Supply Chain Index – Part III – Technology and Apparel

Supply Chain Index Part IIITechnology & Apparel

June 27, 2013

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Supply Chain Insights LLC Copyright © 2013, p. 2

Supply Chain Insights is focused on delivering independent, actionable and objective advice for

supply chain leaders. A company dedicated to research, turn to us when you want the latest

insights on supply chain trends, technologies to know and metrics that matter.

About Us

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Presenters

Abby MayerResearch Associate

Lora CecereFounder and CEO

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This is the new bible for all supply chain executives. It provides an insider’s perspective that will prove incredibly valuable to even the most grizzled supply chain veteran. This is the next must-have business book.

--Bruce Richardson, Chief Enterprise Strategist, Salesforce.com

Today, the worlds of social business and supply chain management have many degrees of separation. I enjoyed working with Lora to understand what the future transformation of digital marketing to digital business could look like.

--Jeremiah Owyang, Research Director, Altimeter

Second Printing of Bricks Matter: 16 Five-Star Reviews on Amazon

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Available at http://www.amazon.com/Bricks-Matter-Building-Market-Driven-Differentiation/dp/1118218310/ref=sr_1_1?ie=UTF8&qid=1369245253&sr=8-1&keywords=bricks+matter

http://www.amazon.com/Bricks-Matter-Building-Market-Driven-Differentiation/dp/1118218310/ref=sr_1_1?ie=UTF8&qid=1369245253&sr=8-1&keywords=bricks+matter




Publishing Two eBooks in 2013 on Supply Chain Metrics That Matter

2013 Publications

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18 Reports in 2012

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Over 30 Reports Planned for 2013

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Supply Chain Metrics That Matter Readership

Focus of Report Date of Publication Readership (as of 6-17-2013)

Retail August 2012 1,726

Consumer Products September 2012 1,205

Chemical Industry November 2012 810

The Cash-to-Cash Cycle November 2012 1,971

Pharmaceutical Industry December 2012 1,695

Driving Reliability in Margins January 2013 1,365

Hospitals January 2013 991

Brick & Mortar Retail February 2013 629

Medical Device Manufacturers February 2013 760

Consumer Electronics April 2013 655

Apparel May 2013 557

Launch of the Supply Chain Index June 2013 422

Supply Chain Metrics That Matter Readership

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• Report details year-long development of the Supply Chain Index

• Presents Index performance of consumer and healthcare value chain (12 industries)

• Available in the Supply Chain Insights Community: http://www.supplychaininsightscommunity.com/docs/DOC-1422

Launch of the Supply Chain Index Report

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http://www.supplychaininsightscommunity.com/docs/DOC-1422

http://www.supplychaininsightscommunity.com/docs/DOC-1422


What Is Best in Class?

Understanding the Supply Chain as a Complex System

Which Companies Have Maximized Market Valuation Through Supply Chain Excellence?

Using the Insights

Agenda

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Perform better than peer group

Improve year-over-year results

Align internally on metrics

Deliver against the business strategy

Demonstrate consistency in results

Use innovation in supply chain processes

Balance. Leaders in managing trade-offs


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Using the Insights

Agenda

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What Is A Supply Chain?

A Supply Chain is a Complex System

with Complex Processes

with Increasing Complexity

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The Supply Chain Effective Frontier:First Representation

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Mining 20 Years of Financial Data

Financial Metrics

Growth Profitability Cycle ComplexityCommon Shares Cash Cash-to-Cash Cycle Altman Z

Employee Growth Cash Change in Period Days of Finished Goods Capital Turnover

Employees Cash on Hand Days of Inventory Current Ratio

Market Capitalization Cash Ratio TTM Days of Payables Outstanding Quick Ratio

R&D Margin Cash Ratio Quarter Days of Raw Materials Return on Assets

R&D Ratio Cash Ratio Year Days of Sales Outstanding Return on Equity

R&D to COGS Ratio Cost of Goods Sold Days of Work in Progress Return on Invested Capital

Revenue EBITDA DPO/DSO Return on Net Assets

Revenue Growth Free Cash Flow Ratio Finished Goods Inventory Revenue per Employee

Revenue Growth TTM Gross Margin Inventory Working Capital Ratio

Revenue TTM Gross Profit Inventory Turns

SG&A Margin Net Profit Margin Receivables Turns

SG&A Ratio Operating Cash Flow Ratio Raw Materials Inventory

SG&A to COGS Ratio Operating Margin Work in Progress Inventory

OPEX Ratio

Pretax Margin

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The Supply Chain Effective Frontier: Second Representation

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• Supply Chain Index: A formulaic representation of supply chain financial ratios correlated to stock market capitalization valuation.

• Supply Chain Effective Frontier: The balance of growth, profitability, cycle and complexity metrics to deliver the supply chain strategy. It may or may not maximize the company’s market valuation.

• Supply Chain Excellence: The behavior of companies working to maximize value through the setting of targets for supply chain financial ratios and aligning metrics that matter (tied to value chain strategy).

Definitions

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A Look at History: Progress in Productivity

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A Look at Retail

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CPG: An Industry with Leaders

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CPG: An Industry with Leaders

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Apparel Manufacturing

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Apparel Stores

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Apparel Stores

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Communication Equipment

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Using the Insights

Agenda

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Introducing the Supply Chain Index

A formulaic representation of how companies are trading off growth, profitability, cycle and

complexity performance on selected supply chain financial

metrics against market valuation.

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1. To better understand which supply chain metrics matter to corporate balance sheet performance in public markets. We want to help leaders better align supply chain and financial performance.

2. To create an objective system for evaluating and ranking supply chains by industry peer group.

3. To connect financial performance with supply chain excellence as measured through quantitative surveys in an effort to better identify and define best practices across industry groups.

Why Did We Do This?

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• What it is: A way to understand the impact of companies’ supply chain (relative to peers within an industry sector) to market capitalization based a set of preselected supply chain ratio metrics.

• What it is NOT: A way to evaluate overall company performance or compare the model results to actual market capitalization.

What It Is. What It Is Not.

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• July, August: release of results for additional industries and discussion in Supply Chain Insights Community

• Monthly Webinars (August 29)

• Monthly Reports (July 9, August 13)

• September 11-12th: 1st annual Global Summit with speakers selected based on Index performance

What to Look Forward to?

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Selected 13 Core Supply Chain Ratios to Study

Financial Metrics

Growth Profitability Cycle ComplexityCommon Shares Cash Cash-to-Cash Cycle Altman Z

Employee Growth Cash Change in Period Days of Finished Goods Capital Turnover

Employees Cash on Hand Days of Inventory Current Ratio

Market Capitalization Cash Ratio TTM Days of Payables Outstanding Quick Ratio

R&D Margin Cash Ratio Quarter Days of Raw Materials Return on Assets

R&D Ratio Cash Ratio Year Days of Sales Outstanding Return on Equity

R&D to COGS Ratio Cost of Goods Sold Days of Work in Progress Return on Invested Capital

Revenue EBITDA DPO/DSO Return on Net Assets

Revenue Growth Free Cash Flow Ratio Finished Goods Inventory Revenue per Employee

Revenue Growth TTM Gross Margin Inventory Working Capital Ratio

Revenue TTM Gross Profit Inventory Turns

SG&A Margin Net Profit Margin Receivables Turns

SG&A Ratio Operating Cash Flow Ratio Raw Materials Inventory

SG&A to COGS Ratio Operating Margin Work in Progress Inventory

OPEX Ratio

Pretax Margin

Source: Supply Chain Insights LLC

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Selected Ratios


Summary of Progress

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0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 10

2

4

6

8

10

12

Luxury Goods

Discount Stores

Medical Distribution

Medical Care

Household & Personal Products

Chemical

Drug Manufacturers- Major

Medical Instruments & Supplies

Medical Devices

Computer SystemsApparel Manufacturing

Apparel Stores

Packaged Food

Drug Manufacturers- Specialty & Generic


R^2 Value

Y-I

nte

rcep

t

Y-Intercept & Value

Source: Supply Chain Insights LLC

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Apparel Manufacturing Equation

Ln(market cap) = 6.15 + 30.65(OM) – 16.08(ROIC) + 7.01(WC) – 6.79(FCF) + 1.65(SGAC) – 0.45(CR) – 0.01(DSO) – 0.01(DOI)

Correlation Strength

NOTE: Full equation is Ln(market capitalization) = 6.150214 + 30.65192(operating margin) – 16.0787(return on invested capital) + 7.008643(working capital ratio) – 6.79366(free cash flow ratio) + 1.651491(sga to cogs ratio) – 0.44988(current ratio) – 0.01175(days of sales outstanding) – 0.01006(days of inventory)We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Apparel Manufacturing Equation

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Apparel Manufacturing Ranking 2012

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Apparel Stores Equation

Ln(market cap) = 6.98 + 11.49(OM) – 7.19(ROA) + 4.77(WC) + 3.96(RONA) – 2.87(FCF) – 0.44(CR) -0.04(DSO) – 0.04(DPODSO)

+ 0.02(DPO) – 0.01(DOI)


NOTE: Full equation is Ln(market capitalization) = 6.983261 + 11.49445(operating margin) – 7.19005(return on assets) + 4.774818(working capital ratio) + 3.956711(return on net assets) – 2.86895(free cash flow ratio) – 0.44084(current ratio) -0.0425(days of sales outstanding) – 0.03859(dpo/dso) + 0.018544(days of payables outstanding) – 0.00652(days of inventory) We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Apparel Stores Equation

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Apparel Stores Ranking 2012

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Computer Systems Equation

Ln(market cap) = 6.59 – 4.54(ROA) + 3.82(OM) + 3.08(FCF) + 2.19(RONA) + 2.05(WC) + 1.67(DPODSO) – 0.45(CR) – 0.01(DOI)

– 0.01(DPO)


NOTE: Full equation is Ln(market capitalization) = 6.594429 – 4.540524 (Return on Assets) + 3.821219 (Operating Margin) + 3.082302 (Free Cash Flow Ratio) + 2.188873 (Return on Net Assets) + 2.050960 (Working Capital Ratio) + 1.672430 (DPO/DSO Ratio) – 0.449033 (Current Ratio) – 0.011581 (Days of Inventory) – 0.010802 (Days of Payables Outstanding)We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Computer Systems Equation

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Computer Systems Ranking 2012

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Communication Equipment Equation

Ln(market cap) = 9.32 – 0.38(CR) – 0.01(DOI) + 0.03(DPO) – 0.04(DSO) – 3.10(DPODSO) + 3.79(OM) – 1.04(SGAC) + 3.09(WC)


NOTE: Full equation is Ln(market capitalization) = 9.3169024 – 0.3787264 (Current Ratio) – 0.0099324 (Days of Inventory) + 0.0340425 (Days of Payables Outstanding) – 0.0405110 (Days of Sales Outstanding) – 3.0954322 (DPO/DSO Ratio) + 3.7885751 (Operating Margin) – 1.0383185 (SG&A to COGS Ratio) + 3.0910721 (Working Capital Ratio)We utilized adjusted which accounts for the occurrence of large p values. Outliers values were defined and excluded as those 5 times larger than IQR.

Communication Equipment Equation

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Communication Equipment Ranking 2012

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Understanding Supply Chain as a Complex System


Using the Insights

Agenda

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Apparel Value Chain

Apparel StoresApparel

Manufacturing

Equations:Ln(market cap) =

6.98 + 11.49(OM)

– 7.19(ROA) + 4.77(WC)

+ 3.96(RONA) – 2.87(FCF) – 0.44(CR)

– 0.04(DSO) – .039(DPODSO)

+ 0.02(DPO) – 0.01(DOI)

6.15 + 30.65(OM)

– 16.08(ROIC) + 7.01(WC) – 6.79(FCF)

+ 1.65(SGAC) – 0.45(CR) – 0.01(DSO) – 0.01(DOI)

True collaboration only happens when there is a sustaining win-win value proposition.

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Step 1: Located data sources

Step 2: Selected core supply chain ratios from over 50 financial metrics

Step 3: Identified meaningful metrics per industry using regression analysis among selected ratios

Step 4: Constructed industry equation based on correlation of industry metrics to market capitalization values

Step 5: Determined company rankings within industry by applying 2012 company results to industry equation

Step 6: Analyze peer group companies over the last decade

Step 7: Correlate Supply Chain Index findings to supply chain practices, technologies and organizational design

Our Next Steps: Supply Chain Index Methodology

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• What drives value in each industry is different.

• Financial markets reward supply chain balance and alignment.

• The supply chain is a complex system. Supply chain excellence must be carefully defined.

• Relationships should be built upon cross-industry definitions of value to create win-win relationships.

• There is no substitute for leadership.

• Supply chain excellence matters.

Summary

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1. Join the Supply Chain Index Group in the Supply Chain Insights Community for Peer Review and Discussion: www.scicommunity.com

2. Gain Insights from Supply Chain Leaders at the Global Summit www.supplychaininsightsglobalsummit.com

3. Build the Next Generation of Supply Chain Research Using the Index

4. Leverage the Index to Connect Supply Chain Processes, People and Technology Decisions to Balance Sheet Results

What You Can Do

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http://www.scicommunity.com/groups/supply-chain-index

http://www.supplychaininsightsglobalsummit.com/


Join Us!

www.supplychaininsightsglobalsummit.com

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PAST SUPPLY CHAIN INDEX WEBINARS:

AVAILABLE ON DEMAND• From October 26, 2012:

The Supply Chain Index, 20 Years in the Making: A Focus on Discrete Industries

• From April 25, 2013: Launch of the Supply Chain Index

• From May 23, 2013:

Supply Chain Index Part II: How and Why?

Webinars

www.supplychaininsights.com/upcoming-webinars

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UPCOMING WEBINARS• July 11th: Big Insights From Big Data Supply

Chains

• July 25th: What is the Role of the Store? And, Which Metrics Matter for Retail?

• August 15, 2013: Supply Chain Talent : The Missing Link in the Supply Chain?


Supply Chain Insights Community

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Who Is Lora?

• Founder of Supply Chain Insights

• Partner at Altimeter Group (leader in open research)

• 7 years of Management Experience leading Analyst Teams at Gartner and AMR Research

• 8 years Experience in Marketing and Selling Supply Chain Software at Descartes Systems Group and Manugistics (now JDA)

• 15 Years Leading teams in Manufacturing and Distribution operations for Clorox, Kraft/General Foods, Nestle/Dreyers Grand Ice Cream and Procter & Gamble. #sciwebinar


Where Do You Find Lora?

Contact Information: [email protected]

Blog: www.supplychainshaman.com (4000 pageviews/month)

Twitter: lcecere 3850 followers. Rated as a top rated supply chain social network user.

LinkedIn: linkedin.com/pub/lora-cecere/0/196/573 (3750 in the network)

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Where Do You Find Abby?

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Contact Information: [email protected]

Blog: www.supplychainindex.com (2600 pageviews/month)

Twitter: @indexgirl

LinkedIn: www.linkedin.com/pub/abby-mayer/40/941/972

Business

Supply Chain Index – Part III – Technology and Apparel