, they not only outperformed the competition as in earlier years, they demonstrated even stronger relative performance throughout this time period.”
During the downturn, sales growth of the leaders was higher by nine percent, but return on assets was 98 percent higher, significantly better than the 58 percent advantage exhibited in the 2004-2007 timeframe. Return on sales was 57 percent higher versus 31 percent, and return on equity 100 percent higher versus 41percent.
“Clearly the top firms were positioned to respond to the challenges of a severe economic downturn far better than their competitors,” Nix said.
All companies included in the research made changes in their supply chains in response to the economic downturn. They cut expenses to cope with declining sales, cut inventories, used cash reserves and downsized their workforce.
“Surprisingly, all companies paid suppliers a little faster,” Swink said. “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 asked their customers to pay faster and 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,” Nix said. “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.
Key Steps of Strategically Resilient Leaders in Supply Chain Management
This research points to several steps that create and support supply chain excellence as a key driver for a strategically resilient firm.
- Attack wastes in internal processes and in transactions with suppliers and customers.
- Be responsive in order processing.
- Create a variable cost structure.
- Outsource many asset-intensive, non-core processes.
- Build relationships that leverage the assets of partners.
“Most of the leading firms we studied are large, global companies,” Swink said. “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 we 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,” Nix said. “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 made through simple process improvements.”
How Can Your Company Get Started on the Road to Resilience?
Supply chain excellence is a vital key to building strategic resilience that can lead to significant advantages in financial performance and a greater ability to cope with turbulent environments that inevitably occur in business.
- 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 due to poor processes and bad partnerships?
- Look for opportunities to build key relationships with customers and suppliers.
- Drive out waste through process improvements. It’s important to view these improvement efforts as return-on-investment initiatives, where both invested capital and project outcomes are closely monitored.
- Attract, retain and develop quality supply chain management. Real improvements are either driven or hampered by the quality of the supply chain management talent represented in your company. 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 should look 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,” Nix said.
“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,” Swink said.
“We encourage looking for lessons 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,” Nix said.
Public Relations Manager
Neeley Sschool of Business at TCU