Executive Summary: Current State of Food and Beverage Industries
Over the last decade, consumer confidence in the food and beverage industry supply chains has waned. Shopper distrust is high; and as a result, growth in many categories like carbonated beverages and cereals declined.
While these two industries have similarities, there are different underlying dynamics in business drivers. The potential of the food supply chain is different than that of beverage. As a result, in this report, we share information on the two industries separately.
For both industries, the last decade was a tough market. Despite attempts to stimulate demand through trade programs, new product launch, and product expansion into new continents, growth declined. In 2003-2006, growth in the food industry was 7% while in 2011-2014, year-over growth was 4%. In parallel, in 2003-2006, growth in the beverage industry was 22%; yet, in 2011-2014, it was 7%. As growth declined, supply chain maturity mattered more than ever. Most companies were not equal to the challenge.
Traditional marketing tactics are not as effective in these two industries as they were a decade ago. To try to stimulate growth, 33% new items were introduced into the retail chain from these two industries. This rise in complexity reduced the effectiveness of the supply chain at a time of declining volumes. In Table 4, we profile the results in the food industry, while in Table 5 we portray the trends in the beverage industry.
In both industries, operating margin declined despite improved productivity in revenue per employee. In parallel, despite multiple investments in technologies, inventory turns declined in the food industry. Companies were unable to balance metrics in times of declining volumes. The reason? Rising commodity costs and the slow development of supply chain skills.
Companies that did the best in driving improvement in key metrics in times of declining volumes have seven characteristics: core competency in network design; strong capabilities in transportation management; a focus on inventory management; use of more advanced forms of supply chain planning; balance and understanding of the trade-offs of volume, price and mix; use of channel data; and continuity of leadership.
Table 4. Progress on the Effective Frontier for Food Companies
Table 5. Progress on the Effective Frontier for Beverage Companies
When we compiled the Supply Chains to Admire Report in August 2014, two food and beverage companies—General Mills and ABInBev—made the list. To make the list, a company had to deliver performance (posting above-average results for the period of 2009-2013 when compared to their peer group on a portfolio of metrics including operating margin, inventory turns and Return on Invested Capital). They also had to drive supply chain improvement (based on the Supply Chain Index as defined in the Research Methodology section) faster than their peer group. We believe b
Best Practices for Implementing an External Recruiting Partnership
Supply Chain Metrics That Matter: A Focus on Food and Beverage Companies - 2015
1. Supply Chain Metrics That Matter:
A Focus on Food and Beverage
Companies
Progress on Supply Chain Excellence
06/30/2015
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC
By Regina Denman
Client Services Director
Supply Chain Insights LLC
2. Page 2
Contents
Research
Disclosure
Research Methodology
Improving Performance
Driving Profitability
Improving Cycles
Managing Complexity
Defining Improvement
Balance
Strength
Resiliency
Evaluating Supply Chain Excellence: Putting It All Together
Executive Summary: Current State of Food and Beverage Industries
Understanding Supply Chain Performance in the Food Industry
Driving Supply Chain Improvement
Cash-To-Cash
Recommendations
Conclusion
Definitions
Companies Studied
Prior Reports in This Series
About Supply Chain Insights, LLC
About Lora Cecere
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Research
The Supply Chain Metrics That Matter report series is an analysis of supply chain excellence for a
specific industry. In this report, we take a closer look at the food and beverage industry. The goal is to
help supply chain leaders understand what is possible in driving supply chain excellence programs.
These reports are based on data collected from financial balance sheets and income statements over
the period of 2000-2014. Our source of data is YCharts. In these Supply Chain Metrics That Matter
reports, we analyze how companies made trade-offs in balancing growth, profitability, cycles and
complexity in the last decade.
Within the world of Supply Chain Management (SCM), each industry is unique. It is dangerous to list
all industries in a spreadsheet and declare a supply chain leader. Instead, it is our preference to
evaluate change over time with a focus on overall performance and improvement within an industry
peer group. In this series of reports--Supply Chain Metrics That Matter--we analyze the potential of
each supply chain peer group while sharing insights and recommendations from industry leaders
based on general market trends. In the appendix of this report, we share information and links for
other reports in this series.
Disclosure
Your trust is important to us. As such, we are open and transparent about our financial relationships
and our research process. This independent research is 100% funded by Supply Chain Insights.
These reports are intended for you to read, share and use. Please share this data freely within your
company and across your industry. All we ask for in return is attribution when you use the materials
in this report in public forums. We publish under the Creative Commons License Attribution-
Noncommercial-Share Alike 3.0 United States and our citation policy is outlined on the Supply Chain
Insights Website.
Research Methodology
The methodology to understand supply chain performance and improvement is based on ten years of
data mining of supply chain financial ratios. In Table 1, we share the supply chain ratios we analyzed
to understand the trends in the Supply Chain Metrics That Matter report series.
4. Page 4
Table 1. Financial Ratios Considered in the Development of the Supply Chain Index
While there are other measurements which we believe are important in the determination of supply
chain excellence—forecast accuracy, case fill rate, carbon footprint, and inventory write-offs—we
cannot find a reliable and consistent source of data for these metrics that covers all industries and the
years studied. We find that the industry data sources are spotty and largely inaccurate due to the self-
reporting of data. Without a consistent data source across the industries, we cannot include these
factors even though we believe they are important.
The Supply Chain Index methodology was built on the belief that the supply chain is a complex
system with increasing complexity. We believe it is the supply chain leader’s role to build and manage
supply chain performance to drive year-over-year improvements which are balanced, strong, and
resilient. In our research we find that most companies throw the system out of balance and are able
to drive progress only on a single metric, not a balanced metrics portfolio. To illustrate this point, in
the development of the Supply Chains to Admire Report, we studied public manufacturing and retail
companies for the period of 2006-2013, and we found that only 21 of the companies in the study
group performed better than their peer group on the portfolio of metrics of operating margin, inventory
turns and Return on Invested Capital (ROIC).
5. Page 5
In the management of the supply chain there are many metrics. In fact, we find that most supply chain
leaders measure too many, which drives confusion. Our first goal in the research was to determine
which metrics should be tracked in the portfolio analysis. To understand the relationship between
supply chain performance and market capitalization, we calculated the correlation of seven years of
financial ratios (based on quarterly reporting) to market capitalization (the number of outstanding
shares multiplied by the share price) on a quarterly basis. The results of this study are presented in
Table 2. Our goal was to select a portfolio of metrics that could be meaningful to all industries.
Table 2. Correlation to Supply Chain Financial Ratios to Market Capitalization
For leaders, we find that progress is slow and deliberate. In our research we find that it takes at least
three years to drive significant supply chain progress, and that the best supply chain transformation
projects take at least five to six years.
We also find that it is difficult for supply chain leaders to sustain progress. A bad project, a quality
issue, or a merger can result in deep balance sheet gyrations. As a result, most companies go
through ups and downs with distinct patterns.
Our work is a study of metric performance patterns. We believe the patterns matter. It is for this
reason that in this report we analyze companies’ progress in time periods—pre-recession, during the
recession, and post-recession—to analyze year-over-year trends. In our research, supply chain
excellence is defined as ‘performance better than a competitor on a portfolio of metrics’, and
‘improvement better than the peer group average’. While this sounds easy, what will be seen by the
reader of this report is that this is a tough standard that few can meet.
6. Page 6
Improving Performance
To evaluate performance we analyzed a portfolio of metrics against industry averages and
improvement for three periods of time: 2006-2014, 2009-2014, and 2011-2014. This allowed us to
analyze the companies in this report for the longer view, and post-recession recovery.
The basis of the analysis in this report is the Effective Frontier Model. As shown in Figure 1, the
Effective Frontier model is designed to illustrate the principle that a supply chain is a complex system,
with increasing complexity, which needs to be managed using a balanced metrics portfolio. We use
the model of The Effective Frontier to represent this complex system.
Figure 1. The Effective Frontier
In our writing it is deliberately not termed the ‘Efficient Frontier’—a term used in economic theory.
Why? Quite simply it is because the term “efficiency” in supply chain processes is usually linked to
the lowest cost or the best revenue per employee. The concepts of the Effective Frontier are based
on the balance of growth agendas with cost, cycle metrics (a focus on inventory), and complexity. We
use Return on Invested Capital (ROIC) as a proxy for complexity.
In this report we analyze the progress of the food and beverage industry on The Effective Frontier.
Across all industries we find that nine out of ten companies are stalled at the intersection of two
important metrics: inventory turns and operating margin. While some companies made no
improvement over time, most companies were able to either improve inventory turns or cost, but not
both together. The reason? We believe it is due to the rise of unchecked complexity. Complexity
throws the supply chain out of balance.
7. Page 7
Driving Profitability
There is often an inverse relationship between margin and supply chain excellence. Industries with
the thinnest margins are more serious about delivering on the promise of supply chain leadership.
With the historically low margins in the food and beverage industry, supply chain has been an
important industry imperative. Progress was faster in the last decade than more recently.
In our analysis for this report, we use operating margin as the measure of profitability. The
methodology is equally applicable to EBITDA.
Improving Cycles
When it comes to managing cash-to-cash cycles, a small number is better. The question in the
boardroom is “How small can supply chain working capital cycles be managed to pump cash into the
organization?” There is seldom the question of “How low can we go in working capital cycles before
we put the supply chain at risk?” To understand the management of cycles in the food and beverage
industries we evaluated the cycles in three time periods: 2006-2014, 2009-2014, and 2011-2014.
Here we use inventory turns as the proxy metric for supply chain cycles.
Cash-to-cash is a composite metric of receivables, inventory, and payables. As can be seen through
the charts, the greatest improvement in supply chains in the last decade has been made in
payables—lengthening payment terms to suppliers. Inventory levels and receivables have been more
constant. In our analysis, we use inventory turns as our measure of supply chain cycles. The higher
the inventory turn value, the stronger the results.
Managing Complexity
By definition the food and beverage industry is an asset-intensive industry. Factory smokestacks are
iconic representations of manufacturing excellence. Within the food and beverage supply chain, there
are many forms of complexity: increase in items, formulas, customer policies, geographic reach, and
markets. Over the last decade complexity has increased. A focus on cost-to-serve, supply chain
segmentation, and supply chain planning improves the potential of the supply chain to balance
complexity while managing asset utilization. Very few companies in the food and beverage industries
are good at translating volume planning into value-based policy decisions.
Return on Invested Capital (ROIC) is a less well-known metric compared to Return on Assets (ROA).
Return on Assets has a narrower focus. Our research indicates that ROIC has a better correlation
with stock market capitalization, and provides a broad perspective on cash flow generation and
8. Page 8
profitability based on shareholder equity. The formula used for ROIC is:
𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐼𝑛𝑣𝑒𝑠𝑡𝑒𝑑 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐼𝑛𝑐𝑜𝑚𝑒 + 𝐼𝑛𝑐𝑜𝑚𝑒 𝑇𝑎𝑥 𝑇𝑜𝑡𝑎𝑙
𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′ 𝑠𝐸𝑞𝑢𝑖𝑡𝑦
ROIC is a measurement of the company’s use of capital. The goal is to drive higher returns than the
market rate of the cost of capital. As will be seen in this report, for many companies this is a struggle.
Defining Improvement
In judging improvement, the patterns matter. We built the Supply Chain Index to gauge progress. It
starts with understanding the resulting pattern when two supply chain metrics (generally ratios) are
plotted over time on an orbit chart. As shown in Figure 2, the orbit chart enables the visualization of
performance patterns. In this case the company is Coca-Cola. The average values for the two
financial ratios of revenue per employee and inventory turns are shown in the center box, and the
progress is shown as points on the chart. The best scenario is notated in the upper right-hand corner
of the figure. The analysis on supply chain performance is to view and learn from year-over-year
patterns.
Figure 2. Example Orbit Chart of Coca-Cola for Revenue per Employee versus Inventory Turns
9. Page 9
Over time, due to changes in bottler investments and shifts in the product portfolio, the productivity of
the Coca-Cola workforce declined. At the same time, inventory turns worsened. While most
companies improved labor productivity during this time period, Coca-Cola did not.
In contrast, as shown in Figure 3, the orbit chart for Coca-Cola comparing operating margin and
inventory turns is less linear with a precipitous decline in operating margin. Yet, Coca-Cola was the
#2 performer in the beverage industry.
Figure 3. Example Orbit Chart of Coca-Cola for Operating Margin versus Inventory Turns
The patterns of orbit charts for manufacturing and retail companies tell stories. Often they are gnarly
and turbulent. As a result, our first challenge in the creation of a methodology was to define Supply
Chain Improvement. This was our goal in the building of the Supply Chain Index methodology. We
wanted to develop a means to analyze improvement across a variety of industries with applicability to
companies at different levels of revenue and at different levels of supply chain maturity.
As we shared our findings, and educated supply chain leaders about financial ratios, they helped us
to better understand the data. “What caused this downswing in inventory in 2007?” we would ask.
The company would then share that it was a six-month laser-focus brought on by a new manager.
When we asked, “What caused these cash-to-cash cycle gyrations in the period of 2002-2004?” they
told us the story of a difficult merger. We found that this was a new way of looking at data; and while it
took adjustment and training, it provided a new and fresh perspective at most organizations.
10. Page 10
Our insight? Supply chain progress happens over time; not in months or quarters, but in years. The
interrelationships between the metrics are real. The supply chain is a complex system with nonlinear
relationships between the metrics of growth, cost, inventory turns, and ROIC. As a result, the data
cannot properly be assessed in a spreadsheet. Our approach was to plot the shifts over time using
orbit charts. In this report, we share the orbit charts of food and beverage leaders.
In 2013 we partnered with Arizona State University’s School of Computing, Informatics and Decision
Systems Engineering. After two years of work, we believe that we now have a methodology which
enables the comparison of supply chain progress in the delivery of the Supply Chain Index. We
defined the Index as a whole, and applied the methodology across industries to measure supply
chain improvement. To help the reader understand the Supply Chain Index calculations in this report,
we first define the separate pieces—balance, strength, and resiliency—and then evaluate the input of
the pieces to the total index.
Balance
Balance in the supply chain is a constant struggle. Growth requires an increase
in inventory. Forecasting and managing new product launch is difficult.
Excessively long Days of Payables leads to weakened supplier health. The
examples are endless. The two metrics that comprise our balance measure are
Revenue Growth and Return on Invested Capital (ROIC). In Figure 4, we contrast the patterns of
Coca-Cola and PepsiCo for the periods of 2006-2014. PepsiCo operates at a higher level of potential
at this intersection, with a higher level of growth and ROIC than Coca-Cola, but the patterns are
gnarly and both companies are losing ground.
The balance measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between growth and ROIC for the periods of 2006-2014 and 2009-2014.To understand
this measurement, imagine a four quadrant grid with growth and ROIC on the two axes. In our
calculation, the overall trajectory of this vector from Year 0 (2006) to Year 8 (2014) is simplified into a
single value which represents the company’s ability to balance growth while improving ROIC.
Companies that were able to drive improvement in both metrics scored the best, while companies
that deteriorated in both metrics scored the worst. The companies are then stack-ranked based on
factor ratings.
11. Page 11
Figure 4. Growth versus ROIC for the Coca-Cola and PepsiCo for the Period of 2006-2014
The balance factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both year-over-year growth and ROIC indicates a balanced supply chain and is reflected in a high
balance score.
Strength
A successful supply chain is a strong and reliable. Supply chain leaders strive
to deliver year-over-year improvements in both cost and inventory
management. Our research on pattern recognition has uncovered a rich
relationship between operating margin and inventory turns. For most supply
chain leaders, these are some of the most important measures of their performance. Not only are
they important, they are more directly influenced by day-to-day supply chain decisions than other, and
more broadly used, corporate metrics. It is for this reason they are the two components of our
strength factor in the Supply Chain Index.
The strength measure in the Supply Chain Index is a mathematical calculation of the vector trajectory
of the pattern between inventory turns and operating margin for the periods of 2006-2014 and 2009-
2014. Like the balance factor calculation, the work starts with understanding the orbit chart pattern.
12. Page 12
To understand the calculation, imagine a plot—an orbit chart—of inventory turns and operating
margin. In this report, performance is graphed on an annual basis from an origination point
representing performance on the two metrics at Year 0 (2006). The overall trajectory of this vector
from Year 0 (2006) to Year 8 (2014) is simplified into a single value which represents strength.
Improvement on both metrics simultaneously is graphically shown as movement to the upper-right
quadrant with increasing values for both inventory turns and operating margin over the period. The
companies are then stacked-ranked based on performance and assigned a strength factor.
The strength factor comprises 1/3 of the total Supply Chain Index calculation. Sustained improvement
on both inventory turns and operating margin indicates a strong supply chain and is reflected in a high
strength score.
In Figure 5, we show the pattern of Coca-Cola versus PepsiCo. Note that PepsiCo is performing
better on inventory turns and lower performing on operating margin. Also, note that the performance
of both companies is declining at this metrics intersection. As category growth declined, neither
company was able to redesign the supply chain to stabilize metric performance on these two
important supply chain metrics. This is the case with all beverage companies except Anheuser-
Busch/InBev.
Figure 5. Operating Margin vs. Inventory Turn Comparison of Coca-Cola and PepsiCo for the Period of 2006-2014
13. Page 13
Resiliency
Resiliency is an adjective easily tossed around as one of the important qualities
of a successful supply chain in today’s volatile world. However, the concept of
resiliency is difficult to define, and there is rarely clarity among stakeholders as
to what resiliency is or should be.
As we plotted orbit chart after orbit chart, we could see that some supply chains had very tight
patterns at the intersection of operating margins and inventory turns, and that other companies had
wild swings. We wanted to find a way to measure the variation. So, we turned to the experts at ASU.
After evaluating several methods to determine the pattern in the orbit chart, we settled upon the
Euclidean Mean Distance between the points.
These results were published in our March 2014 report, Supply Chain Metrics That Matter: Improving
Supply Chain Resiliency, where we define resiliency as the tightness of the pattern at the intersection
of inventory turns and operating margin. These metrics, both critical for any supply chain, are
components of both the strength and resiliency metrics in our Supply Chain Index model.
Table 3. Supply Chain Resiliency by Industry
The tightness of the pattern (mathematically speaking, the Euclidean Mean Distance) indicates the
ability of a supply chain to maintain a tight, consistent pattern across these two metrics as the
14. Page 14
business environment shifts and changes over a nine year period (2006-2014). As shown in Table 3,
the resiliency of the supply chain varies considerably by industry. The food and beverage industries
are more volatile, and less resilient, than consumer packaged goods companies.
The resiliency metric is similar to the cash-to-cash cycle in that a smaller number is better. A lower
number for resiliency is an indicator of a tighter pattern and greater reliability in results over the time
period.
Evaluating Supply Chain Excellence: Putting
It All Together
In the analysis, each company is judged by their own potential to make progress. While the average
values of a company’s performance may be higher, in the
Supply Chain Index we are evaluating companies on their
ability to drive year-over-year improvement and reliable
progress on the metrics that we believe matter.
The Supply Chain Index is a measurement of supply chain improvement. Each of the factors—
balance, strength and resiliency—as defined above, comprises 1/3 of the total score.
𝑆𝑢𝑝𝑝𝑙𝑦 𝐶ℎ𝑎𝑖𝑛 𝐼𝑛𝑑𝑒𝑥 =
1
3
𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑆𝑡𝑟𝑒𝑛𝑔𝑡ℎ 𝐹𝑎𝑐𝑡𝑜𝑟 +
1
3
𝑅𝑒𝑠𝑖𝑙𝑖𝑒𝑛𝑐𝑦 𝐹𝑎𝑐𝑡𝑜𝑟
Companies that are underperforming their peer group can drive supply chain improvement faster than
higher-performing companies. As a result, when evaluating supply chain excellence, it is important to
look at improvement and performance together.
15. Page 15
Executive Summary: Current State of Food
and Beverage Industries
Over the last decade, consumer confidence in the food and beverage industry supply chains has
waned. Shopper distrust is high; and as a result, growth in many categories like carbonated
beverages and cereals declined.
While these two industries have similarities, there are different underlying dynamics in business
drivers. The potential of the food supply chain is different than that of beverage. As a result, in this
report, we share information on the two industries separately.
For both industries, the last decade was a tough market. Despite attempts to stimulate demand
through trade programs, new product launch, and product expansion into new continents, growth
declined. In 2003-2006, growth in the food industry was 7% while in 2011-2014, year-over growth
was 4%. In parallel, in 2003-2006, growth in the beverage industry was 22%; yet, in 2011-2014, it
was 7%. As growth declined, supply chain maturity mattered more than ever. Most companies were
not equal to the challenge.
Traditional marketing tactics are not as effective in these two industries as they were a decade ago.
To try to stimulate growth, 33% new items were introduced into the retail chain from these two
industries. This rise in complexity reduced the effectiveness of the supply chain at a time of declining
volumes. In Table 4, we profile the results in the food industry, while in Table 5 we portray the trends
in the beverage industry.
In both industries, operating margin declined despite improved productivity in revenue per employee.
In parallel, despite multiple investments in technologies, inventory turns declined in the food industry.
Companies were unable to balance metrics in times of declining volumes. The reason? Rising
commodity costs and the slow development of supply chain skills.
Companies that did the best in driving improvement in key metrics in times of declining volumes have
seven characteristics: core competency in network design; strong capabilities in transportation
management; a focus on inventory management; use of more advanced forms of supply chain
planning; balance and understanding of the trade-offs of volume, price and mix; use of channel data;
and continuity of leadership.
17. Page 17
When we compiled the Supply Chains to Admire Report in August 2014, two food and beverage
companies—General Mills and ABInBev—made the list. To make the list, a company had to deliver
performance (posting above-average results for the period of 2009-2013 when compared to their peer
group on a portfolio of metrics including operating margin, inventory turns and Return on Invested
Capital). They also had to drive supply chain improvement (based on the Supply Chain Index as
defined in the Research Methodology section) faster than their peer group. We believe both
performance and improvement matter in the definition of Supply Chain Excellence.
Figure 6. Supply Chain Insights 2014 Results of the Supply Chains to Admire
With an additional year of results, we revisit the Supply Chains to Admire analysis to understand
which companies have outperformed their peer group.
Understanding Supply Chain Performance in
the Food Industry
Supply chain excellence is more difficult to deliver than to say. In Table 6, we list all of the companies
studied in the research for this report for the food industry. The companies are listed in order of their
rankings on the Supply Chain Index for the period of 2009-2014. (J.M. Smucker drove the greatest
18. Page 18
improvement for the period of 2009-2014.) The most balanced performance in the food industry with
average improvement is General Mills. The next closest are Maple Leaf Foods and Nestlé SA.
As you scan Table 6, note the difficulty that companies have in posting balanced performance. While
both J.M. Smucker and Hershey drove strong results in operating margin, they lack the inventory
performance. In contrast, Danone and Kellogg have great inventory performance, but are not equal to
their peer group in the other metrics. Other companies like ConAgra and Mondelēz struggle across
the portfolio.
Table 6. Performance and Improvement in the Food Industry
In contrast, the best overall performance in the beverage industry is Anheuser-Busch-InBev with
Coca-Cola a strong second. Note the pattern in the rest of the chart. Overall, companies struggle to
deliver improved performance on the balanced portfolio. In general, beverage companies have a
lower supply chain maturity than their food counterparts.
Table 7. Relative Performance of Food and Beverage Leaders on the Effective Frontier for 2006-2014
Operating Margin Inventory Turns Return on Invested Capital
Company 2006-2014 2009-2014 2011-2014 2006-2014 2009-2014 2011-2014 2006-2014 2009-2014 2011-2014 2006-20142009-2014
The J.M. Smucker Company 0.14 0.15 0.16 6.93 6.59 6.14 7% 7% 7% 4 1
Hershey Co. 0.16 0.17 0.18 9.60 10.36 10.47 19% 22% 24% 1 2
Mead Johnson Nutrition Co. 0.24 0.23 0.22 7.67 8.49 8.26 2% 4% 4% 3 3
Mondelez 0.10 0.10 0.10 8.85 8.35 8.21 6% 6% 6% 9 4
Conagra Foods Inc. 0.08 0.09 0.08 6.68 7.20 7.38 8% 7% 6% 8 5
Nestle SA 0.14 0.14 0.14 11.13 10.65 10.13 17% 18% 13% 7 6
General Mills, Inc. 0.17 0.17 0.17 11.00 10.98 11.04 11% 12% 12% 2 7
Maple Leaf Foods 0.14 0.13 0.12 12.68 12.07 11.47 14% 13% 11% 6 8
Campbell Soup Co. 0.16 0.16 0.15 9.58 9.45 9.40 19% 18% 16% 5 9
Danone SA 0.13 0.13 0.12 18.81 18.56 18.42 6% 2% 1% 10 10
Kellogg Company 0.10 0.20 0.22 16.61 14.94 15.20 8% 8% 8% 11 11
Average 0.14 0.15 0.15 10.87 10.69 10.56 11% 11% 10%
Performance and Improvement
Supply Chain
Index Rankings
Company 2006-2014 2009-2014 2011-2014 2006-2014 2009-2014 2011-2014 2006-2014 2009-2014 2011-2014 2006-2014 2009-2014
Anheuser-Busch 0.31 0.34 0.36 14.57 15.52 15.94 8% 8% 10% 6 1
Coca-Cola 0.24 0.23 0.22 14.80 14.63 15.02 18% 16% 13% 1 2
Diageo 0.28 0.27 0.28 2.92 2.85 2.80 14% 13% 14% 2 3
Molson Coors 0.17 0.21 0.21 19.56 18.30 17.20 6% 6% 5% 6 4
SABMiller 0.19 0.20 0.22 16.61 14.94 15.20 8% 8% 8% 5 5
Heineken 0.14 0.14 0.15 13.06 12.99 12.79 8% 7% 8% 6 6
PepsiCo 0.16 0.15 0.14 18.64 18.61 18.88 20% 16% 13% 4 7
Monster Beverage 0.26 0.28 0.27 10.76 10.95 11.39 22% 14% 0% 3 8
Average 0.22 0.23 0.23 13.87 13.6 13.65 13% 11% 9%
Performance and Improvement
Operating Margin Inventory Turns
Supply Chain
Index RankingsReturn on Invested Capital
19. Page 19
As we have shown, the patterns at the intersection of the metrics are gnarly with lots of twists and
turns. The averages help, but do not tell the full story. As you stare at Tables 6 and 7 you will see
several patterns emerge. Five trends stand out for us:
1. Driving Performance and Improvement Together Is a Tall Order. The management of the
portfolio of metrics is a hard task in a turbulent market. The companies that are doing the best are at
the center of the Supply Chain Index. Supply chain excellence happens through conscious choice, and
balance of volume, mix and price, in horizontal processes such as Sales and Operations planning
(S&OP), new product launch, revenue management and supplier development.
2. Lack of Balance in Metrics Performance. Most companies focus on singular metrics. The history
of supply chain leaders is often reactive with a focus on quarter-after-quarter results. Supply chain
excellence requires a longer-term view. Why? The supply chain is a complex system requiring a
proactive approach tying supply chain strategy to business strategy through intentional design and
business policy. The management of a balanced portfolio is easier said than delivered.
3. Higher Performance of Smaller Companies. The large, historic food and beverage conglomerates
of Kellogg and Mondelēz are worse performers than smaller and more targeted companies like
Hershey and J.M. Smucker.
4. Best Performance Is at the Center of the Index. The best performers are typically at the center of
the Supply chain Index. It is easier to drive faster rates of improvement if you have low performance;
likewise, it is harder to drive improvement if a company is a high performer.
5. Bottom of the List. Through this analysis, it is easy to differentiate top from bottom performers. The
patterns tell the story. For us in this analysis it is ConAgra, Kellogg and Mondelēz.
Driving Supply Chain Improvement
While recognized industry leaders like Coca-Cola and PepsiCo are declining in performance,
Campbell’s, Hershey, General Mills and Smucker’s are fighting back and making some improvement.
As shown in Figures 7 and 8, this is quite different than ConAgra, Danone, and Kellogg’s
performance. Kellogg, with many failed implementations, lost ground on both operating margin and
inventory turns.
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Figure 7. Contrast at the Intersection of Operating Margins and Inventory Turns for Campbell’s and Smucker’s
Figure 8. Contrast at the Intersection of Operating Margins and Inventory Turns for Danone and Hershey
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Figure 9. Contrast at the Intersection of Operating Margins and Inventory Turns for General Mills and Kellogg
Cash-To-Cash
Cash-to-cash is a compound metric. What does that mean? A compound metric is the result, or the
combination, of several individual metrics. The Cash-to-Cash (C2C) metric is defined as:
Cash-to-Cash =Days of Receivables (DOR) +Days of Inventory (DOI)-Days of Payables Outstanding
(DOP).
Most companies in the food and beverage industries leverage the lengthening of Days of Payables to
financially architect the Cash-to-Cash metric. This is usually a dictate by the finance department and
orchestrated through procurement processes. The lengthening of Days of Payables is like being on a
bad drug. It has an initial high, but the longer-term damage is great.
The lengthening of Days of Payables hides the lack of progress in Days of Inventory. (Note that while
companies want to have high inventory turns, when it comes to the measurement of Days of
Inventory, smaller is better.)
Compound metrics are problematic. When companies drive an improvement in Cash-to-Cash, you
have to ask, “What drove the change?” This is followed by a deep on discussion on “Why?” The
dialogue focuses on, “Did we change the policies with our customers resulting in a change in DOR, or
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did we make the terms longer with our suppliers increasing DOP? Or did we make improvements in
inventory (DOI)?”
Figure 10. Cash-To-Cash Cycle for the Period of 2000-2014
The average cash-to-cash cycle for the food industry in 2014 was 32 days. As shown in Figure 10,
Nestlé and Danone have pushed the cash-to-cash cycles to negative values based on extended Days
of Payables to suppliers
In the next set of figures, we show how the three components of the Cash-to-Cash cycle have
changed over time. In this series, we compare the Cash-to-Cash elements which are listed in
alphabetical order in the charts.
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Figure 11. Cash-To-Cash Analysis for Food and Beverage Companies for the Period of 2006-2009
Figure 12. Cash-To-Cash Analysis for Food and Beverage Companies for the Period of 2010-2014
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It is interesting to note that some of the better performers on supply chain financial ratios have the
smallest Days of Payables target. Is this a coincidence? We think not. Usually as payables are
lengthened, it becomes part of operating cost. Suppliers pass back the costs of capital in price. With
the current viability issues of the second- and third-tier providers in the food and beverage industry,
the lengthening of terms can be detrimental to the relationships.
While the food and beverage industry has worked very hard on supplier relationships and reducing
costs and improving Cash-to-Cash, we find it interesting that no major player has taken an active role
in redefining Days of Receivables and orchestrating business policy with customers. With a long
legacy in manufacturing, the food and beverage industries tend to be very functional, leading to gaps
in alignment.
As the recession hit, companies held on to their belt buckles. Cash was king. Danone, Mondelēz and
Nestlé introduced more aggressive Days of Payables terms.
While many consulting companies will come into a company and recommend inventory targets and
lengthening Days of Payables, it is important to stay grounded on the basics of Supply Chain
Management. Inventory is the primary buffer for the supply chain and should not be artificially
manipulated to meet market expectations. Likewise, Days of Payables should not be leveraged to
self-finance the company. Both actions can throw the supply chain within the company out of balance.
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Recommendations
In supply chain benchmarking, it is important to look at performance and improvement of peer
companies over time. The orbit charts are useful to see these patterns. As companies do this work,
we recommend that they:
1) Build a Guiding Coalition Based on Food and Beverage Industry Data. Organizations should
benchmark companies within an industry. Each industry has unique rhythms and cycles.
2) Understand the Potential of Your Supply Chain and Orchestrate Trade-offs on the Effective
Frontier. Supply chain leadership teams should analyze the total portfolio of metrics and study
progress at the intersections of the Effective Frontier. Companies with higher performance are using
more advanced analytics to plan outcomes and design the supply chain.
3) Apply Systems Theory. Teams should evaluate performance over time to understand improvement
while realizing that they are managing a complex system. The functions should be aligned to a
balanced portfolio of metrics representing the Effective Frontier while functional metrics should be
focused on improving reliability (first-pass yield, OEE, hands-free orders, etc.).
4) Focus on Building Value Networks. The food and beverage industries, overall, need to build value
networks. The average company is not good at supply chain planning or network design, and they have
been slow to improve end-to-end value chains. With the rise of commodity prices, the principles of
market-driven value networks matter more than ever for these industries.
5) Learn from Other Industries and Use a Steady Hand to Drive Improvement. Companies within
the food and beverage industries have been insular over the last decade. Funding for travel and
conferences has been difficult, and many of the supply chain projects have been led by Information
Technology teams or Finance. It is time for the supply chain leader to step up to the plate and drive a
supply chain transformation.
Conclusion
The food and beverage industries had stronger performance in the period prior to the recession than
after. With the increase in commodity prices, and the decline in volume, the food and beverage
companies have been slow to adopt new technologies and processes to improve the Effective
Frontier. With so many stuck on the Effective Frontier, we must ask if now is the right time change
these processes.
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Definitions
The definitions of the additional financial metrics used in this report are outlined in Table A.
Table A. Metrics Definitions
Companies Studied
Table B. Overview of Companies Studied in this Report from the Beverage Industry
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Table C. Overview of Companies Studied in the Food Industry
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Prior Reports in This Series
Over the course of the last three years, our methodology has changed and matured. You can track
our progress, and while we are looking at each industry again in 2015 (and have finished a closer
look at the pharmaceutical manufacturing and the food and beverage industry), you can find industry-
specific information here:
Supply Chain Metrics That Matter: A Focus on Retail
Published by Supply Chain Insights in August 2012.
Supply Chain Metrics That Matter: A Focus on Consumer Products
Published by Supply Chain Insights in September 2012.
Supply Chain Metrics That Matter: A Focus on the Food and beverage Industry
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: The Cash-to-Cash Cycle
Published by Supply Chain Insights in November 2012.
Supply Chain Metrics That Matter: A Focus on the Food and beverage Industry
Published by Supply Chain Insights in December 2012.
Supply Chain Metrics That Matter: Driving Reliability in Margins
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Hospitals
Published by Supply Chain Insights in January 2013.
Supply Chain Metrics That Matter: A Focus on Brick & Mortar Retail
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Medical Device Manufacturers
Published by Supply Chain Insights in February 2013.
Supply Chain Metrics That Matter: A Focus on Consumer Electronics
Published by Supply Chain Insights in April 2013.
Supply Chain Metrics That Matter: A Focus on Apparel
Published by Supply Chain Insights in May 2013
Supply Chain Metrics That Matter: A Focus on Contract Manufacturing
Published by Supply Chain Insights in August 2013
29. Page 29
Supply Chain Metrics That Matter: A Focus on the Automotive Industry
Published by Supply Chain Insights in October 2013
Supply Chain Metrics That Matter: A Closer Look at the Cash-To-Cash Cycle (2000-2012)
Published by Supply Chain Insights in November 2013
Supply Chain Metrics That Matter: Third Party Logistics Providers
Published by Supply Chain Insights in December 2013
Supply Chain Metrics That Matter: A Critical Look at Operating Margin
Published by Supply Chain Insights in December 2013
Supply Chain Metrics That Matter: A Closer Look at Pharmaceutical Companies
Published by Supply Chain Insights in April 2014
Supply Chain Metrics That Matter: A Closer Look at Chemical Companies
Published by Supply Chain Insights in April 2014
30. Page 30
About Supply Chain Insights, LLC
Founded in February, 2012 by Lora Cecere, Supply Chain Insights LLC is focused on delivering
independent, actionable, and objective advice for supply chain leaders. If you need to know
which practices and technologies make the biggest difference to corporate performance, turn to us.
We are a company dedicated to this research. Our goal is to help you understand supply chain
trends, evolving technologies and which metrics matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 5,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written three books. The first book, Bricks
Matter (co-authored with Charlie Chase). published in 2012. The second book, The
Shaman’s Journal, published in September 2014, and the third book, Supply Chain
Metrics Metrics That Matter, published in December 2014.
With over twelve years as a research analyst with AMR Research, Gartner Group, and Altimeter
Group, and now as a Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a
year on the evolution of supply chain processes and technologies. Her research is designed for the
early adopter seeking first mover advantage.