What Drives Value

in a Value Chain?
Speakers

Lora Cecere, Dave Goldsman

Founder of Supply School of ISyE
Chain Insights Georgia Tech
Disclosure: This work is open
source jointly funded by Kinaxis
and Supply Chain Insights.
 5

SECTION 1

Introduction

Supply Chain Insights LLC. Copyright

© 2024
I Am A Social Scientist
Who Is Lora?
Founder of Supply Chain
Insights (13 years)
“LinkedIn Influencer”, Guest
blogger for Forbes, Author:
Bricks Matter (2012), Supply
Chain Metrics That Matter
(2014), and Shaman’s
Journal (2014-23)
2 years Partner at Altimeter 15 Years Leading Teams in
Group (leader in open Manufacturing and
research) Distribution for Clorox,
Kraft/General Foods,
8 years as an Analyst at Nestle/Dreyers Grand Ice
Gartner and AMR Research Cream and Procter &
Gamble.
8 years Experience in
Marketing and Selling
Supply Chain Software at
Descartes Systems Group
and Manugistics (now Blue
Yonder)
 8

SECTION 2

Background

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© 2024
 Our Journey

Wrote the Book

Published Supply
Bricks Matter First Project with
Chains to Admire Target End Date
Arizona State 2014
2013 2016-2022 Winter 2024

Started Work with

Wrote Metrics That Published the
Georgia Tech
Matter 2015 Supply Chain Index
Spring 2024
Spring 2015
1996
A Look at the Shifts
Organizational
• Alignment issues grew 3-fold for brand
owners.
• Focus on efficient supply chains. Lack of
recognition of supply chain flows.
• Supply chain became a function within
a functional organization focused on
supply.
Value Chain
• 40-50% of products are no longer
forecastable due to distortion of history.
• 8 out of 10 companies are degrading
the forecast with current practices.
• Increase in demand latency.
• Growth of bullwhip impact and supply
variability.
1
1
 Food Industry
Operating Margin vs. Inventory Turns (2013 - 2022)
Best Scenario
7.0

2015

2014
2013 2016
2018
Inventory Turns

2019 2020
6.0
Food Industry Average: 2017
Margin: 0.10 2021
Inventory Turns: 6.19

2022
5.0
0.08 0.09 0.10 0.11
Operating Margin
Food Industry
◆Average (Operating Margin, Inventory Turns)
 Mondelez
Operating Margin vs. Inventory Turns (2013 - 2022)

Best Scenario
7.0 2015

MDLZ
6.5 2016 0.14, 6.23 2021
Inventory Turns

2017
2014
2019
2022
6.0 2018 2020
2013

5.5
0.11 0.12 0.13 0.14 0.15 0.16 0.17 0.18
Operating Margin
Mondelez
◆Average (Operating Margin, Inventory Turns)

Source: Supply Chain Insights LLC, Corporate Annual Reports 2013-2022 from YCharts
 14

The Industry
Struggles with
Inventory

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Supply Chain Insights LLC. Copyright © 2024
 16

SECTION 3

Methodology

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© 2024
Data Processing

• Data sourced from Y-Charts for the period of 1982-2022

• For each company and each year…
• 114 dependent and independent factors (performance metrics) to
examine
• Many of these factors aren’t really independent
• 26 Different industry sectors (as defined in Supply Chains to Admire)
• Examples: Chemical sector has 37 companies, Food has 31, etc.
• Data is laid out well and is very clean
Method
• Pick three industry groups (Chemical, Food, Pharma)
• Consider 40 years of data as a whole and in 10-year increments
• Conduct correlation analysis to develop “independent” clusters of the 114 factors for our
models
• Settled on 5 independent clusters for now (possibly dependent on industry group, but that’s for later)
• Pick representative factor from each of the 5 clusters

• Perform regression analysis using the 5 factors to model the 3 output quantities one-at-a-time
(market cap, fundamental score, price to book ratio).
• Actually, for a particular model, e.g., market cap, can also use the other two output quantities as model
input factors.
• “Elementary” regression first (to make sure to get things right), then…
• …more-advanced techniques to squeeze out improvements

• Rinse and Repeat for other sectors.

Model Analysis/Reduction
Start
Step 1: Select Predicting Variables
Methodology:
• Conducted a correlation analysis to identify
'independent' clusters among the 114 factors.
• Determined 5 independent clusters for the initial
model framework
• Run forward stepwise regression to see which
predicting variables are insignificant
Note: Clusters may vary by industry group, which will be
considered in subsequent analyses.
Step 2: Remove Outliers
Methodology:
• Utilize Cook's Distance to pinpoint influential
points in the dataset.
• Establish a threshold for Cook's Distance (𝐷𝑖 )
4
such that data points with 𝐷𝑖 > 𝑛 (where 𝑛 is the
sample size) are classified as outliers.
• Remove identified outliers from the dataset to
mitigate the risk of skewed analysis results.
Model Analysis/Reduction

Step 3: Check Predicting Variable Goodness

Step 4: Check for Multicollinearity
of Fit (Linear)

Methodology:
Determine R-squared (𝑅 2 )Value:
• Calculate the proportion of variance in the
dependent variable that's predictable from
the predicting variable.
Analyze Residuals:
• Examine the residual plots for patterns
that indicate deviations from the linearity
assumption.
Conduct F-test:
• Use the F-test to check the overall
significance of the regression model.
Inspect p-values:
• For each predictor, assess the p-value to
determine its statistical significance.
Methodology:
• For each predictor, compute the Variance
Inflation Factor (𝑉𝐼𝐹) to quantify the
inflation in variance caused by
correlations with other predictors.
• Establish a VIF threshold using the
greater of two values: 10, or 1ൗ 1−𝑅2 , to
discern significant multicollinearity.
• Evaluate the VIF results to confirm that no
predicting variables exhibit
multicollinearity.
Model Analysis/Reduction

Step 6: Modify Dataset to Meet Residual

Step 5: Transform Response Variable
Assumptions

Methodology: Methodology:

Diagnostic Tools Applied: • Fitted value standardized residual plot

• QQ plot to assess the normality of • Remove redundant response variables
residuals.
• Residual histogram to identify
skewness in the data distribution.
Transformation Technique:
• In cases where the residual histogram
indicated right skewness:
• Executed a power transformation on the
response variable using 𝑦 𝜆
• Determined the optimal 𝜆 , where 0 < 𝜆 < 1,
to achieve a more normalize the distribution
of residuals. Final Model
First Pass Model
Model Results:
Initial Model : 𝑦ො = 𝛽መ0 + 𝛽መ1 𝑋1 + ⋯ + 𝛽መ11 𝑋11 • F Statistic P-value:
Where 𝑋1 , … , 𝑋11 are all 10 predicting variables + time
• Adjusted 𝑅2 :

Preliminary residual analysis → Residual assumptions violated:

• ϵi ’s are normally distributed with…
• … mean 0 and constant variance
• ϵi ’s are independent
Correlation
Matrix of the
Selected
Elements
 24

Results

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Chemical Sector:
Predicting Market Capitalization

Dependent Variable
ෝ
𝒚 𝑷𝒓𝒆𝒅𝒊𝒄𝒕𝒆𝒅 𝑴𝒂𝒓𝒌𝒆𝒕 𝑪𝒂𝒑 Coefficients
෡
β 4332.031
Independent Variables (Predictors) 0
𝑿𝟏 Profit Margin Annual ෡
β -1.393e+04
1
𝑿𝟐 Net Income Annual ෡
β 15.506
2
𝑿𝟑 Finished Goods Annual ෡
β 3 -2.950
𝑿𝟒 Annual Revenue per Employee ෡
β 4 -0.003
𝑿𝟓 Retention Ratio Annual ෡ Key Statistics
β 5 -5353.538
R-squared 0.70
𝑻 𝑻𝒊𝒎𝒆 (𝒀𝒆𝒂𝒓) ෡
β 206.4631
T F-statistic 122
Jarque-Bera (JB): 27.851
෡𝟎 + 𝜷
ෝ =𝜷
𝒚 ෡ 𝟏 𝑿𝟏 + 𝜷
෡ 𝟐 𝑿𝟐 + 𝜷
෡ 𝟑 𝑿𝟑 + 𝜷
෡ 𝟒 𝑿𝟒 + 𝜷
෡ 𝟓 𝑿𝟓 +𝜷
෡𝑻 𝑻 Prob (F-statistic) 0.000
Food Sector:
Predicting Market Capitalization

Dependent Variable
ෝ
𝒚 𝑷𝒓𝒆𝒅𝒊𝒄𝒕𝒆𝒅 𝑴𝒂𝒓𝒌𝒆𝒕 𝑪𝒂𝒑 Coefficients
෡
β 2.3619
Independent Variables (Predictors) 0
𝑿𝟏 Annual Inventories Net ෡
β 0.0002
1
𝑿𝟐 Annual Retention Ratio ෡
β -0.2606
2
𝑿𝟑 Annual Revenue per Employee ෡
β -1.412e-08
3
𝑿𝟒 Annual Profit Margin ෡
β4 6.5285
𝑻 𝑻𝒊𝒎𝒆 (𝒀𝒆𝒂𝒓) ෡
β -5.91e-06 Key Statistics
T
R-squared 0.70
F-statistic 176.4
Jarque-Bera (JB): 13.51
෡𝟎 + 𝜷
ෝ𝟎.𝟓 = 𝜷
𝒚 ෡ 𝟏 𝑿𝟏 + 𝜷
෡ 𝟐 𝑿𝟐 + 𝜷
෡ 𝟑 𝑿𝟑 + 𝜷
෡ 𝟒 𝑿𝟒 +𝜷
෡𝑻 𝑻 Prob (F-statistic) 0.000
Pharmaceutical Sector:
Predicting Market Capitalization

Dependent Variable
ෝ
𝒚 𝑷𝒓𝒆𝒅𝒊𝒄𝒕𝒆𝒅 𝑴𝒂𝒓𝒌𝒆𝒕 𝑪𝒂𝒑 Coefficients
෡
β 198.815
Independent Variables (Predictors) 0
𝑿𝟏 Annual Revenue per Employee ෡
β 0.0002
1
𝑿𝟐 Annual Finished Goods ෡
β 0.0901
2
𝑿𝟑 Annual Retention Ratio ෡
β -219.236
3
𝑿𝟒 Annual Debt to Assets ෡
β4 -135.621
𝑿𝟓 Annual Profit Margin ෡
β 749.043 Key Statistics
5
𝑻 𝑻𝒊𝒎𝒆 (𝒀𝒆𝒂𝒓) ෡
β -3.970 R-squared 0.75
T
F-statistic 104.4
Jarque-Bera (JB): 10.707
෡𝟎 + 𝜷
ෝ𝟎.𝟓 = 𝜷
𝒚 ෡ 𝟏 𝑿𝟏 + 𝜷
෡ 𝟐 𝑿𝟐 + 𝜷
෡ 𝟑 𝑿𝟑 + 𝜷
෡ 𝟒 𝑿𝟒 + 𝜷
෡ 𝟓 𝑿𝟓 +𝜷
෡𝑻 𝑻
Prob (F-statistic) 0.000
 28

Wrap-up

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Summary:
• Traditional supply chain approaches
reduce costs, but do not necessarily
drive improvements in value.
• Many actions in the last decade
reduced value decreasing enterprise
resilience.
• The market capitalization model is
actionable by the supply chain leader.
 Questions?

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© 2024
 Thank You…

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