Supply Chains to Admire Household Nondurables Calculation Example

If you’re like me, you might see a long report online and skip past the details to get to the good stuff – the results. When the Supply Chains to AdmireTM  report came out last week, I scrolled right to the winners.

To try to wrap my head around the way the winners were determined, I dug in to the data. I wanted to take one particular company and calculate their results myself to understand the methodology fully.

As you can see from Figure 1, the Supply Chains to Admire methodology has 3 steps. The winners are those companies that show they are in the top of their industry in: improvement (measured by being in the top 2/3rds of the Supply Chain Index ranking for the industry), value (measured by being at or above industry average in either Market Capitalization or Price to Tangible Book Value), and performance (measured by being at or above industry average for Growth, Operating Margin, Inventory Turns, and Return on Invested Capital).

Figure 1. Supply Chains to Admire Methodology

Looking at Proctor and Gamble

I decided to look at Proctor & Gamble since, as Lora mentioned in her post, they are known for having a strong supply chain. So why didn’t they make the Supply Chains to Admire winner list this year?

P&G is in a small industry segment; the Household Products (Nondurable) industry includes only 10 companies – Church & Dwight, Colgate-Palmolive, Clorox, Kimberly-Clark, Newell Rubbermaid, Procter & Gamble, Reckitt Benckiser Group, Spectrum Brands Holdings, Tupperware Brands, and Unilever.

In order to understand why P&G didn’t make the winner list, I had to look at how they measure up in terms of each of the three elements: improvement, value, and performance.

Improvement

The Supply Chain Index is a ranking of improvement within an industry group. The methodology was determined with Supply Chain Insights and Arizona State University in 2014. It measures a company’s improvement in balance, strength and resiliency factors over time.

Balance
Balance looks at the change in Revenue Growth  and the change in Return on Invested Capital (ROIC) over the years included in the analysis (2010 – 2016). As the company moves toward a higher Revenue Growth and ROIC, the company improves their balance. Lora has noted, “as growth increases, there is usually an increase in demand error which can reduce the Return on Invested Capital.” For this reason, a company shows greater balance if the improvement of one of the metrics does not cause a negative effect on the other.

Table 1. P&G Balance Metrics

The balance result for P&G is:


Balance = (1 /(7-1)) x [ ((-0.08-0.03)/(0.03)) + ((0.12-0.13)/(0.13)) ],
Balance = 1/6 x (-3.67 + -0.08),
Balance = (1/6) x (-3.74),
Balance = -0.63

The balance result of -0.63 reflects a negative trend in Revenue Growth and a slight negative trend in ROIC as well for P&G from 2010 through 2016. Compared to the other Household Products (N) companies, P&G comes in at 9 out of 10, with only Colgate-Palmolive performing worse. It appears that the significant decrease in Revenue Growth is affecting P&G quite a bit in terms of this balance metric.

Table 2. Household Products (Nondurable) Balance Rankings

Strength 

Strength looks at the trend of Operating Margin and Inventory Turns from 2010 to 2016. In supply chains with strong overarching strategies, there isn’t the tendency to switch priorities as often as those with more siloed functional strategies. A strong supply chain will show that as operating margin goes up, inventory turns go up as well.

Table 3. P&G Strength Metrics

The strength result for P&G is:


Strength = (1/(7-1)) x [ ((0.206-0.203)/(0.203)) + ((6.98-5.94)/(5.94)) ],
Strength = (1/6) x [0.014 + 0.18],
Strength = (1/6) x 0.19,
Strength = 0.03

As the company moves toward a higher Operating Margin and higher Inventory Turns, the supply chain is stronger. P&G is staying pretty flat, and therefore ranks right in the middle of the industry at number 5 in the strength category.

Table 4. Household Products (Nondurable) Strength Rankings

Resiliency
Resiliency looks at the movement between Operating Margin and Inventory Turns over the 7 years from 2010 through 2016 . It measures the distance between each of the points on the orbit chart in Figure 2. Since there are 7 points representing the 7 years, there are 21 possible combinations of points (or pairs) that we can measure the distance between.

Figure 2. Proctor & Gamble Orbit Chart


The resiliency equation is:

Where d is the Euclidean distance between the points, and m is the total number of pairs, in this case 21 (6! or 6 + 5 + 4 + 3 + 2 +1).

Table 5. Resiliency Calculation for P&G

After the total sum of the distance between all of the 21 pairs is added together, they are divided by 21 to get the final resiliency number of 0.85 (17.83/21 = 0.85).

The smaller the resiliency number, the better. In other words, the less distance between all of the points on the plot by year of Operating Margin and Inventory Turns, the more resilient the supply chain is. You can see in the chart that P&G has quite a bit of movement between the two metrics year over year. This leads to a poor ranking of 9 out of 10 for the resiliency category.

Table 6. Household Products (Nondurable) Resiliency Rankings

Supply Chain Index Result
As a result of the rankings in each of the categories of strength, balance, and resiliency, P&G ends up with the final Supply Chain Index  ranking of 10th in the Household Products (Nondurable) industry peer group. (This is determined by averaging the rankings in the 3 categories, see Table 7.)

Table 7. Household Products (Nondurable) Supply Chain Index Rankings

This automatically disqualifies P&G from being a Supply Chains to Admire winner, as the company must fall within the top 2/3rds rank of their industry to be considered a winner.

Value

Let’s say that P&G did fall in the top two-thirds of the Supply Chain Index ranking, would they then be a winner in the Supply Chains to Admire results?

To determine if they are a winner in value, we look at Market Capitalization or Price to Tangible Book Value. In order to be considered a winner in the Supply Chains to Admire, P&G must be at or above industry average  in one of the two of these categories.

P&G beats the industry average by a long shot in Market Capitalization for the years 2010 through 2016, and thus would have qualified to be a winner in the value category.

Performance

In order to be considered a winner in the Supply Chains to Admire, P&G must also be at or above industry average for Growth, Operating Margin, Inventory Turns, and ROIC. (Recall we are averaging results for the years 2010 through 2016. Also note that the calculation allows for a margin of error within the average.)

As you can see from Table H, P&G is at or above the industry average for Operating Margin and Inventory Turns. They are below the industry average, however, for Growth and Return on Invested Capital.

Table 8. Household Products (Nondurable) 2017 Supply Chain to Admire Metric Results
So, even if they had shown a strong Supply Chain Index ranking, P&G would not be a winner based on the Supply Chains to Admire methodology.

Summary

This, of course, is not saying that P&G has a bad supply chain. The strong Inventory Turns and the Market Cap value show they are great in some areas. What hurt P&G was the negative Growth and low Return on Invested Capital results these last 7 years, as well as a low resiliency result. Note that there was not a winner in the Household Products (Nondurable) industry segment.

Let me know if you have another industry or company you would like me review using the Supply Chains to Admire methodology!

Anne Kalinowski

Author Anne Kalinowski

Anne Kalinowski is a Research Analyst at Supply Chain Insights LLC. She worked in the Supply Chain industry for nine years in various supply chain roles for GE and Ecolab, including manufacturing, procurement, fulfillment, quality, and planning. In 2016 she managed the implementation of Demand Sensing software for Ecolab’s U.S. network. She has a degree in Chemical Engineering and an MBA focusing in Supply Chain Operations and Finance from the University of Minnesota.

More posts by Anne Kalinowski

Join the discussion One Comment

Leave a Reply

Follow

Get every new post delivered to your Inbox

Join other followers