Executive Overview Over the course of the last decade, retailers made more progress on costs and inventory turns than manufacturers. In the rush for technology adoption, we commonly find companies overstating what is possible because they are not clear on the historical trends, and often mistakenly coached to overcommit by industry consultants to justify technology investments. In studying supply chain metrics, we find that each industry has a definitive pattern. Few are linear. To set reasonable goals, the definitions need to be very industry specific. That is the goal of this report. In developing supply chain strategy, one of the first objectives is defining what is possible. This involves delineating the metrics, establishing reasonable targets, and rates of improvement. In the review of strategy documents for clients, we find that most companies are not clear on any of these critical sets of assumptions. This report is designed to help. We start with the definition of metrics and then share industry progress for the period of 2006-2016. This report ends with recommendations and conclusions. • Report Details: This report is based on the analysis of orbit chart charts showing year-over-year supply chain performance at the intersection of operating margin and inventory turns for twenty industries for the period of 2006-2016. The goal is to help supply chain leaders to understand what is possible. • Objective: As supply chain leaders attempt to define supply chain excellence, they need guidance on industry supply chain performance and overall trends for benchmarking. The goal is to help supply chain leaders make better decisions. • Hypothesis: Each industry is unique and a good supply chain has different characteristics based upon the specific industry it is in, the product it creates and the customers it serves. Our aim is to help supply chain leaders understand relative industry performance. As shown in this report, each individual industry is charting a unique path on supply chain performance.

1. Conquering the Supply Chain
Effective Frontier
A Study of Supply Chain Excellence
11/27/2017
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC
and Alina Beskrovna
Research Analyst
Supply Chain Insights LLC

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Contents
Research Methodology
Open Content Research
Disclosure
Executive Overview
The Effective Frontier
Trends within Peer Groups
Retail
Apparel Retail
Broadline Retailers
Drug Retailers
Home Improvement Retailers
Restaurants
Manufacturing
Apparel Manufacturers
Auto Parts
Beauty
Chemical Manufacturers
Consumer Nondurables
Contract Manufacturers
Medical Device
Over-The-Counter Drugs
Pharmaceuticals
Semiconductor Manufacturing
Telecommunications
Driving Organizational Alignment to Improve Metric Performance
Recommendations
Conclusions
Other Reports in This Series
About Supply Chain Insights LLC
About Lora Cecere
About Alina Beskrovna
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Research Methodology
This report is based on the analysis of public balance sheet information of retailers, manufacturers,
and distributors. The source of the data for this work is YCharts.
Open Content Research
This report is shared using the principles of Open Content research. It is intended for you to read,
share, and use to improve your supply chain decisions. 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. We publish under the Creative Commons License Attribution-Noncommercial-Share Alike
3.0 United States, and you will find our citation policy here.
Disclosure
Your trust is important to us. In our business, we are open and transparent about our financial
relationships and our research processes; and, we never share the names of respondents or give
attribution to the open comments collected in the research. This research was 100% funded by the
Supply Chain Insights team.
In the development of our research, our philosophy is, “You give to us, and we give to you.” As a part
of this philosophy, we share data with all respondents; and if interested, we will share our insights
with the respondents on a one-hour phone call with their team. We are committed to delivering
thought-leading content. It is our goal to be the place where visionaries turn to gain an understanding
of the future of supply chain management.

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Executive Overview
Over the course of the last decade, retailers made more progress on costs and inventory turns than
manufacturers. In the rush for technology adoption, we commonly find companies overstating what is
possible because they are not clear on the historical trends, and often mistakenly coached to
overcommit by industry consultants to justify technology investments.
In studying supply chain metrics, we find that each industry has a definitive pattern. Few are linear.
To set reasonable goals, the definitions need to be very industry specific. That is the goal of this
report.
In developing supply chain strategy, one of the first objectives is defining what is possible. This
involves delineating the metrics, establishing reasonable targets, and rates of improvement. In the
review of strategy documents for clients, we find that most companies are not clear on any of these
critical sets of assumptions. This report is designed to help. We start with the definition of metrics and
then share industry progress for the period of 2006-2016. This report ends with recommendations
and conclusions.

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The Effective Frontier
Supply chain teams battle a list of ever-changing goals for growth, profitability, and cycles in the face
of rising complexity. Leadership teams want to do the right thing, but it just isn’t clear what to do to
move forward. Each organization has a unique potential as defined by The Effective Frontier in Figure
1. It is deliberately termed the Effective Frontier, not the Efficient Frontier.
The reason why is simple. It is to avoid confusion. The term efficient frontier is used in economics to
describe the minimization of risk and maximization of reward in investments. In contrast, the term
Effective Frontier is used to define the potential of what is possible at the intersection of supply chain
metrics, over time, within an industry subsector. In this report, we will take a close look at the
Effective Frontier at the intersection of operating margin and inventory turns. We analyzed the
patterns of 25 peer groups, and share results from the five retail and eleven manufacturing industries
that we consider to be the most relevant.
Figure 1. The Effective Frontier
Each company has its own unique potential within an industry. Its potential is determined by products,
processes, technologies, markets, and channels. Within a company, there are finite trade-offs
between interconnected metrics. As complexity rises, the potential of the organization decreases. To
maintain the status quo, and keep pace, companies must constantly redesign operations. This
includes managing product proliferation, simplifying platform complexity, and mitigating changes in
manufacturing operations. Companies are constantly being asked to reduce costs and improve
working capital, and to do more with less, in the face of rising complexity. Most supply chain leaders
do not see it as a set of metrics in a nonlinear system, bounding a finite set of capabilities.

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The Efficient organization is not necessarily the most effective (an efficient organization is usually
defined as one with the highest productivity/employee or the lowest cost per case). The historical
focus was to improve efficiency. The belief was that increasing efficiency would lower costs and
improve performance. However, we see that a singular focus has an adverse effect on operating
margin and inventory cycles in seven of the 11 manufacturing industry sectors, as will be seen in the
orbit charts later in this report.
As shown through our Supply Chains to Admire research, nine out of ten companies are stuck at the
intersection of two important metrics: operating margin (a measurement of cost) and inventory turns
(a measurement of inventory effectiveness). To conquer the Effective Frontier and drive change there
needs to be a focus on outputs, not inputs, while shifting from a focus on functional metrics to define
a balanced portfolio. Most are so entrenched in functional metrics that it’s hard to focus on corporate
performance. For the best-performing companies, it is a series of conscious choices to improve
capabilities and push to a new level of The Effective Frontier. Progress happens slowly. It is only after
achieving balance and resiliency in a current state that companies can push to a new level of
performance. Balance is achieving the optimal values for all metrics in the balanced portfolio, while
resiliency is the ability to have controlled results of that balanced portfolio year after year.
Figure 2. Driving Improvement on the Effective Frontier
Technology is an enabler. It can also be a disruptor. Empowered companies use technologies and
new ways of working to increase potential and move to new levels of the Effective Frontier.

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Companies want to increase or accelerate inventory turns and reduce cash-to-cash cycles. Improving
inventory turns and decreasing cash cycles improves working capital; but, an increase in complexity
will usually decrease margin and increase inventory turns. Complexity shifts and metrics performance
are connected and interrelated. Working these metrics as a complex system, while on the Effective
Frontier, enables companies to build a road map to drive business strategy. Today, there are more
challenges to managing metrics trade-offs while on a frontier than in the past. The pace of change is
rapid. Businesses are larger and more global. Organizations are not aligned. In the last decade,
demand and supply volatility increased. Markets became more competitive. Merger and Acquisition
(M&A) activity was rampant. To meet financial markets’ expectations, companies pushed costs and
elongated the cycles of suppliers. This improved our cash-to-cash cycle by lengthening payables, but
it had an adverse impact on margin.
It is easier to shift costs than improve internal operations. Each organization has its own unique
potential and is operating on its own frontier. A useful technique to understand performance is an
orbit chart plot at the intersection of the metrics on the Effective Frontier.
Figure 3. An Example of an Orbit Chart

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In an orbit chart, the intersection of two metrics is plotted to track performance. Companies that are
moving the portfolio towards the best scenario are improving costs, and driving improvements in year-
over-year performance in inventory turns, are driving improvement. In the case of Bridgestone in the
period of 2006-2016, the trend is upward, moving towards the best scenario. The results at
Bridgestone are resilient with very little swing or variation in metrics performance.
The second step is to compare the company’s performance to the industry. Companies
demonstrating supply chain excellence beat the industry averages within a peer group. For example,
General Mills has an operating margin of 16% compared to the industry average of 11%, and
inventory turns of 7.38 versus an industry average of 6.96. What can be seen in the data?
Consistently, General Mills performs better on cost than its industry peer group, but slightly lower in
inventory turns. However, note the swings. General Mills is less resilient—with larger swings and
deviations at the intersection—than the peer group.
Figure 4. Orbit Chart of General Mills vs. the Food Industry Peer Group of for the Period of 2006-2016
Today, business leaders live in the Information Age. Technologies make new ideas possible. Data
flows quicker and computational power enables quicker assessment of complex problems. Decisions
can be more data-driven, and real-time information enables new capabilities. More and more, metrics
can be measured. Targets can be assessed more quickly. However, this only adds value if the

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technological advancements can be successfully aligned with business outcomes. This is the
challenge.
Why is there a problem? Simply put, companies are new at it. We are only 40 years into the
Information Age. The adoption of technology in the Information Age followed the Industrial Revolution.
The Industrial Revolution was all about mechanization. There was a shift from making things by hand
to the mechanization and adoption of manufacturing processes. The focus was on the management
of physical assets. It was all about the control of financial assets and liabilities. The Information Age
started in 1975 with the widespread adoption of computers. The practices and policies were a stark
contrast to those of the Industrial Revolution that stretched from 1850 to 1975. The impact of the third
Industrial Age on United States Productivity is shown in Figure 5.
Figure 5. Impact of Industrial Revolutions on Productivity

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Trends within Peer Groups
To understand what is possible, study the potential of the industry peer groups at the intersection of
operating margin and inventory turns. The patterns tell the story. Industries making the most
improvement have a linear progression towards the “best scenario.” Struggling industries, with less
discipline and market sensing in supply chain management, show a lack of resiliency with wild swings
at the intersection of the metrics.
Retail
Within retail, the greatest improvements were in the areas of Drug Retailers and Restaurants. In
general, Retailers made more progress on the Effective Frontier than Manufacturers for the period of
2006-2016.
Apparel Retails, Broadline Retailers, and Home Improvement Retailers lacked resiliency. The
setpoints, or what is a reasonable expectation for performance, also vary widely as shown in Table 1.
In operating margin, the averages for the period of 2006-2016 range from 12% for Apparel Retailers,
to 7% for Drug Retailers, and .1% for Restaurants. For inventory cycles, the averages vary from 75.8
for Restaurants to 4.3 for Home Improvement Retailers. To manage metrics improvement, companies
need to focus on what is reasonable from a like industry.
Table 1. Averages for Retailers for the Period of 2006-2016
Industry Operating Margin Averages for
the Period of 2006-2016
Inventory Turn Averages for the
Period of 2006-2016
Apparel Retailers 12% 4.81
Drug Retailers 7% 6.47
Broadline Retailers 5% 4.98
Home Improvement Retailers 3% 4.30
Restaurants .1% 75.8

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Apparel Retailers
Figure 6. Apparel Retailers Orbit Chart for 2006-2016
Broadline Retailers
Figure 7. Broadline Retailers Orbit Chart for 2006-2016

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Drug Retailers
Figure 8. Drug Retailers Orbit Chart for 2006-2016
Home Improvement Retailers
Figure 9.Home ImprovementRetailersOrbitChartfor2006-2016

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Restaurants
Figure 10. Restaurants Orbit Chart for 2006-2016

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Manufacturing
As shown in Table 2, each manufacturing industry operates at a different level on the Effective
Frontier. Industries like Household Nondurables, Medical Device, and Semiconductor companies are
moving backward on both metrics, while Auto Parts, Chemical, Consumer Nondurables, Over-the-
Counter Drugs, Pharmaceuticals, and Telecommunications are making progress. While the progress
in the Auto Parts industry is linear, progress in the Apparel Manufacturing, Beauty, Chemical,
Contract Manufacturing, Pharmaceutical, and Telecommunications industries is more turbulent with
each showing a lack of resiliency. The low margins in Contract Manufacturing make this industry
especially risky.
Table 2. Averages for Each Industry for the Period of 2006-2016
Industry Operating Margin Averages for
the Period of 2006-2016
Inventory Turn Averages for the
Period of 2006-2016
Pharmaceuticals 22% 2.38
Medical Device 18% 2.47
Consumer Nondurables 16% 5.79
Apparel Manufacturing 12% 3.71
Beauty 11% 2.87
Semiconductor 10% 5.17
Chemical 10% 5.31
Over-The-Counter Drugs 9% 3.32
Telecommunications 8% 10.05
Auto Parts 8% 9.01
Contract Manufacturers 3% 6.87

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Apparel Manufacturers
Figure 11. Apparel Manufacturers Orbit Chart for 2006-2016
Auto Parts
Figure 12. Auto Parts Orbit Chart for 2006-2016

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Beauty
Figure 13. Beauty Orbit Chart for 2006-2016
Chemical Manufacturers
Figure 14. Chemical Manufacturers Orbit Chart for 2006-2016

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Consumer Nondurables
Figure 15. Consumer Nondurables Orbit Chart for 2006-2016
Contract Manufacturers
Figure 16. Contract Manufacturers Orbit Chart for 2006-2016

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Medical Device
Figure 17. Medical Device Orbit Chart for 2006-2016
Over-The-Counter Drugs
Figure 18. Over-The-Counter Drugs Orbit Chart for 2006-2016

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Pharmaceuticals
Figure 19. Pharmaceuticals Orbit Chart for 2006-2016
Semiconductor Manufacturing
Figure 20. Semiconductor Manufacturing Orbit Chart for 2006-2016

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Telecommunications
Figure 21. Telecommunications Orbit Chart for 2006-2016

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Driving Organizational Alignment to Improve
Metric Performance
Metrics improvement requires alignment. Progress only happens when there is a cross-functional
alignment. When companies are out of balance in metrics goals, the organization has tension. As
shown in Figure 22, this is especially true between sales and operations teams, and also finance. The
lack of alignment results in inventory of the wrong type.
While companies want to align the functions, often the organization is too functional even to have the
discussion. This work requires leadership, clarity on supply chain strategy, and alignment on goals
and objectives.
Figure 22. Alignment Gaps in Consumer Products Manufacturers

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Recommendations
We believe that strength, balance, and resiliency are important components of a high-performing
organization. Reaching this goal requires focus and organizational alignment. Here are seven
recommendations:
Manage Metrics as a Complex System. Design the portfolio of metrics to include the critical elements
of customer service, inventory/cash cycles, profitability, and market share. Understand the
interrelationships and manage the metrics portfolio as a complex system.
Get Clear. Be Concrete. Drive Alignment. Terms like flexible, responsive, agile, efficient, customer-
centric and demand-driven permeate corporate strategy documents, but they mean different things to
different people. Unless the terms are clearly defined and aligned to metrics, they are not actionable.
Take the time to define each term and align the desired outcome to a portfolio of metrics.
Understand Industry and Corporate Potential before You Set Targets. Understand your company’s
potential within your peer group. Study the patterns of industries to determine what is possible. Then
use advanced analytics to determine the potential of your division or company.
Drive Balance in a Metrics Portfolio. Clearly articulate the business outcome and define a balanced
portfolio of metrics to drive improvement. Hold the entire organization accountable for the same
portfolio of metrics.
Make Conscious Trade-Offs. In the analysis and determination of organizational potential, the
interrelationships between growth, profitability, cycles and complexity metrics will become clear. Use
modeling technologies to understand the trade-offs and drive the analysis to make conscious trade-offs.
Evolve. Metrics evolve as organizations mature. Review metrics annually and align with the business
strategy. Embrace technology and product disruptors to move the organization to the next frontier.
Stay the Course. As a leader, avoid knee-jerk reactions and “programs of the month.” Measurements
should not be viewed and managed in isolation. Instead, manage individual metrics as integral pieces
of a complex system. Be Patient. This takes time.
Conclusions
Driving performance on supply chain metrics is easier said than done. Setting targets on the balanced
scorecard is Job #1 in the definition of supply chain strategy. To drive improvement, be clear on what
is possible as a goal, and the rate of improvement. Orbit charts of like industries are a good way to
gauge what is feasible.

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Other Reports in This Series
Readers may gain added value by accessing complimentary reports on the Supply Chain Insights
website:
Supply Chains to Admire, Published June 2017
Supply Chain Index, Published June 2013
Supply Chain Metrics That Matter Chemical Industry, Published July 2017
Supply Chain Metrics That Matter Automotive Parts, Published August 2017
Supply Chain Metrics That Matter Retail, Published June 2017

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About Supply Chain Insights LLC
Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is in its sixth year of operation.
The Company’s mission is to deliver 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, we want you to turn to us. We are a company dedicated to this research. Our
goal is to help leaders 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 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a contributor to Forbes. She has written five books. The first book, Bricks Matter,
(co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in August 2015, the fifth book, The Shaman’s Journal 2016,
published in June 2016 and the sixth book, The Shaman’s Journal 2017, published in July 2017.
With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and is a frequent speaker on the
evolution of supply chain processes and technologies. Her research is designed for the early adopter
seeking first mover advantage.
About Alina Beskrovna
Alina holds an M.Sc. degree in Applied Mathematics from Kyiv-Mohyla Academy
and an MBA in Finance from Lehigh University. At Lehigh, she was the recipient of
a prestigious Global Village-Iacocca scholarship.
At Supply Chain Insights Alina contributes to the monthly publication of the Metrics
That Matter Series. She is also in charge of data analytics. In her spare time, Alina
loves active outdoor activities, especially hiking. Her goal is to hike all of the U.S.
National Parks in the next five years.