Supply Chain Benchmarking – an endlessly debatable topic. I wanted to share with you one way I like to use benchmarking, which is to frame a conversation with Supply Chain executive leadership around direction and distance of performance change required. My first pass at benchmarking years ago was for the CIO of HP, around IT cost as a percentage of revenue, to gauge whether IT budgets were in line with industry peers. We used one of the big-five consultancies, and 3 months and $400K later, we had the numbers, and had a great view of, by each tech market we were in, what level of tech spend was appropriate, and where budget changes may be mandated. I found the process very subjective, which it was, but valuable in the sense that it provided “bracketing” or bounding for what we should expect to set strategically.
When I built a supply chain consulting practice in HP, I wanted the same ability to bracket expectations with clients, but it wasn’t tenable to launch a $400K program just to have a conversation. So, I turned to public financial data to have the conversation. I was introduced to a European pharmaceutical company, who had just hired a head of supply chain, and in setting the context of the conversation, I benchmarked them against 9 others in their sector. It looked something like this:
(Rec’s = Receviables, DOI = Days of Inventory, PAY’s = Payables, C2C = Cash-to-Cash Cycle-time, TSCC = Total Supply Chain Cost as percentage of revenue)
My subject company had high inventory compared to other companies, but it was at parity for the industry. SC Cost was high, compared to other companies, but within the industry as a whole it was not a problem. What was the perceived problem? Pharmaceutical patents were expiring, and the new pipeline of products was not big enough. Pricing was going to be descending over the next 10 years, and they needed to operate more like a chemical company than a pharmaceutical – literally their statement.
What did that mean? If I benchmarked – again, gross level financials – their inventory was twice or more as high as similar sized chemical companies. The low end of their targeting needed to be around 75 days, and high-end roughly 128 days to be in the right range – bracketing. Their supply chain cost was about 1/6 that of a comparable chemical company. Their supply chain targeting – goal setting – was to operate with the inventory of a chemical company, but supply chain cost at the range of pharma companies with the most mature product range.
So how well did the bracketing work? Lets do a similar benchmark now a decade or so later:
Pharmas dropped their inventory into the range of Chemical companies – product redesign, flexible packaging, better planning – note also that most pharma companies dropped their inventory – in fact almost all did. They managed to handle doubling their supply chain cost %, but are still nowhere in the range of Chemical industries. They can still do more improvement – other pharmaceuticals have better C2C metrics, and better SC % Cost metrics. I think you can see now how this simple benchmark, from publicly available data, can help set the context for performance, range of performance expectation. Try it with your own company, look at it over several years, and see how strategic performance targets were set (or not set) and met (or not met).