Over the past 20 years, companies have invested a great deal of resources into improving their supply chain performance. For example, manufacturing companies with annual sales greater than $1 billion have spent 1.7 percent of their revenue on supply chain-related information technology. But has there been any improvement in balance-sheet performance during that time? Have those efforts resulted in improved levels of value?
At Supply Chain Insights, we define supply chain excellence as the ability to improve customer service levels, operating margins, and inventory levels while also growing revenue. Based on our analysis of balance sheet patterns for more than 2,000 public companies in 35 industries from 2006 to 2015, we believe that nine out of 10 companies are stuck when it comes to supply chain improvement. They are unable to deliver on a growth agenda while improving customer service, operating margins, and inventory levels. We find that most companies can make improvement in one or two of the metrics, but they struggle to improve the entire portfolio.
Why are companies struggling to drive improvement? We believe the main reason is a belief in historic best practices. These functional processes drive improvement within a function but have failed to produce balance sheet improvements and increase value across the entire supply chain. In most organizations, we find that the functions are not aligned horizontally within the company, and they lack strategic direction of how to maximize value within the firm and within a value network.
It is important to note that a value network and a supply chain are very different concepts. While a supply chain focuses on the improvement of supply chain management within the firm, a value network strategy defines how the firm drives value through interactions with trading partners in a global economy.
In theory, if a value network is driving value, all parties should see an improvement in margin, inventory, and cash-to-cash cycle times. If there is true collaboration, then there should be a long-term win/win value proposition.
But while business leaders speak of collaboration with external supply chain partners, the connections between firms are largely buy/sell relationships. The focus is largely on price without a definition of value. We can see that in the technologies that companies have invested in to automate the front office, termed customer relationship management (CRM), and the back office, termed supplier relationship management (SRM). These technologies automated contracts and price but ironically did not improve relationships. We have largely automated buy/sell relationships not driven value in trade.
When companies buy and sell opportunistically based on price, there are winners and losers, and the lack of collaboration leads to increased inefficiency due to the bullwhip effect with the demand signal growing more and more distorted as it moves downstream.
To drive overall improvement, then, the network must be designed for value, and power brokers in the network must own and drive end-to-end thinking. There are few examples in the value network where this has happened. (The examples include Taiwan Semiconductor's design network, which fosters collaboration between customers and suppliers on the design of new products, and Wal-Mart's Retail Link, which shares daily data on sales and other customer and store information with its supplier network.)
Has value chain performance improved?
To understand why we believe that value chain performance has not improved, let's take a look at our evaluation of four value networks: automotive, consumer, health care, and high tech (See Figures 1, 3, 4, and 5). In this analysis, we compare the average value of the industry sectors within those networks for 2006 to the average value for the industry for 2015 on what we call the "Supply Chain Metrics That Matter. " The Supply Chain Metrics That Matter are the financial metrics that correlate—as a portfolio—to market capitalization. This includes year-over-year revenue growth; operating margin; inventory turns; cash-to-cash cycle time; return on invested capital; revenue per employee; and sales, general, and administrative (SGA) expenses. This allows the comparison of pre-recession (2006-2009) and post-recession (2010-2015) results and gives a comparison of relative industry improvement in the period of 2006-2015.
What we find is disturbing. The overall performance of each value network on these metrics is declining, with the most adverse impact on suppliers. (If the industry is making progress, it is marked with a green arrow showing a percentage improvement for the comparison of 2015 to 2006. If the arrow is red, there is a decline in performance.)
Let's start with the automotive industry (Figure 1). First-tier automotive is making improvements in margin, inventory turns, cash-to-cash cycle times, and return on invested capital (ROIC). Supplier performance, however, is declining. This discrepancy suggests that first-tier automotive companies are winning at the expense of suppliers, and that, over time, those suppliers will become less viable. First-tier automotive companies have the opportunity to be power brokers and improve overall value, but instead they have focused on improving efficiency. In other words, the industry's focus on lean has not driven value for the entire value chain. In a healthy value network, all parties are improving performance.
If lean practices were driving improvement, then Toyota and Honda would not be at the same place in margin and inventory turns in 2015 that they were in 2006 (see the orbit chart in Figure 2). Similarly, kaizen events would have improved the entire value chain. What we are really seeing is the automation by the buyer of buy/sell relationships. It is taking longer to set up a supplier in the transactional system, and payables are being elongated to improve cash-to-cash performance for the buyer. The downside is that there is a limit on how far payables can be elongated before suppliers go out of business.
In the case of the consumer value chain (Figure 3), the tier closest to the consumer again has the best performance when the 2006 average performance is compared to 2015. The consumer products industry is currently experiencing many changes and challenges, including the disruption caused by e-commerce pure-play retailers and an increase in complexity of items (38 percent in the last five years). This increasing complexity has resulted in a "double whammy" for the companies in this sector in terms of higher cost and increased inventory. It also intensifies the bullwhip effect, increasing waste for downstream suppliers, such as chemical and packaging companies. As companies sort through the changes, manufacturers with a supply chain strategy that focuses on reducing costs will see diminishing returns, while companies with a strategy focused on improving overall value will fare better.
In the health care value chain, the pharmaceutical companies are winning at the expense of the rest of the value chain. While many big pharmaceutical companies trumpet their commitment to value, what we find is that none has stepped up to drive value-based outcomes through the redesign of processes from the patient back through the chain.
Within health care there is even confusion about who the customer is. Is the customer the physician? The payer? The hospital? The patient? The group purchasing organization? The focus on buy/sell relationships that do not provide any transparency to the rest of the channel in regards to sales at the hospital or pharmacy is a detriment to this industry. In addition, this industry has the most complex trade agreements for rebates and promotions. These bifurcated, multiparty trade deals coupled with legacy distributor relationships create barriers to improvement. Pharmaceutical and medical-device supply chain leaders lag other industries in network design, business-to-business (B2B) integration, and the use of analytics. The focus on marketing, clinical trials, and drug discovery in the pharmaceutical industry forces supply chain strategy to the back burner.
The fastest moving and most innovative network is in the high-tech industry. Increasing price pressure and the scarcity of materials have forced this industry to adopt analytics and improve B2B integration more quickly than other industries. Within high tech, the industrial sectors are faring better than the consumer-focused businesses. However, all of high tech is dependent on a contract manufacturing relationship that has very low margins and lacks resiliency. The lack of viability of this model is a risk for the industry.
Five steps forward
In the last decade, have we added value in the value network? I think the answer is no. The extended supply chain is dependent on e-mail and spreadsheets, and for 98 percent of companies, value chain collaboration is largely a matter of talk, with little or no action. Companies today talk about value but focus on efficiency and cost-based buy/sell agendas. There is an opportunity for traditional manufacturers to step up and redefine value-network business models in a way that will improve value. The evolution of technology makes this feasible. However, it will never happen if it is not a focus area.
What steps should companies take? Here are five that come to mind:
1. Actively design value networks. Incorporate supply chain professionals into sales teams and measure cost-to-serve and network flows to improve value. Align incentives and trade terms with value. Simplify marketing programs to reduce deductions and improve cash-to-cash matching of orders and invoices.
2. Own the value chain. If you are a power broker within the industry, then you should drive change. Lifting all "boats" in the value chain will also lift yours.
3. Build strong supplier-development programs and close alignment gaps with finance. We cannot save our way to value, nor can we improve cash flow through payables without hurting suppliers. Today, technology allows money to move much faster than in the past, yet payables to suppliers have lengthened precipitously. Take ownership of cash flow in the value chain and reward strategic relationships.
4. Rethink traditional processes. The traditional supply chain process focuses on improving a company's efficiency, not on driving value throughout networks. We reap what we sow.
5. Build value chain leadership. Move away from buy/sell transactional definitions for procurement and sales. Build outside-in processes with a focus on the customer and improving value.
How do you believe that we put true value in the value chain? Let me know either by e-mail or by using the comment function at the end of this article. I look forward to hearing from you.
The launch is based on “Amazon Nova,” the company’s new generation of foundation models, the company said in a blog post. Data scientists use foundation models (FMs) to develop machine learning (ML) platforms more quickly than starting from scratch, allowing them to create artificial intelligence applications capable of performing a wide variety of general tasks, since they were trained on a broad spectrum of generalized data, Amazon says.
The new models are integrated with Amazon Bedrock, a managed service that makes FMs from AI companies and Amazon available for use through a single API. Using Amazon Bedrock, customers can experiment with and evaluate Amazon Nova models, as well as other FMs, to determine the best model for an application.
Calling the launch “the next step in our AI journey,” the company says Amazon Nova has the ability to process text, image, and video as prompts, so customers can use Amazon Nova-powered generative AI applications to understand videos, charts, and documents, or to generate videos and other multimedia content.
“Inside Amazon, we have about 1,000 Gen AI applications in motion, and we’ve had a bird’s-eye view of what application builders are still grappling with,” Rohit Prasad, SVP of Amazon Artificial General Intelligence, said in a release. “Our new Amazon Nova models are intended to help with these challenges for internal and external builders, and provide compelling intelligence and content generation while also delivering meaningful progress on latency, cost-effectiveness, customization, information grounding, and agentic capabilities.”
The new Amazon Nova models available in Amazon Bedrock include:
Amazon Nova Micro, a text-only model that delivers the lowest latency responses at very low cost.
Amazon Nova Lite, a very low-cost multimodal model that is lightning fast for processing image, video, and text inputs.
Amazon Nova Pro, a highly capable multimodal model with the best combination of accuracy, speed, and cost for a wide range of tasks.
Amazon Nova Premier, the most capable of Amazon’s multimodal models for complex reasoning tasks and for use as the best teacher for distilling custom models
Amazon Nova Canvas, a state-of-the-art image generation model.
Amazon Nova Reel, a state-of-the-art video generation model that can transform a single image input into a brief video with the prompt: dolly forward.
Economic activity in the logistics industry expanded in November, continuing a steady growth pattern that began earlier this year and signaling a return to seasonality after several years of fluctuating conditions, according to the latest Logistics Managers’ Index report (LMI), released today.
The November LMI registered 58.4, down slightly from October’s reading of 58.9, which was the highest level in two years. The LMI is a monthly gauge of business conditions across warehousing and logistics markets; a reading above 50 indicates growth and a reading below 50 indicates contraction.
“The overall index has been very consistent in the past three months, with readings of 58.6, 58.9, and 58.4,” LMI analyst Zac Rogers, associate professor of supply chain management at Colorado State University, wrote in the November LMI report. “This plateau is slightly higher than a similar plateau of consistency earlier in the year when May to August saw four readings between 55.3 and 56.4. Seasonally speaking, it is consistent that this later year run of readings would be the highest all year.”
Separately, Rogers said the end-of-year growth reflects the return to a healthy holiday peak, which started when inventory levels expanded in late summer and early fall as retailers began stocking up to meet consumer demand. Pandemic-driven shifts in consumer buying behavior, inflation, and economic uncertainty contributed to volatile peak season conditions over the past four years, with the LMI swinging from record-high growth in late 2020 and 2021 to slower growth in 2022 and contraction in 2023.
“The LMI contracted at this time a year ago, so basically [there was] no peak season,” Rogers said, citing inflation as a drag on demand. “To have a normal November … [really] for the first time in five years, justifies what we’ve seen all these companies doing—building up inventory in a sustainable, seasonal way.
“Based on what we’re seeing, a lot of supply chains called it right and were ready for healthy holiday season, so far.”
The LMI has remained in the mid to high 50s range since January—with the exception of April, when the index dipped to 52.9—signaling strong and consistent demand for warehousing and transportation services.
The LMI is a monthly survey of logistics managers from across the country. It tracks industry growth overall and across eight areas: inventory levels and costs; warehousing capacity, utilization, and prices; and transportation capacity, utilization, and prices. The report is released monthly by researchers from Arizona State University, Colorado State University, Rochester Institute of Technology, Rutgers University, and the University of Nevada, Reno, in conjunction with the Council of Supply Chain Management Professionals (CSCMP).
"After several years of mitigating inflation, disruption, supply shocks, conflicts, and uncertainty, we are currently in a relative period of calm," John Paitek, vice president, GEP, said in a release. "But it is very much the calm before the coming storm. This report provides procurement and supply chain leaders with a prescriptive guide to weathering the gale force headwinds of protectionism, tariffs, trade wars, regulatory pressures, uncertainty, and the AI revolution that we will face in 2025."
A report from the company released today offers predictions and strategies for the upcoming year, organized into six major predictions in GEP’s “Outlook 2025: Procurement & Supply Chain.”
Advanced AI agents will play a key role in demand forecasting, risk monitoring, and supply chain optimization, shifting procurement's mandate from tactical to strategic. Companies should invest in the technology now to to streamline processes and enhance decision-making.
Expanded value metrics will drive decisions, as success will be measured by resilience, sustainability, and compliance… not just cost efficiency. Companies should communicate value beyond cost savings to stakeholders, and develop new KPIs.
Increasing regulatory demands will necessitate heightened supply chain transparency and accountability. So companies should strengthen supplier audits, adopt ESG tracking tools, and integrate compliance into strategic procurement decisions.
Widening tariffs and trade restrictions will force companies to reassess total cost of ownership (TCO) metrics to include geopolitical and environmental risks, as nearshoring and friendshoring attempt to balance resilience with cost.
Rising energy costs and regulatory demands will accelerate the shift to sustainable operations, pushing companies to invest in renewable energy and redesign supply chains to align with ESG commitments.
New tariffs could drive prices higher, just as inflation has come under control and interest rates are returning to near-zero levels. That means companies must continue to secure cost savings as their primary responsibility.
Specifically, 48% of respondents identified rising tariffs and trade barriers as their top concern, followed by supply chain disruptions at 45% and geopolitical instability at 41%. Moreover, tariffs and trade barriers ranked as the priority issue regardless of company size, as respondents at companies with less than 250 employees, 251-500, 501-1,000, 1,001-50,000 and 50,000+ employees all cited it as the most significant issue they are currently facing.
“Evolving tariffs and trade policies are one of a number of complex issues requiring organizations to build more resilience into their supply chains through compliance, technology and strategic planning,” Jackson Wood, Director, Industry Strategy at Descartes, said in a release. “With the potential for the incoming U.S. administration to impose new and additional tariffs on a wide variety of goods and countries of origin, U.S. importers may need to significantly re-engineer their sourcing strategies to mitigate potentially higher costs.”
Grocers and retailers are struggling to get their systems back online just before the winter holiday peak, following a software hack that hit the supply chain software provider Blue Yonder this week.
The ransomware attack is snarling inventory distribution patterns because of its impact on systems such as the employee scheduling system for coffee stalwart Starbucks, according to a published report. Scottsdale, Arizona-based Blue Yonder provides a wide range of supply chain software, including warehouse management system (WMS), transportation management system (TMS), order management and commerce, network and control tower, returns management, and others.
Blue Yonder today acknowledged the disruptions, saying they were the result of a ransomware incident affecting its managed services hosted environment. The company has established a dedicated cybersecurity incident update webpage to communicate its recovery progress, but it had not been updated for nearly two days as of Tuesday afternoon. “Since learning of the incident, the Blue Yonder team has been working diligently together with external cybersecurity firms to make progress in their recovery process. We have implemented several defensive and forensic protocols,” a Blue Yonder spokesperson said in an email.
The timing of the attack suggests that hackers may have targeted Blue Yonder in a calculated attack based on the upcoming Thanksgiving break, since many U.S. organizations downsize their security staffing on holidays and weekends, according to a statement from Dan Lattimer, VP of Semperis, a New Jersey-based computer and network security firm.
“While details on the specifics of the Blue Yonder attack are scant, it is yet another reminder how damaging supply chain disruptions become when suppliers are taken offline. Kudos to Blue Yonder for dealing with this cyberattack head on but we still don’t know how far reaching the business disruptions will be in the UK, U.S. and other countries,” Lattimer said. “Now is time for organizations to fight back against threat actors. Deciding whether or not to pay a ransom is a personal decision that each company has to make, but paying emboldens threat actors and throws more fuel onto an already burning inferno. Simply, it doesn’t pay-to-pay,” he said.
The incident closely followed an unrelated cybersecurity issue at the grocery giant Ahold Delhaize, which has been recovering from impacts to the Stop & Shop chain that it across the U.S. Northeast region. In a statement apologizing to customers for the inconvenience of the cybersecurity issue, Netherlands-based Ahold Delhaize said its top priority is the security of its customers, associates and partners, and that the company’s internal IT security staff was working with external cybersecurity experts and law enforcement to speed recovery. “Our teams are taking steps to assess and mitigate the issue. This includes taking some systems offline to help protect them. This issue and subsequent mitigating actions have affected certain Ahold Delhaize USA brands and services including a number of pharmacies and certain e-commerce operations,” the company said.
Editor's note:This article was revised on November 27 to indicate that the cybersecurity issue at Ahold Delhaize was unrelated to the Blue Yonder hack.