This month, the Supply Chain Insights team will announce the Supply Chain Index. The Supply Chain Index is a formulaic representation of supply chain excellence based on market valuations. It will be launched on a webinar on April 25, 2013 and through a report that will run in our May newsletter. Here, we would like to share insights on the Index and how we intend to use it.
How was it developed? Over the course of the last year, Abby Mayer of the Supply Chain Insights team built a database of 20 years of information and over 50 supply chain financial ratios. To understand supply chain excellence, we have been studying pattern recognition for industry peer groups at the intersection of the metrics in the Supply Chain Effective Frontier of growth, profitability, cycles and complexity. (Based on inquiry, we do this analysis free of charge for members of our Supply Chain Insights Community.
We have performed multiple analyses for companies. Each time that we run a new analysis, we learn more. As a result, we have built a database of how companies have made trade-offs on financial ratios over the last decade. This analysis has been fun and insightful. We have found that only a few companies are improving the potential of their supply chain to balance supply chain metrics.
How is the Supply Chain Index different from the Supply Chain Effective Frontier? Last month, we decided that it was time to take this analysis to the next level and not just plot the patterns at the intersection of the Supply Chain Effective Frontier, but instead, start to build a formulaic representation of market valuation. We are using ycharts.com and Morningstar sectors to build a formulaic representation of market valuation for over 30 industry peer groups. Each peer group has a unique equation based upon what drives value in their specific value chain. While we have known this empirically, it is fascinating to see the differences between industries and across value networks. (A value network is a group of companies that trade together to satisfy a market need. An example is retail/consumer products/chemical/transportation or hospital/pharmaceutical companies/medical device companies/medical distributors.)
How does the methodology compare to the Gartner Top 25. Why do we need a new Index? This methodology differs in a number of critical ways. We hope that it provides new and critical insights for the supply chain leader. We believe that the Gartner Top 25 is flawed in three primary ways:
- Value chains are not created equally: You cannot put all companies in a spreadsheet and shake them up. The Gartner Top 25 methodology is biased to reward the high tech and electronics industry. As a result, asset intensive companies or service providers will never do well via this methodology. We believe that companies need to be compared within their peer groups.
- A long-term view of leadership is needed: We believe that the data needs to be based on a longer time horizon than three years. Supply chain excellence happens over the course of many years, and the relative positions of companies, and the movement over the decade, is just as interesting as the index itself.
- Objectivity: We are correlating the formula based on quarterly stock market valuation data. We want to understand the differences between industries, and across value chains, to help teams better align and to improve collaboration between trading partners.
How will we use it? It is our goal to use the Supply Chain Index in four different ways. It will become one of the cornerstones of our research.
- Discovery. It is our goal to tie financial balance sheet data together to quantitative surveys and do a deep analysis on supply chain excellence. We are busy trying to figure out what practices and technologies drive supply chain excellence. So after we announce the index, all publically held companies will be given an index factor based on annual performance and grouped into segments based upon maturity. We will then use this as a comparison table to understand the processes and technologies used by more mature companies.
- Selection of conference speakers. On September 11-12, 2013, we will be holding our first Global Summit. The companies that have performed the best on the Supply Chain Index will be selected to be our speakers.
- Supply Chain strategy sessions. The sharing of performance on the Supply Chain Effective Frontier helps companies to understand their performance against their peer group and the overall trends of the market. Similarly, the Supply Chain Index allows companies to better prioritize strategies.
- Publication of our next book. We plan to publish two epublications this year; one on Supply Chain Metrics that Matter, and the other covering the Supply Chain Effective Frontier and the Supply Chain Index. They will be digitally shared through Amazon, iTunes and other sources.
How can you and your teams gain benefit from this research? We hope that it can help you better define supply chain excellence. And, articulate why supply chain matters.
We would love to hear your feedback and we hope to see you on our webinar to discuss the Index on Thursday, April 25, 2013. Go here to register for the webinar.