Supply Chain Insights Webinar on the Supply Chain Index on May 23rd

Supply Chain Index Part IIHow & Why?

May 23, 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: 15 Five-Star Reviews on Amazon

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Book can be ordered: 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 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 5-21-2013)

Retail August 2012 1,592

Consumer Products September 2012 1,097

Chemical Industry November 2012 693

The Cash-to-Cash Cycle November 2012 1,823

Pharmaceutical Industry December 2012 1,429

Driving Reliability in Margins January 2013 1,298

Hospitals January 2013 865

Brick & Mortar Retail February 2013 545

Medical Device Manufacturers February 2013 633

Consumer Electronics April 2013 490

Apparel May 2013 300

Supply Chain Metrics That Matter Readership

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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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Cash-to-Cash Cycle vs. Gross Margin (2000-2011): Medical Device Industry

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Cash-to-Cash Cycle vs. Gross Margin (2000-2011): Pharmaceutical Industry

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Inventory Turns vs. Revenue per Employee (2002-2011): Hospital Industry

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Cash-to-Cash Cycle vs. Gross Margin (2000-2011): Cross Industry Analysis

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Financial Metrics Across the Healthcare Value Chain (2000-2011)

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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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• May 23rd: presentation of consumer value chain and healthcare value chain industries

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

• Monthly Webinars (June 27, July 25, August 29)

• Monthly Reports (June 11, July 9, August 13)

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

Now and Then

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Selected 14 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


“The output of a credit-strength test that gauges a publicly traded manufacturing company's likelihood of bankruptcy.”

)

What is Altman Z?

Source: Investopedia (http://www.investopedia.com/terms/a/altman.asp)

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http://www.investopedia.com/terms/a/altman.asp

http://www.investopedia.com/terms/a/altman.asp


Consumer Value Chain

Metrics That Matter by Industry

Retail (Discount StoresHousehold & Personal

ProductsChemical

Operating Margin Operating Margin Operating Margin

Working Capital Ratio Free Cash Flow Ratio Days of Inventory

Return on Invested Capital Return on Invested CapitalDays of Payables

Outstanding

DPO/DSO Ratio Current Ratio Return on Assets

Days of Inventory SG&A to COGS Ratio

Days of Payables Outstanding

Days of Inventory

0.89 0.68

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Healthcare Peer Groups

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Pharmaceutical Value Chain



Medical CareMedical

DistributionPharmaceutical

MajorPharmaceutical

Generic

Free Cash Flow Ratio Operating Margin Free Cash Flow Ratio Operating Margin

Working Capital RatioReturn on Invested

CapitalReturn on Invested

CapitalFree Cash Flow Ratio

Operating Margin Free Cash Flow Ratio Altman Z Working Capital Ratio

SG&A to COGS Ratio Working Capital Ratio Current Ratio DPO/DSO Ratio

YoY Revenue Growth Return on Net AssetsDays of Payables

OutstandingAltman Z

Current Ratio DPO/DSO RatioReturn on Invested

CapitalDays of Sales Outstanding

Current Ratio Current Ratio

Days of Inventory Days of Inventory SG&A to COGS Ratio


Days of Sales Outstanding

Days of Inventory

0.73 0.84 78 35

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Medical Device Value Chain



Medical CareMedical

DistributionMedical Devices

Medical Instruments &

Supplies

Free Cash Flow Ratio Operating Margin Return on Assets DPO/DSO Ratio

Working Capital RatioReturn on Invested

CapitalOperating Margin Altman Z

Operating Margin Free Cash Flow Ratio Free Cash Flow RatioReturn on Invested

Capital

SG&A to COGS Ratio Working Capital Ratio DPO/DSO Ratio Free Cash Flow Ratio

YoY Revenue Growth Return on Net Assets Working Capital Ratio Working Capital Ratio

Current Ratio DPO/DSO Ratio Return on Net Assets YoY Revenue Growth

Days of Sales Outstanding

Current Ratio YoY Revenue Growth SG&A to COGS Ratio

Days of Inventory Days of Inventory Altman Z Current Ratio


Current RatioDays of Payables

OutstandingDays of Payables

OutstandingDays of Inventory

0.73 0.84 0.48 0.46

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Medical Care Equation

Ln(market cap) = 6.24 + 16.33(FCF) + 10.34(WC) + 5.72(OM) – 2.39(SGAC) + 1.09(YOY) – 1.01(CR) + 0.02(DSO) + 0.01(DOI) +

0.01(DPO)

Correlation Strength

NOTE: Full equation is Ln(market capitalization) = 6.241727 + 16.32968(free cash flow) + 10.33977(working capital ratio) + 5.72111(operating margin) – 2.38969(sga to cogs ratio) + 1.087475(revenue growth) – 1.00962(current ratio) + 0.022692(days of sales outstanding) + 0.013903(days of inventory) + 0.008173(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.

Medical Care Equation

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Medical Care Ranking (2012)


Rank Company

1 Fresenius Medical Care AG & Co. KGaA

2 Community Health Systems

3 DaVita HealthCare Partners Inc

4 Health Management Associates, Inc.

5 VCA Antech, Inc.

6 Omnicare, Inc.

7 Chemed Corporation

8 Vanguard Health Systems, Inc.

9 SunLink Health Systems, Inc.

10 Cardionet IncSource: Supply Chain Insights LLCMorningstar peer group used as basis for equation included Acadia Healthcare Company Inc., Almost Family, Inc. Amedisys Inc., Amsurg Corp, Gentiva Health Services, Inc. Hanger Inc. HCA Holdings Inc. HEALTHSOUTH Corp, Healthways, Inc. IPC The Hospitalist Company Inc., LCA-Vision Inc., LHC Group, Inc., LifePoint Hospitals, Inc., Mednax Inc., Select Medical Holdings Corporation, Tenet Healthcare Corporation, The Providence Service Corporation, U.S. Physical Therapy, Inc., Universal Health Services, Inc. for which 2012 results were not available as of 5/9/2013.

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Medical Care Performance Ranking (2012)


Rank Company CR DOI DPO DSO FCF OM YOY SGAC WC Equation Output

1Fresenius Medical Care AG & Co. KGaA

1.77 41.19 29.62 81.97 0.097 0.157 0.102 0.272 0.180

2 Community Health Systems

1.60 68.09 152.75 57.92 0.039 0.083 -0.044 0.138 0.098

3 DaVita HealthCare Partners Inc

1.43 5.11 27.10 63.37 0.067 0.158 0.216 0.161 0.105

4Health Management Associates, Inc.

1.51 64.46 96.06 60.66 0.035 0.051 0.155 0.090 0.085

5VCA Antech, Inc.

1.31 14.18 10.86 12.01 0.094 0.058 0.144 0.094 0.034

Source: Supply Chain Insights LLC, Corporate Annual Reports 2012 from One SourceRankings only include companies that had annual data available through One Source at time of calculation (May 2013).

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Medical Distribution Equation

Ln(market cap) = 6.04 + 33.39(OM) – 24.69(ROIC) + 15.23(FCF) – 11.11(WC) + 1.49(RONA) + 1.37(DPODSO) +

0.83(CR) + 0.02(DOI)


NOTE: Full equation is Ln(market capitalization) =6.036327 + 33.38703(operating margin) -24.6924(return on invested capital) + 15.23431(free cash flow ratio) -11.1125(working capital ratio) + 1.488203(return on net assets) + 1.371671(dpo/dso ratio) + 0.83093(current ratio) + 0.018224(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.

Medical Distribution Equation

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Medical Distribution Ranking (2012)


Rank Company

1 McKesson Corporation

2 Cardinal Health, Inc.

3 Henry Schein Inc.

4 Patterson Companies Inc.

5 Owens & Minor, Inc.

6 MWI Veterinary Supply, Inc.

Source: Supply Chain Insights LLCMorningstar peer group used as basis for equation included, AmerisourceBergen Corp., ALR Technologies Inc. and Chindex International, Inc. for which 2012 results were not available as of 5/15/2013.

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Medical Distribution Performance Ranking (2012)


Rank Company CR DOI DPODSO FCF OM ROIC RONA WC Equation Output

1 McKesson Corporation 1.09 31.66 1.91 0.021 0.017 0.065 0.474 0.016

2 Cardinal Health, Inc. 1.24 27.86 1.85 0.008 0.017 0.074 0.210 0.031

3 Henry Schein Inc. 1.84 68.10 0.78 0.040 0.069 0.116 0.259 0.137

4 Patterson Companies Inc.

2.65 49.08 0.45 0.082 0.101 0.131 0.200 0.246

5 Owens & Minor, Inc. 1.76 34.92 1.09 0.020 0.022 0.089 0.122 0.079

Source: Supply Chain Insights LLC, Corporate Annual Reports 2012 from One SourceRankings only include companies that had annual data available through One Source at time of calculation (May 2013).

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Drug Manufacturers:Major Equation

Ln(market cap) = 14.00 + 5.75(FCF) + 5.14(ROIC) – 4.02(AZ) – 1.09(CR) – 0.003(DPO)


NOTE: Full equation is Ln(market capitalization) = 14.00234 + 5.748799(free cash flow ratio) + 5.141905(return on invested capital) -4.02167(altman z) – 1.08604(current ratio) – 0.00253(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.

Drug Manufacturers - Major Equation

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Drug Manufacturers:Generic Equation

Ln(market cap) = 8.21 + 2.39(OM) + 1.62(FCF) + 1.33(WC) – 1.28(DPODSO) + 1.28(AZ) – 1.26(ROIC) – 0.49(CR) –

0.24(SGAC) – 0.01(DSO) + 0.01(DOI)


NOTE: Full equation is Ln(market capitalization) = 8.211013 + 2.391626(operating margin) + 1.616986(free cash flow ratio) + 1.334929(working capital ratio) – 1.27888(dpo/dso ratio)+ 1.277077(altman z) – 1.25889(return on invested capital) – 0.48899(current ratio) – 0.244(sga to cogs ratio) – 0.0128(days of sales outstanding) + 0.006356(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.

Drug Manufacturers - Generic Equation

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Medical Device Equation

Ln(market cap) = 5.19 – 5.84(ROA) + 5.17(OM) + 4.42(FCF) – 3.68(DPODSO) + 2.76(WC) + 1.97(RONA) + 1.33(YOY) +

1.21(AZ) – 0.29(CR) + 0.02(DPO)


NOTE: Full equation is Ln(market capitalization) = 5.18946 – 5.83668(return on assets) + 5.168711(operating margin) + 4.416875(free cash flow ratio) – 3.68006(dpo/dso ratio) + 2.757156(working capital ratio) + 1.968532(return on net assets) + 1.325632(revenue growth) + 1.213438(altman z) – 0.28953(current ratio) + 0.017218(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.

Medical Device Equation

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Medical Instruments & Supplies Equation

Ln(market cap) = 9.74 – 2.97(DPODSO) – 2.00(AZ) + 1.91(ROIC) + 1.25(FCF) + 0.90(WC) + 0.79(YOY) – 0.69(SGAC)

– 0.30(CR) + 0.02(DPO) – 0.01(DOI)


NOTE: Full equation is Ln(market capitalization) = 9.740893 -2.97109(dpo/dso ratio) – 1.99811(altman z) + 1.911615(return on invested capital) + 1.247788(free cash flow ratio) + 0.902128(working capital ratio) + 0.785072(revenue growth) – 0.68905(sga to cogs ratio) – 0.29805(current ratio) + 0.015862(days of payables outstanding) – 0.00697(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.

Medical Instruments & Supplies Equation

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Understanding Supply Chain as a Complex System


Using the Insights

Agenda

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Consumer Value Chain

Retail(Discount

Stores)

Household & Personal Products

Chemical

Equations:Ln(market cap) =

10.41 + 52.67(OM) -34.72(WC)

- 16.02(ROIC) -0.09(DPODSO)

+ 0.02(DOI)

3.37+ 2.11(OM) + 1.62(FCF) - 1.29(ROIC) - 1.17ln(CR) + 0.25(SGAC) + 0.02(DPO) – 0.01(DOI)

7.85(OM) - 4.84(ROA) + 1.81ln(DPO)

+ 0.01(DOI)

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

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Pharmaceutical Value Chain

Medical Care

Medical Distribution

Drug Manufacturers

- Major


6.24 + 16.33(FCF)+ 10.34(WC)+ 5.72(OM)

- 2.39(SGAC)+ 1.09(YOY)- 1.01(CR)

+ 0.02(DSO)+ 0.01(DOI)

+ 0.01(DPO)

6.04+ 33.39(OM) - 24.69(ROIC)+ 15.23(FCF) - 11.11(WC)

+ 1.49(RONA)+ 1.37(DPODSO)

+ 0.83(CR) + 0.02(DOI)

14.00+ 5.75(FCF) + 5.14(ROIC)

- 4.02(AZ)- 1.09(CR)

- 0.003(DPO)


8.21+ 2.39(OM) + 1.62(FCF)+ 1.33(WC)

- 1.28(DPODSO)+ 1.28(AZ)

- 1.26(ROIC)- 0.49(CR)

- 0.24(SGAC)- 0.01(DSO)+ 0.01(DOI)

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Drug Manufacturers

-Generic

Major Generic


Medical Device Value Chain

Medical Care

Medical Distribution

Medical Devices


6.24 + 16.33(FCF)+ 10.34(WC)+ 5.72(OM)

- 2.39(SGAC)+ 1.09(YOY)- 1.01(CR)

+ 0.02(DSO)+ 0.01(DOI)

+ 0.01(DPO)

6.04+ 33.39(OM) - 24.69(ROIC)+ 15.23(FCF) - 11.11(WC)

+ 1.49(RONA)+ 1.37(DPODSO)

+ 0.83(CR) + 0.02(DOI)

5.19 - 5.84(ROA)+ 5.17(OM) + 4.42(FCF)

- 3.68(DPODSO)+ 2.76(WC)

+ 1.97(RONA)+ 1.33(YOY)+ 1.21(AZ)- 0.29(CR)

+ 0.02(DPO)


9.74- 2.97(DPODSO)

- 2.00(AZ)+ 1.91(ROIC)+ 1.25(FCF) + 0.90(WC) + 0.79(YOY)- 0.69(SGAC)

- 0.30(CR) + 0.02(DPO)- 0.01(DOI)

Medical Instruments & Supplies

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Medical Devices

Medical Instruments & Supplies


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 September 24, 2012:

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

• From October 26, 2012: The Supply Chain Index, 20 Years in the Making: A Focus on Discrete Industries

• From April 25, 2012: Launch of the Supply Chain Index

Webinars

www.supplychaininsights.com/upcoming-webinars

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UPCOMING WEBINARS• June 13th: Sales and Operations Planning: State

of the Union

• June 27th: Supply Chain Index Part III, Apparel/Food & Beverage

• July 11th: Big Insights From Big Data Supply Chains

• July 25th: Supply Chain Index Part IV, Consumer Electronics & Technology


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

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Supply Chain Insights Webinar on the Supply Chain Index on May 23rd