Editor’s note: Appearing online at scmr.com on the second Tuesday of each month, Leadership Lens highlights issues that supply chain leaders face on a daily basis. If you are interested in participating in future months, you can see a full list of upcoming topics on our Editorial Calendar.
On Nov. 28, 2022, Apple stock dropped 2.6% as unrest at a factory in China led to a Bloomberg report that the company could see a production shortfall of 6 million iPhone Pro units.
The Ever Given cargo ship got stuck in the Suez canal in 2021, backlogging 369 ships at the time and -disrupting $9.6 billion worth of trade.
Yemen-backed Houthi attacks on maritime shipping in the Red Sea, as part of the fallout from the Israel-Hamas war drags on, continue to result in longer transit times as ocean carriers seek to avoid the area.
Ongoing drought conditions in the Panama Canal have created transit delays and limits on how many ships can cross the canal in any given day.
What do all of these things have in common? First, they represent disruption to supply chains, which adds to cost and complexity. Secondly, and more importantly, they impact the bottom line. Either the shipper is absorbing higher shipping costs, or the customer is being asked to wait for their item, which also may be more expensive. In many cases, it is both.
“We have consistently observed this outsized and growing role of investor pressure over four years. In the modern environment, commercial interests—be it access to capital gated by sustainability-minded investors or sales opportunities gated by sustainability-minded procurement teams—represents supply chain managers’ fastest-growing source of pressure to improve supply chain sustainability.”
And it is that point—the impact on the bottom line—that is driving more investors to become interested in the supply chains of their portfolio companies.
David Correll and Kellen Betts authored Massachusetts Institute of Technology’s annual State of Supply Chain Sustainability 2023 for the Center for Transportation & Logistics. While the report dives into the sustainability of supply chains, it cuts across many aspects of supply chain. And, as the authors note, the pressure to improve supply chain sustainability is growing, especially from investors.
According to the 2023 report, investor pressure registered a 3.5 on a scale of 1 to 5 (1 being not a priority and 5 being very high priority). In fact, over the four years MIT has conducted the survey, investor pressure to increase supply chain sustainability is up 25% in that timeframe, far outpacing the next item, corporate buyers, at 15%.
Why is sustainability such an important topic for investors? The answer is because it cuts to the heart of what investors are looking for—profits. The more sustainable a supply chain is, the more ability the organization has to avoid negative impacts from the ongoing supply chain disruptions we continue to see year after year.
“We have consistently observed this outsized and growing role of investor pressure over four years,” the authors noted. “In the modern environment, commercial interests—be it access to capital gated by sustainability-minded investors or sales opportunities gated by sustainability-minded procurement teams—represents supply chain managers’ fastest-growing source of pressure to improve supply chain sustainability.”
Financial impacts
While it is clear that supply chain disruptions can cause financial pain for an organization, authors Seock-Jin Hong (University of North Texas) and Hossein Najmi (University of Central Oklahoma) tried to quantify the impact in a research paper published by science journal MDPI in April 2020.
“Economic value added (EVA) contributes to creating shareholder value and gradually substitutes cost and profit objective functions to design a supply chain network,” they wrote. “Shareholders’ perspectives always inform managerial decisions because every company must do its best to keep shareholders and bondholders happy. The ultimate purpose of the company is to maximize SHV for the long-term worth of the business to its owners. The supply chain strategy has a central position in SHV creation and is the main source of competitive advantage.”
The authors noted that the “basic drivers” to enhance shareholder value include revenue growth, operating cost reductions, fixed capital efficiency and working capital efficiency among others.
“Supply chain practices could improve cash flows and reduce the [cash-to-cash, aka C2C] cycle time, which would help free up cash and working capital to be invested in other products, better processes, and better financial performance,” they wrote.
Managing investor expectations
With increased pressure from investors, the question becomes how to manage expectations. Afterall, investors, typically, are looking for one thing—profits. Therefore, any investment in supply chains has the potential of diluting the profit margin. But a lack of investment threatens that same profit margin with increased and unplanned costs from disruptions.
While large organizations employ shareholder relations teams, the fact remains that managing shareholder and investor relations is part of everyone’s job at an organization, and that includes the supply chain. According to Brian Cristol, CEO and co-founder of Isometric Technologies, that starts with measuring your supply chain.
“Supply chains inherently require a significant amount of collaboration between partners, but just communicating regularly about your sustainability goals is not enough,” he is quoted as saying in the MIT Sloan report. “You can’t manage what you can’t measure. In order to start moving the needle, supply chain partners need to leverage shared technology that can serve as a single source of truth for them to collectively measure the results of their sustainability efforts.”
The MIT report found that code of supplier conduct (80%), supplier audits (52%), supply chain mapping (43%) and code of (internal) conduct (38%) and standards or certifications (36%) are the most likely sustainability practices employed by supply chains.
Agile supply chains
Investors are also increasingly concerned about compliance with global regulations around ethical sourcing requirements.
“Stakeholders want to know that the products they purchase or invest in are produced ethically and sustainably. By providing transparent information about their supply chains, companies can build trust, attract responsible investors, and meet evolving consumer expectations,” wrote business consulting service Emergent Africa, in a LinkedIn post.
As a result, supply chains are balancing how to approach improved supply chain visibility. That topic was addressed by J. Paul Dittman, assistant department head for supply chain management and distinguished lecturer at the University of Tennessee, Knoxville’s Haslam College of Business, in a 2022 interview with the university’s Global Supply Chain Institute. Dittman also addressed another point that he said is often overlooked by companies.
“Lead time at every link in the supply chain. Too often, we see leadership and companies that totally ignore lead time. They don’t measure themselves on lead time, or they don’t measure lead time at all. And it starts with a new product and action lead time,” he said. “It goes into the planning and forecasting lead times: How long does it really take you to replan and do a forecast and a new schedule? And supplier lead time; so many companies don’t aggressively manage their supplier lead time or their manufacturing lead time. Another question: How long does it take to get things through your factory? Then there’s fulfillment lead time and delivery lead time, not to mention decision lead time: How long does it take the overall organization just to make a decision to access real, actionable data and then use the information to make good, rapid decisions? I think the thing that is missed so often is people don’t manage time, lead time in particular. I think that’s the most undervalued action that companies might be missing. So my advice is simple: Focus on lead time and every element of it.”
The supply chain bottom line
In their research, Hong and Najmi noted that attention to indicators such as days-sales-outstanding is a critical component to managing the supply chain’s impact on a company’s financial performance. Top companies show “very short DSO,” they said.
“This means that supply chain benefits share not only themselves but also others by shortening payment times to reduce the financial pressure to suppliers,” the authors concluded. “Relying on C2C to control supply chain management as shown on previous research, it possibly weakens their control supply chain capability and sustainability beyond the company in the long-term and makes it difficult to ensure that their suppliers are operating in a financially sustainable fashion.”
Many companies only measure that which they can easily access, Hong and Najmi noted. “Supply chain management has become a complicated set of activities that involves many business functions and processes, along with competitive differentiators. Financial performance is one of the essential pillars that provide the necessary capital to supply chain networks.”
Lee Clair, managing partner with Transportation and Logistics Advisors, and Steven Fox, a principal in the same firm, covered the topic of how supply chains can unlock shareholder value, in an article for Supply Chain Management Review in November.
“Even within a well-run supply chain/operations organization, there are always opportunities for improvement,” the wrote. “Even well-planned supply chains can quickly become sub-optimal. Forecasts don’t always come true and there are unplanned events and trends. It’s the double-edged sword of the ‘perfect’ supply chain. … There is also only so much bandwidth to take on additional projects beyond executing on staff’s ongoing work and the cost of change can be significant. The question of how much change and how often is important.”
The pair suggested a structured approach to identifying opportunities, such as sourcing locations and customer research, and by analyzing your current supply chain. In doing so, supply chains can unlock real value for shareholders.
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