ABSTRACT NUMBER A FINANCIAL APPROACH TO BENCHMARK SUPPLY CHAIN PERFORMANCE IN LATIN-AMERICA

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1 ABSTRACT NUMBER A FINANCIAL APPROACH TO BENCHMARK SUPPLY CHAIN PERFORMANCE IN LATIN-AMERICA Marcela Giraldo Giraldo Center for Latin-American Logistics Innovation (CLI) Avenida el Dorado # 70-16, Bogotá, Colombia Tel: , Fax: mgiraldo@logyca.org René Alejandro Suárez Puello Center for Latin-American Logistics Innovation (CLI) Avenida el Dorado # 70-16, Bogotá, Colombia rsuarez@logyca.org POMS 22nd annual conference Reno, Nevada, USA April 29 to May 2, 2011 Abstract The literature shows a wide range of key performance indicators to measure supply chain performance. These indicators involved a variety of concepts such as agility, flexibility, responsiveness, reliability, costs and asset management. Usually these measures are detailed and easily understood for supply chain and operations people, but hardly valued by other areas in the company. This research uses financial information as the common language to create a benchmark methodology for supply chain performance. This methodology uses financial indicators related to operational performance to benchmark companies in different sectors in Latin-American. It is focused on cost, return on assets and cash flow, allowing to identify relevant differences among companies by using variables as sector, sales or assets. This methodology is a starting point for supply chain managers in order to speak the same language with the CEO and CFO. Moreover, it can be useful to track the impact of the operational indicators at the financial level. Key words: Supply chain, key performance indicators, financial performance.

2 1. Introduction According to Furey (1987), benchmarking is an analytic process which measures and compares the operations of a company rigorously against the best companies of its kind. Likewise, Manning, et.al. (2008) define it as a method which turns data into relevant information and allow new knowledge about a process. The objectives of a benchmarking process are: identifying key performance indicators, measuring internal performance of a company, comparing obtained results against competitors, identifying strengths and weaknesses and implementing solutions aimed to reducing the gap with regard to other companies (Furey, 1987). Benchmarking benefits are: measuring company s performance, identifying strengths, validating if clients expectations are met; helping organizations understand their processes; validating what they know and understanding what they don t know; identifying problems, bottlenecks or wastes; assuring that decisions are made based on facts and not assumptions, and validating if stated solutions yield expected results (Parker, 2000). In logistics and supply chain management (SCM), metrics are mainly operational. According to Gunasekaran et.al., (2007) there are 26 SCM common indicators in studies undertaken in the United States and Europe such as on-time and in-full deliveries, perfect order, order cycle time, etc. From these indicators only eight were related to finance and mostly related to cost. A similar review made in Latin-America revealed that from the 14 common indicators only five were related to finance. Rey (2007) performed an operational benchmark with 153 companies in Latin-America where logistics costs by country were

3 determined. Similar studies were carried out in Mexico, Panama and Colombia. However, none of these studies used financial indicators for its analysis. The operational measures allow analyzing the operation in detail but it is required to translate the logistics activity in tangible benefits for the company. In 2010, Kremers 2010 stated that there is no connection among the priorities of a supply chain manager and the priorities of the CEO or CFO; that there is no alignment between strategy and execution. Supply chain managers commonly measure their contribution to company s performance through operational cost (Kremers, 2010) without considering the direct and indirect effect that supply chain management has on sales increase and fixed and working capital efficiency (Christopher, et.al, 1999). The financial impact of the supply chain components can be clearly identified in a company s financial reports which reflect its financial results during a year providing investors with key indicators of profitability, expenses, costs and net profit (Kremers, 2010). For example, supply chain s flexible response time has a direct effect on sales by reducing the out of stocks that comes from the mismatch between supply and demand. Several studies show a high correlation between SCM performance and financial performance. According to Kremers (2010), collaboration relationships between a company and its providers have an impact on time response and raw materials costs. Lanier Jr., et. al (2010) used public information and financial reports to analyze return on assets, assets turnover, cash cycle and profits. Their study demonstrated that supply chain integration generates a cash cycle 15 days lower than the industry average. According to Pittiglio, et. al. (1997), companies with the best supply chain practices have a total cost lower than their

4 competitors. Furthermore, cash cycle improves due to reductions in the time elapsed in the transformation from raw materials to finished products. Cash cycle and working capital have acquired relevance due to their impact on business profitability. Protopappa-Sieke, et. al. (2009) demonstrated the impact that supplier delays generated on working capital, operational costs and total financial costs. Even thought there is a clear relationship between finance and SCM, there is lack of information related to this topic in Latin America. The objective is to analyze the operational performance of Latin American companies using financial indicators as the main source of logistics benchmarking. This study aims to promote the interest of supply chain managers regarding SCM financial impact in order to improve competitiveness regarding other companies in the same industry. It might also help as a tool to build the business cases for supply chain improvements and get approval from the company s board of directors. This document will present the methodology, the case study, the data analysis, the conclusions and the proposed future work. 2. Methodology See Figure 1 for a summary of the methodology.

5 Select contries to analyze. Select economic sectors to analyze. Define companies to be included Obtanied financial stratement from 2008 to 2009 for selected companies. Sample selection Data processing Calculated profit and cost measures: EBITDA%REV, COGS%REV y SG&A%REV Calculated cash to cash cycle measures: days payables, days receivables, days inventory Calculated assets related measures: ROCA. Asset turnover & GMROI Compare measures against companies, countries and ecnomic sectors.. Identify relevant evolution trends among measures. Identify relevant correlations between diferent variables. Analysis and results Figure 1: Methodology Source: Author Sample selection: The first step is to select the countries, the economic sectors and the companies to analyze. Once the study sample is selected, secondary information regarding financial statements is collected. Normally, financial information of the country s largest companies is available in public databases which present detailed financial reports per year. Data processing: Once financial reports are collected, financial indicators are generated. These indicators were selected because they reveal supply chain management impact in three fundamental aspects: cost, cash-to-cash cycle and asset management. See Figure 1.

6 Cash to cash cycle Days invent ory Days receiv ables Days payables Assets GMROI ROCA ROA Profits and cost EBITDA%Re venue COGS% Revenue SG&A% Revenue Figure 2: Indicators used in the study: Profits and costs, cash-to- cash cycle and assets. Source: Author The first group of indicators is composed by the indicators related to Cash-to-Cash Cycle. The Cash-to-Cash Cycle measures basic functions measures supply chain speed to convert cash into revenue. It of supply chain management such as purchasing, inventory management and delivery efficiency. Cash to cash Cycle = Days Inventory + Days Receivables Days Payables Note: COGS (Cost of Goods Sold)

7 Day s inventory shows the average number of days that a company keeps of inventory (raw materials, work in progress and finished goods). Days receivables measure the company collection days policy. Lack of delivery effectiveness and invoicing mistakes may generate additional collection delays. Days payable measures operational leverage with suppliers. It is an important indicator because it affects supplier relationships. Long term payments may threaten supplier existence and hence the availability of raw materials. The second group of indicators is composed by the indicators related to cost. Cost indicators use in this study reflects the costs related with the company s core business. The methodology analyzes operational costs rather than costs generated or influenced by finance such as interests, taxes, depreciation and amortizations. The cost indicators used were:

8 EBITDA (Earnings before Interests, Taxes, Depreciation and Amortization) measures the operational income of the company as a percentage of revenue. COGS (Cost of Goods Sold) are direct costs associated to a product and SG&A (Sales, General and Administrative) are the overhead and the sales costs of the company. Both indicators are calculated as a percentage of revenue. The third group of indicators is related to asset management and supply chain efficiency. The indicators used were: ROCA (Return on Operational Assets) and GMROI (Gross Margin Return on Inventory) measure the return and the quality of the assets under supply chain supervision (inventories and accounts receivables).

9 ROA measures the return generated by total assets. These indicators mostly consider activities linked to operations. They omit results related to activities related to finance. Therefore, based on this information is possible to assess the results generated by the company s value chain. After calculating these indicators, the sample was divided into quartiles. Then companies were classified according the performance obtained in each indicator. Analysis and results: The following values were calculated for each indicator: average, standard deviation, maximum and minimum. In addition, patterns of behavior among performance and variables were analyzed per country and industry. 3. Case study: Sample selection was made based on World Bank (2011) data that presents the Latin- American GDP, gross domestic product, per country. The top four Latin American countries from this list were selected: Brazil, Mexico, Argentina and Colombia. Argentina was taken out from the sample due to the difficulty of finding companies public financial information. For each of the countries selected, companies were chosen among the ones that quote in the stock exchange market, mainly those engaged in CPG, consumer product goods, as

10 decision criteria. This study obtains companies public financial statements from the stock exchange web page of each country. Bolsa de Valores de Colombia (2011); Bolsa Mexicana de Valores (2011); Valores de São Paulo y de la Bolsa de Mercadorias & Futuros (2011). Some of the companies listed in these web sites were excluded due to a lack of complete or coherent financial data. Figure 3 shows the distribution of the companies selected by country. The sample is composed by 48 companies: 42% of them were Mexican companies, 29% were Brazilian and 29% were Colombian. The list of all companies analyzed in this study is shown in Table 1. Mexico 42% Colombia 29% Brazil 29% Figure 3: Sample composition Source: Author

11 Country BRAZIL COLOMBIA Company Conservas ODERICH S.A. J. Macêdo S.A. Josapar-Joaquim Oliveira S.A. M.DIAS BRANCO S.A. IND COM DE ALIMENTOS Company Country Cosan S.A Industria e comercio EMBOTELLADORAS ARCA, S.A.B. DE C.V. SAO MARTINHO S.A. INDUSTRIAS BACHOCO, S.A.B. DE C.V. CIA CACIQUE DE CAFE SOLUVEL GRUPO BAFAR, S.A. DE C.V. CIA IGUACU DE CAFE SOLUVEL GRUPO BIMBO, S.A.B. DE C.V. CIA BEBIDAS DAS AMERICAS - AMBEV GRUPO CONTINENTAL, S.A.B. CIA BRASILEIRA DE DISTRIBUICAO FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V. B2W - COMPANHIA GLOBAL DO VAREJO GRUPO AZUCARERO MÉXICO, S.A. DE C.V. HYPERMARCAS S.A. GRUPO EMBOTELLADORAS UNIDAS, S.A.B. DE CV LOJAS AMERICANAS S.A. GRUPO MODELO, S.A.B. DE C.V. SOUZA CRUZ S.A. GRUMA, S.A.B. DE C.V. BAVARIA S.A. GRUPO HERDEZ, S.A.B. DE C.V. ALPINA PRODUCTOS ALIMENTICIOS S A COCA-COLA FEMSA, S.A.B. DE C.V. COMPAÑIA NACIONAL DE CHOCOLATES S.A. GRUPO INDUSTRIAL MASECA, S.A.B. DE C.V. COMPAÑIA DE GALLETAS NOEL S A GRUPO MINSA, S.A.B. DE C.V. RIOPAILA INDUSTRIAL S.A. GRUPO NUTRISA, S. A. DE C. V. ALIMENTOS CÁRNICOS S.A. GRUPO COMERCIAL CHEDRAUI, S.A.B. DE C.V. COLOMBINA S.A. CONTROLADORA COMERCIAL MEXICANA, S.A.B. DE C.V. INDUSTRIA DE ALIMENTOS ZENU S.A GRUPO GIGANTE, S.A.B. DE C.V. INDUSTRIA COLOMBIANA DE CAFE S A ORGANIZACION SORIANA, S.A.B. DE C.V. PRODUCTOS NATURALES DE LA SABANA S.A. ALQUERIA WAL - MART DE MEALS, MERCADEO DE ALIMENTOS DE COLOMBIA S.A. PRODUCTOS ALIMENTICIOS DORIA S A SETAS COLOMBIANAS S.A. SETAS S. A. Table 1: Companies analyzed in the study Source: Author 3.1 Indicator values Tables 2, 3 and 4 summarize indicators values obtained for each country for years 2008 and These values represent the average of the company s indicators.

12 Brazil Average StaDev Max Min Average StaDev Max Min EBITDA%REVENUE 6,1% 8,3% 20,4% -11,9% 6,7% 9,2% 25,1% -8,6% COGS%REVENUE 77,6% 9,6% 95,5% 53,4% 77,1% 8,9% 91,6% 56,3% SG&A%REVENUE 16,3% 5,2% 29,6% 6,7% 16,2% 7,5% 29,6% 0,0% Average StaDev Max Min Average StaDev Max Min GMROI 2,6 2,3 9,5 0,3 2,7 2,3 9,4 0,3 ROA 3,0% 7,9% 24,4% -7,4% 5,0% 9,1% 29,4% -6,3% ROCA 48% 96% 351% -67% 60% 117% 445% -40% Average StaDev Max Min Average StaDev Max Min DI DR DP CTC (17) (14) Table 2: Indicator values for Brazilian companies. Source: Author Mexico Average StaDev Max Min Average StaDev Max Min EBITDA%REVENUE 10,6% 10,2% 40,7% -9,1% 11,8% 9,6% 36,0% 1,6% COGS%REVENUE 64,4% 16,1% 94,2% 37,3% 64,1% 14,8% 86,1% 40,6% SG&A%REVENUE 25,1% 12,7% 53,5% 11,9% 24,8% 13,1% 49,9% 0,0% Average StaDev Max Min Average StaDev Max Min GMROI 4,4 4,1 16,8 0,6 4,6 3,9 16,2 1,1 ROA 4,7% 11,0% 17,0% -26,6% 7,7% 5,3% 19,5% -0,8% ROCA 70% 84% 366% -48% 79% 71% 306% 10% Average StaDev Max Min Average StaDev Max Min DI DC DP CTC (36) (28) Table 3: Indicator values for Mexican companies. Source: Author

13 Colombia Average StaDev Max Min Average StaDev Max Min EBITDA%REVENUE 10,3% 6,0% 24,8% 2,7% 8,7% 6,7% 25,4% 0,5% COGS%REVENUE 65,2% 12,7% 80,8% 32,9% 66,3% 14,0% 93,4% 35,0% SG&A%REVENUE 24,5% 9,1% 42,3% 6,5% 25,0% 9,0% 39,5% 6,1% Average StaDev Max Min Average StaDev Max Min GMROI 4,0 2,6 9,3 0,9 4,8 3,3 12,3 0,4 ROA 4,1% 2,2% 9,5% 1,0% 5,1% 4,1% 16,0% -2,4% ROCA 62% 57% 193% 12% 67% 78% 271% 2% Average StaDev Max Min Average StaDev Max Min DI DC DP CTC (13) Table 4: Indicator values for Colombian companies. Source: Author 3.2 Analysis of results The analysis is divided in two parts. Firstly, the three groups of indicators are used to obtain some insights about the behavior of the companies grouped by country. Secondly, the analysis focuses on the behavior of specific companies Country level analysis The profit and cost indicators show that Mexican and Brazilian companies on average had an increment in the EBITDA indicator from 2008 to In the case of the Mexican companies this is explained by a decline in the sales general and administrative expenses account. In the case of the Brazilian companies the direct contributor to this increment was the cost of goods sold account decrease. On the other hand, Colombian companies experienced on average a reduction of 15% in this indicator mainly affected by a contraction in the cost of goods sold account.

14 The asset related indicators showed that on average Colombian companies had a good performance in GMROI (inventory quality) compared with Brazil and Mexico. This is stated by a 20% improvement of this indicator in Colombia compared with only a 4% in the other two countries. Cash to cash cycle indicators has shown reductions from 2008 to 2009 in all three countries. A reduction in Cash to cash cycle indicators added to an improvement in the ROCA and GMROI indicators show evidence of the efforts that companies are doing to reduce capital investment in inventories. Moreover, the days payable indicator showed an increase or stable behavior in all three countries. This can be associated with the efforts put by the companies to build a sustainable relationship with suppliers. In other words, this indicates the development of policies more focus in benefits and risk reduction for all parties involved in the supply chain than just a financial motivation Company level analysis To perform this part of the analysis companies indicators were ranked by quartiles. For instance, companies whose indicators are in the first quartile perform better (for that particular indicator) that the ones in the last quartile. The final ranking for the companies is obtained by adding the individual ranking of each group of KPIs (profit and cost, cash to cash cycle and asset). See Appendix A for the detail of these calculations.

15 For the majority of the companies, one of KPI leads in performance to the others. This could be related with company s policies oriented to reinforce certain areas of their supply chains but not the supply chain as a whole. On the contrary, Alimentos Carnicos, a Colombian company, was the only one ranked equally (second quartile) for the three groups of KPIs. This means that is very difficult to excel in all areas of the supply chain at the same time. This study found a common trend for top ranked companies (located in the first quartile). The performance in assets for these companies was superior to cost or cash to cash indicators. Similarly, bottom ranked companies (located in the last quartile) had the lowest performance in assets compared with the other two groups of indicators. These results can imply a relationship between superior operational performance and assets management. As companies keep close eyes on assets, especially in current assets, the efficiency increases, generating a positive side impact on cost and cash to cash cycle indicators. Moreover, top companies are more focus in generating more profit though efficiency than reducing cost per se. COMPANY COCA-COLA FEMSA, S.A.B. DE C.V. EMBOTELLADORAS ARCA, S.A.B. DE C.V. BAVARIA S.A. CIA BEBIDAS DAS AMERICAS - AMBEV WAL - MART DE, S.A.B. DE C.V. INDUSTRIA DE ALIMENTOS ZENU S.A GRUPO CONTINENTAL, S.A.B. GRUPO MODELO, S.A.B. DE C.V. GRUPO BIMBO, S.A.B. DE C.V. GRUPO NUTRISA, S. A. DE C. V. MEALS, MERCADEO DE ALIMENTOS DE COLOMBIA S.A. GRUPO HERDEZ, S.A.B. DE C.V. GRUPO EMBOTELLADORAS UNIDAS, S.A.B. DE CV COUNTRY COLOMBIA BRAZIL COLOMBIA COLOMBIA Table 5: Top ranked companies Source: Author

16 As a final remark, this study did not reveal enough evidence of superior performance relate to companies operating in a specific country or having a specific volume of sales. Top performance companies are presented in table 5. 4 Conclusions and future work: It can be concluded that inventory levels have been reduced for companies in CPG sector in Brazil, Colombia and Mexico from 2008 to This reduction was translated in improvements in the GMROI and cash to cash cycle indicators. These results follow the worldwide trend to improve management of current assets, mainly focused on inventory. On the other hand, increase in days payable indicator could be an evidence for an increasing interest to build sustainable relationship with suppliers, more focused in common benefits and in securing raw material availability. Nonetheless, the results have an improvement gap compare with results obtain for USA companies in the same industry. Nonetheless, the results also show that there is a lot of room for improvement. This is evident when these indicators are compared their counterparts coming from USA companies in the same industry. These results provide an idea of what can be analyzed with these indicators. As a future work, we propose to analyze in detail the operations of each of these companies. This deeper analysis will provide an explanation on the effect on these indicators produced by these companies best practices.

17 References Brewer Peter C. y Speh Thomas W Using the balanced scorecard to measure supply chain performance [Publicación periódica] // Journal of business logistics : Vol pág. 75. Bolsa mexicana de valores. Retrieved January 11, Christopher Martin y Ryals Linette Supply chain strategy: its impact on shareholder value [Publicación periódica] // The international journal of logistics management : Vol págs Christopher Martin y Ryals Lynette supply chain strategy: its impact on shareholder value [Publicación periódica] // The international journal of logistics management : Vol págs Furey T.R. Benchmarking the key to developing competitive advantage in mature markets [Publicación periódica] // Planning Rev págs Gunasekaran Angappa y Kobu Bulent Performance measures and metrics in logistics and supply chain management: a review of recent literature ( ) for research and applications [Publicación periódica] // International Journal of Production Research : Vol págs IBM The GMA 2010 Logistics benchmark report [Informe]. - New York : [s.n.], Kremers Luc The link between Supply chain and finance [Publicación periódica] // Supply chain Asia págs Lanier Jr. Danny, Wempe William F. y Zacharia Zach G. Concentrated supply chain membership and financial performance: chain and firm level perspectives [Publicación periódica] // Journal of Operations Management págs La Bolsa de valores de Colombia. Retrieved January 11, Manning L. y Baines R. Benchmarking the poultry meat supply chain [Publicación periódica] // Benchmarking: An International Journal : Vol págs Parker C. Performance measurement [Publicación periódica] : Vol. 49. Pittiglio Rabin y Mcgrath Todd Integrated supply chain management benchmarking study [Publicación periódica]

18 Protopappa-Sieke Margarita y Seifert Ralf W. Interrelating operational and financial performance measurements in inventory control [Publicación periódica] // European Journal of Operational Research Vol págs Rey Maria Fernanda Estado de la logistica en latinoamerica [Informe] Stapleton Drew, Hanna Joe B. y Yagla Steve Measuring logistics performance using the strategic profit model [Publicación periódica] // The international journal of logistics management : Vol págs Valores de São Paulo y de la Bolsa de Mercadorias & Futuros. Retrieve January 11, Vickery Shawnee K. [y otros] The effects of an integrative supply chain strategy on customer service and financial performance: an analysis of direct versus indirect relationships [Publicación periódica] // Journal of Operations Management págs World Bank. Retrieved January 4,

19 Appendix A Profit and Cost Cash to Cash Assets Ranking Razon Social Pais EBITDA&REV COGS%REV SGA%REV DI DC DP GMROI ROCA ROA Profit and Cost Cash to Cash Assets TOTAL 1 COCA-COLA FEMSA, S.A.B. DE C.V EMBOTELLADORAS ARCA, S.A.B. DE C.V BAVARIA S.A. COLOMBIA CIA BEBIDAS DAS AMERICAS - AMBEV BRAZIL WAL - MART DE, S.A.B. DE C.V INDUSTRIA DE ALIMENTOS ZENU S.A COLOMBIA GRUPO CONTINENTAL, S.A.B GRUPO MODELO, S.A.B. DE C.V GRUPO BIMBO, S.A.B. DE C.V GRUPO NUTRISA, S. A. DE C. V MEALS, MERCADEO DE ALIMENTOS DE COLOMBIA S.A. COLOMBIA GRUPO HERDEZ, S.A.B. DE C.V GRUPO EMBOTELLADORAS UNIDAS, S.A.B. DE CV SOUZA CRUZ S.A. BRAZIL M.DIAS BRANCO S.A. IND COM DE ALIMENTOS BRAZIL FOMENTO ECONÓMICO MEXICANO, S.A.B. DE C.V PRODUCTOS NATURALES DE LA SABANA S.A. ALQUERIA COLOMBIA LOJAS AMERICANAS S.A. BRASIL GRUPO COMERCIAL CHEDRAUI, S.A.B. DE C.V RIOPAILA INDUSTRIAL S.A. COLOMBIA CIA BRASILEIRA DE DISTRIBUICAO BRAZIL B2W - COMPANHIA GLOBAL DO VAREJO BRAZIL HYPERMARCAS S.A. BRAZIL GRUPO BAFAR, S.A. DE C.V PRODUCTOS ALIMENTICIOS DORIA S A COLOMBIA CONTROLADORA COMERCIAL MEXICANA, S.A.B. DE C.V GRUPO INDUSTRIAL MASECA, S.A.B. DE C.V COMPAÑIA NACIONAL DE CHOCOLATES S.A. COLOMBIA COMPAÑIA DE GALLETAS NOEL S A COLOMBIA ALIMENTOS CÁRNICOS S.A. COLOMBIA J. Macêdo S.A. BRAZIL ORGANIZACION SORIANA, S.A.B. DE C.V INDUSTRIAS BACHOCO, S.A.B. DE C.V ALPINA PRODUCTOS ALIMENTICIOS S A COLOMBIA CIA CACIQUE DE CAFE SOLUVEL BRAZIL SETAS COLOMBIANAS S.A. SETAS S. A. COLOMBIA COLOMBINA S.A. COLOMBIA GRUPO AZUCARERO MÉXICO, S.A. DE C.V GRUMA, S.A.B. DE C.V GRUPO GIGANTE, S.A.B. DE C.V GRUPO MINSA, S.A.B. DE C.V SAO MARTINHO S.A. BRAZIL Josapar-Joaquim Oliveira S.A. BRAZIL Cosan S.A Industria e comercio BRAZIL CIA IGUACU DE CAFE SOLUVEL BRAZIL Conservas ODERICH S.A. BRAZIL INDUSTRIA COLOMBIANA DE CAFE S A COLOMBIA